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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 September 30, 1999
[ ] 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
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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
-----------------------------------
(Address of principal executive offices)
(203) 601-3000
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(Issuer's telephone number)
542 Westport Ave., Norwalk, CT 06851
------------------------------------
Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
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 October 31, 1999
----- -------------------------------
Common Stock Par Value $.01 5,738,928 shares
Series A Preferred Stock No Par Value 1,000,000 shares
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E-SYNC NETWORKS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1999 (unaudited), December 31, 1998 (unaudited)
and October 31, 1998 (audited) 3
Condensed Consolidated Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, OCTOBER 31,
1999 1998 1998
------------- ------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,339,500 $ 796,800 $ 667,900
Accounts receivable, less allowance
for doubtful accounts of $112,000 at September 30,
1999 and $35,000 at December 31, 1998 and October
31, 1998 1,299,400 932,500 1,073,600
Note receivable 75,000 - -
Other current assets 126,200 115,500 106,400
------------ ----------- -----------
Total Current Assets 3,840,100 1,844,800 1,847,900
Equipment, net 3,350,000 886,600 897,200
Other assets 250,000 - -
------------ ----------- -----------
TOTAL ASSETS $ 7,440,100 $ 2,731,400 $ 2,745,100
============ =========== ===========
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31, OCTOBER 31,
1999 1998 1998
------------- ------------ ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Term loan payable, current portion $ 762,800 $ 12,800 $ -
Obligations under capital leases, current portion 113,700 125,900 134,700
Accounts payable and accrued expenses 2,954,700 928,000 945,300
Medical benefits obligation, current portion 26,400 - -
Deferred revenue - 127,000 121,800
Other current liabilities 1,706,400 - -
------------ ----------- -----------
Total Current Liabilities 5,564,000 1,193,700 1,201,800
Term loan payable, less current portion 9,600 19,100 -
Obligations under capital leases, less current portion 50,700 74,300 92,400
Medical benefits obligation, less current portion 217,600 - -
------------ ----------- -----------
Total Liabilities 5,841,900 1,287,100 1,294,200
Stockholders' Equity:
Series A Convertible Preferred Stock, stated value $.01
per share, 1,000,000 shares authorized, issued and
outstanding 10,000 - -
Common Stock, par value $.01 per share,
9,000,000 shares authorized, 6,731,493 shares issued and
outstanding at September 30, 1999, 4,884,693 shares
issued and outstanding, stated value $.33 1/3 per share, at
December 31,1998 and October 31, 1998 67,300 1,628,200 1,628,200
Additional paid in capital 11,789,500 5,591,800 5,591,800
Accumulated deficit (9,052,200) (4,559,300) (4,552,700)
Less treasury stock at cost, 992,565 shares (1,216,400) (1,216,400) (1,216,400)
------------ ----------- -----------
Total Stockholders' Equity 1,598,200 1,444,300 1,450,900
------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,440,100 $ 2,731,400 $ 2,745,100
============ =========== ===========
See accompanying notes to condensed consolidated financial statements.
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
------------ ---------- ------------ ----------
REVENUES
Managed services $ 756,800 $1,057,400 $ 2,527,600 $3,331,300
Professional services 1,002,100 747,000 2,627,900 2,327,100
------------ ---------- ------------ ----------
Total revenues 1,758,900 1,804,400 5,155,500 5,658,400
COSTS AND EXPENSES
Cost of managed services 1,037,600 582,500 2,457,100 1,812,100
Cost of professional services 872,700 524,500 1,944,800 1,687,400
Sales and marketing 727,700 231,500 1,753,500 760,500
General & administrative 1,260,100 267,700 2,595,100 803,900
Product development 375,100 124,600 792,900 375,300
Other expense, net 1,400 3,200 102,400 5,300
Interest (income) expense, net 11,700 14,400 1,900 37,700
------------ ---------- ------------ ----------
4,286,300 1,748,400 9,647,700 5,482,200
----------- ---------- ----------- ----------
NET INCOME (LOSS) $(2,527,400) $ 56,000 $(4,492,200) $ 176,200
=========== ========== =========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.52) $ .01 $ (1.05) $ .05
Diluted $ (.52) $ .01 $ (1.05) $ .05
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATION:
Basic 4,834,499 3,866,350 4,278,196 3,856,347
Diluted 4,834,499 4,212,071 4,278,196 4,154,149
See accompanying notes to condensed consolidated financial statements.
