Insynq, Inc.
The accompanying notes are an integral part of these condensed financial statements.
Insynq, Inc.
The accompanying notes are an integral part of these condensed financial statements.
Insynq, Inc.
The accompanying notes are an integral part of this condensed financial statement.
Insynq, Inc.
The accompanying notes are an integral part of these condensed financial statements.
Insynq, Inc.
Notes to Condensed Financial Statements
February 28, 2003
(unaudited)
Note 1 – Business and Significant Accounting Policies
Business
Insynq, Inc. (the Company) is a Nevada corporation headquartered in Tacoma, Washington USA. The Company is an application hosting and managed software service provider that provides server-based computing access and services to customers who decide to augment all or part of their information technology requirements. Customers pay a monthly fee for their services and connect to Company’s server farm primarily through either the Internet, wireless or DSL connection.
On July 25, 2002, the Board of Directors approved a re-incorporation merger of the Company with its wholly owned subsidiary, Insynq, Inc., a Nevada corporation, and to effectuate a 100:1 common stock exchange of the Company’s currently issued and outstanding shares of common stock. The re-incorporation, which was effective as of December 23, 2002, resulted in the exchange of 59,013,393 common shares of the terminating entity, Insynq, Inc-Delaware, for 590,134 common shares of the surviving entity, Insynq, Inc-Nevada.
All shares and per share amounts have been retroactively restated to reflect this transaction.
Fair Value of Financial Instruments
Financial instruments consist principally of cash, accounts and related party receivables, trade and related party payables, accrued liabilities, short and long-term obligations. The carrying amounts of such financial instruments in the accompanying balance sheet approximate their fair values. It is management’s opinion that the Company is not exposed to significant currency or credit risks arising from these financial instruments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Restructuring Costs.” SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, the Company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require the Company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to
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the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123”. SFAS 148 amends FASB Statement No. 123, “Accounting for Stock Based Compensation” and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002.
The Company does not believe the adoption of these standards will have a material impact to the financial statements.
Interim Condensed Financial Statements
The condensed financial statements as of February 28, 2003 and for the three months and nine months ended February 28, 2003 and 2002 are unaudited. In the opinion of management, such condensed financial statements include all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position and the results of operations. The results of operations for the three and nine months ended February 28, 2003 and 2002, are not necessarily indicative of the results to be expected for the full year. The condensed balance sheet information as of May 31, 2002 was derived from the audited financial statements included in the Company’s annual report Form 10-KSB. The interim condensed financial statements should be read in conjunction with that report.
Reclassifications
Certain reclassifications have been made to the previously reported statements to conform to the Company's current financial statement format.
Note 2 – Going Concern and Management Plans
The Company’s financial statements for the three months and nine months ended February 28, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. For the nine months ended February 28, 2003, the Company had a net loss of $2,063,720 and a negative cash flow from operations of $453,632. The Company had a working capital deficit of $6,630,898 and a stockholders’ deficit of $6,310,104 at February 28, 2003. The Company’s working capital deficit as of February 28, 2003 may not enable it to meet certain financial objectives as presently structured.
As of February 28, 2003, and to the filing date of this report, the Company is not in compliance with the proper registration and licensing of certain software applications and products critical to support the customer base and its own internal operations. The Company has initiated negotiations with these software vendors in an effort to meet the licensing requirements. Should the Company not reach a satisfactory agreement with these vendors, and due to the vital and critical nature of these licenses to support its services, sales and operations, it may be forced to cease operations and/or to file bankruptcy.
As of February 28, 2003, the Company is in default on three capitalized lease obligations and six related party notes payable. The assets of an underlying computer equipment lease are critical to the Company’s operations. The Company has initiated contact to restructure this significant lease obligation, and, due to the current economic climate and current market for the equipment, the Company anticipates that it can successfully restructure this obligation. As a contingency plan for the backup of this equipment, the Company entered into another equipment
8
lease agreement in August 2001 for similar equipment to support its customer base. The Company is past due on six related party notes payable with principal totaling approximately $1,307,300. Total accrued interest related to these obligations is approximately $316,800. In addition, the Company has a letter of intent from one related party to convert approximately $1,300,000 of principal and accrued interest into preferred stock.
The development and marketing of the Company’s technology and products will continue to require a commitment of substantial funds. Currently, pursuant to Item 303(b)(1) and (3) of Regulation SB, the Company has no material capital commitments. However, should the Company be forced to seek other equipment in the open market, based on its inability to restructure its capital lease obligation, the Company would attempt to raise the necessary finances. These amounts, however, are currently not quantifiable.
As of February 28, 2003 the Company was delinquent on approximately $785,000 of its payroll and business taxes and related penalties and interest. The majority of the past due amount, or estimated at approximately $699,500, is for payroll taxes, penalties and interest due to the Internal Revenue Service (IRS). In April 2002, the IRS filed a Federal Tax Lien on the assets of the Company for all past due employment taxes, penalties and accrued interest. The Company had submitted an Offer In Compromise to the Internal Revenue Service seeking relief on a portion of its overall obligation and to structure a payment plan on the settled amount of taxes due. The Company was notified, on April 1, 2003, that the Offer In Compromise was denied. The Company expects to resubmit a second offer or appeal the decision of the IRS. Unless the Company and the IRS agree to a mutually agreeable workout, the IRS could take possession of the Company’s assets or the Company will be forced to cease operations and/or to file for bankruptcy protection.
The condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company is devoting its efforts into establishing a business in the new emerging Managed Services Provider industry. The Company is establishing alliances with Independent Software Vendors and Internet Service Providers to provide access to their applications for their customers and building new channels for marketing products to potential customers. As a result of these new alliances and products, the Company will be able to provide additional and enhanced services to customers. The Company is continuing to develop new products to enable the deployment of and on going management of the Company services.
The Company successfully implemented cost containment strategies and continues to devote significant efforts in the development of new products and opening new markets. Also, the Company continues to contact vendors with past due account balances with the intention of settling the balance due for cash at either less than face or structure a long-term payment plan. To date, Company negotiations to settle creditors’ debts have been very favorable and well received.
However, the rate at which the Company expends its resources is variable, may be accelerated, and will depend on many factors. The Company will need to raise substantial additional capital to fund its operations and may seek such additional funding through public or private equity or debt financing. There can be no assurance that such additional funding, if any, will be available on acceptable terms. The Company’s continued existence as a going concern is ultimately dependent upon its ability to secure additional funding for completing and marketing its technology and products, and, therefore, the success of its future operations.
Note 3 – Loss Per Common Share
Basic and diluted loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding available to common stockholders during the period. The weighted average number of common shares outstanding for basic and diluted loss per share was 11,180,930 and 507,155 for the three months ended February 28, 2003 and 2002, respectively, and, 4,109,708 and 417,856 for the nine months ended February 28, 2003 and 2002, respectively. Common stock equivalents have been excluded from the computation of diluted loss per share for the periods presented, as their effect would be anti-dilutive.
Note 4 – Notes Receivables – Officers
In January 2002, the Company entered into two promissory notes totaling $90,000 with two of its officers in conjunction with the exercise of non-qualified class A common stock options. Each note bears interest at 12% per annum, payable on or before June 2003 and is secured with shares of common stock. As of February 28, 2003 total accrued interest was approximately $12,350.
