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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 March 31, 2001
[ ] 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 May 1, 2001
--------------------------- --------------------------
Common Stock Par Value $.01 7,406,420 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
Yes No X
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E-Sync Networks, Inc.
Index
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheet at March 31, 2001 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(in thousands, except share and per share data)
MARCH 31,
2001
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents..................................................................... $ 619
Accounts receivable, less allowance for doubtful accounts of $197............................. 1,285
Other current assets.......................................................................... 87
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Total current assets..................................................................... 1,991
Equipment, net.................................................................................. 3,562
Other assets.................................................................................... 234
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Total assets............................................................................. $ 5,787
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable .............................................................................. $ 1,894
Obligations under capital leases, current portion............................................. 49
Accounts payable.............................................................................. 1,356
Accrued expenses.............................................................................. 917
Medical benefits obligation, current portion.................................................. 33
Deferred revenue.............................................................................. 111
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Total current liabilities................................................................ 4,360
Obligations under capital leases, less current portion.......................................... 8
Medical benefits obligation, less current portion............................................... 214
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Total liabilities............................................................................... 4,582
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, 8,382,575
shares issued and outstanding 84
Additional paid in capital...................................................................... 28,977
Accumulated deficit............................................................................. (26,673)
Less treasury stock at cost, 992,565 shares..................................................... (1,216)
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Total Stockholders' Equity............................................................... 1,205
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Total liabilities and stockholders' equity............................................... $ 5,787
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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
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(in thousands, except share and per share data)
Three Months Ended
March 31,
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2001 2000
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(unaudited)
REVENUES:
Managed services............................................... $ 1,287 $ 1,191
Professional services.......................................... 1,028 1,349
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Total revenues............................................ 2,315 2,540
COST OF SALES:
Managed services............................................... 1,089 929
Professional services.......................................... 1,039 1,268
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Total cost of sales....................................... 2,128 2,197
GROSS MARGIN:
Managed services............................................... $ 198 $ 262
Professional services.......................................... (11) 81
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Total gross margin........................................ 187 343
OPERATING EXPENSES:
Sales and marketing ........................................... 400 668
General and administrative .................................... 734 991
Product development ........................................... 94 385
Non-cash compensation.......................................... 305 102
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Total Operating Expenses.................................. 1,533 2,146
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Loss from Operations........................................... (1,346) (1,803)
OTHER INCOME (EXPENSE):
Other income (expense), net.................................... 1 (4)
Interest expense............................................... (183) (7)
Interest income................................................ 10 105
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Total other income (expense).............................. (172) 94
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NET LOSS.......................................................... $ (1,518) $ (1,709)
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BASIC AND DILUTED NET LOSS PER SHARE.............................. $ (0.22) $ (0.26)
=================== ====================
WEIGHTED AVERAGE NUMBER OF SHARES USED IN BASIC AND DILUTED
NET LOSS PER SHARE................................................ 6,822,678 6,689,983
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See accompanying notes to unaudited condensed consolidated financial statements.
