United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended August 31, 2001.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from ______________________ to
_________________________.
Commission file number 0-22814
---------------
INSYNQ, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 74-2964608
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
1127 Broadway Plaza, Suite 10
Tacoma, Washington 98402
------------------------
(Address of Principal Executive Office)(Zip Code)
Telephone Number (253) 284-2000
-------------------------------
(Registrant's telephone number, including area code)
1101 Broadway Plaza, Tacoma, Washington 98402
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value --- 54,610,766 as of February 8, 2002
2
The purpose of this amendment is to restate the financial statements presented
in the Company's Quarterly Report on Form 10-QSB for the first quarter ended
August 31, 2001, filed October 15, 2001 (the "Original Filing"). In the course
of the review of the financial statements for the first quarter ended August 31,
2001, the Company discovered a material error in its financial statements as
reported in its Original Filing. The following is a summary of the material
error discovered by the Company:
The Company did not recognize a $650,000 discount on convertible debentures
which was equal to the fair market value of warrants issued and the intrinsic
value of the beneficial conversion feature.
As a result of amortizing the discount over the term of the convertible
debentures and reclassifying and adjusting other insignificant estimates and
transactions, net loss increased $121,357 over the original filing for quarter
ended August 31, 2001.
The Company has taken steps to correct this error and has implemented procedures
to ensure such an error does not recur.
The Company, in its original filing for period ending August 31, 2001, reported
itself as a development stage company. Subsequently, it was determined that the
company has commenced its planned operations and that operating revenues are
being generated. As a result, the Company is no longer considered a development
stage company beginning in the fiscal year 2002.
Any items in the Original Filing not expressly changed herein shall be as set
forth in the Original Filing. All information in this Amendment 1 and the
Original Filing is subject to updating and supplementing as provided in the
Company's periodic reports filed with the Securities and Exchange Commission
subsequent to the date of such reports.
3
INSYNQ, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION 4
Item 1 Financial Statements of Insynq, Inc. 4
Balance Sheets - Restated as of August 31, 2001 (unaudited) 4
and May 31, 2001 (a development stage company)
Statements of Operations - Restated for the three months 5
ended August 31, 2001 and 2000 (a development stage
company)(unaudited)
Statement of Stockholders' Deficit - Restated for the three 6
months ended August 31, 2001 (unaudited)
Statements of Cash Flows - Restated for the three months 7
ended August 31, 2001 and 2000 (a development stage
company)(unaudited)
Notes to the Financial Statements - Restated 8
Item 2 Management's Discussion and Analysis of Financial 12
Condition of Results of Operations
Signatures 17
4
PART I
ITEM I FINANCIAL STATEMENTS
Insynq, Inc.
Balance Sheets - Restated
August 31, May 31,
--------- ------
2001 2001
(a development
(unaudited) stage company)
-----------------------------
ASSETS
Current assets
Cash ..................................................... $ 30,130 $ 26,900
Accounts receivable, net of allowance for doubtful
accounts of $25,000...................................... 68,890 27,469
Related party receivables ................................ 42,990 98,990
Prepaid expenses ......................................... 55,271 61,962
------ ------
Total current assets ......................................... 197,281 215,321
Property and equipment, net .................................. 653,916 756,493
Other assets
Intangible assets, net ................................... 46,085 52,585
Deposits ................................................. 5,791 72,000
----- ------
Total assets ..................................... $ 903,073 $ 1,096,399
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable ............................................ $ 33,964 $ 27,973
Related party notes payable .............................. 1,377,486 1,318,251
Accounts payable ......................................... 974,098 1,001,395
Accrued liabilities ...................................... 1,165,508 1,129,695
Customer deposits ........................................ 43,080 49,684
Deferred compensation .................................... 124,363 107,175
Current portion of capital lease obligations ............. 721,156 692,208
------- -------
Total current liabilities .................................... 4,439,655 4,326,381
Capital lease obligations, net of current portion ............ 23,360 29,256
Convertible debentures, net of discount of $553,889 .......... 96,111 -
Commitments and contingencies ................................ - -
Stockholders' deficit
Preferred stock, $0.001 par value, 10,000,000 shares ..... - -
authorized, no shares issued and outstanding
Class A common stock, $0.001 par value, 10,000,000 ....... - -
shares authorized, no shares issued and outstanding
Common stock, $0.001 par value, 100,000,000 shares ....... 37,366 33,532
authorized, 37,364,930 and 33,531,094 shares issued and
outstanding as of August 31, 2001 and May 31, 2001,
respectively
Additional paid-in capital ............................... 16,510,203 15,430,507
Unearned compensation and services ....................... (549,224) (725,717)
Accumulated deficit ...................................... (19,654,398) (17,997,560)
----------- -----------
Total stockholders' deficit .................................. (3,656,053) (3,259,238)
---------- ----------
Total liabilities and stockholders' deficit $ 903,073 $ 1,096,399
============ ============
The accompanying notes are an integral part of these financial statements.
