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 February 28, 2002.
[ ] 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)
(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 --- 59,457,003 as of May 13, 2002
INSYNQ, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION 3
Item 1 Financial Statements of Insynq, Inc. 3
Balance Sheets - February 28, 2002 (unaudited) and May 31, 3
2001 (a development stage company)
Statements of Operations - Restated for the three months 4
and nine months ended February 28, 2002 and 2001 (a
development stage company) (unaudited)
Statement of Stockholders' Deficit - Restated for the three 5
and nine months ended February 28, 2002 (unaudited)
Statements of Cash Flows - Restated for the nine months 9
ended February 28, 2002 and 2001 (a development stage
company) (unaudited)
Notes to the Financial Statements - Restated 10
Item 2 Management's Discussion and Analysis of Financial 15
Condition of Results of Operations
PART II OTHER INFORMATION 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
3
PART I - FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
Insynq, Inc.
Balance Sheets
February 28, 2002 May 31, 2001
--------------------- ---------------------
ASSETS (unaudited) (a development
stage company)
Current assets
Cash .................................................... $ 15,586 $ 26,900
Restricted cash ......................................... 51,147 --
Accounts receivable, net of allowance for doubtful
accounts of $25,000 ................................... 31,086 27,469
Related party receivables ............................... 98,351 98,990
Prepaid expenses ........................................ 259,297 61,962
------------ ------------
Total current assets ........................................ 455,467 215,321
Property and equipment, net ................................. 542,200 756,493
Other assets
Intangible assets, net .................................. 33,085 52,585
Deposits ................................................ 6,345 72,000
Other receivable ........................................ 829 --
------------ ------------
Total assets ..................................... $ 1,037,926 $ 1,096,399
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Notes payable ........................................... $ 20,497 $ 27,973
Related party notes payable ............................. 1,313,198 1,318,251
Accounts payable ........................................ 943,609 1,001,395
Accrued liabilities ..................................... 1,472,340 1,129,695
Convertible debentures, net of discount of $807,184 ..... 628,766 --
Customer deposits ....................................... 36,376 49,684
Deferred compensation ................................... 111,210 107,175
Current portion of capital lease obligations ............ 790,612 692,208
------------ ------------
Total current liabilities ................................... 5,316,608 4,326,381
Capital lease obligations, net of current portion ........... 3,347 29,256
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, 5,000,000 shares issued and outstanding .... 5,000 --
Common stock, $0.001 par value, 250,000,000 shares
authorized, 56,686,371 and 33,531,094 shares issued and
outstanding as of February 28, 2002 and May 31, 2001,
respectively............................................ 56,687 33,532
Additional paid-in capital .............................. 17,528,827 15,430,507
Notes receivable from officers .......................... (90,000) --
Unearned compensation and services ...................... (214,577) (725,717)
Accumulated deficit ..................................... (21,567,966) (17,997,560)
------------ ------------
Total stockholders' deficit ................................. (4,282,029) (3,259,238)
------------ ------------
Total liabilities and stockholders' deficit ...... $ 1,037,926 $ 1,096,399
============ ============
The accompanying notes are an integral part of these financial statements.
4
Insynq, Inc.