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E-SYNC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,518) $ (1,709)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization ............................................. 237 419
Amortization of loan discount ............................................. 129 --
Non-cash compensation ..................................................... 305 102
Changes in operating assets and liabilities:
Accounts receivable ................................................... 98 (793)
Other current assets .................................................. 31 (140)
Accounts payable and accrued expenses ................................. (443) (712)
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NET CASH USED IN OPERATING ACTIVITIES ..................................... (1,161) (2,833)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (39) (763)
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NET CASH USED IN INVESTING ACTIVITIES ................................................ (39) (763)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ............................................... 55 --
Payments on bank loan ..................................................... (5) (4)
Proceeds from exercise of stock options ................................... 4 76
Payments under capital lease obligations, net ............................. (2) (23)
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NET CASH PROVIDED BY FINANCING ACTIVITIES ............................................ 52 49
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Net decrease in cash and cash equivalents ............................................ (1,148) (3,547)
Cash and cash equivalents at beginning of period ..................................... 1,767 7,182
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 619 $ 3,635
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................................. $ 2 $ 7
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Income Taxes .............................................................. $ -- $ 4
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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 MONTHS ENDED MARCH 31, 2001
(unaudited)
1. ORGANIZATION AND BASIS OF ACCOUNTING
The condensed consolidated balance sheet as of March 31, 2001, and the related
condensed consolidated statements of operations for the three months ended March
31, 2001 and 2000 and the condensed consolidated statements of cash flows for
the three months ended March 31, 2001 and 2000 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 financial statements as of March 31, 2001, and for the three months then
ended, should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2000. The accounting policies followed by the Company with
respect to the unaudited interim financial statements are consistent with those
stated in the Company's Annual Report on Form 10-KSB for the year ended December
31, 2000.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company
continues to incur substantial net losses and negative operating cash flow,
revenues have been insufficient to cover costs of operations for the three
months ended March 31, 2001. The Company has a working capital deficit of $2.4
million and an accumulated deficit of $26.7 million. Management believes the
Company's ability to continue as a going concern is dependent upon its ability,
among other things, to obtain additional financing and to achieve increased
revenue to generate sufficient cash flow to meet its obligations on a timely
basis. Our Annual Report on Form 10KSB for the year ended December 31, 2000
included a report from our independent auditors containing an explanatory
paragraph stating that we have recurring losses from operations, have a working
capital deficiency and an accumulated deficit that raise substantial doubt about
our ability to continue as a going concern.
On May 7, 2001 the Company entered into a letter of intent ("LOI") to commence
negotiating a definitive merger agreement (the "Agreement") with SpaceLogix,
Inc. As one of the conditions for execution of the definitive merger agreement,
SpaceLogix will provide one or more bridge loans to E-Sync of at least
$1,050,000, which would be converted into common stock upon consummation of the
merger. Additionally, SpaceLogix would agree in the definitive merger agreement
to cause its investment banker to undertake an additional best efforts to raise
equity capital of $2,000,000 to $3,500,000 for the merged entity.
Upon the consummation of the merger, (i) SpaceLogix would merge into a
subsidiary of E-Sync, (ii) E-Sync stockholders would retain their currently
outstanding securities in E-Sync, and (iii) SpaceLogix' stockholders would
receive the following consideration:
- First, that number of shares of E-Sync's common stock equal to the
sum of (x) 6,000,000 plus (y) that number of shares equal to the
quotient of the amounts bridge loaned by SpaceLogix to E-Sync
divided by 80% of the 5 day average closing price for the
immediately prior 5 day period from the date of the respective loan;
- Second, 1,200,000 shares of a new series C preferred stock, which
(x) if, within 120 days of the consummation of the merger, the
combined company is able to complete a private placement of a
minimum of $2 million of new equity capital (the "Private
Placement"), in addition to the amount previously bridge loaned,
would convert into an aggregate amount of 12,000,000 shares of
E-Sync's common stock, and (y) if the Private Placement is not
consummated within 120 days of the merger, would instead be
thereafter redeemed for an aggregate cash consideration of $600,000;
and
- Third, warrants to acquire 5,500,000 shares of E-Sync common stock,
with an exercise price equal to 85% of the average closing price of
E-Sync's common stock over the five trading days prior to the date
the definitive merger agreement is executed, the exercisability of
which would be subject to the merged entity meeting the following
performance criteria:
- (i) 1,833,000 shall be exercisable at such time as
E-Sync has increased monthly gross margin on sales above
the level recorded at April 30, 2001 by $100,000 for
three consecutive months, (ii) 1,833,000 shall be
exercisable at such time as E-Sync has net after tax
income (but excluding any goodwill amortization charges
arising by virtue of the merger) for a period of three
consecutive months and (iii) 1,834,000 shall be
exercisable at such time as the balance sheet current
ratio will exceed 1:1 for a period of three consecutive
months commencing not earlier than November, 2001.
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The execution of any such Agreement would be subject to the satisfactory
completion of each Party's ongoing investigation of the other Party's business,
and would also be subject to approval by the each Party's board of directors.