5
Insynq, Inc.
Statements of Operations - Restated
(unaudited)
Three Months Ended August 31,
--------------------------------------
2001 2000
---------------- ----------------
(a development
stage company)
--------------
Revenues $ 194,565 $ 67,760
Costs and expenses
Direct cost of services 319,867 308,499
Selling, general and administrative
Non-cash compensation 516,668 647,800
Other 725,998 1,252,571
Network and infrastructure costs 29,327 37,414
Research and development 58,981 69,250
------ ------
1,650,841 2,315,534
--------- ---------
Loss from operations (1,456,276) (2,247,774)
Other income (expense)
Other income 36,777 566
Loss on disposal of assets (46,897) -
Interest expense
Non-cash (103,978) (526,177)
Other (86,464) (35,114)
------- -------
(200,562) (560,725)
-------- --------
Net loss $ (1,656,838) $ (2,808,499)
============ =============
Net loss per common share - basic and diluted $ (0.05) $ (0.14)
============ =============
The accompanying notes are an integral part of these financial statements.
6
Insynq, Inc.
Statement of Stockholders' Deficit - Restated
(unaudited)
Additional Unearned Total
Common Stock Paid-In Compensation Accumulated Stockholders'
Shares Amount Capital and Services Deficit Deficit
---------- ---------- ------------ ------------- ------------- -------------
Balance, May 31, 2001 (a development 33,531,094 $33,532 $15,430,507 $(725,717) $(17,997,560) $(3,259,238)
stage company)
Issuance of common stock at $0.10 per 20,000 20 1,980 - - 2,000
share through the exercise of stock
options in June 2001 in lieu of
accounts payable
Issuance of common stock at $0.09 per 399,354 399 35,543 - - 35,942
share through the exercise of stock
options in June 2001 in lieu of
employee compensation and accrued
liabilities
Issuance of common stock at $0.09 per 355,556 356 31,644 - - 32,000
share through the exercise of stock
options in June 2001 for cash
Issuance of common stock at $0.09 per 2,125,000 2,125 189,125 (180,000) - 11,250
share to non-employees for services
in July 2001
Issuance of common stock at $0.18 per 50,000 50 8,950 - - 9,000
share through exercise of stock
options to non-employee in lieu of
cash payment of accrued liabilities
in July 2001
Issuance of common stock at $0.07 per 250,000 250 17,250 - - 17,500
share through exercise of stock
options in July 2001 in lieu of
employee compensation
Issuance of common stock at $0.06 per 633,926 634 37,401 - - 38,035
share through exercise of stock
options in August 2001 in lieu of
employee compensation
Adjustment as a result of re-pricing - - 107,803 - - 107,803
of warrants in June 2001
Allocation of discount on convertible - - 650,000 - - 650,000
debentures with warrants and
beneficial conversion feature
Amortization of unearned compensation - - - 356,493 - 356,493
for three month period ended August
31, 2001
Net loss for the three month period - - - - (1,656,838) (1,656,838)
ended August 31, 2001
---------- ------- ------------ ---------- ------------- ------------
Balance, August 31, 2001 37,364,930 $37,366 $ 16,510,203 $(549,224) $(19,654,398) $(3,656,053)
========== ======= ============ ========== ============= ============
The accompany notes are an integral part of this financial statement.
7
Insynq, Inc.