Statements of Operations - Restated
(unaudited)
Three months ended Nine months ended
February 28, February 28,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- -------------- ----------- --------------
(a (a
development development
stage stage
company) company)
REVENUES ..................... $ 285,626 $ 150,990 $ 707,919 $ 324,923
COSTS AND EXPENSES
Direct cost of services ... 278,118 347,482 952,656 983,623
Network and infrastructure
costs ................... 3,741 36,128 36,526 115,309
Selling, general and
administrative
Non-cash compensation ... 180,872 2,274,343 959,514 3,457,945
Other ................... 448,776 399,209 1,697,045 3,757,926
Research and development .. 14,617 76,338 109,848 218,846
------------ ------------ ------------ ------------
926,124 3,133,500 3,755,589 8,533,649
------------ ------------ ------------ ------------
Loss from operations ......... (640,498) (2,982,510) (3,047,670) (8,208,726)
OTHER INCOME (EXPENSE)
Other income ............... 372,279 275 488,913 841
Loss from disposal of assets -- -- (45,612) --
Interest expense
Non-cash ................. (311,570) (7,868) (658,964) (3,700,615)
Other .................... (126,441) (40,051) (307,073) (96,976)
------------ ------------ ------------ ------------
(65,732) (47,644) (522,736) (3,796,750)
------------ ------------ ------------ ------------
NET LOSS ..................... $ (706,230) $ (3,030,154) $ (3,570,406) $(12,005,476)
============ ============ ============ ============
Net loss per share, basic and
diluted .................... $ (0.01) $ (0.12) $ (0.09) $ (.52)
============ ============ ============ ============
The accompany notes are an integral part of these financial statement.
5
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
share through the exercise of stock
options in June 2001 in lieu of
accounts payable .................. 20,000 20 1,980 -- -- 2,000
Issuance of common stock at $0.09 per
share through the exercise of stock
options in June 2001 in lieu of
employee compensation ............. 399,354 399 35,543 -- -- 35,942
Issuance of common stock at $0.09 per
share through the exercise of stock
options in June 2001 for cash ...... 355,556 356 31,644 -- -- 32,000
Issuance of common stock at $0.09 per
share to non-employees for services
in July 2001 ........................ 2,125,000 2,125 189,125 (180,000) -- 11,250
Issuance of common stock at $0.18 per
share through exercise of stock
options to non-employee in lieu of
cash payment of accrued liabilities
in July 2001 ....................... 50,000 50 8,950 -- -- 9,000
Issuance of common stock at $0.07 per
share through exercise of stock
options in July 2001 in lieu of
employee compensation ............. 250,000 250 17,250 -- -- 17,500
Issuance of common stock at $0.06 per
share through exercise of stock
options in August 2001 in lieu of
employee compensation .............. 633,926 634 37,401 -- -- 38,035
Adjustment as a result of re-pricing of
warrants in June 2001 ............. -- -- 107,803 -- -- 107,803
Allocation of discount on convertible
debentures with warrants and
beneficial conversion feature ........ -- -- 650,000 -- -- 650,000
Amortization of unearned compensation
for three month period ended August
31, 2001 ........................... -- -- -- 356,493 -- 356,493
Net loss for the three month period
ended August 31, 2001 ............. -- -- -- -- (1,656,838) (1,656,838)
------------ ------------ ------------ ------------ ------------ ------------
Balance, August 31, 2001 .............. 37,364,930 $ 37,366 $ 16,510,203 $ (549,224) $(19,654,398) $ (3,656,053)
============ ============ ============ ============ ============ ============
Continued
6
Insynq, Inc.