Additionally, the following preconditions would need to be satisfied prior to
the execution and delivery of the Agreement by SpaceLogix; (i) The holders of
approximately $1,000,000 of convertible notes of E-Sync due May 31, 2001 shall
agree to convert all principal and interest on such notes to equity under the
terms of the voluntary conversion provisions of such notes upon the occurrence
of the Merger; (ii) The holders of the $1,000,000 term notes of E-Sync due
August 15, 2001 (the "MM Notes") shall agree to convert all principal and
interest on such notes into that number of shares of E-Sync common stock equal
to the quotient obtained by dividing the outstanding principal and interest on
the MM Notes on the date of conversion by the Bridge Price (as defined) upon
the occurrence of the Merger;(iii) All material contractual agreements with
employees and stockholders of ESNI shall be addressed to the reasonable
satisfaction of SpaceLogix (with the effectiveness of any such change being
conditioned upon the effectiveness of the Merger); (iv) A plan for, and
estimated costs expected to be incurred in connection with, closing E-Sync
operations in England shall be established and agreed to by SpaceLogix.
In addition, concurrently with the execution and delivery of the LOI, E-Sync
entered into Consulting Agreements (the "Consulting Agreements") with each of
SpaceLogix and Trautman Wasserman & Co., Inc., a New York corporation ("TW"),
pursuant to which each of SpaceLogix and TW will provide management consulting
services and will each be entitled to a fee of $75,000 in the event the proposed
Merger does not occur within 150 days of May 7, 2001 (assuming such non-
occurrence does not result from their respective actions or inactions). The
Company will pay Spacelogix a monthly fee of $50,000 . The fee shall accrue and
become payable only in the event Bridge Loans (as defined in the LOI) in an
aggregate amount of at least $1,050,000 are made to the Company by Spacelogix.
Notwithstanding the foregoing, the fee shall only accrue for three (3) months
following May 7, 2001 and following such time the obligation to accrue and
pay the fee shall terminate, unless at such time the monthly revenues generated
by SpaceLogix equal or exceed the fee. Spacelogix agrees that any net revenues
generated by Spacelogix following May 7, 2001, shall be for the account of and
payable to the Company. The Company will pay TW a monthly fee of $25,000 a
month. The fee shall accrue and become payable only if the Private Placement (as
defined in the LOI) is completed within 120 days following consummation of the
Merger (as defined in the LOI) and such Private Placement renders net proceeds
to the Company of at least $2,000,000. In the event this Agreement is terminated
in accordance with its terms, the accrued fee shall only become payable in the
event that of a successful capital funding occurs.
2. CASH
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 3,451,000 shares and 850,089 shares of common stock at
exercise prices ranging from $0.01 to $15.00 per share were outstanding at
March 31, 2001 and 2000, respectively. Convertible preferred shares of
3,352,727 and 3,272,727 were outstanding at March 31, 2001 and 2000,
respectively. All the stock options and convertible preferred shares were
excluded from the calculation of diluted EPS for the three month periods ended
March 31, 2001 and 2000, because the Company experienced a loss for those
periods and inclusion of such securities would have had an anti-dilutive effect.
4. STOCK OPTIONS
During 2000, the Company issued to various consultants fully vested options to
purchase 20,000 shares of common stock, at exercise prices from $1.19 to $1.81
per share in exchange for their professional services. These options are
exercisable for a period of ten years. The Company valued these options using
the Black-Scholes pricing model and this cost will be amortized over the
applicable service periods. The Company amortized approximately $6,000 during
the three months year ended March 31, 2001. In addition, during the first
quarter of 2001 the Company issued to various consultants fully vested options
to purchase 7,500 shares of common stock, at an exercise price of $1.06 per
share in exchange for providing services. The Company amortized approximately
$7,000 during the three months ended March 31, 2001 related to these options.
Such amounts are included in non-cash compensation in the statements of
operations.
During 2001, the Company granted employees options to purchase 304,264 shares of
common stock at an exercise price of $0.27 per share. These options vest
immediately and are exercisable for ten years. Compensation expense was recorded
for the difference between the exercise price and fair value at the grant date,
totaling approximately $239,000. Such amounts are included in non-cash
compensation in the statements of operations.