Statements of Cash Flows - Restated
(unaudited)
Three Months Ended August 31,
------------------------------------
2001 2000
---------------- -----------------
(a development
stage company)
--------------
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss $ (1,656,838) $ (2,808,499)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 62,179 72,357
Loss on disposal of assets 117,898 -
Gain on forgiveness of debts (36,000) -
Issuance of common stock for services 47,191 169,270
Issuance of options and warrants for services, and
amortization of unearned compensation 356,493 358,024
Issuance of options to employees under fair market value - 120,506
Warrants issued with debt and capital leases 7,867 145,267
Warrants and beneficial conversion features of debentures 203,914 325,000
Interest capitalized 21,310 -
Changes in assets and liabilities:
Accounts receivable and related party receivables 14,579 1,492
Inventories - 16,448
Prepaid expenses 6,691 (3,295)
Deposits (4,791) -
Accounts payable (37,033) 562,397
Accrued liabilities 100,349 (11,733)
Customer deposits (6,604) (671)
Deferred compensation 17,188 -
------ -------
Net cash used in operating activities (785,607) (1,053,437)
-------- ----------
Cash flows from investing activities
Purchase of equipment - (135,608)
Deposit on future acquisition - (50,000)
--------- --------
Net cash used in investing activities - (185,608)
--------- --------
Cash flows from financing activities
Bank overdraft 47,736 -
Proceeds from notes payable and related party notes payable 78,176 310,000
Proceeds from issuance of common stock and exercise
of warrants and options 32,000 -
Proceeds from convertible debentures 650,000 550,000
Payments on short term notes payable (12,950) (5,625)
Payments on capital lease obligations (6,125) (2,136)
Advances from stockholder - 280,000
------- -------
Net cash provided by financing activities 788,837 1,132,239
------- ---------
Net increase (decrease) in cash 3,230 (106,806)
Cash at beginning of period 26,900 106,806
------ -------
Cash at end of period $ 30,130 $ -
============== ==============
The accompanying notes are an integral part of these financial statements.
8
Insynq, Inc.
Notes to Financial Statements - Restated
August 31, 2001
(unaudited)
Note 1 - Financial Statements
The unaudited financial statements of Insynq, Inc. (Company) have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) have been condensed or omitted pursuant to such
rules and regulations. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year
ending May 31, 2002. The accompanying unaudited financial statements as of
August 31, 2001 and 2000, respectively, and the related notes should be read in
conjunction with the Company's audited financial statements and notes, thereto,
and Form 10-KSB/A for its fiscal year ended May 31, 2001.
Note 2 - Basis of Presentation
The August 31, 2001 financial statements have been restated. The Company
discovered a material error in its financial statements as reported in its
original filing. The Company was a development stage company as defined under
Statement of Financial Accounting Standards No. 7 through May 31, 2001. Although
the Company is still devoting substantially all of its present efforts to
establishing its core business, its planned operations have commenced, and,
operating revenues are being generated. As a result, the Company is no longer
considered a development stage company beginning in the fiscal year 2002.
Note 3 - Management Plans
The Company has incurred recurring losses from operations and has a total
accumulated deficit of $19,654,398 at August 31, 2001. As discussed in Note 8,
the Company is in default on a capitalized lease obligation. The underlying
leased assets are critical to the Company's operations. The Company has
initiated contact to restructure the lease obligation. In the meantime, the
Company has signed an additional lease agreement for equipment to support its
customer base. The development of the Company's technology and products will
continue to require a commitment of substantial funds. 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.
The Company is devoting its efforts into establishing a business in the new
emerging Managed Services Provider industry. Insynq is establishing alliances
with Independent Software Vendors to provide access to their applications for
customers and building new channels for marketing products to customers. The
Company is further developing new products to enable the deployment and on going
management of Insynq services. As a result of these new alliances and products,
the Company will be able to provide additional and enhanced services to
customers. In addition, the Company has been negotiating with a national
corporation to provide hosting and application services. The negotiations are
advancing and are currently in the procurement stage.
The Company has implemented cost restructuring strategies, cost-cutting
measures, and, in addition, the Company initiated vendor negotiations resulting
in improved payment terms or reductions in the total amounts due.
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 will be available on acceptable
terms, if at all. 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 the success of its future
operations.
9
Note 4 - Loss Per Common Share
Basic 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 was
35,663,143 and 19,972,841 for the three months ended August 31, 2001 and 2000,
respectively. The computation for loss per common share, assuming dilution, for
the three months ended August 31, 2001 and 2000 was anti-dilutive, and
therefore, is not included. Outstanding warrants and options as of August 31,
2001 total 23,850,779.