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Note 5 – Notes Payable
The Company has the following notes payable:
| February 28, 2003
| May 31, 2002
|
|---|
| Note payable to bank, $15,000 revolving line of | | | | | | | | |
| credit, bearing interest at prime plus 6.0% and is | | |
| unsecured. Prime rate of interest at February 28, | | |
| 2003 was 4.25% | | | $ | 12,567 | | $ | 13,277 |
| | | | | | | | | |
| Two notes payable to vendors. Both notes are past | | |
| due. One note is due on demand; the other note is | | |
| serviced at $25 per month. Interest is 18% and both | | |
| are unsecured | | | | 6,019 | | | 6,556 | |
|
| |
| |
| | | | $ | 18,586 | | $ | 19,833 | |
|
| |
| |
Note 6 – Related Party Notes Payable
The Company has short-term promissory notes with stockholders, a corporate officer, and a prior employee. All related party notes, plus accrued interest, and are generally due within one year of issuance or on demand and consist of the following at:
| February 28, 2003
| May 31, 2002
|
|---|
| Note payable to stockholder, past due, originally | | | | | | | | |
| due November 2, 2001, plus accrued interest; bearing | | |
| interest at 10% and is unsecured. The Company has | | |
| received a letter of intent to convert the principal | | |
| and accrued interest, totaling approximately | | |
| $1,300,000, into preferred stock | | | $ | 1,162,000 | | $ | 1,162,000 |
| | | | | | | | | |
| Various notes payable to related parties, past due, | | |
| with various due dates ranging through April 20, | | |
| 2002; bearing default interest ranging from 18% to | | |
| 21%, and are unsecured | | | | 145,274 | | | 153,429 | |
| | | | | | | | | |
| Note payable to corporation owned by corporate | | |
| officer. Past due, originally due on October 23, | | |
| 2002, bearing interest at 10% and is unsecured | | | | 1,000 | | | -- | |
|
| |
| |
| | | | $ | 1,308,274 | | $ | 1,315,429 | |
|
| |
| |
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Note 7 – Accrued Liabilities
Accrued liabilities consist of the following as of:
| February 28, 2003
| May 31, 2002
|
|---|
| Salaries and benefits | | | $ | 223,763 | | $ | 264,490 | |
| Taxes | | |
| Payroll | | | | 464,068 | | | 515,182 | |
| Business | | | | 58,855 | | | 109,683 | |
| Penalties and interest | | | | 276,801 | | | 233,296 | |
| Interest | | | | 585,973 | | | 272,506 | |
| Licenses, consulting and other | | | | 536,290 | | | 423,673 | |
|
| |
| |
| | | | $ | 2,145,750 | | $ | 1,818,830 | |
|
| |
| |
| | |
As of February 28, 2003 the Company was delinquent on approximately $785,000 of its payroll and business taxes and related penalties and interest. The majority of the past due amount, or estimated at approximately $699,500, is for payroll taxes, penalties and interest due to the Internal Revenue Service (IRS). In April 2002, the IRS filed a Federal Tax Lien on the assets of the Company for all past due employment taxes, penalties and accrued interest. The Company had submitted an Offer In Compromise to the Internal Revenue Service seeking relief on a portion of its overall obligation and to structure a payment plan on the settled amount of taxes due. The Company was notified, on April 1, 2003, that the Offer In Compromise was denied. The Company expects to resubmit a second offer or appeal the decision of the IRS. Unless the Company and the IRS agree to a mutually agreeable workout, the IRS could take possession of the Company’s assets or the Company will be forced to cease operations and/or to file for bankruptcy protection.
The Company has consummated workout arrangements with three state taxing agencies for past due taxes. As of February 28, 2003, the Company owes approximately $20,700 pursuant to these workout agreements. Terms of these workouts require monthly payments ranging from $290 to $1,500, to include varying rates of interest, over periods ranging from ten to twenty-four months. The state taxing agencies filed either a warrant or a lien with local county authorities to protect their position during the respective workout periods. As of March 25, 2003 the Company has only two state tax workouts remaining.
Additionally, two liens have been filed by two other states for past due taxes, plus accrued penalties and interest. One lien, for approximately $28,000, is to a state for prior year’s income taxes assessed to the predecessor company of Insynq, Inc. This amount has been disputed and amended returns to correct this deficiency have been filed, but not yet approved. The second lien is to another state for payroll taxes, penalties and interest totaling approximately $26,400. The Company has submitted a proposal for a workout settlement on this state’s payroll taxes but has not yet received either acceptance or rejection of its offer.
Note 8 – Convertible Debentures
As of February 28, 2003, the Company is obligated to the investors who purchased secured convertible debentures over three separate private financing transactions. On March 6, 2003, the Company entered into an agreement with two groups of the investors to extend the maturity dates of certain debentures that were past due as February 28, 2003, and modify the conversion prices and certain other provisions of all three issuances as described below.
A summary of the material transactions and balances due are as follows:
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| | Issued | | | | | Total Amount
Due Per
Convertible | Warrants
Issued in
Connection With |
|---|
Date of Issuance
| Date of
Maturity*
| Convertible
Debenture
| Unamortized
Discount
| Principal
Redeemed
| Principal
Amount Due
| Accrued
Interest
| Debenture
Issuance
| Convertible
Debenture
|
|---|
| |
| First Issuance | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2001 | | | March 6, 2004* | | | $ | 550,000 | | $ | -- | | $ | 76,050 | | $ | 473,950 | | $ | 87,968 | | $ | 561,918 | | | 1,100,000 | |
| August 10, 2001 | | | March 6, 2004* | | | | 100,000 | | | -- | | | -- | | | 100,000 | | | 17,575 | | | 117,575 | | | 200,000 | |
| October 17, 2001 | | | March 6, 2004* | | | | 150,000 | | | -- | | | -- | | | 150,000 | | | 24,851 | | | 174,851 | | | 300,000 | |
| November 2, 2001 | | | March 6, 2004* | | | | 400,000 | | | -- | | | -- | | | 400,000 | | | 65,239 | | | 465,239 | | | 800,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 1,200,000 | | $ | -- | | $ | 76,050 | | $ | 1,123,950 | | $ | 195,633 | | $ | 1,319,583 | | | 2,400,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Second Issuance | | |
| January 24, 2002 | | | March 6, 2004* | | | $ | 300,000 | | $ | -- | | $ | -- | | $ | 300,000 | | $ | 42,927 | | $ | 342,927 | | | 1,200,000 | |
| July 3, 2002 | | | March 6, 2004* | | | | 250,000 | | | 89,384 | | | -- | | | 250,000 | | | 19,892 | | | 269,892 | | | 1,000,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 550,000 | | $ | 89,384 | | $ | -- | | $ | 550,000 | | $ | 62,819 | | $ | 612,819 | | | 2,200,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Third Issuance | | |
| September 30, 2002 | | | September 30, 2003 | | | $ | 120,000 | | $ | 69,616 | | $ | -- | | $ | 120,000 | | $ | 6,118 | | $ | 126,118 | | | 240,000 | |
| November 6, 2002 | | | November 6, 2003 | | | | 30,000 | | | 20,433 | | | -- | | | 30,000 | | | 1,150 | | | 31,150 | | | 60,000 | |
| December 6, 2002 | | | December 6, 2003 | | | | 30,000 | | | 23,014 | | | -- | | | 30,000 | | | 796 | | | 30,796 | | | 60,000 | |
| January 31, 2003 | | | January 31, 2004 | | | | 60,000 | | | 55,233 | | | -- | | | 60,000 | | | 572 | | | 60,572 | | | 120,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 240,000 | | $ | 168,296 | | $ | -- | | $ | 240,000 | | $ | 8,636 | | $ | 248,636 | | | 480,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Grand Total | | | | | | $ | 1,990,000 | | $ | 257,680 | | $ | 76,050 | | $ | 1,913,950 | | $ | 267,088 | | $ | 2,181,038 | | | 5,080,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| * Amended Maturity
Dates | | | | | | | | | | | | | | |
Terms of the First Issuance of Convertible Debentures
On June 29, 2001, the Company entered into a private financing transaction with three investors for a total of $1,200,000, 12% secured convertible debentures. Pursuant to the amended terms dated March 6, 2003, the debentures are convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the average of the lowest three trading prices in the twenty-day trading period immediately preceding the notice to convert, discounted by sixty percent (60%). The convertible debentures carry attached warrants that allow the investors, under the terms of the warrants, to purchase up to 2,400,000 shares of common stock at $0.25 per share. The terms of the debentures provide for full payment on or before one year from the date of issuance, plus accrued interest at 12% per annum. However, these convertible debentures have been amended to provide a maturity date of March 6, 2004 upon which these obligations are to be repaid or converted into common stock at the investor’s option. As of February 28, 2003, principal in the amount of $1,123,950 plus accrued interest of $195,633 is outstanding. All other terms of the debentures remain the same.
Terms of the Second Issuance of Convertible Debentures
On January 24, 2002, the Company entered into a private financing transaction with three investors for a total of $550,000, 12% secured convertible debentures. Pursuant to the amended terms dated March 6, 2003, the debentures are convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the average of the lowest three trading prices in the twenty-day trading period immediately preceding the notice to convert, discounted by sixty percent (60%). The convertible debentures carry attached warrants that allow the investors, under the terms of the warrants, to purchase up to 2,200,000 shares of common stock at $0.25 per share. The terms of the debentures provide for full payment on or before one year from the date of issuance, plus accrued interest at 12% per annum. However, these convertible debentures have been amended to provide a maturity date of March 6, 2004 upon which these obligations are to be repaid or converted into common stock at the investor’s option. As of February 28, 2003, principal in the amount of $550,000 plus accrued interest of $62,819 is outstanding. All other terms of the debentures remain the same.