Statement of Stockholders' Deficit - Restated (Continued)
(unaudited)
Additional Unearned Total
Common Stock Paid-In Compensation Accumulated Stockholders'
Shares Amount Capital and Services Deficit Deficit
------ ------ ---------- ------------ ----------- -------------
Balance, August 31, 2001 ................ 37,364,930 $ 37,366 $ 16,510,203 $(549,224) $(19,654,398) $ (3,656,053)
Warrants issued in September 2001 with
exercise price of $0.07 per share in
lieu of payment of note payable and
accrued liabilities ................. -- -- 17,500 -- -- 17,500
Issuance of common stock at $0.02 per
share in October 2001 through
conversion of debentures ............ 468,750 469 8,906 -- -- 9,375
Issuance of common stock at $0.125 per
share in October 2001 through
exercise of warrants ................ 14,104 14 1,749 -- -- 1,763
Issuance of common stock at $0.01 per
share in October 2001 through
conversion of debentures ............ 937,500 937 8,438 -- -- 9,375
Issuance of common stock at $0.05 per
share through exercise of stock
options in September and October
2001 in lieu of employee compensation 380,650 381 18,652 -- -- 19,033
Issuance of common stock at $0.02 per
share through exercise of stock
options in October in lieu of
employee compensation ............... 25,000 25 475 -- -- 500
Issuance of common stock at $0.005 per
share in November 2001 through
conversion of debentures ............ 3,600,000 3,600 14,400 -- -- 18,000
Issuance of common stock at $0.028 to
$0.065 per share from September
through November 2001 for
non-employee services ............... 300,000 300 14,000 -- -- 14,300
Issuance of common stock at $0.125 per
share in November 2001 through the
exercise of warrants ................ 14,104 14 1,749 -- -- 1,763
Issuance of common stock at $0.025 per
share in November 2001 through
exercise of stock options in lieu of
employee compensation ............... 614,300 614 14,743 -- -- 15,357
Issuance of common stock at $0.017 per
share in November 2001 through
exercise of stock options in lieu of
payment of accrued liabilities ...... 264,706 265 4,235 -- -- 4,500
Allocation of discount on convertible
debentures with warrants and
beneficial conversion feature ....... -- -- 492,549 -- -- 492,549
Amortization of unearned compensation
for the three-months ended November . -- -- -- 212,784 -- 212,784
30, 2001
Net loss for the three-months ended ..... -- -- -- -- (1,207,338) (1,207,338)
November 30, 2001
------------ --------- ------------ --------- ------------ ------------
Balance, November 30, 2001 .............. 43,984,044 $ 43,985 $ 17,107,599 $(336,440) $(20,861,736) $ (4,046,592)
============ ========= ============ ========= ============ ============
Continued
7
Insynq, Inc.
Statement of Stockholders' Deficit - Restated (Continued)
(unaudited)
Class A Common Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
Balance, November 30, 2001 ................. -- $ -- 43,984,044 $ 43,985
Rescission of common stock at $0.17
per share in December 2001 .............. -- -- (540,000) (540)
Issuance of common stock at $0.007
per share in December 2001 through
conversion of debentures ................ -- -- 969,234 969
Issuance of common stock at $0.015
per share in December 2001 for
non-employee services ................... -- -- 3,500,000 3,500
Issuance of common stock at $0.007
per share in December 2001 through
the conversion of debentures ............ -- -- 1,304,349 1,304
Issuance of common stock at $0.007
per share in January, 2002 through
conversion of debentures ................ -- -- 1,739,133 1,739
Issuance of common stock at $0.015
per share in January 2002 in lieu
of payment of accounts payable .......... -- -- 400,000 400
Issuance of common stock at $0.024
per share in January 2002 through
the exercise of stock options in
lieu of employee compensation and
payment on account payable .............. -- -- 657,604 658
Issuance of common stock at $0.07 per
share in January 2002 through the
exercise of options in lieu of
employee compensation ................... -- -- 25,000 25
Issuance of common stock at $0.009
per share in January 2002 through
conversion of accrued interest on
debentures .............................. -- -- 1,901,400 1,901
Issuance of Class A common stock at
$0.018 per share in January 2002 through
exercise of stock options in exchange
for notes receivable from officers ...... 5,000,000 5,000 -- --