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------------ ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(2,684,800) $ 282,900
INVESTING ACTIVITIES:
Capital expenditures (2,756,400) (243,900)
----------- ---------
Net cash used in investing activities (2,756,400) (243,900)
----------- ---------
FINANCING ACTIVITIES:
Net borrowings from bank 740,400 50,000
Proceeds from exercise of employee stock options 116,000 12,000
Proceeds from issuance of preferred stock, warrants and common stock upon
exercise of warrants 4,531,200 -
Proceeds prior to and in anticipation of future sale of Series B Preferred Stock 1,706,400 -
Payments under capital lease obligations (110,100) (122,900)
----------- ---------
Net cash provided by (used in) financing activities 6,983,900 (60,900)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,542,700 (21,900)
Cash and cash equivalents at beginning of period 796,800 462,300
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,339,500 $ 440,400
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 39,600 $ 50,000
=========== =========
Income Taxes $ 4,000 $ 2,000
=========== =========
Non-cash investing activities:
Capital lease obligations incurred for fixed asset acquisitions $ 73,600 $ 99,100
=========== =========
See accompanying notes to condensed consolidated financial statements.
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E-SYNC NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING
The condensed consolidated balance sheet as of September 30, 1999, and December
31, 1998, and the related condensed consolidated statements of operations for
the three and nine months ended September 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the nine months ended September 30,
1999 and 1998, are unaudited. The balance sheet as of October 31, 1998 is
derived from the audited financial statements as reported on the Company's Form
10-KSB for the period then ended. 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 September 30, 1999 and December 31, 1998, and for
the three and nine month periods ended September 30, 1999, 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 fiscal year ended October 31,
1998. 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 fiscal year ended October 31,
1998.
2. CASH
For the purposes 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. The cash and
cash equivalents reported on the balance sheet at September 30, 1999 includes
$1,706,400 of funds paid to the Company related to an issuance of the Company's
newly-created Series B Preferred Stock that was completed subsequent to the
close of the Company's third quarter.
3. REORGANIZATION
At the Company's annual shareholders' meeting held on July 15, 1999, the
shareholders approved the formation of E-Sync Networks, Inc., a Delaware
corporation and (at the time) a wholly-owned subsidiary of Wiltek Inc., and the
merger of Wiltek Inc. with and into E-Sync Networks, Inc., with the effect of
(i) changing the name of the issuer, (ii) changing the state of incorporation of
the issuer and (iii) amending the Certificate of Incorporation and By-laws of
the issuer (such events, collectively, the "Reorganization"). The Reorganization
was completed on July 28, 1999. By virtue thereof, Wiltek Inc. was merged with
and into E-Sync Networks, Inc., in essence changing the name and state of
incorporation of the Company. The financial statements discussed above represent
the balance sheets, consolidated statements of operations and cash flows of
Wiltek, Inc. for the periods prior to the Reorganization; however, such
financial statements have been renamed to E-Sync Networks, Inc. to reflect the
current name of the Company at the time of filing of this report on Form 10-QSB.
4. SECURITIES PURCHASE AGREEMENT
On January 28, 1999, Commercial Electronics Capital Partnership, LP ("CECAP"),
and a related entity, Commercial Electronics, L.L.C. (collectively,
"Purchaser"), purchased 732,160 shares of common stock from three retiring
directors at $.85 per share. In connection therewith, the Purchaser also
purchased (i) 1,000,000 shares of Series A Convertible Preferred Stock with no
par value, and (ii) a warrant to purchase up to 1,500,000 shares of the
Company's common stock for 18 months at a price of $1.00 per share, for an
aggregate cash consideration paid to the Company of $3,000,000. The Series A
Convertible Preferred Stock is convertible into common stock at any time at the
option of the holder on the basis of 2.5 shares of common stock for each share
of preferred stock.