On January 24, 2002, we entered into a second agreement to issue $550,000, 12% secured convertible debentures, and 2,200,000 warrants to four investors. The debentures are convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the average of the lowest three trading prices in the twenty-day trading period immediately preceding the notice to convert, discounted by sixty percent (60%). The convertible debentures carry attached
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warrants that allow the investor, under the terms of the warrants, to purchase up to 2,200,000 shares of common stock at $0.25 per share. Terms of the debentures provide for full payment on or before one year from the date of issuance, plus accrued interest at 12% per annum. Pursuant to the agreement, the Company may not, without consent, (i) engage in any future equity financing involving the issuance of common stock for a period of six months from the date of closing, and (ii) may not engage in such transactions for a period of two years without first giving the investors the opportunity to purchase shares on a pro-rata basis. As of February 28, 2003, principal in the amount of $550,000 plus accrued interest of approximately $62,819 is outstanding. These obligations were to be repaid or converted into common stock on or before the original conversion (maturity) date, one year from the date of issuance. However, these convertible debentures have been amended on March 6, 2003 to provide a maturity date of March 6, 2004 upon which these obligations are to be repaid or converted into common stock at the investor’s option.
Terms of the Third Issuance of Convertible Debentures
On September 27, 2002, the Company entered into a third securities purchase agreement with four investors for the sale of (i) $450,000 in convertible debentures and (ii) the issuance of warrants to buy 900,000 shares of its common stock. As of February 28, 2003 the investors are obligated to provide the Company with the funds as follows: (a.) $240,000 has already been disbursed, and, (b.) disburse the remaining $210,000 at the rate of $30,000 per month on the final business day of each successive month ending September 2003. As of April 18, 2003, the investors purchased an additional $60,000 of secured 12% convertible debentures from the Company, leaving an un-disbursed balance of $150,000.
The debentures bear interest at 12% per annum, mature one year from the date of issuance, and are convertible into common stock, at the investors’ option, at the lower of:
| |
|---|
| (a.) | $0.30 per share; or |
| (b.) | 40% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days prior to, but not including, the conversion date. |
The full principal amount of the convertible debentures is due upon default under the terms of convertible debentures. In addition, the Company granted the investors a security interest in substantially all of our assets and intellectual property and registration rights. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.25 per share. In addition, the exercise price of the warrants will be adjusted in the event the Company issues common stock at a price below market, with the exception of any securities issued as of the date of this warrant. The conversion price of the debentures and the exercise price of the warrants may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the investor’s position. The Company granted the investors a security interest in all of its assets against the convertible debentures.
As of February 28, 2003, investors have purchased a total of $1,990,000 of convertible debentures, and have converted $76,050 of debentures and $27,993 of accrued interest into 193,232 shares of common stock.
Pursuant to the Rules and Regulations of the Securities and Exchange Commission regarding beneficial conversion features, as determined by the Black-Sholes pricing model, and using the intrinsic value method, the Company recorded $490,000 of discounts equal to the fair market value of the beneficial conversion feature and the warrants as a credit to additional paid-in capital for the nine months ended February 28, 2003. For the nine months ended February 28, 2003 the Company amortized $691,291 of discounts on the convertible debentures as interest expense. The unamortized discount at February 28, 2003 is $257,680.
The fair market values of the warrants are estimated on the grant date using the Black-Scholes option pricing method as required under SFAS 123. As of the date of this report no warrant has been exercised.
Note 9 — Capital Lease Obligations
As of February 28, 2003, the Company was in default on three capital lease obligations. Accordingly, the leases have been classified as a current obligation. In December 2002 the Company paid off one equipment lease in default. (See also Note 2.)
Note 10 – Preferred Stock
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On July 25, 2002, the Board of Directors authorized the issuance of a series of preferred stock designated Series A Convertible Preferred in the amount 2,100,000 shares with a par value of $0.001, which designation was filed and became effective in October 2002. Each share is entitled to vote 50 times the number of common stock, and, is convertible upon the merger, initially, at the rate of 10 shares of common stock for each full share of convertible preferred stock. On October 16, 2002 directors, officers, employees and one investor executed Exchange Agreements under which they exchanged 10 shares of common stock for one (1) share of Series A Convertible Preferred Stock. A total of 12,514,110 shares of common stock were exchanged for 1,251,410 shares of preferred stock. Under the Plan of Merger, effective December 23, 2002, all the preferred shares, totaling 1,331,410, were converted into 13,314,110 shares of common stock of the Nevada corporation.
Note 11 – Stock Options
On March 31, 2000, the Company’s Board of Directors adopted two long-term incentive plans (Plans), the 2000 Long Term Incentive Plan (LTIP) and the 2000 Executive Long Term Incentive Plan (Executive LTIP). As of February 28, 2003 the LTIP had 111,840 options available for issuance and outstanding option granted totaled 125,390. As of February 28, 2003 the Executive LTIP had 4,000 shares of class A common shares available for issuance and had no outstanding options.
On July 25, 2002, the Board of Directors adopted a third incentive plan, the 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (2002 SP). The 2002 SP provides for the issuance of incentive and non-qualified deferred stock incentives to certain executives, directors and key employees of the Company who contribute significantly to the long-term performance and growth of the Company. The Company may make awards in form of options, warrants, restricted common or convertible preferred or unrestricted common or convertible preferred and other awards, or any combination thereof. The Company has set aside 16,000,000 shares of common stock under this plan at its adoption. As of February 28, 2003, 450,000 options to purchase shares of common stock under the 2002 SP have been set aside for the Company's directors.
Note 12 – Warrants
For the nine-month period ended February 28, 2003, the Company issued 1,480,000 warrants to purchase common stock in connection with the sale of the Company’s convertible debentures. Outstanding warrants to purchase common stock as of February 28, 2003 totaled 5,506,053. In addition, 5,050,000 warrants to purchase common stock have been reserved, but not issued, under the Company's 2002 SP.
Note 13 – Contingencies and Commitments
On September 6, 2001, the Company was served with a summons and complaint by its former landlords, asserting: (a.) a breach of a settlement agreement entered into in May 2001 to register 5,000 shares of common stock, valued at $80,000, in partial settlement of its then existing lease, and, (b.) a default by the Company on two new long-term lease obligations. Terms of the first lease call for base monthly payments of $12,046 for the period of August 1, 2001 to July 31, 2006, plus triple net charges estimated at approximately $3,038 per month and beginning in year two, an increase equal to the change in the annual consumer price index but not less than annual increase of 3%. Minimum aggregate lease payments and triple net charges approximate $954,500 over the term of the lease. Terms of the second lease call for monthly payments, beginning in June 2001 of approximately $4,000 per month, or a total of $80,000 for the remaining term of the lease from August 1, 2001 to May 31, 2003. On October 4, 2001, the Company’s former landlords filed a summons and complaint with local jurisdictional court for a summary judgment motion on all claims. All claims under this motion were initially denied. However, on May 10, 2002, the Court awarded a partial summary judgment in favor of the former landlords for approximately $170,000. The Company has previously recorded approximately $170,000 of expense related to this award.
It is the opinion of management and its legal counsel that the settlement agreement signed in May 2001 requiring the signing of the two new leases was entered into under economic duress, based on misrepresentation, and, was signed in bad faith on the part of the former landlords. As such, it is management’s opinion that the settlement agreement and the two lease agreements are void.
14
Management believes that the ultimate outcome of this litigation will be that the former landlords will not be successful in their assertions under their claim(s). Any additional claim under this dispute is not recognized in the accompanying financial statements. The Company denies the allegations under this claim and believes this claim is without merit and intends to continuously and vigorously defend against this lawsuit.
On October 9, 2002, the Company settled an alleged grievance filed by a former employee for $30,000. As of February 28, 2003, the Company recorded an expense of $30,000 and made five $1,500 monthly payments of pursuant to terms of the settlement.
Note 14 – Other Disclosures
Gain on Forgiveness and Settlements of Debts
The Company has executed complete settlements and reductions of the outstanding obligations due certain creditors and employees. For the nine months ended February 28, 2003 the Company has settled approximately $425,800 of obligations for approximately $14,315 in cash and/or common stock, re-priced warrants or any combination thereof. In connection with the settlements and forgiveness of debts, the Company recorded in other income, $7,218 and $411,485 for the three and nine months ended February 28, 2003, respectively.