Note 5 - Accrued Liabilities
As of August 31, 2001, the Company was delinquent of approximately
$650,000 of its payroll and business taxes, and related penalties and interest.
The majority of the past due amount, or approximately $567,000, is for payroll
taxes, penalties and interest due to the Internal Revenue Service. The Company
is currently negotiating with the Internal Revenue Service about a payment plan
for the past due taxes. The IRS has imposed certain conditions on the Company in
order to proceed with negotiations, one of which requires the Company to remain
current on all future payroll tax deposits. The Company has been in contact with
other respective taxing authorities to initiate payment plans in settlement of
their respective past due taxes.
The Company has an outstanding tax lien in an amount of approximately $28,000 to
a State for prior year's income taxes assessed to the predecessor company of
Insynq, Inc. This amount, included in the above past due taxes, is in dispute.
Amended returns to correct the assessed deficiency have been filed by the
Company.
Note 6 - Related Party Notes Payable
During the three month period ended August 31, 2001, the Company entered into
three additional short-term promissory notes, totaling $78,176. Each note is
unsecured and bears interest ranging from ten percent (10%) to twelve percent
(12%) per annum. Total related party notes payable, all with similar terms, as
of August 31, 2001 aggregate $1,377,486.
Note 7 - Convertible Debentures
On June 29, 2001, the Company entered into a private financing transaction with
three investors under which the investors initially purchased a total of
$550,000 from a total of $1,200,000 12% convertible debentures. On August 15,
2001 investors purchased an additional $100,000 under this financing agreement.
As of August 31, 2001 the Company has recorded a total of $650,000 as
convertible debentures. The debentures are convertible into shares of common
stock at the lesser of (i) $0.18 or (ii) the average of the lowest three trading
prices in the twenty-day trading period immediately preceding the notice to
convert, discounted by 50%. 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 $0.04 per share. Terms of the debentures
provide for full payment on or before one year from the date of issuance, plus
accrued interest of 12% per annum. Proceeds from these initial transactions, net
of fees, were $563,500. The Company received the remaining $550,000 in October
and November 2001, net of certain fees. As of August 31, 2001, the Company
recorded a discount on the convertible debentures totaling $650,000, equal to
the fair value of the warrants issued and the intrinsic value of the beneficial
conversion feature. The Company recognized $96,111 of interest expense on the
discount for the three months ended August 31, 2001. 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.
Note 8 - Capital Lease Obligation
The Company is in default on a capital lease obligation as of August 31,
2001; accordingly, the lease has been classified as a current obligation.
Note 9 - Stock Options
10
On March 31, 2000, the Company's Board of Directors adopted two long-term
incentive plans (Plans), described as follows:
2000 Long Term Incentive Plan (LTIP)
The LTIP provides for the issuance of incentive and non-qualified stock
options, stock appreciation rights and restricted stock to directors, officers,
employees and consultants. At the adoption of this plan, the Company set aside
16,675,300 shares of common stock, which may be issued upon the exercise of
options granted. As of August 31, 2001, options available for issuance are
4,915,772.
2000 Executive Long Term Incentive Plan (Executive LTIP)
The Executive LTIP provides for the issuance of incentive and non-qualified
stock options, stock appreciation rights and restricted stock to executive
officers of the Company. The Company set aside 5,400,000 shares of Class A
common stock under this plan at its adoption. As of August 31, 2001, two
corporate officers have been granted options to purchase a total of 5,000,000
shares of Class A common stock.
Note 10 - Non-Cash Investing and Financing Activities
Non-cash investing and financing activities included the following for the three
months ended August 31:
2001 2000
---- ----
Discount on convertible notes payable ....... $ 650,000 $ 650,000
Accrued liabilities converted to common stock 64,536 --
Accounts payable converted to common stock .. 2,000 --
Discount on short term notes payable ........ -- 229,000
Equipment purchased under capitalized leases -- 17,762
Capitalized lease obligations incurred ...... -- (17,762)
Note 11 - Contingencies and Commitments
The Company has an agreement with a consulting group providing for financial
advisory services from September through November 2001. Consideration for these
services are three monthly payments starting September 1, 2001 of $21,500 in
cash and 100,000 shares of common stock.