In connection with the aforementioned transaction, the Purchaser became the
beneficial owner of 4,732,160 shares of the Company's authorized common stock,
representing approximately 59% of the Company's outstanding common stock
(assuming the conversion of Purchaser's preferred stock into common stock and
the full exercise of the Purchaser's warrant to purchase common stock). Such
beneficial ownership, along with the fact that the Purchaser's designees
currently constitute a majority of the Company's Board of Directors, and the
fact that Purchaser has the contractual right to retain control of the Company's
Board of Directors, constituted a change in control of the Company from the
retiring directors to the Purchaser and their director nominees. Utilization of
the Company's net tax loss carry forwards will be significantly limited as a
result of the change in control of the Company.
Pursuant to the Purchase Agreement, the Company signed a "Medical Benefit
Letter" which obligates the Company to provide medical benefits to the three
retiring directors and their spouses until they reach age 65 (dates ranging from
September 12, 2004 to December 29, 2009). The Company's maximum obligation under
the "Medical Benefit Letter" is $400,000. The Company
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initially recorded a liability approximating $260,000 representing the net
present value of the maximum $400,000 medical benefit obligation. The Company
was also required to deposit $250,000 in a Medical Escrow Fund to secure a
portion of the Company's obligation under the "Medical Benefit Letter". The
Company has classified the deposit of $250,000 as "other assets" in the
accompanying balance sheet. The Company is entitled to withdraw from the medical
escrow fund medical benefits paid pursuant to the "Medical Benefit Letter" on a
quarterly basis. Such payments totaled $6,400 and $16,000 during the three and
nine months ended September 30, 1999, respectively, and were charged against the
medical benefit obligation liability.
5. EARNINGS PER SHARE
For the periods presented in the consolidated statement of operations, the
calculations of basic EPS and diluted EPS vary in some instances in that the
weighted average shares outstanding assuming dilution includes the incremental
effect of stock options and convertible preferred stock and common stock
warrants.
Reconciliation of Basic and Diluted EPS computations:
Three Months Ended September 30,
-------------------------------------------------------------------
1999 1998
---------------------------------- -------------------------------
Income Shares Per Share Income Shares Per Share
------------ --------- --------- --------- --------- ---------
BASIC EPS
Income (Loss) available to Common
Shareholders $(2,527,400) 4,834,499 $ (.52) $ 56,000 3,866,350 $.01
DILUTIVE EFFECT OF SECURITIES:
Stock Options - - - 345,720
----------- --------- --------- ---------
DILUTED EPS
Income (Loss) available to Commons
Shareholders plus assumed conversions $(2,527,400) 4,834,499 $ (.52) $ 56,000 4,212,071 $.01
=========== ========= ======== ========= ========= =========
Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998
---------------------------------- -------------------------------
Income Shares Per Share Income Shares Per Share
------------ --------- --------- --------- --------- ---------
BASIC EPS
Income (Loss) available to Common
Shareholders $(4,492,200) 4,278,196 $(1.05) $176,200 3,853,347 $.05
DILUTIVE EFFECT OF SECURITIES:
Stock Options - - - 300,802
----------- --------- --------- ---------
DILUTED EPS
Income (Loss) available to Common
Shareholders plus assumed conversions $(4,492,200) 4,278,196 $(1.05) $176,200 4,154,149 $.05
=========== ========= ======== ========= ========= =========
Options to purchase 398,500 shares and 698,300 shares of common stock at prices
ranging from $.25 to $2.94 were outstanding at September 30, 1999 and 1998,
respectively. No options were issued in the nine months ended September 30,
1999. One million Series A Convertible Preferred Shares were outstanding at
September 30, 1999. All the stock options and convertible preferred shares were
excluded from the calculation of Diluted EPS for the three and nine months ended
September 30, 1999, because the Company experienced a loss for those periods and
inclusion of such securities would have had an anti-dilutive effect. Options to
purchase 146,500 shares of common stock at prices ranging from $0.87 to $2.94
were excluded in the computation of Diluted EPS for the three months ended
September 30, 1998 because the options' exercise price was greater than the
average market price of the common shares. Options to purchase 286,968 shares of
common stock at prices ranging from $0.81 to $2.94 were excluded in the
computation of Diluted EPS for the nine months ended September 30, 1998 because
the options' exercise price was greater than the average market price of the
common shares.