During 2001, the Company granted options at the then fair value, to purchase
approximately 270,000 shares, of common stock to employees at prices ranging
from $1.06 to $1.09. These options are exercisable for a ten year period and
vest over three years. These options are exercisable for a period of ten years.
5. COMMITMENTS AND CONTINGENCIES
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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. At March
31, 2001 the outstanding balance net of discount was $932,000.
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 March 31, 2001,
the Company amortized approximately $41,000, which is included in interest
expense in the consolidated statement of operations.
During December 2000, the Company received $ 850,000 and an additional $55,000
during the first quarter of 2001 from an affiliate in connection with the
issuance of subordinated term notes payable. The notes bear an interest rate of
10% per annum. The principal balance and interest is payable at the maturity
date, May 31, 2001. The note and accrued interest will automatically convert in
the event the Company receives proceeds in excess of $3,500,000 from the sale of
securities under the same terms as such sale. In the event the note is not
automatically converted and the note is not repaid prior to May 31, 2001 the
holder may convert a portion of the note into common stock at $0.25 per share,
not to exceed 600,000 shares. At March 31, 2001, the outstanding balance net of
discount was $905,000. Subsequent to March 31, 2001 the Company received an
additional $95,000 under the same terms and conditions.
In connection with the issuance of these notes, the Company issued warrants to
purchase 108,000 shares of the Company's common stock at an exercise price of
$1.25 per share. The warrants are transferable and expire on December 22, 2005.
A value of approximately $88,000 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 term
of the notes. For the three months ended March 31, 2001, the Company amortized
approximately $88,000, which is included in interest expense in the consolidated
statement of operations
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 March 31, 2001 was approximately $57,000.
6. RESTRUCTURING RESERVE
During the fourth quarter of 2000, the company committed to a plan to
discontinue the operations of its web design consulting, which was the principal
activity of Braincraft. As a result, the Company recorded a charge totaling
$225,000 for minimum lease payments and other costs to shut down these
operations. During the three months ended March 31, 2001 approximately $10,000
for lease termination costs was charged to this reserve. The Company expects the
shut down to be completed during the second quarter of 2001.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133, as
amended by SFAS 137, (Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the effective date of SFAS No. 133 - an Amendment of
SFAS No. 133) is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, SFAS No.138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", was issued to provide
additional implementation guidance related to SFAS 133. Adoption of these
statements did not have a material effect on the Company's financial position or
results of operations for the three months ended March 31, 2001.
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8. BUSINESS SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131) in June
1997. SFAS 131 supersedes FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. SFAS 131 replaces the "industry segment'
concept of Statement 14 with a "management approach" concept as the basis for
identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. Consequently, the segments are
evident from the structure of the enterprise's internal organization. It focuses
on financial information that an enterprise's decision makers use to make
decisions about the enterprise's operating matters.
The Company is an e-commerce enabler, providing global messaging solutions for
Fortune 1000 companies. The Company offers a suite of enterprise communication
infrastructure capabilities that facilitate secure and reliable information
exchange. These services include secure online messaging, outsourced e-mail
services, directory and fax services, hosted communications, network design and
integration, messaging integration and message platform migration. 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
The Managed Services business delivers its services through four products,
MailFAX, TotalMail, Directory and Messaging Services, and Hosting Services.
MailFAX facilitates conversion, encryption and delivery of faxes to e-mail or
e-mail to faxes without any additional hardware or software. This service
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) Outbound Fax, which sends faxes and attachments via e-mail, and
(iii) Inbound Fax, which allows receipt of inbound faxes at the desktop via
e-mail. TotalMail is a full featured email solution supporting a range of
available options. The service is outsourced and web-based, and includes the
integration of e-mail with directory services, content filtering, and virus
scanning. Directory and Messaging Services enable customers' multiple-messaging
systems to have all user address information presented in a complete, native
format to all participating systems. This service feature also allows external
trading partner systems to participate in the directory synchronization process.
As an enhancement, messaging integration, which connects users of disparate
messaging applications (Exchange, Lotus Notes, cc:Mail, Profs, etc.) within an
organization can be implemented over intranets, extranets, and virtual private
networks (VPNs). 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.