Non-cash Investing and Financing
Non-cash investing and financing activities included the following for the nine months ended:
| February 28, |
|---|
| 2003
| 2002
|
|---|
| Discount on convertible debentures | | | $ | 490,000 | | $ | 1,442,549 | |
| Convertible debentures converted into common stock | | | | 4,500 | | | 64,050 | |
| Accrued liabilities converted into common stock | | | | -- | | | 83,819 | |
| Accounts payable converted into common stock | | | | -- | | | 8,000 | |
| Notes payable converted into warrants | | | | -- | | | 14,000 | |
| Accrued liabilities converted into warrants | | | | -- | | | 3,500 | |
| Promissory notes receivable issued for class A common stock | | | | -- | | | 90,000 | |
Supplemental Cash Flows Information
| February 28, |
|---|
| 2003
| 2002
|
|---|
| Cash paid for interest | | | $ | 12,745 | | $ | 27,981 | |
Selling, general and administrative expenses for the nine months ended are:
| February 28, |
|---|
| 2003
| 2002
|
|---|
| Salaries | | | $ | 492,120 | | $ | 563,660 | |
| Benefits | | | | 9,943 | | | 20,643 | |
| Rent | | | | 20,433 | | | 154,886 | |
| Consulting | | | | 534,787 | | | 1,207,508 | |
| Legal, accounting and professional | | | | 180,238 | | | 397,684 | |
| Telephone and utilities | | | | 17,072 | | | 39,046 | |
| Taxes | | | | 10,850 | | | 73,953 | |
| Administration, supplies and repairs | | | | 22,850 | | | 18,834 | |
| Travel and entertainment | | | | 16,616 | | | 22,475 | |
| Insurance | | | | 4,417 | | | (406 | ) |
| Other and settlements | | | | 150,922 | | | 158,276 | |
|
| |
| |
| Total | | | $ | 1,460,248 | | $ | 2,656,559 | |
|
| |
| |
| Non-cash compensation | | | $ | 595,339 | | $ | 959,514 | |
| Other | | | | 864,909 | | | 1,697,045 | |
|
| |
| |
| Total | | | $ | 1,460,248 | | $ | 2,656,559 | |
|
| |
| |
15
Note 15 – Subsequent Events
The March 6, 2003 amendments to the convertible debentures increased the discount to the market price upon conversion to common stock, and also increased the number of warrants issued in connection with the debentures. The Company will re-value the beneficial conversion feature and the warrants in the fourth quarter of the fiscal year 2003. This will result in additional interest expense on the convertible debentures in future periods.
On April 11, 2003, pursuant to the exercise of 5,050,000 warrants held by consultants, the Company issued 5,050,000 shares of common stock.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the condensed financial statements and including notes thereto, appearing in this Form 10-QSB and in our May 31, 2002 annual report on Form 10-KSB.
Except for the historical information contained herein, this Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.
The statements contained in this report that are not historical facts, including, without limitation, statements containing the words “believes,” “anticipates,” “estimates,” “expects,” and words of similar import, constitute “forward-looking statements.” Forward-looking statements are made based upon our management’s current expectations and beliefs concerning future developments and their potential effects upon us. Our actual results could differ materially from those anticipated for many reasons. Factors that could cause or contribute to the differences include, but are not limited to, availability of financial resources adequate for short-, medium- and long-term needs, demand for our products and services and market acceptance, as well as those factors discussed in the “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report.
Our management disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
A more detailed discussion of these factors is presented in our May 31, 2002 annual report on Form 10-KSB.
Overview
We were originally incorporated as Xcel Management, Inc. in the state of Utah on May 22, 1980, under the name Ward’s Gas & Oil, to engage in the oil and gas business, which business was terminated a few years after operations commenced. Xcel then changed its name to Palace Casinos, Inc. and from November 1992 until approximately 1995, it was engaged, through its wholly owned subsidiary, in the development of a dockside gaming facility in Biloxi, Mississippi. On December 1, 1994, Xcel and its wholly owned subsidiary each filed voluntary petitions for bankruptcy under Chapter 11 of the federal bankruptcy laws. On June 16, 1999, the bankruptcy court confirmed a plan of reorganization whereby the obligations of Xcel’s creditors were satisfied. On February 18, 2000, Xcel and Insynq, Inc., a Washington company formed on August 31, 1998, closed an asset purchase transaction in which Xcel acquired substantially all of the assets of Insynq. Subsequent to the asset purchase transaction, Xcel continued to develop the business of Insynq. On August 3, 2000, at a special meeting of Xcel’s stockholders, Xcel completed a re-incorporation merger with its wholly owned subsidiary, Insynq, Inc., a Delaware corporation. On July 25, 2002, the Board of Directors approved the re-incorporation merger of the Company with its wholly owned subsidiary, Insynq, Inc., a Nevada corporation, and a 1-for-100 reverse stock split of the Company’s currently issued and outstanding shares of common stock. Insynq, Inc. re-incorporated in the state of Nevada upon entering into the Plan and Agreement of Merger with its wholly owned subsidiary, Insynq, Inc., a Nevada corporation on December 23, 2002. As a result of the re-incorporation, the surviving Company exchanged 59,013,393 shares of common stock of the terminating entity, Insynq, Inc. (Delaware), for 590,134 shares of common stock of the surviving entity, Insynq, Inc. (Nevada).
Today, as the combined and surviving entity, Insynq, Inc. (Nevada) continues to develop the IQ Utility Service
We manage and host software services, Web hosting services, Web-based local and wide area networks, and access to Internet marketing assistance and related equipment and services. These products and services are offered as components or as an integrated whole, either sold directly or on a fee or subscription basis.
We target small and medium enterprises and the high-end segment of the small office and home office market for the sale of hardware and hosted software and access to internet-related services. We provide products and services to our customer subscriber base, which allows our customers to adopt “web-based” computing that serves as an alternative to both traditional local wide area networks and traditional client-server implementations. Generally, we market ourselves as an Internet utility company that can provide all of the computer software, hardware, connectivity and internet-access needs for its customers on a cost effective basis.
The complete IQ Delivery System and Internet Utility Service include managed network and application services, which can span from a customer’s keyboard to the data center. We may provide certain equipment, which is kept on our customer’s premises, including a simplified, diskless workstation or thin client, and a multi-function router, our IQ Delivery System, which is entirely managed and maintained by us. The system can also include Internet-access services provided by us or by a user selected telecommunications partner/provider. The final piece of the system is the data center, which is located in Bellingham, Washington. This facility, with redundant power, bandwidth, and cooling, house the servers, routers and other equipment. While this is the recommended configuration for customer use to take advantage of the full services offered, customers are free to choose which components they would like to use.
In fiscal 2003 (fiscal year ending May 31, 2003), we plan to focus on growing sales, controlling expenses and restructuring the debt and equity. We will strive to build on our core value of customer service and delivery of our hosted services at a competitive price.
Results of Operations
We incurred a net loss of $813,205 and $2,063,720 for the three months and nine months ended February 28, 2003 as compared to a net loss of $706,230 and $3,570,406 for the three months and nine months ended February 28, 2002. The net loss for the three and nine months ended February 28, 2003 resulted primarily from:
- discounted or free services as we marketed our products and services;
- professional and consulting fees;
- issuance and amortization of common stock, warrants and options for services;
- contract settlements; and
- interest expense.
The decrease in the net loss for the nine months ended February 28, 2003 of $1,506,686 as compared to the nine months ended February 28, 2002 resulted primarily from:
- increase in revenues;
- decrease in legal and consulting fees;
- decrease in wages, related taxes and benefits;
- decrease in co-location and rent; and
- decrease in abandoned leasehold improvements.
Total revenue for three months ended February 28, 2003 and 2002 was $271,527 and $285,626, respectively, representing a modest 4.9% decrease, or $14,099. The primary sources of revenue during the three-month period ended February 28, 2003 were generated from the following:
- seat subscriptions - $188,191, net of discounts;
- managed software and support services - $34,558; and
- licensing and other services - $48,778.
Total revenue for the nine months ended February 28, 2003 and 2002 was $757,631 and $707,919, respectively. This is an improvement of $49,712 or a 7.0% growth rate over the prior year. Primary revenue sources for the nine-month period ended February 28, 2003 were generated from the following:
- seat subscription revenue - $564,756, net of discounts;
- managed software service revenue - $57,492; and
- licensing and other services revenue - $135,383.