6. COMMITMENTS AND CONTINGENCIES
The Company entered into a Loan and Security Agreement with a commercial lender
in June 1998, 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.
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The working capital loan requires that interest be paid monthly on outstanding
advances during the term of the loan at one quarter percent above prime and a
fee on the unused portion of the loan will be payable quarterly at one quarter
percent. The working capital facility was scheduled to expire on July 1, 1999,
however the Company received an extension under the same terms and conditions
until November 15, 1999. In October 1999, the Company repaid $250,000 of the
line of credit, and the facility amount available was reduced by the same
amount.
Interest on advances under the term loan are payable monthly in arrears at one
half percent above prime and the total of such advances outstanding at December
31, 1998 were converted to a term loan. The term of the loan is for thirty
months payable in equal monthly principal payments of one thirtieth of the
outstanding balance at December 31, 1998, plus interest payable monthly
commencing January 31, 1999, at one half percent above prime on the outstanding
principal balance. The amount outstanding under the term loan at December 31,
1998 and September 30, 1999 was approximately $31,900 and $22,400, respectively.
The related Security Agreement provides that the loans be secured by the
Company's existing and future assets. Covenants under the Loan and Security
Agreement provide that the Company's current ratio cannot be lower than 1.2,
tangible net worth be at least $1,000,000 and the Company must achieve $100,000
net earnings for each six-month period on a rolling six-month basis. The Company
was in default of the current ratio and net earnings covenants at and for the
period ended September 30, 1999; however, the Company received notification from
the bank indicating waiver of those defaults.
The Company's lease for its former primary offices and data center in Norwalk,
Connecticut will expire on December 31, 1999. On April 1, 1999, the Company
entered into a fifteen year non-cancelable lease for 20,555 square feet of
office space located in Trumbull, Connecticut. In August 1999, the Company
relocated their primary offices to the Trumbull location. The Company plans to
complete the move of its data center during the course of the year. The Trumbull
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 will record the rent expense ratably over the
lease term.
7. SUBSEQUENT EVENTS
On November 8, 1999, the Company acquired 100% of the outstanding stock of
Braincraft Learning Technologies, Inc. in exchange for $250,000 of cash and
671,676 shares of the Company's common stock. Braincraft is a leading provider
of web-based corporate communication and training tools to major enterprise
clients. The addition of Braincraft enables the Company to leverage Braincraft's
expertise in the development of innovative communications solutions across
internal and external settings.
On November 10, 1999, the Company completed a $10,000,000 private placement of a
newly-created Series B Preferred Stock. The Company sold 1,590,909 shares of
Series B Preferred Stock, each convertible into one share of the Company's
common stock (subject to adjustment upon the occurrence of certain events) for
$7,000,000 ($4.40 per share), and sold a European investor $3,000,000 of the
preferred stock of the Company's U.K. subsidiary (which preferred stock is, at
the option of the investor, exchangeable into 681,818 additional shares of the
Series B Preferred Stock). The proceeds will be used to repay outstanding debt
which is now due, provide working capital, and to fund operating losses related
to the investment in the growth initiatives the Company has undertaken. As of
September 30, 1999 the Company had received $1.7 million of the stock offering
amount, and recorded such amount as a current liability as of such date.
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 adopted SFAS 131
in 1999.