PROFESSIONAL SERVICES
Professional Services provides consulting services in the areas of messaging
design, architecture and implementation, as well as a broad range of additional
services including network design and integration, systems management, security
planning and training. Network Design and Integration provides expert resources
for all network design and integration needs. E-Sync assesses information,
messaging, and connectivity needs, evaluates existing infrastructure
architecture for adaptability to change, defines and tests migration processes,
executes and documents phased migration procedures for disparate messaging
platforms, and prepares enterprise-wide implementation plans. E-Sync also offers
numerous services in application development and support and in workflow
automation. E-Sync can install a Virtual Private Network (VPN) to ensure that
only authorized users can access a client's network and that data cannot be
intercepted. The Security Solutions area provides the ability to exchange
sensitive documents and private information securely with confidence and
reliability. E-Sync uses public key infrastructure (PKI) technology to deliver
digital certificates, encryption keys, and SmartCards for optimum secure
messaging. With large-scale anti-virus protection capabilities and e-mail
anti-virus filtering, E-Sync can provide full protection for applications, data,
messaging, and user systems across entire networks. E-Sync's Security Solutions
evaluates the costs and benefits of ID/password pairs, challenge/response
tokens, smart cards, biometrics, or other devices that provide unique profiles.
BackOffice(R) Consulting provides architecture, design, and implementation
services. The Company's Microsoft Certified Professionals, Systems Engineers,
and Trainers offer a complete BackOffice(R) solution, including assessing system
requirements, installing, configuring, and training.
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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 MARCH 31,
2001 2000
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REVENUE:
Managed services $ 1,287 $ 1,191
Professional services 1,028 1,349
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Consolidated revenues $ 2,315 $ 2,540
============== ==============
OPERATING LOSS:
Managed services $ (701) $ (975)
Professional services (645) (828)
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Operating loss from segments (1,346) (1,803)
Corporate expenses, net 1 (4)
Interest (expense) income, net (173) 98
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Net loss $ (1,518) $ (1,709)
============== ==============
DEPRECIATION AND AMORTIZATION:
Managed services $ 111 $ 70
Professional services 20 22
Corporate 106 327
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Total depreciation and amortization $ 237 $ 419
============== ==============
CAPITAL EXPENDITURES:
Managed services $ 29 $ 141
Professional services 10 --
Corporate -- 622
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Total capital expenditures $ 39 $ 763
============== ==============
IDENTIFIABLE ASSETS AT: MARCH 31, 2001
--------------
Managed services $ 2,948
Professional services 461
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Total assets for reportable segments 3,409
Corporate 2,378
--------------
Total assets $ 5,787
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an e-commerce enabler, providing global messaging solutions for
Fortune 1000 companies. The Company offers a suite of enterprise communication
infrastructure capabilities that facilitate secure and reliable information
exchange. The company's managed services include secure online messaging,
outsourced e-mail services, directory and fax services and hosted
communications. In addition, the Company has a highly qualified professional
services organization, which directs its efforts towards providing network
design and integration, messaging integration and message platform migration
services.
The Company's strategy, which was adopted during the fourth quarter of 2000, is
to leverage its relationships with key channel partners to extend its core
messaging solutions into vertical solution frameworks initially for the
insurance and healthcare markets. Previously, the company had focused much of
its efforts towards the development of supply chain management software, which
efforts were discontinued during 2000 through a reprioritization of capital
resources towards core messaging activities that comprise the majority of the
company's business and revenue.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
The Company's revenues consist of fees for Professional Services provided to its
customers in the form of 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 Braincraft subsidiary,
are normally billed on a 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.
Managed Services revenues increased by 8.1% and Professional Services revenues
decreased by 23.8% in the three months ended March 31, 2001. Managed Services
revenues increased primarily due to increases in customer volume offset by the
impact of discontinued product offerings. The decrease in Professional Services
revenue is primarily due to the lower volume of our web design services which
the Company discontinued during the first quarter of 2001. Net of the effect of
the web design services, Professional Services revenue increased by 6.9% over
the period, principally due to an increase in the volume of professional
services provided.
Gross margin for Managed Services decreased to 15.4% in the three months ended
March 31, 2001, compared to 22.0% for the three months ended March 31, 2000.