Seat revenue for the nine months ended February 28,2003 increased a modest, yet solid, 5.5% over the same nine month period ended February 28, 2002. For the nine months ended February 28, 2003, seat revenue accounted for approximately 74.5% of total revenue. While we have experienced overall growth in revenue in recent periods, prior growth rates should not be considered as necessarily indicative of future growth rates or operating results for fiscal ending 2003. We expect future revenue from all sources to trend away from our practice of providing discounts and free offerings, as experienced in the first three quarters of Fiscal 2003, because we are continuing to develop our sales programs, implement our sales and marketing strategies, increase consumer understanding and awareness of our technology, and prove our business model.
Our continued growth is significantly dependent upon our ability to generate sales relating to our subscription and managed software services. Our main priorities relating to revenue are as follows:
- increase market awareness of our products and services through our strategic marketing plan;
- growth in the number of customers and seats per customer;
- continue to accomplish technological economies of scale; and
- continue to streamline and maximize efficiencies in our system implementation model.
Costs and Expenses
During the three months ended February 28, 2003, we incurred direct costs of services provided of $193,735. This represents a 30.3% decrease, or $84,383, as compared to the same three month period ended February 28, 2002. For the nine-month periods ended February 28, 2003 and February 28, 2002, we incurred $573,044 and $952,656 in direct costs, and, $3,408 and $36,526 in network and infrastructure costs, respectively. Both classifications show significant improvement in containing costs over the prior comparable period.
Selling and general and administrative expenses were $595,621 and $629,648 the three months ended February 28, 2003 and 2002, respectively. Non-cash compensation for the three months ended February 28, 2003, resulted in a 89.5%, or $161,906 increase over the same comparable period one year ago. Non-cash compensation is generally representative of the fair value of common stock, options and warrants issued for services, and the amortization of unearned compensation. Cash expenses for the three months ended February 28, 2003 and 2002 were $252,843 and $448,776, respectively. This is a significant decrease of these expenses of $195,933 or 43.7%.
For the nine months ended February 28, 2003 and 2002, selling, general and administrative expenses were $1,460,248 and $2,656,559, respectively, a positive change of $1,196,311. Non-cash compensation for the nine months ended February 28, 2003 and 2002 was $595,339 and $959,514, respectively. Cash compensation for the nine months ended February 28, 2003 and 2002 was $864,909 and $1,697,045, respectively.
Of significance is the reduction of the professional and consulting fees. These specific expenses accounted for approximately 49.0% and 60.4% of the total selling, general and administrative expenses for the nine months ended February 28, 2003 and 2002, respectively. Accordingly, there was over a $890,000 reduction in these fees as recorded between these two comparable periods. This reduction accounts for approximately 74.4% of the total selling, general and administrative reduction between these two respective periods. The overall reduction is a direct result from management’s concerted and diligent efforts to reduce and control these critical expenses.
Overall, we reduced total operating expenses for the three and nine months ended February 28, 2003, as compared to the three and nine months ended February 28, 2002, by over $135,000 and $1,718,800, respectively, but maintained an average consistent growth rate in total revenue of approximately 7.0% for the nine months ended February 28, 2003 as compared to February 28, 2002.
Interest expense was $303,993 for the three months ended February 28, 2003 as compared to $438,011 for the same period ended February 28, 2002. Interest expense is primarily comprised of: (a) accruing interest on the related party promissory notes, convertible debentures, and capitalized leases and (b) accounting for non-cash interest recognized on the fair value of convertible debentures and warrants issued. Interest expense for the nine months ended February 28, 2003 and 2002 was $1,177,512 and $966,037, respectively.
Accounting for non-cash interest resulted in $287,831 and $311,570 of reported expense for the three months ended February 28, 2003 and 2002, respectively, and, $1,119,540 and $658,964 for the nine month periods ended February 28, 2003 and 2002, respectively. The primary classifications of non-cash interest expense for the nine months ended February 28, 2003 are as follows:
- amortization of discounts on debentures - $691,291;
- accrued interest on debentures and notes - $313,266;
- accrued interest and discount on a capitalized lease - $79,918; and
- other - $35,065.
Liquidity and Capital Resources
Our financial statements for the three months and nine months ended February 28, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. For the nine months ended February 28, 2003, we had a net loss of $2,063,720 and a negative cash flow from operations of $453,632. We had a working capital deficit of $6,630,898 and a stockholders’ deficit of $6,310,104 at February 28, 2003. Our working capital deficit as of February 28, 2003 may not enable it to meet certain financial objectives as presently structured.
We had cash of $27,824 as of February 28, 2003, and a deficit in working capital of $6,630,898 at the same date. For the nine months ended February 28, 2003, we used cash in our operating activities totaling $453,632 as compared to the same period one year ago of $1,525,419. The decrease in our usage of cash of over $1,071,700 was the direct result of managements' execution of its expense reduction plan, yet all the while increasing sales and maintaining customer service.
We finance our operations and capital requirements primarily through private debt and equity offerings. For the nine months ended February 28, 2003, we received cash totaling $506,926 from:
- borrowings on our credit line - $2,887;
- release of restricted cash held in escrow - $10,355;
- issuances of convertible debentures - $490,000;
- issuance of a short term note payable - $2,000; and
- loans from an officer/stockholder - $1,684.
As of February 28, 2003, we had $7,010,994 in current liabilities and past due obligations. Of the total current debt, approximately $291,500 is deemed as a current trade payable, accrual or taxes due. Effective March 6, 2003 an amendment to two convertible debenture agreements, originally dated June 29, 2001 and January 24, 2002 extended the maturity dates to each of the defaulted issuances, totaling $1,423,950, to March 6, 2004.
We are late in payment of certain creditor trade payables of approximately $796,000.
Recently, management has initiated re-negotiations with many of its creditors, by offering them cash payments for substantially less than the amounts due, or request a total forgiveness of the debt. We believe by continuing this important effort with a high degree of intensity, we will be able to reduce a significant part our past due creditor trade obligations. However, if we are not able to negotiate and execute payment plans or complete cash settlements with these creditors/vendors, we could experience a severe negative impact on our business resources and we may be forced to cease operations.
Currently, we have three capitalized equipment leases, each expiring in 2003. As of February 28, 2003, our principal capital lease obligation for computer hardware, printers and related infrastructure is in default in the amount of approximately $868,600. We have initiated discussions to restructure these remaining obligations and given the current market conditions, believe we will be successful in such attempts. If we are unable to successfully restructure these obligations, options remain open to us including, for example, returning the equipment and purchasing new equipment on the open market. As a precautionary measure, in fiscal 2002, we signed an additional operating lease agreement for similar equipment to support our current customer base. If negotiations do not go as planned, there still is no assurance that we would be able to locate other similar and necessary equipment or raise the funds necessary to make such further purchases or execute new leases. If all other methods fail, we might be able to outsource our data center function; however, there is no assurance that such methods will be available to us on favorable terms, or at all. If this were to occur then we may be unable to deliver to our customers their contracted services. In December 2002 we settled one lease for approximately $9,500 in cash.
As of February 28, 2003, we are delinquent in the payment of approximately $508,200 of business and payroll taxes, plus an estimated $276,800 of related assessed penalties and interest. The majority of the past due amount is for payroll taxes, penalties and interest due to the Internal Revenue Service. In April 2002, the IRS filed a Federal Tax Lien on our assets for all past due employment taxes, penalties and accrued interest. We had submitted an Offer In Compromise to the Internal Revenue Service seeking relief on a portion of its overall obligation and to structure a payment plan on the settled amount of taxes due. We were notified on April 1, 2003 that the Offer In Compromise was denied. Management expects to resubmit a second offer or appeal the decision of the IRS. Unless the IRS agrees to a mutually agreeable workout, the IRS could take possession of our assets or we will be forced to cease operations and/or to file for bankruptcy protection.
We have only two remaining workout agreements for past due taxes with the taxing authorities. As of March 25, 2003 we paid off two other workout arrangements. As of April 18, 2003 total principal balance due for the remaining two workouts is approximately $17,000. Terms of the two remaining workouts require us to pay $530 and $1,500 per month until each respective tax obligation is fulfilled. These two taxing agencies have either filed a lien or a warrant with the local county authorities to protect their position during the respective workout periods.
Additionally, two liens have been filed by two other states for past due taxes, plus accrued interest and penalties. One lien was filed by the State of Utah for approximately $28,000 for prior year’s income taxes assessed to our predecessor company. This amount is in dispute and amended returns to correct this deficiency have been filed, but not yet approved or denied. The second lien was filed by the State of California for past due payroll taxes, assessed penalties and accrued interest. Recently, the we submitted a proposal for a long-term workout of the tax debt. We believe the proposal is currently in review and under consideration with the state authorities.