Note 12 - Subsequent Events
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 500,000 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 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
and other charges. 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 the Superior Court of Washington for Pierce County for a summary judgment
motion on all claims. All claims under this motion were denied.
The Company denies the allegations under this claim and believes it is without
merit. It is the opinion of management and its 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
11
of the former landlords. As such, it is management's opinion that the settlement
agreement and the lease agreement are void.
Because 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, the Company has not recorded a liability for payments under the leases or
for other claims under this dispute in the accompanying financial statements.
The Company intends to continue to vigorously defend against this lawsuit.
12
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 financial statements and including notes thereto, appearing in this Form
10-QSB and in our May 31, 2001 annual report on Form 10-KSB/A.
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 the
Company's 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,
2001 annual report on Form 10-KSB/A.
Overview
Insynq, Inc. was incorporated in the state of Washington on August 31,
1998. We provide Internet appliances, known as customer premise equipment,
managed and hosted 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 a components or
as an integrated whole, either sold directly or on a fee or subscription basis.
In late 1999, Insynq decided to seek out a combination with a public
company. On February 18, 2000, Xcel Management, Inc., a publicly held company,
and Insynq closed an asset purchase transaction in which Xcel acquired
substantially all of the assets of Insynq. Xcel continued to develop the
business of Insynq, and 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. Today, as the combined and
surviving entity, Insynq, Inc. continues to develop the IQ Utility Service while
incorporating the customer premise equipment developed as part of the IQ
Delivery System.
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. The products and services are provided
by developing a customer subscriber base that adopts a cost-effective, on-line
solution to building and maintaining an information technology system through
the adoption of "Web-based" computing as an alternative to both traditional
local wide area networks and traditional client-server implementations.
Generally, we market our self as an Internet utility company that can
cost-effectively provide all of the computer software, hardware, connectivity
and Internet-access needs for its customers.
We currently have several independent software vendors' products on line
using the IQ Data Utility Service computing services and anticipate signing
various agreements with additional organizations in the next few months. We
expect to increase the subscriber base through these respective sales channels.
Software vendor relationships currently in place include Microsoft Corporation,
Network Associates, Inc./McAfee, Remedy Corporation, Macola Software, and
Novell, Inc.
13
The complete IQ Delivery System and Internet Utility Service includes
managed network and application services, and can span from a customer's
keyboard to the data center. We 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 pieces of the system are the data centers, which are
located in Tacoma and Bellingham, Washington. These facilities, with redundant
power, bandwidth, and cooling, house the server equipment and routers. While
this is the recommended configuration for customer use to take advantage of the
full services, customers are free to choose which components they use.
In the process of developing the IQ Delivery System, our management
believes we have acquired valuable technological expertise. We have created new
methodologies and produced proprietary hardware and software that is believed to
be essential to the configuration and effective management of Internet-based
networks and outside deployment of shared software applications
Results of Operations
During the three months ended August 31, 2000 (first quarter, Fiscal 2001),
we had limited active operations, and therefore, we believe that a comparison of
the results of operations to the three months ended August 31, 2001 (first
quarter, Fiscal 2002) has limited value for evaluating trends and/or as a basis
for predicting future results.
We incurred a net loss of $1,656,838 for the three months ended August 31,
2001 as compared to a net loss of $2,808,499 for the same period a year ago. The
respective quarterly losses resulted primarily from: (1) providing discounted or
free services as we test- marketed our products and services, (2) initial
network, infrastructure, and research and development costs associated with
start-up operations, (3) adjustments to salaries and directly related benefits,
(4) increased professional and consulting fees, and, (5) the issuance of
warrants and options for services.
Total revenue for three months ended August 31, 2001 was $194,565, an
increase of $126,805 over first quarter, Fiscal 2001. The primary sources of
first quarter, Fiscal 2002 revenue includes: (1) seat subscription revenue of
$142,448, net of discounts, (2) managed software and support service revenue of
$5,382, and (3) hardware and software sales and other revenue of $46,735. The
increase in total revenue over the first quarter, Fiscal 2001 was due primarily
to the strong demand for seat subscriptions. Seat revenue increased 279% over
the same period one year ago and accounted for 82.7 % of the overall net revenue
increase over first quarter, Fiscal 2001. While we have experienced 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
2002. We expect future revenue from all sources to trend away from our practice
of providing discounts and free offerings experienced in first quarter, Fiscal
2001 as we continue to develop our sales and 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: (1) increase market awareness of our
products and services through our strategic marketing plan, (2) growth in the
number of customers and seats per customer, (3) continue to accomplish
technological economies of scale, and (4) continue to streamline and maximize
efficiencies in our system implementation model.