Managed Services revenue in the first quarter of 2000 included a high margin
software license sale, resulting in a higher than historical gross margin.
Professional Services recognized a negative gross margin of (1.1%) in the three
months ended March 31, 2001 compared to a 6.1% gross margin in the three months
ended March 31, 2000. The decrease was principally due to losses incurred from
the web design operations, which were discontinued during the first quarter of
2001. Excluding the web design operations, gross margin was 33.2% during 2001
compared to 28.9% for 2000. The increase is attributable to revenue from higher
margin projects.
Sales and marketing expenses decreased $268,000, or 40.1%, in the current
quarter, and as a percent of total revenues decreased from 26.3% in the three
months ended March 31, 2000, to 17.3% for the three months ended March 31, 2001.
The decrease is a result of the Company's efforts to reduce operating expenses.
The lower expenses are principally in the areas reduced sales promotion activity
and reduced use of outside consultants. Management expects the level of such
expenses to remain consistent in 2001.
The Company's general and administrative expenses were $257,000 or 26.0% lower
for the three months ended March 31, 2001, than for the three months ended March
31, 2000. As a percent of total revenues, general and administrative expenses
decreased from 39.0% to 31.7% over the periods. The decrease in costs is
primarily attributable to reduced goodwill amortization. During the fourth
quarter of 2000, the Company record an impairment charge related to the
remaining goodwill balance at December 31, 2000. Management expects the level of
such expenses to remain consistent in 2001.
Research and development expenditures were $94,000 and $385,000 for the three
months ended March 31, 2001, and 2000, respectively. The decrease in expense for
the current quarter was mainly due to a reduction in research and development
personnel. To date, all development costs have been expensed in the period
incurred.
Interest expense was $183,000 in the three months ended March 31, 2001, as
compared to $7,000 in the same period in 2000. The increase is due to the
increase in borrowings during 2001.
Interest income was $10,000 in the three months ended March 31, 2001, as
compared to $105,000 in the same period in 2000. The decrease was mainly due to
higher available funds invested during 2000.
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During 2000, the Company issued to various consultants fully vested options to
purchase 20,000 shares of common stock, at exercise prices from $1.19 to $1.81
per share in exchange for their professional services. These options are
exercisable for a period of ten years. The Company valued these options using
the Black-Scholes pricing model and this cost will be amortized over the
applicable service periods. The Company amortized approximately $6,000 during
the three months year ended March 31, 2001. In addition, during the first
quarter of 2001 the Company issued to various consultants fully vested options
to purchase 7,500 shares of common stock, at an exercise price of $1.06 per
share in exchange for providing services. The Company amortized approximately
$7,000 during the three months year ended March 31, 2001. Such amounts are
included in non-cash compensation in the statements of operations.
During 2001, the Company granted employees options to purchase 304,264 shares of
common stock at an exercise price of $0.27 per share. These options vest
immediately and are exercisable for ten years. Compensation expense was recorded
for the difference between the exercise price and fair value at the grant date,
totaling approximately $239,000. Such amounts are included in non-cash
compensation in the statements of operations.
In 1999, the Company issued 75,000 non-refundable shares of its common stock to
an advisor for services to be performed over three years. The $422,000 value
ascribed to the 75,000 shares is recorded as an other asset and is being ratably
amortized over three years, with $52,700 of such amortization expensed in the
three months ended March 31, 2001. The issuance of the shares is non-refundable.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.1 million during the quarter ended
March 31, 2001 from $1.7 million at December 31, 2000. At March 31, 2001, the
Company had a working capital deficit (current assets minus current liabilities)
of approximately $2.4 million. Net cash used in operating activities was $1.1
million for the quarter ended March 31, 2001. Net cash flows used in operating
activities in the period reflect net losses of $1.5 million, offset by non cash
expenses of approximately $0.7 million.