There can be no assurances, however, that we will be able to agree or commit to any proposed terms set forth by the Internal Revenue Service or favorably negotiate terms with any of the other taxing authorities. If we are unsuccessful in our negotiations or fail to make our workout payments timely, the taxing authorities could take possession of some or all of our assets. Should this occur, we likely would be forced to cease our operations.
As of February 28, 2003, we have approximately $340,600 of employee agreement related obligations in the form of accrued and deferred salaries and vacation benefits. These obligations are primarily a result of applying the terms of existing employment agreements or company personnel policies against that which we actually paid. In July 2002, an officer forgave $24,501 of deferred compensation in consideration for 3,500 shares of common stock with a market value of $1,050.
As of February 28, 2003, we have approximately $1,580,000 in short-term related party promissory notes, loans and accrued interest. All these obligations are past due. In settlement of these debts, our board of directors may authorize the issuance of a class of preferred stock. To-date, we have received a letter of intent to convert approximately $1,300,000 of this debt into preferred stock.
As of February 28, 2003, we have also recorded outstanding convertible debentures of $1,913,950 plus related accrued interest of approximately $267,088 and unamortized discounts of $257,680.
As of February 28, 2003, we are obligated to the investors who purchased secured convertible debentures over three separate private financing transactions. On March 6, 2003, the we entered into an agreement with two groups of the investors to extend the maturity dates of certain debentures that were past due as February 28, 2003, and modify the conversion prices as described below. A summary of the material transactions and balances due are as follows:
| | Issued | | | | | Total Amount
Due Per
Convertible | Warrants
Issued in
Connection With |
|---|
Date of Issuance
| Date of
Maturity*
| Convertible
Debenture
| Unamortized
Discount
| Principal
Redeemed
| Principal
Amount Due
| Accrued
Interest
| Debenture
Issuance
| Convertible
Debenture
|
|---|
| |
| First Issuance | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2001 | | | March 6, 2004* | | | $ | 550,000 | | $ | -- | | $ | 76,050 | | $ | 473,950 | | $ | 87,968 | | $ | 561,918 | | | 1,100,000 | |
| August 10, 2001 | | | March 6, 2004* | | | | 100,000 | | | -- | | | -- | | | 100,000 | | | 17,575 | | | 117,575 | | | 200,000 | |
| October 17, 2001 | | | March 6, 2004* | | | | 150,000 | | | -- | | | -- | | | 150,000 | | | 24,851 | | | 174,851 | | | 300,000 | |
| November 2, 2001 | | | March 6, 2004* | | | | 400,000 | | | -- | | | -- | | | 400,000 | | | 65,239 | | | 465,239 | | | 800,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 1,200,000 | | $ | -- | | $ | 76,050 | | $ | 1,123,950 | | $ | 195,633 | | $ | 1,319,583 | | | 2,400,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Second Issuance | | |
| January 24, 2002 | | | March 6, 2004* | | | $ | 300,000 | | $ | -- | | $ | -- | | $ | 300,000 | | $ | 42,927 | | $ | 342,927 | | | 1,200,000 | |
| July 3, 2002 | | | March 6, 2004* | | | | 250,000 | | | 89,384 | | | -- | | | 250,000 | | | 19,892 | | | 269,892 | | | 1,000,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 550,000 | | $ | 89,384 | | $ | -- | | $ | 550,000 | | $ | 62,819 | | $ | 612,819 | | | 2,200,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Third Issuance | | |
| September 30, 2002 | | | September 30, 2003 | | | $ | 120,000 | | $ | 69,616 | | $ | -- | | $ | 120,000 | | $ | 6,118 | | $ | 126,118 | | | 240,000 | |
| November 6, 2002 | | | November 6, 2003 | | | | 30,000 | | | 20,433 | | | -- | | | 30,000 | | | 1,150 | | | 31,150 | | | 60,000 | |
| December 6, 2002 | | | December 6, 2003 | | | | 30,000 | | | 23,014 | | | -- | | | 30,000 | | | 796 | | | 30,796 | | | 60,000 | |
| January 31, 2003 | | | January 31, 2004 | | | | 60,000 | | | 55,233 | | | -- | | | 60,000 | | | 572 | | | 60,572 | | | 120,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Totals | | | | | | $ | 240,000 | | $ | 168,296 | | $ | -- | | $ | 240,000 | | $ | 8,636 | | $ | 248,636 | | | 480,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| Grand Total | | | | | | $ | 1,990,000 | | $ | 257,680 | | $ | 76,050 | | $ | 1,913,950 | | $ | 267,088 | | $ | 2,181,038 | | | 5,080,000 | |
| |
| |
| |
| |
| |
| |
| |
| |
| * Amended Maturity
Dates | | | | | | | | | | | | | | |
Terms of the First Issuance of Convertible Debentures
On June 29, 2001, we entered into a private financing transaction with three investors for a total of $1,200,000, 12% secured convertible debentures. The debentures are convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the average of the lowest three trading prices in the twenty-day trading period immediately preceding the notice to convert, discounted by sixty percent (60%). The convertible debentures carry attached warrants that allow the investor, under the terms of the warrants, to purchase up to 2,400,000 shares of common stock at $0.25 per share. The terms of the debentures provide for full payment on or before one year from the date of issuance, plus accrued interest at 12% per annum. Pursuant to the agreement, we may not, without consent, (i) engage in any future equity financing involving the issuance of common stock for a period of six months from the date of closing, and (ii) may not engage in such transactions for a period of two years without first giving the investors the opportunity to purchase shares on a pro-rata basis. As of February 28, 2003, principal in the amount of $1,123,950 plus accrued interest of approximately $195,633 is outstanding. These obligations were to be repaid or converted into common stock on or before the original conversion (maturity) date, one year from the date each issuance. However, these convertible debentures have been amended on March 6, 2003 to provide a maturity date of March 6, 2004 upon which these obligations are to be repaid or converted into common stock at the investor’s option.
Terms of the Second Issuance of Convertible Debentures
On January 24, 2002, we entered into a second agreement to issue $550,000, 12% secured convertible debentures, and 2,200,000 warrants to four investors. The debentures are convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the average of the lowest three trading prices in the twenty-day trading period immediately preceding the notice to convert, discounted by sixty percent (60%). The convertible debentures carry attached warrants that allow the investor, under the terms of the warrants, to purchase up to 2,200,000 shares of common stock at $0.25 per share. Terms of the debentures provide for full payment on or before one year from the date of issuance, plus accrued interest at 12% per annum. Pursuant to the agreement, we may not, without consent, (i) engage in any future equity financing involving the issuance of common stock for a period of six months from the date of closing, and (ii) may not engage in such transactions for a period of two years without first giving the investors the opportunity to purchase shares on a pro-rata basis. As of February 28, 2003, principal in the amount of $550,000 plus accrued interest of approximately $62,819 is outstanding. These obligations were to be repaid or converted into common stock on or before the original conversion (maturity) date, one year from the date of issuance. However, these convertible debentures have been amended on March 6, 2003 to provide a maturity date of March 6, 2004 upon which these obligations are to be repaid or converted into common stock at the investor’s option.
Terms of the Third Issuance of Convertible Debentures
On September 27, 2002, we entered into a third securities purchase agreement with four investors for the sale of (i) $450,000 in convertible debentures and (ii) the issuance of warrants to buy 900,000 shares of its common stock. As of February 28, 2003 the investors are obligated to provide us with the funds as follows: (a.) $240,000 has already been disbursed, and, (b.) disburse the remaining $210,000 at the rate of $30,000 per month on the final business day of each successive month.
As of April 18, 2003 the investors purchased an additional $60,000 of secured 12% convertible debentures from us, leaving an un-disbursed balance of $150,000.
Terms of these debentures were amended on March 6, 2003, and bear interest at 12% per annum, mature on one year from the date of issuance, and are convertible into common stock, at the investors’ option, at the lower of:
| |
|---|
| (a.) | $0.30 per share; or |
| (b.) | 40% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days prior to, but not including, the conversion date. |
The full principal amount of the convertible debentures is due upon default under the terms of convertible debentures. In addition, we granted the investors a security interest in substantially all of our assets and intellectual property and registration rights. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.25 per share. In addition, the exercise price of the warrants will be adjusted in the event we issue common stock at a price below market, with the exception of any securities issued as of the date of this warrant. The conversion price of the debentures and the exercise price of the warrants may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the investor’s position. The investors have contractually agreed to restrict their ability to convert their convertible debentures or exercise their exercise of warrants and receive shares of our common stock such that the number of shares of common stock in the aggregate, held by them and their affiliates, after such conversion or exercise does not exceed 4.9% of the then issued and outstanding shares of common stock. We granted the investors a security interest in all of its assets against the convertible debentures.