Issuance of common stock at $0.010 to
$0.022 per share from January
through February 2002 for
non-employee services ................... -- -- 645,000 645
Issuance of common stock at $0.006
per share in February 2002 through
conversion of accrued interest on
debentures .............................. -- -- 2,075,607 2,076
(Continued from table above, first column repeated)
Notes
Additional Receivable Unearned Total
Paid In From Compensation Accumulated Stockholders'
Capital Officers and Services Deficit Deficit
--------- ---------- ------------ ----------- -------------
Balance, November 30, 2001 ................ $ 17,107,599 $ -- $ (336,440) $(20,861,736) $ (4,046,592)
Rescission of common stock at $0.17
per share in December 2001 ............. (91,260) -- -- -- (91,800)
Issuance of common stock at $0.007
per share in December 2001 through
conversion of debentures ............... 5,331 -- -- -- 6,300
Issuance of common stock at $0.015
per share in December 2001 for
non-employee services .................. 49,000 -- -- -- 52,500
Issuance of common stock at $0.007
per share in December 2001 through
the conversion of debentures ........... 7,696 -- -- -- 9,000
Issuance of common stock at $0.007
per share in January, 2002 through
conversion of debentures ............... 10,261 -- -- -- 12,000
Issuance of common stock at $0.015
per share in January 2002 in lieu
of payment of accounts payable ......... 5,600 -- -- -- 6,000
Issuance of common stock at $0.024
per share in January 2002 through
the exercise of stock options in
lieu of employee compensation and
payment on account payable ............. 15,125 -- -- -- 15,783
Issuance of common stock at $0.07 per
share in January 2002 through the
exercise of options in lieu of
employee compensation .................. 1,725 -- -- -- 1,750
Issuance of common stock at $0.009
per share in January 2002 through
conversion of accrued interest on
debentures ............................. 14,260 -- -- -- 16,161
Issuance of Class A common stock at
$0.018 per share in January 2002 through
exercise of stock options in exchange
for notes receivable from officers ..... 85,000 (90,000) -- -- --
Issuance of common stock at $0.010 to
$0.022 per share from January
through February 2002 for
non-employee services .................. 8,385 -- -- -- 9,030
Issuance of common stock at $0.006
per share in February 2002 through
conversion of accrued interest on
debentures ............................. 9,755 -- -- -- 11,831
Continued
8
Insynq, Inc.
Statement of Stockholders' Deficit - Restated (Continued)
(unaudited)
Class A Common Stock Common Stock
Shares Amount Shares Amount
------- ------ ------ ------
Issuance of common stock at $0.015
per share in February 2002 through
exercise of stock options in lieu
of employee compensation ......... -- -- 25,000 25
Allocation of discount on convertible
debentures with warrants and
beneficial conversion feature .... -- -- -- --
Amortization of unearned compensation
for the three-months ended
February 28, 2002 ................ -- -- -- --
Net loss for the three-months ended
February 28, 2002 ................ -- -- -- --
------------ ------------ ------------ ------------
Balance, February 28, 2002 .......... 5,000,000 $ 5,000 56,686,371 $ 56,687
============ ============ ============ ============
(Continued from table above, first column repeated)
Notes
Additional Receivable Unearned Total
Paid In From Compensation Accumulated Stockholders'
Capital Officers and Services Deficit Deficit
---------- ---------- ------------- ----------- -------------
Issuance of common stock at $0.015
per share in February 2002 through
exercise of stock options in lieu
of employee compensation ......... 350 -- -- -- 375
Allocation of discount on convertible
debentures with warrants and
beneficial conversion feature .... 300,000 -- -- -- 300,000
Amortization of unearned compensation
for the three-months ended
February 28, 2002 ................ -- -- 121,863 -- 121,863
Net loss for the three-months ended
February 28, 2002 ................ -- -- -- (706,230) (706,230)
------------ ----------- ------------ ------------ ------------
Balance, February 28, 2002 .......... $ 17,528,827 $(90,000)` $ (214,577) $(21,567,966) $ (4,282,029)
============ ========= ============ ============ ============
The accompany notes are an integral part of these financial statement
9
Insynq, Inc.