Costs and Expenses
For the three months ended August 31, 2001, we recorded direct costs of
services of $319,867, a relatively modest increase of $11,368 over the limited
operations experienced in the same period one year ago. Network and
infrastructure costs were $29,327 for first quarter, Fiscal 2002, which is a
decrease of $8,087 over the same period ended August 31, 2000.
Selling, general, and administrative costs were $1,242,666 for the three
months ended August 31, 2001, representing a decrease of $657,705 over the same
three month period one year ago. The decrease can be directly attributed to our
management's committed efforts, beginning in the fall of 2000, to restructure
our operations and
14
reduce our expenses. Of significance is the $526,573 decrease of comparable
period expenses requiring cash payments. In addition, non-cash compensation
decreased by $131,132. Non-cash expenses for the first quarters, Fiscal 2002 and
2001 was $516,668 and $647,800, respectively. 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.
Total interest expense decreased to $190,442 during the first quarter,
Fiscal 2002 versus $561,291 during the first quarter, Fiscal 2001. The decrease
of $370,849 was due primarily to: (1) accounting for non-cash interest
recognized on the fair value of warrants issued with notes payable and
convertible debentures, (2) interest recognized for the beneficial conversion
features on the conversion of debentures and notes payable, (3) for the
reductions in the original conversion prices offered significantly below the
fair market value of the common stock on the conversion dates, and (4)
capitalized equipment lease obligations. Accounting for non-cash interest
resulted in $103,978 and $526,177 of the reported expense for first quarter,
Fiscal 2002 and 2001, respectively.
The Company reported other income of $36,777 for the first quarter, Fiscal
2002. The reported amount represents approximately $36,000 of favorable vendor
negotiated settlements.
Liquidity and Capital Resources
Insynq had cash and cash equivalents of $30,130 as of August 31, 2001, and
a deficit in working capital of $4,242,374 at the same date. During the first
quarter Fiscal 2002 Insynq used cash in its operating activities totaling
$785,607.
We finance our operations and capital requirements primarily through
private debt and equity offerings. For the three months ended August 31, 2001,
we received cash totaling $728,176 from the issuance of promissory notes payable
and convertible debentures. During first quarter Fiscal 2002, we received
$32,000 from the issuance of common stock for the exercise of options.
On June 29, 2001, the Company entered into a private financing transaction
with three investors under which the investors initially purchased $550,000 from
a total of $1,200,000 12% convertible debentures. On August 15, 2001 investors
purchased an additional $100,000 under this financing agreement. The debentures
are convertible into shares of common stock at the lesser of (i) $0.18 or (ii)
the average of the lowest three trading prices on the twenty trading days prior
to the notice of such conversion, discounted by 50%. 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 $0.04 per share.
Terms of the debentures provide for full payment on or before one year from the
date of issuance, plus accrued interest of 12% per annum. Cash proceeds from
these initial transactions, net of fees, were $563,500. We have received the
remaining $550,000, less applicable fees, in the month of October 2001. However,
our continuation as a going concern is dependent on our ability to obtain
additional financing and generate sufficient cash flow from operations to meet
our obligations on a timely basis.
As of October 10, 2001, we were late in payment of certain creditor trade
payables of $743,886. In June 2001, our management negotiated either substantial
reduction of amounts owed or negotiated more favorable long-term payment plans.
We offered three payment plans: (1) seventy percent reduction in the amount owed
with payment due in one installment; (2) fifty percent reduction of the amount
owed with payment in twelve installments; and (3) no reduction of the amount
owed with payment in twenty-four installments. We believe that these
negotiations were well received by our vendors. As of October 10, 2001,
creditors whose payables totaled $359,292 (including the discounts described
above) have accepted such plans as follows: (i) $55,964 in trade payables have
accepted option 1; (ii) $2,887 have accepted option 2; (iii) $125,308 have
accepted option 3; and (iv) $175,133 have accepted various payment plans of
varying time periods ranging from 2-18 months. In addition, vendors forgave
$75,659 in trade payables.