As of February 28, 2003, investors have purchased a total of $1,990,000 of convertible debentures, and have converted $76,050 of debentures and $27,993 of accrued interest into 193,232 shares of common stock.
For the nine months ended February 28, 2003, we amortized $691,291 of discounts on the convertible debentures as interest expense. The unamortized discount at February 28, 2003 is $257,680.
The March 6, 2003 amendments to the convertible debentures increased the discount to the market price upon conversion to common stock, and also increased the number of warrants issued in connection with the debentures. The Company will re-value the beneficial conversion feature and the warrants in the fourth quarter of the fiscal year 2003. This will result in additional interest expense on the convertible debentures in future periods.
Our continuation as a going concern is dependent on our ability to obtain additional financing, and, generate sufficient cash flows from operations to meet our obligations on a timely basis. Our ability to raise capital in the future will be difficult because our securities purchase agreements with our debenture investors prohibit us from entering into any financial arrangement, which would involve the issuance of common stock for a period of two years without offering a right of first refusal to the debenture investors. Moreover, our ability to raise capital would also be difficult because our debentures issued in connection with the June 29, 2001, January 24, 2002 and September 27, 2002 private placements have floating conversion features which, when converted, would cause purchasers of our common stock to experience a substantial dilution of their investment.
On September 6, 2001, we were served with a summons and complaint by our former landlords, asserting: (a.) a breach of a settlement agreement entered into in May 2001 to register 5,000 shares of common stock, valued at $80,000, in partial settlement of the then existing lease, and, (b.) a default by us on two new long-term lease obligations. Terms of the first lease call for base monthly payments of $12,046 for the period of August 1, 2001 to July 31, 2006, plus estimated triple net charges currently at $3,038 per month and beginning in year two, annual consumer price index with a minimum annual increase of 3%. Minimum aggregate lease payments and triple net charges approximate $954,500 over the term of the lease, excluding late fees, interest, legal fees and other charges. Terms of the second lease called for monthly payments, beginning in June 2001 of approximately $4,000 per month, or a total of $80,000 for the remaining term of the lease from August 1, 2001 to May 31, 2003. On October 4, 2001, our former landlords filed a summons and complaint with the Superior Court of Washington for Pierce County for a summary judgment motion on all claims. All claims under this motion were denied. On May 10, 2002, the Court awarded a partial summary judgment in favor of the former landlords for approximately $170,000. We anticipate filing a motion requesting the court to vacate the summary judgment in light of new evidence and/or appeal the court’s decision.
We deny the allegations under this claim and believe it is without merit. It is the opinion of our management and our legal counsel that the settlement agreement signed in May 2001 that required the signing of the new leases were entered into under economic duress, based on misrepresentation and fraud and were signed in bad faith on the part of the former landlords. As such, it is our managements’ opinion that the settlement agreement and the lease agreement are void. We intend to continue to vigorously defend against this lawsuit.
We currently have no material commitments for capital requirements. If we were forced to purchase new equipment to replace the equipment we currently lease, any new leases would constitute a material capital commitment; however, we are currently unable to quantify such amounts. If this occurs, we will attempt to raise the necessary finances to make such purchases, but there is no assurance that we will be able to do so. Without the ability to quantify these amounts, we nonetheless believe that it would have a material impact on our business and our ability to maintain our operations.
Since September 2000, we began the implementation of an internal cost restructuring of our operations, both in sales and marketing, as well in our executive management team, and other critical cost cutting measures. In June 2001, we negotiated with many of our vendors to materially reduce amounts owed or attain more favorable long-term payment terms. Between October 2001 and June 2002, we further reduced our staffing requirements and as a result of these measures, we have tightened the controls over our use of cash and, additionally, have taken steps to improve the billing and collection process. Our management forecasts the continuing effects of these changes will result in a substantial improvement of monthly cash flows. In addition to these changes, we have implemented a marketing program through our recently developed accounting vertical, which has dramatically reduced customer acquisition costs. The combination of the internal restructuring efforts and increased operational efficiencies will allow us to move toward profitability and to achieve our business plan and goals. We are also pursuing opportunities to merge and/or acquire compatible companies with which to leverage management, financial and operational resources. We believe these changes and strategies will position us well for future opportunities.
Effective December 21, 2002, we renewed our contract for another year with a large U.S. telecommunication firm who will re-market, via private label, hosted software applications and managed services, such as, MS Exchange, virus protection, data storage and other products and services to be bundled with broadband solutions. These bundled services or products will be delivered on a subscription basis.
We have recently launched our e-Accounting Center portal located atWWW.CPA-ASP.COM, which has been designed to help the accounting professional manage and expand their business. It includes resources for marketing, promotion, professional education, and web design, as well as, step-by-step tips for transforming a traditional accounting business into an e-Accounting practice. In addition, we host the Intuit QuickBooks software application in our secure Data Center for CPA firms throughout the country. By centrally hosting the application and data in our Data Center, we give the CPA secure central access to all his remote customers’ data. This gives the CPA the ability to manage more customers with fewer staff and, thereby, generating greater profitability for the CPA firm.
This, in addition to an agreement with an accounting affiliation of approximately 60,000 subscribers, and the adoption of the IQ Data Utility Service solution by these and other accountants is providing access to professional accounting organizations and their client bases. Other services include business functions such as e-commerce, sales force automation, customer support, human resource and financial management, messaging and collaboration, and professional services automation. We believe that technology outsourcing, focused on these business fundamentals, will be the primary adopters of application service providers and managed service solutions in the next year. We are focusing all possible resources in developing our domain expertise in these areas to gain additional leverage and build broader service offerings that compliment our current services already being delivered to those markets. There can be no assurances, however, that we will substantially increase our monthly recurring revenues.
We currently have no arrangements or commitments for accounts receivable financing. We believe our need for additional capital going forward will be met from private debt and equity offerings, and, increasingly, from revenues from operations as we continue to implement our strategic plan; however, future operations will be dependent upon our ability to secure sufficient sources of financing and adequate vendor credit. However, there can be no assurance that we will achieve any or all of these requirements.
We are currently developing and refining our acquisition and expansion strategy. If we expand more rapidly than currently anticipated, if our working capital needs exceed our current expectations, or if we consummate acquisitions, we will need to raise additional capital from equity or debt sources. We cannot be sure that we will be able to obtain the additional financings to satisfy our cash requirements or to implement our growth strategy on acceptable terms or at all. Our ability to raise capital in the future will be difficult because our securities purchase agreements with our debenture investors prohibit us from entering into any financial arrangement which would involve the issuance of common stock for a period of two years from the date this registration statement becomes effective without offering a right of first refusal to the debenture investors. If we cannot obtain such financings on terms acceptable to us, our ability to fund our planned business expansion and to fund our on-going operations will be materially adversely affected. If we incur debt, the risks associated with our business and with owning our common stock could increase. If we raise capital through the sale of equity securities, the percentage ownership of our stockholders will be diluted. In addition, any new equity securities may have rights, preferences, or privileges senior to those of our common stock.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Restructuring Costs.” SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, we will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require us to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3.
We do not believe the adoption of these standards will ahve a material impact to the financial statements.
In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123". SFAS 148 amends FASB Statement No. 123, “Accounting for Stock Based Compensation” and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 6, 2001, we were served with a summons and complaint by its former landlords, asserting: (a.) a breach of a settlement agreement entered into in May 2001 to register 5,000 shares of common stock, valued at $80,000, in partial settlement of its then existing lease and (b.) a default by us on two new long-term lease obligations. Terms of the first lease call for base monthly payments of $12,046 for the period of August 1, 2001 to July 31, 2006, plus triple net charges estimated at approximately $3,038 per month and beginning in year two, an increase equal to the change in the annual consumer price index but not less than annual increase of 3%. Minimum aggregate lease payments and triple net charges approximate $954,500 over the term of the lease. Terms of the second lease call for monthly payments, beginning in June 2001 of approximately $4,000 per month, or a total of $80,000 for the remaining term of the lease from August 1, 2001 to May 31, 2003. On October 4, 2001, our former landlords filed a summons and complaint with local jurisdictional court for a summary judgment motion on all claims. All claims under this motion were initially denied. However, on May 10, 2002, the Court awarded a partial summary judgment in favor of the former landlords for approximately $170,000. We have previously recorded approximately $170,000 of expense related to this award.