Statements of Cash Flows - Restated
(unaudited)
Nine Months Ended February 28,
-----------------------------
2002 2001
---- ----
(a development
stage company
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss ..................................................... $ (3,570,406) $(12,005,476)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 183,145 226,396
Loss on disposal of assets ............................... 121,648 5,200
Gain on forgiveness of debts ............................. (482,078) --
Issuance of common stock for services .................... 160,571 521,594
Issuance of options and warrants for services, and
amortization of unearned compensation................... 691,140 4,673,250
Issuance of options to employees under fair market value . -- 778,395
Warrants issued with debt and capital leases ............. 23,600 252,601
Warrants and beneficial conversion features of debentures 743,168 900,000
Interest capitalized ..................................... 64,989 --
Changes in assets and liabilities:
Accounts receivable and related party receivables .... (1,879) (2,823)
Inventories .......................................... -- 29,512
Prepaid expenses ..................................... (195,185) 29,186
Deposits and other assets ............................ (5,345) 116,413
Accounts payable ..................................... 271,800 809,653
Accrued liabilities .................................. 478,686 656,127
Customer deposits .................................... (13,308)
Deferred compensation ................................ 4,035 --
------------ ------------
Net cash used in operating activities ............. (1,525,419) (3,009,972)
------------ ------------
Cash flows from investing activities
Purchase of equipment ........................................ -- (176,509)
Deposit on future acquisition ................................ -- (35,000)
------------ ------------
Net cash used in investing activities ............. -- (211,509)
------------ ------------
Cash flows from financing activities
Proceeds from notes payable and related party notes payable .. 101,076 1,859,596
Proceeds from issuance of common stock and exercise of options
and warrants ............................................. 35,526 479,160
Proceeds from convertible debentures ......................... 1,500,000 800,000
Payments on short term notes payable ......................... (54,427) (6,153)
Payments on capital lease obligations ........................ (16,923) (12,508)
Restricted cash - held in escrow ............................. (51,147) --
------------ ------------
Net cash provided by financing activities ......... 1,514,105 3,120,095
------------ ------------
Net decrease in cash ............................................. (11,314) (101,386)
Cash at beginning of period ...................................... 26,900 106,806
------------ ------------
Cash at end of period ............................................ $ 15,586 $ 5,420
============ ============
The accompanying notes are an integral part of these financial statements.
10
Insynq, Inc.
Notes to Financial Statements - Restated
February 28, 2002
(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
February 28, 2002 and 2001, 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 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 $21,567,966 at February 28, 2002. As discussed in Note 9,
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 are currently not quantifiable.
The Company has retained legal counsel for representation in the current
negotiations 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 is a requirement to remain current on
all future payroll tax deposits. If the Company is unsuccessful, the taxing
authorities could move against all or some of the Company's assets. (See also
Note 5.)
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 recently completed negotiations with a
national corporation to provide hosting and application services.
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 and depends on
many factors. The Company will need to raise substantial additional capital to
fund its operations and may seek such additional funding through
11
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.
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
50,715,466 and 26,281,906 for the three months ended February 28, 2002 and 2001;
41,785,629 and 23,221,800 for the nine months ended February 28, 2002 and 2001,
respectively. The computation for loss per common share, assuming dilution, for
the three months and nine months ended February 28, 2002 and 2001, was
anti-dilutive, and therefore, is not included. Outstanding warrants and options
as of February 28, 2002 totaled 26,585,138.
Note 5 - Accrued Liabilities
As of February 28, 2002, the Company was delinquent on approximately $734,200 of
its payroll and business taxes, and related penalties and interest. The majority
of the past due amount, or approximately $608,000, 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. In April 2002, the Internal Revenue
Service filed a federal tax lien on the asset of the Company for all past due
employment related taxes, penalties and interest. Unless the Company makes
arrangements with the IRS to pay the amount owed, the IRS could take possession
of the Company's assets. The Company has been in contact with other respective
taxing authorities to initiate payment plans in settlement of their respective
past due taxes. (See also Note 3.)
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 - 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 exercising 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 5,000,000 shares of class A common
stock. (See also Note 11.)
Note 7 - Related Party Notes Payable
During the nine month period ended February 28, 2002, the Company entered into
three additional short-term promissory notes, totaling $80,076. 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 February 28, 2002 aggregate $1,313,198. Two officers loaned $21,000 to the
Company in the quarter ended February 28, 2002 and were repaid in the same
period.
Note 8 - 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% 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, divided by two. 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 at 12% per annum.
Pursuant to the agreement, the Company may not, without consent, (i) engage in
any
12
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.