As of March 31, 2001, the Company had $619,000 of cash and cash equivalents. The
Company has an accumulated deficit of $26.7 million as of March 31, 2001. The
Company continues to incur substantial net losses and negative operating cash
flow. The Company will need additional financing to meet current operating cash
requirements. If we are unable to raise additional financing or generate
sufficient cash flow, we may be unable to continue as a going concern. Even if
the Company is successful in obtaining funding to meet current operating
expenses, the Company will need to substantially increase its revenues and
reduce expenses or its losses will continue indefinitely. Even if the Company's
efforts to increase revenue are successful, there will be a delay in making this
revenue available to fund operating expenses. The Company will need to raise
additional funds to maintain current operating expenses and those expenses
needed to support efforts to increase revenue. If the Company is not successful
in securing additional funding the Company's business will be seriously harmed.
Our principal commitments consist of subordinated convertible notes, notes
payable, obligations under capital and operating leases and accounts payable.
Our annual report on Form 10KSB for the year ended December 31, 2000 included a
report from our independent auditors containing an explanatory paragraph stating
that we have recurring losses from operations, have a working capital deficiency
and an accumulated deficit that raise substantial doubt about our ability to
continue as a going concern.
Our consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue as a going concern. We believe our ability to continue as a going
concern is dependent upon our ability to obtain additional financing to generate
sufficient cash flow to meet our obligations on a timely basis as may be
required and ultimately to achieve profitable operations. Management is
implementing internal actions to improve our operations and liquidity including
a reduction of our workforce and closure of some of our businesses operating
with negative cash flows. The internal actions to date to reduce operating
expenses will not be sufficient to reach positive cash flow. In addition to
these internal actions, Management is considering external financing options,
such as strategic alliances, debt, or equity offerings. There can be no
guarantee that these efforts will be successful. Such offerings can have a
dilutive effect on the Company's shareholders.
The Company's Common Stock is traded over the counter and quoted on the NASDAQ
Small Cap Market System under the symbol "ESNI". The Company has received
notification from NASDAQ that the Company's common stock has failed to maintain
a minimum bid price of $1.00 for thirty (30)consecutive trading days as required
by NASDAQ rules. Therefore, in accordance with the NASDAQ rules, the Company is
provided until June 28, 2001, to regain compliance with this rule. If, prior to
June 28, 2001, the bid price of the Company's common stock is at least $1.00 for
a minimum of ten (10) consecutive trading days, NASDAQ's staff will determine if
the Company complies with NASDAQ's Marketplace Rule 4310(c)(8)(b). If the
Company is unable to demonstrate compliance with such rule on or before June 28,
2001, NASDAQ will notify the Company that its common stock will be de-listed. As
of May 10, 2001, the bid price for the Company's common stock has not been at
least $1.00 for ten (10) consecutive trading days. The Company's management is
considering measures to avoid de-listing however, no assurances can be given
that the Company will avoid such delisting.
On May 7, 2001 the Company entered into a letter of intent to commence
negotiating a definitive merger agreement (the "Agreement") with SpaceLogix,
Inc. As one of the conditions for execution of the definitive merger agreement,
SpaceLogix will provide one or more bridge loans to E-Sync of at least
$1,050,000, which would be converted into common stock upon consummation of the
merger. Additionally, SpaceLogix would agree in the definitive merger agreement
to cause its investment banker to undertake an additional best efforts to raise
equity capital of $2,000,000 to $3,500,000 for the merged entity.