The Company provides outsourced solutions for the development and hosting of
Web-based Extranet initiatives. Serving its Fortune 1000 customer base, the
Company offers secure online messaging, directory and fax services,
legacy-to-Web application development services, hosted communications, and
infrastructure support solutions that link business partners via the Web. The
operations of the Company are conducted through two business segments primarily
within the continental United States and the United Kingdom. Descriptions of the
business segments' services and operations are as follows:
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MANAGED SERVICES
Managed services provides customers with hosted global messaging services for
e-mail, fax, directory services, and remote management services supported by a
Company owned and operated, 24-hours-a-day, 7-days-a-week data center and help
desk that assures reliable and safe electronic communications. Messaging
services includes (i) TotalMail that provides user access to e-mail, shared
calendar scheduling, distribution lists and folders, and (ii) Hosting Services,
whereby the Company will maintain customers' mail servers and run the e-mail
function remotely at one of its sites. Fax services includes (i) Application to
Fax which simultaneously delivers computer generated files from mainframe or
PC-based applications to one or many facsimile devices worldwide, (ii) Mailfax,
which sends faxes and attachments via e-mail, and (iii) Inbound Fax, which
allows receipt of inbound faxes at the desktop via e-mail. Directory Services
allows customers to outsource the management of their corporate data directories
via the Company's custom-designed directory solutions products. The Company also
offers secure e-mail and fax messaging services through public key
infrastructure (PKI), digital certificates, and SmartCard authentication
products. The Company provides constant verification and analysis of multiple
network resources, and monitors network traffic and bandwidth, and file and mail
servers.
PROFESSIONAL SERVICES
Professional Services is a consulting systems design and integration services
organization that provides legacy-to-Web application development and migration.
As a Microsoft Solution Provider Partner, certified system engineers and
Microsoft product specialists assist customers in designing and developing
migration strategies to Microsoft BackOffice(R) products. They provide
assistance for Windows NT(R), Exchange(R), Systems Management Server(R) (SNS),
SNA Server(R), and internet/intranet deployment through Internet Information
Server(R) (IIS). The Company's system engineers also provide design and
integration services, whereby they assess customers' information, messaging, and
connectivity needs, evaluate existing infrastructure architecture, define and
test migration processes, and prepare enterprise-wide implementation plans. They
also develop tools, utilities and conversion software for directory support and
design workflow automation solutions. The professional services organization
also supplies clients with experienced project managers to scope, plan and
coordinate virtually any information technology project.
Identifiable assets by segment are those assets that are used in the operations
of each segment as well as the accounts receivable generated by each segment.
Corporate assets consist primarily of cash and cash equivalents, short term
investments, prepaid expenses, and corporate furniture, fixtures, and equipment.
Capital expenditures are comprised primarily of additions to data processing
equipment, furniture and fixtures, and leasehold improvements.
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The following table presents the Company's business segment financial
information:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30
------------------------------------- ---------------------------------
1999 1998 1999 1998
------------------ ----------------- ---------------- ---------------
REVENUE:
Managed services $ 756,800 $1,057,400 $ 2,527,600 $3,331,300
Professional services 1,002,100 747,000 2,627,900 2,327,100
------------------ ----------------- ---------------- ---------------
Consolidated revenues $ 1,758,900 $1,804,400 $ 5,155,500 $5,658,400
================== ================= ================ ===============
OPERATING INCOME (LOSS):
Managed services $(1,352,900) $ 109,300 $(2,450,100) $ 377,200
Professional services (1,161,400) (35,700) (1,937,800) (158,000)
------------------ ----------------- ---------------- ---------------
Operating income (loss) from segments (2,514,300) 73,600 (4,387,900) 219,200
Corporate expenses, net (1,400) (3,200) (102,400) (5,300)
Interest expense (income), net (11,700) (14,400) (1,900) (37,700)
------------------ ----------------- ---------------- ---------------
Net earnings (loss) $(2,527,400) $ 56,000 $(4,492,200) $ 176,200
================= ================ ================ ===============
DEPRECIATION AND AMORTIZATION:
Managed services $ 61,900 $ 30,300 $ 145,600 $ 96,900
Professional services 8,900 6,600 21,500 18,200
Corporate 67,900 16,600 125,900 43,400
------------------ ----------------- ---------------- ---------------
Total depreciation and amortization $ 138,700 $ 53,500 $ 293,000 $ 158,500