We lease equipment under a capital leases expiring in 2003. Our principal
capital lease obligation for computer hardware, printers and related
infrastructure is in default in the amount of approximately $697,314. We have
initiated discussions to restructure this obligation, and, given the current
market conditions, believe we will be successful in such attempt. If we are
unable to successfully restructure this obligation, options remain open to us
including, for example, returning the equipment and purchasing new equipment on
the open market. In the meantime, we have signed an additional lease agreement
for equipment to support our customer base. However,
15
there can be no assurance that we will able to locate other necessary equipment
or raise the funds necessary to make such further purchases. In addition, if all
other methods fail, we might be able to outsource our data center function;
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 addition, approximately $523,000 of business and payroll taxes is
delinquent, plus $127,000 of related assessed penalties and interest. We are
currently negotiating with the Internal Revenue Service about a payment plan for
the past due taxes. The IRS has imposed certain conditions on us in order to
proceed with negotiations, one of which requires us to remain current on all
future payroll tax deposits. We have also been in contact with other respective
taxing authorities to initiate payment plans in settlement of their respective
past due taxes. 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 other taxing authorities. If we are
unsuccessful, the taxing authorities could obtain a lien against some or all of
our assets. Should this occur, we likely would be forced to cease our
operations.
Additionally, there is one lien for approximately $28,000, filed by the
State of Utah, for prior year's income taxes, plus accrued penalties and
interest. The State of Utah assessed these taxes to Xcel Management, Inc., the
predecessor company of Insynq, Inc. This amount is in dispute and amended
returns to correct this deficiency have been filed.
Our former landlords, Howe/Horizon Holdings, LLC and Horizon Holdings I,
LLC, have served us with a summons and complaint. The lawsuit asserts a default
by us on our two long-term lease obligations. Terms of the first lease call for
base monthly payments of $12,046 from August 1, 2001 to July 31, 2006, plus
triple net charges. Minimum base payments total approximately $722,760. Terms of
the second lease call for monthly payments of approximately $4,000 for the
remaining term August 1, 2001 to May 31, 2003. We believe this claim is without
merit and we intend to vigorously defend the action.
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 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. 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 aggressively 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.
We have recently signed several sales and marketing agreements. In
particular, an agreement with an accounting affiliation of approximately 60,000
subscribers has recently been finalized. The adoption of the IQ Data
16
Utility Service solution by these and other accountants is providing access to
professional accounting organizations and their client bases. There can be no
assurance that our entering into this agreement will substantially increase our
monthly recurring revenues. In addition, we are currently negotiating with a
large national corporation to provide hosting and application services. The
immediate performance in this market indicates that use of enabling technologies
for accounting on-line and business process outsourcing is gaining momentum.
There can be no assurances, however, that we will successfully negotiate and
execute these agreements.
We believe that technology outsourcing, focused on business fundamentals,
such as finance, accounting, customer relationship management and sales force
automation, will be the primary adopters application service provider 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.
We cannot be sure that we will be able to obtain the additional financing
to satisfy the cash requirements or to implement the growth strategy on
acceptable terms, or at all. If we cannot obtain such financing on acceptable
terms, the ability to fund the planned business expansion and to fund the
on-going operations will be materially adversely affected. Presently, our
management is pursuing a variety of sources of debt and equity financing. If
debt is incurred, the financial risks associated with the business and with
owning our common stock could increase. If enough capital is raised through the
sale of equity securities, the percentage ownership of the current stockholders
will be diluted. In addition, any new equity securities may have rights,
preferences, or privileges senior to those of the common stock.
Our continuation as a going concern is currently dependent on our ability
to obtain additional financing, acquire strategic business entities and generate
sufficient cash flow from our operations to meet, and in certain cases,
restructure certain obligations on a timely basis. We also believe the need for
additional capital going forward will be met from public and private debt and
equity offerings. In essence, future operations will be dependent upon our
ability to secure sufficient sources of financing, continuation of adequate
vendor credit and increased sales of services.
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. 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. We are presently pursuing a variety of sources
of debt and equity financings. 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.
17
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/A 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 February 25, 2002.
INSYNQ, INC.
By: /s/ John P. Gorst
John P. Gorst
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stephen C. Smith
Stephen C. Smith
Interim Chief Financial Officer
(Principal Financial Officer)