It is the opinion of management and its legal counsel that the settlement agreement signed in May 2001 requiring the signing of the two new leases was entered into under economic duress, based on misrepresentation and was signed in bad faith on the part of the former landlords. As such, it is management’s opinion that the settlement agreement and the two lease agreements are void.
Management believes that the ultimate outcome of this litigation will be that the former landlords will not be successful in their assertions under their claim(s). Any additional claim under this dispute is not recognized in the accompanying financial statements. We deny the allegations under this claim and believes this claim is without merit and intend to continuously and vigorously defend against this lawsuit.
On October 9, 2002, we settled an alleged grievance filed by a former employee for $30,000. As of February 28, 2003, we have recorded an expense of $30,000 and made five $1,500 monthly payments pursuant to terms of the settlement.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of February 28, 2003, we have approximately $1,624,100 in short-term related party promissory notes, loans and accrued interest. All these obligations are past due. In settlement of these debts, our board of directors may authorize the issuance of a class of preferred stock. To-date, we have received a letter of intent to convert approximately $1,300,000 of this debt into preferred stock.
As of February 28, 2003, we were in default on $1,423,950 of 12% secured convertible debentures originally dated June 29, 2001 and January 24, 2002 and related accrued interest. On March 6, 2003, we entered into an agreement with the holders of the defaulted debentures whereby certain terms and provisions of the original agreements were amended primarily to extend the maturity dates and conversion terms of the convertible debentures and the attached warrants to purchase common stock. The amended terms stipulate the following:
- The maturity dates of the convertible debentures were extended to March 6, 2004;
- The conversion price of each debenture will be the lesser of (i) $0.30 per share or (ii) 40% of the average of the three lowest intraday trading prices for the common stock on its principal market for the 20 trading days before but not including the conversion date;
- The exercise period of the warrants was extended to the fifth anniversary date of the agreement;
- All warrants originally issued will not be adjusted for the effects of the 100 to 1 split effective December 23, 2002; and
- The exercise price of each warrant was amended to be $0.25 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 2002, we received written consents in lieu of a meeting from stockholders representing a majority of our outstanding shares of voting stock approving the re-incorporation of the Company in Nevada by merger with and into the our wholly owned subsidiary, Insynq, Inc., a Nevada corporation, pursuant to a Plan and Agreement of Merger. The re-incorporation, which was effective in December 2002, resulted in:
- the Company being governed by the laws of the State of Nevada;
- the shareholders of the Company right to receive one share of common stock of Insynq Nevada for each one-hundred shares of common stock of the Company owned;
- the persons serving presently as officers and directors of the Company to serve in their respective capacities after the re-incorporation;
- the outstanding shares of Series A Convertible Preferred Stock of the Company being converted into approximately 13,314,110 shares of Insynq Nevada common stock;
- the Company's Certificate of Incorporation authorizing the issuance of the 500,000,000 shares of common stock and 10,000,000 of preferred stock;
- the authorization of the adoption of the 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan; and
- the Board of Directors being divided into three classes which shall be as nearly equal in number as possible.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| 4.1 | | Stock Purchase Warrant dated December 6, 2002 between AJW Offshore, Ltd and Insynq, Inc. Incorporated by reference to Exhibit 4.5 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.2 | | Stock Purchase Warrant dated December 6, 2002 between AJW Qualified Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.6 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.3 | | Stock Purchase Warrant dated December 6, 2002 between AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.7 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.4 | | Secured Convertible Debenture dated December 6, 2002 between AJW Qualified Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.8 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.5 | | Secured Convertible Debenture dated December 6, 2002 between AJW Offshore, Ltd. and Insynq, Inc. (Incorporated by reference to Exhibit 4.9 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.6 | | Secured Convertible Debenture dated December 6, 2002 between AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.10 to the Company's Form 10Q-SB filed January 24, 2003) |
| 4.7 | | Secured Convertible Debenture dated January 31, 2003 between AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.94 to the Company's Form SB-2 filed March 18, 2003) |
| 4.8 | | Secured Convertible Debenture dated January 31, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.92 to the Company's Form SB-2 filed March 18, 2003). |
| 4.9 | | Secured Convertible Debenture dated January 31, 2003 between AJW Offshore, Ltd. and Insynq, Inc. (Incorporated by reference to Exhibit 4.93 to the Company's Form SB-2 filed March 18, 2003) |
| 4.10 | | Stock Purchase Warrant dated January 31, 2003 between AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.91 to the Company's Form SB-2 filed March 18, 2003) |
| 4.11 | | Stock Purchase Warrant dated January 31, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. (Incorporated by reference to Exhibit 4.90 to the Company's Form SB-2 filed March 18, 2003) |
| 4.12 | | Stock Purchase Warrant dated January 31, 2003 between AJW Offshore, Ltd. and Insynq, Inc. (Incorporated by reference to Exhibit 4.89 to the Company's Form SB-2 filed March 18, 2003) |
| 4.13 | | Letter Agreement dated March 6, 2003 amending the debentures and warrants issued in connection with the June 2001 and January 2002 Securities Purchase Agreement between Insynq, Inc. and AJW Partners, LLC, New Millennium Partners II, LLC, AJW Offshore, Ltd. and AJW Qualified Partners, LLC (Incorporated by reference to Exhibit 4.95 to the Company's Form SB-2 filed March 18, 2003) |
| 4.14 | | Letter Agreement dated March 6, 2003 amending the debentures and warrants issued in connection with the September 2002 Securities Purchase Agreement between Insynq, Inc. and AJW Partners, LLC, New Millennium Partners II, LLC, AJW Offshore, Ltd. and AJW Qualified Partners, LLC (Incorporated by reference to Exhibit 4.95 to the Company's Form SB-2 filed March 18, 2003) |
| 4.15* | | Secured Convertible Debenture dated March 18,2003 between AJW Partners, LLC and Insynq, Inc. |
| 4.16* | | Secured Convertible Debenture dated March 18, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. |
| 4.17* | | Secured Convertible Debenture dated March 18, 2003 between AJW Offshore, Ltd. and Insynq, Inc. |
| 4.18* | | Secured Convertible Debenture dated March 18, 2003 between New Millennium Partners II, LLC and Insynq, Inc. |
| 4.19* | | Stock Purchase Warrant dated March 18,2003 between AJW Partners, LLC and Insynq, Inc. |
| 4.20* | | Stock Purchase Warrant dated March 18, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. |
| 4.21* | | Stock Purchase Warrant dated March 18, 2003 between AJW Offshore, Ltd. and Insynq, Inc. |
| 4.22* | | Stock Purchase Warrant dated March 18, 2003 between New Millennium Partners II, LLC and Insynq, Inc. |
| 4.23* | | Secured Convertible Debenture dated March 31, 2003 between New Millennium Capital Partners II, LLC and Insynq, Inc. |
| 4.24* | | Secured Convertible Debenture dated March 31, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. |
| 4.25* | | Stock Purchase Warrant dated March 31, 2003 between New Millennium Capital Partners II, LLC and Insynq, Inc. |
| 4.26* | | Stock Purchase Warrant dated March 31, 2003 between AJW Qualified Partners, LLC and Insynq, Inc. |
| 10.1* | | Business Advisory and Consulting Services Agreement dated December 18, 2002 between Stanton, Walker & Company and Insynq, Inc. |
| 10.2* | | Independent Consulting Agreement dated February 1, 2003 between One Click Investments , LLC and Insynq, Inc. |
| 10.3* | | Consulting Agreement dated March 1, 20203 between San Diego Torrey Hills Capital and Insynq, Inc. |
| 99.1* | | Certification of the Chief Executive Officer of Insynq, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.2* | | Certification of the Treasurer of Insynq, Inc. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form 10-QSB and has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tacoma, State of Washington, on April 18, 2003.
| | INSYNQ, INC.
By: /s/ John P. Gorst
——————————————
John P. Gorst
Chief Executive Officer |
| |
By: /s/ M. Carroll Benton
——————————————
M. Carroll Benton
Secretary and Treasurer |
CERTIFICATION
I, John Gorst, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Insynq, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | April 18, 2003
BY: /s/ John P. Gorst
——————————————
John P. Gorst
|
CERTIFICATION
I, M. Carroll Benton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Insynq, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | April 18, 2003
BY: /s/ M. Carroll Benton
——————————————
M. Carroll Benton
Secretary and Treasurer |