================== ================= =============== ===============
CAPITAL EXPENDITURES:
Managed services $ 460,700 $ 71,600 $ 771,100 $ 175,700
Professional services 12,700 12,000 68,200 40,800
Corporate 1,429,900 2,500 1,917,100 27,400
------------------ ----------------- ---------------- ---------------
Total capital expenditures $ 1,903,300 $ 86,100 $ 2,756,400 $ 243,900
================== ================= ================ ===============
IDENTIFIABLE ASSETS AT: SEPTEMBER 30, 1999 DECEMBER 31, 1998 OCTOBER 31, 1998
------------------ ----------------- ----------------
Managed services $ 2,680,500 $1,201,400 $ 1,328,300
Professional services 812,100 453,500 466,400
----------------- ---------------- ---------------
Total assets for reportable segments 3,492,600 1,654,900 1,794,700
Corporate 3,947,500 1,076,500 950,400
----------------- ---------------- ---------------
Total assets $ 7,440,100 $2,731,400 $ 2,745,100
================= ================ ===============
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of operations for the three and nine months ended September 30, 1999
compared to the same periods last year was negatively impacted by increased
costs related to the growth initiatives discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Period to period comparisons of revenues, cost of services and gross margins are
summarized below:
Three Months Ended
September 30,
------------------------------------------------------------------------------------
Managed Services Professional Services Total
------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Revenue $ 756,800 $ 1,057,400 $ 1,002,100 $ 747,000 $ 1,758,900 1,804,400
Cost of
services 1,037,600 582,500 872,700 524,500 1,910,300 1,107,000
--------- ------- ------- ------- --------- ---------
Gross margin $ (280,800) $ 474,900 $ 129,400 $ 222,500 $ (151,400) $ 697,400
= ========== = ======= = ======= = ======= = ========== = =======
Gross margin
percent (37%) 45% 13% 30% (9%) 39%
Revenues decreased by $45,500 or 3% for the three-month period. The decrease
resulted from lower managed services revenue of $300,600 partially offset by
increased professional services revenue of $255,100. The decline in third
quarter managed services revenue compared to the same period last year was
primarily due to the decision to end support for older technology platforms that
are no longer part of the Company's strategic focus.
Gross margin for managed services decreased in the comparative periods due to
the change in technology platform focus and increased costs associated with
growth initiatives discussed above. Gross margin for professional services also
decreased in the comparative periods principally due to increased costs
associated with the previously discussed growth initiatives.
Sales and marketing expenses increased by $496,200 or 214% for the three months
ended September 30, 1999, compared to the same period last year. This represents
41% of total revenues for the three months ended September 30, 1999, compared to
13% of total revenues for the same period last year. The increase is primarily
due to increased salaries, benefits, and recruiting costs related to the hiring
of additional sales and marketing personnel. During the quarter, and for the
remainder of the year, the Company is experiencing higher rent expense during
the transition period to its new facilities. (The Company's rent expense is
allocated among sales and marketing expenses, general and administrative
expenses and product development expenses.) Additional cost increases pertain to
higher marketing and public relations spending to position the Company's new and
expanded products and services.
General and administrative expenses increased by $992,400 or 371% for the three
months ended September 30, 1999, compared to the same period last year. The
increase is the result of facility relocation expenses of $262,500 and higher
professional fees, insurance costs, travel expenses and salaries, benefits and
recruiting costs related to the hiring of additional personnel in the current
period. During the quarter, and for the remainder of the year, the Company is
experiencing higher rent expense during the transition period
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related to its new facilities.
Product development expenses increased by $250,500 or 201% for the three months
ended September 30, 1999, compared to the same period last year. The increase is
primarily due to increased salaries, benefits, and recruiting costs related to
the hiring of additional software engineering personnel in support of increased
development activities. During the quarter, and for the remainder of the year,
the Company is experiencing higher rent expense during the transition period
related to its new facilities.
Interest income is comprised of interest earned on cash in money market accounts
and interest expense is comprised of interest costs pertaining to capitalized
lease obligations and interest on the bank term loan payable. The decrease of
$2,700 in interest expense (net of interest income) for the three months ended
September 30, 1999, compared to the same period last year, was primarily the
result of increased interest income in the period due to higher cash balances.