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Upon the consummation of the merger, (i) SpaceLogix would merge into a
subsidiary of E-Sync, (ii) E-Sync stockholders would retain their currently
outstanding securities in E-Sync, and (iii) SpaceLogix' stockholders would
receive the following consideration:
- First, that number of shares of E-Sync's common stock equal to the
sum of (x) 6,000,000 plus (y) that number of shares equal to the
quotient of the amounts bridge loaned by SpaceLogix to E-Sync
divided by 80% of the 5 day average closing price for the
immediately prior 5 day period from the date of the respective
loans;
- Second, 1,200,000 shares of a new series C preferred stock, which
(x) if, within 120 days of the consummation of the merger, the
combined company is able to complete a private placement of a
minimum of $2 million of new equity capital (the "Private
Placement"), in addition to the amount previously bridge loaned,
would convert into an aggregate amount of 12,000,000 shares of
E-Sync's common stock, and (y) if the Private Placement is not
consummated within 120 days of the merger, would instead be
thereafter redeemed for an aggregate cash consideration of $600,000;
and
- Third, warrants to acquire 5,500,000 shares of E-Sync common stock,
with an exercise price equal to 85% of the average closing price of
E-Sync's common stock over the five trading days prior to the date
the definitive merger agreement is executed, the exercisability of
which would be subject to the merged entity meeting the following
performance criteria:
- (i) 1,833,000 shall be exercisable at such time as
E-Sync has increased monthly gross margin on sales above
the level recorded at April 30, 2001 by $100,000 for
three consecutive months, (ii) 1,833,000 shall be
exercisable at such time as E-Sync has net after tax
income (but excluding any goodwill amortization charges
arising by virtue of the merger) for a period of three
consecutive months and (iii) 1,834,000 shall be
exercisable at such time as the balance sheet current
ratio will exceed 1:1 for a period of three consecutive
months commencing not earlier than November, 2001.
The execution of any such Agreement would be subject to the satisfactory
completion of each Party's ongoing investigation of the other Party's business,
and would also be subject to approval by the each Party's board of directors.
Additionally, the following preconditions would need to be satisfied prior to
the execution and delivery of the Agreement by SpaceLogix; (i) The holders of
approximately $1,000,000 of convertible notes of E-Sync due May 31, 2001 shall
agree to convert all principal and interest on such notes to equity under the
terms of the voluntary conversion provisions of such notes upon the occurrence
of the Merger; (ii) The holders of the $1,000,000 term notes of ESNI due August
15, 2001 (the "MM Notes") shall agree to convert all principal and interest on
such notes into that number of shares of E-Sync common stock equal to the
quotient obtained by dividing the outstanding principal and interest on the MM
Notes on the date of conversion by the Bridge Price (as defined) upon the
occurrence of the Merger; (iii) All material contractual agreements with
employees and stockholders of E-Sync shall be addressed to the reasonable
satisfaction of SpaceLogix (with the effectiveness of any such change being
conditioned upon the effectiveness of the Merger); (iv) A plan for, and
estimated costs expected to be incurred in connection with, closing E-Sync
operations in England shall be established and agreed to by SpaceLogix.
In addition, concurrently with the execution and delivery of the LOI, E-Sync
entered into Consulting Agreements (the "Consulting Agreements") with each of
SpaceLogix and Trautman Wasserman & Co., Inc., a New York corporation ("TW"),
pursuant to which each of SpaceLogix and TW will provide management consulting
services and will each be entitled to a fee of $75,000 in the event the proposed
Merger does not occur within 150 days of May 7, 2001 (assuming such non-
occurrence does not result from their respective actions or inactions). The
Company will pay Spacelogix a monthly fee of $50,000 . The fee shall accrue and
become payable only in the event Bridge Loans (as defined in the LOI) in an
aggregate amount of at least $1,050,000 are made to the Company by Spacelogix.
Notwithstanding the foregoing, the fee shall only accrue for three (3) months
following May 7, 2001 and following such time the obligation to accrue and pay
the fee shall terminate, unless at such time the monthly revenues generated by
SpacLogix equal or exceed the fee. Spacelogix agrees that any net revenues
generated by Spacelogix following May 7, 2001, shall be for the account of and
payable to the Company. The Company will pay TW a monthly fee of $25,000 a
month. The fee shall accrue and become payable only if the Private Placement (as
defined in the LOI) is completed within 120 days following consummation of the
Merger (as defined in the LOI) and such Private Placement renders net proceeds
to the Company of at least $2,000,000. In the event this Agreement is terminated
in accordance with its terms, the accrued fee shall only become payable in the
event that of a successful capital funding occurs.
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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
developing any 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. 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.
Item 2. Changes in securities and use of proceeds -- N/A
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -- None
(b) Reports on Form 8-K - None
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SIGNATURES
In accordance with 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: May 15, 2001 E-SYNC NETWORKS, INC.
/s/ Michael A. Clark
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Michael A. Clark
President and COO
/s/ Thomas Wikander
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Thomas Wikander
Controller (Chief Accounting Officer)
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