The Company reported a net loss for the three months ended September 30, 1999 of
$2,527,400 or $.52 per share compared to net income of $56,000 or $.01 per
share, on a diluted basis, for the three months ended September 30, 1998. The
decrease in net earnings of $2,583,400 over the comparative periods is primarily
attributable to the Company's growth initiatives discussed previously.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Period to period comparisons of revenues, cost of services and gross margins are
summarized below:
Nine Months Ended
September 30,
------------------------------------------------------------------------------------------
Managed Services Professional Services Total
------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Revenue $ 2,527,600 $ 3,331,300 $ 2,627,900 $ 2,327,100 $ 5,155,500 $ 5,658,400
Cost of
services 2,457,100 1,812,100 1,944,800 1,687,400 4,401,900 3,499,500
--------- --------- --------- --------- --------- ---------
Gross margin $ 70,500 $ 1,519,200 $ 683,100 $ 639,700 $ 753,600 $ 2,158,900
= ====== = ========= = ======= = ======= = ======= = =========
Gross margin
percent 3% 46% 26% 28% 15% 38%
Revenues decreased by $502,900 or 9% for the nine month period ended September
30 1999 compared to the same period last year. The decrease is primarily the
result of lower managed services revenue of $803,700 partially offset by
$300,800 of increased professional services revenue. Managed services revenue
declined primarily due to the decision to end support for older technology
platforms that are no longer part of the Company's strategic focus.
Gross margin for managed services decreased in the comparative periods mainly
due to the change in technology platform focus and increased costs associated
with growth initiatives discussed above. Gross margin for professional services
decreased slightly in the comparative periods principally due to increased costs
associated with growth initiatives discussed above, partially offset by a
reduction in the use of higher cost subcontract consultants and increased
revenue from higher margin consulting engagements.
Sales and marketing expenses increased by $993,000 or 131% for the nine months
ended September 1999 compared to the same period last year. This represents 34%
of total revenues for the nine months ended September 30, 1999, compared to 13%
for the same period last year. The increase is primarily due to increased
salaries, benefits, and recruiting costs related to the hiring of additional
sales and marketing personnel. In addition, the Company incurred approximately
$211,400 of non-recurring expenses related to several initiatives it has
undertaken, including development of a new web site, and expansion of the sales
and marketing departments. Additional cost increases pertain to higher marketing
and public relations spending to position the Company's new and expanded
products and services.
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General and administrative expenses increased by $1,791,200, or 223%, for the
nine months ended September 30, 1999, compared to the same period last year. The
increase is primarily the result of a provision for medical benefit obligation
of $260,000 for three retiring directors and their spouses as disclosed in note
3 to the financial statements and facility relocation expenses of $494,400. In
addition, the Company experienced higher professional fees, insurance costs,
travel expenses and salaries, benefits, and employment related to the hiring of
additional personnel in the current period.
Product development expenses increased by $417,600 or 111% for the nine months
ended September 30, 1999, compared to the same period last year. The increase is
primarily due to increased salaries, benefits, and recruiting costs related to
the hiring of additional software engineering personnel to support increased
development activities.
Other expense increased by $97,100, for the nine months ended September 30,
1999, compared to the same period last year. The increase is mainly attributable
to the identification and write-off during the facilities relocation of impaired
equipment and leasehold improvements having no future value.
Interest income is comprised of interest earned on cash in money market accounts
and interest expense is comprised of interest costs pertaining to capitalized
lease obligations and interest on the bank term loan payable. The decrease of
$35,800 in net interest expense for the nine months ended September 30, 1999,
compared to the same period last year, was primarily the result of interest
earned on the proceeds from the sale of equity securities.
The Company reported a net loss for the nine months ended September 30, 1999 of
$4,492,200 or $1.05 per share compared to net earnings of $176,200 or $.05 per
share, on a diluted basis, for the nine months ended September 30, 1998. The
decrease in net earnings of $4,668,400 over the comparative periods is primarily
attributable to the Company's growth initiatives discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased during the nine months ended September 30,
1999, by $1,542,700 from $796,800 at December 31, 1998. The increase in cash was
due to cash received in anticipation of the subsequently completed issuance of
Series B Preferred Stock of $1,706,400, $4,531,200 in proceeds received from the
issuance of common stock and the exercise of warrants, and $740,400 of proceeds
(net of repayments) from a short term note with a commercial lender. Operations
of the Company used $2,684,800 and an additional $2,756,400 was expended for
capital additions.
At September 30, 1999, the Company had working capital (current assets minus
current liabilities) of approximately negative $1,700,000. However, the
$10,000,000 private placement of Series B Preferred Stock which was completed in
November (see note 8 to Condensed Consolidated Financial Statements above) is
expected to provide the Company with sufficient working capital to repay its
bank facility, to fund operations and to finance its growth initiatives for the
near future.
The Company spent approximately $2.8 million on capital equipment and leasehold
improvement/construction costs, primarily for its new offices and data center in
Trumbull, Connecticut during the nine months ended September 30, 1999. While the
Company has no definitive plans for additional capital expenditures of such a
magnitude at the present time, the Company anticipates that future large capital
expenditures will be needed as the Company's business grows. In addition, the
Company just recently completed the acquisition of Braincraft Learning
Technologies, Inc. (see note 8 to Condensed Consolidated Financial Statements
above) and, while it has no current plans to acquire any other entity, it
intends to continue to explore prospective acquisitions that would assist in the
growth of the Company. The Company would use existing cash, proceeds from future
sales of equity and borrowed funds to finance any such future capital
expenditures or acquisitions.
YEAR 2000
The Company established a Year 2000 (Y2K) executive oversight committee in 1998
to review all of the Company's computer systems and programs as well as those of
third parties whose data the Company relies on in any material respect. The
objective of the review was to assess the ability of the computer systems and
programs to process transactions in the year 2000 and to implement remedial
solutions to preclude interruption of the Company's business operations and
services to its suppliers and customers. Part of the remediation process
includes transitioning customers from and retirement of Y2K non-compliant legacy
systems. The legacy system transitioning process including final verification
and testing, was completed during the third quarter of 1999. The Company has
also contacted all of its hardware and software component suppliers and has
received responses from all verifying Y2K readiness. While systems testing and
remediation for the Company's Y2K project is substantially complete, management
anticipates post remediation testing to continue during the fourth quarter 1999
with one hundred percent testing and compliance achieved on or before October
31, 1999.
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The Company budgeted approximately $100,000 through the year 1999 for the Y2K
compliance program, $75,000 of which is for internal labor. Nominal
expenditures, primarily for maintenance, will be made beyond the year 2000.
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PART II. OTHER INFORMATION
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.
Item 2. Changes in securities and use of proceeds
On August 24, 1999, the Company sold 1,125,000 shares of its Common Stock to
Commercial Electronics, LLC ("CE") and 375,000 shares of its Common Stock to
Commercial Electronics Capital Partnership, L.P. ("CECAP"), for cash proceeds
of $1,125,000 and $375,000, respectively, upon the full exercise of warrants
issued to CE and CECAP in January of 1999. The offer and sale to CE and
CECAP was exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the
Securities Act.
Upon the exercise of previously outstanding stock options the Company sold to
current and former employees (i) 1,800 shares of its Common Stock for $0.25 per
share on July 27, 1999, (ii) 19,000 shares of its Common Stock for
$0.25 per share on August 2, 1999, (iii) 5,000 shares of its Common Stock for
$0.56 per share on August 2, 1999, (iv) 1,000 shares of its Common Stock for
$2.94 per share on August 2, 1999, and (v) 25,000 shares of its Common Stock
for $0.81 per share on August 12, 1999. The offer and sale to such purchasers
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------- ----------------------
27 Financial Data Schedule (filed separately herewith)
(b) Reports on Form 8-K
None
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: NOVEMBER 15, 1999 E-SYNC NETWORKS, INC.
/s/ Frank J. Connolly, Jr.
----------------------
Frank J. Connolly, Jr., Chief Financial Officer
(as principal financial officer and on behalf
of the registrant)
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