On January 24, 2002, the Company entered into a second agreement to issue
$550,000, 12% convertible debentures, and 2,200,000 warrants. The debentures are
convertible into shares of common stock at the lesser of (i) $0.008 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 2,200,000 shares of common stock at the lesser
of $0.007 per share or the average of the lowest three trading prices during the
twenty trading days immediately prior to exercise. 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. The Company has received $300,000 of debentures from this agreement and
has issued 1,200,000 warrants.
During the nine months ended February 28, 2002, the investors have purchased a
total of $1,500,000 of convertible debentures, and have converted $64,050 of
debentures and $27,993 of accrued interest into 12,995,973 shares of common
stock.
For the nine months ended February 28, 2002, the Company recorded discounts on
the convertible debentures totaling $1,442,549, equal to the fair market value
of the warrants and the intrinsic value of the beneficial conversion features.
The Company recognized $639,116 of interest expense on the discounts for the
nine months ended February 28, 2002.
Note 9 - Capital Lease Obligation
The Company is in default on a capital lease obligation. Accordingly, the lease
has been classified as a current obligation.
Note 10 - Common Stock
On November 19, 2001, by majority vote of the shareholders, the Company
authorized an additional 150,000,000 shares of common stock, increasing the
total number to 250,000,000 of authorized shares of common stock.
Note 11 - Stock Options
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. On November 19, 2001 the shareholders approved an amendment to the
LTIP, which would set aside an additional 15,000,000 shares of common stock for
a total of 31,675,300 shares of common stock, which may be issued upon the
exercise of options granted. As of February 28, 2002, options available for
issuance are 9,742,462.
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. On December 10, 2001, the Company
was authorized by the Board of Directors to re-price all of the Executive LITP
stock options from an exercise price of $0.50 per share to an exercise
13
price of $0.018 per share, which was the fair market value on December 10, 2001.
On January 31, 2002, all outstanding non-qualified stock options totaling
5,000,000 shares were exercised into class A common stock in exchange for
promissory notes totaling $90,000 as described in note 6. In accordance with
GAAP, because of the reduction of the exercise price and the consideration
received by the Company, the two non-recourse promissory notes, collateralized
by the shares to be issued, are accounted for as modifications of the original
option agreements requiring variable accounting. The promissory notes are
classified as a reduction of stockholders' equity.
Note 12 - Contingencies and Commitments
The Company has an agreement with a consulting group to provide financial
advisory services from January 1, 2002 through March 2002. Consideration for
these services is three monthly payments starting January 1, 2002 of $13,500 in
cash and 215,000 shares of common stock.
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
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 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. On May
10, 2002, the Court awarded a partial summary judgment in favor of the former
landlords for approximately $170,000 plus legal fees of $16,000. Later in May,
2002, the Company will file a motion asking the Court to vacate the summary
judgment in light of new evidence.
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 requiring the signing of the new leases was entered
into under economic duress, based on misrepresentation and was signed in bad
faith on the part of the former landlords or by mutual mistake. As such, it is
management's opinion that the settlement agreement and the lease agreement are
void and the summary judgment will be set aside by the Court.
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 vigorously defend against this lawsuit.
Note 13 - Non-Cash Investing and Financing Activities
Non-cash investing and financing activities included the following for the nine
months ended February 28, 2002:
2002 2001
---- ----
Discount on convertible notes payable .............. $1,442,549 $ 900,000
Note payable converted into warrants ............... 14,000 --
Accrued liabilities converted into warrants ........ 3,500 --
Debentures converted into common stock ............. 64,050 932,720
Accrued liabilities converted into common stock .... 83,819 --
Accounts payable converted into common stock ....... 8,000 44,410
Promissory notes receivable issued for class
A common stock ................................... 90,000 --
14
Conversion of put options into common stock ........ -- 928,785
Discount on short-term notes payable ............... -- 229,000
Equipment purchased under capitalized leases ....... -- 17,762
Capitalized lease obligations incurred ............. -- (17,762)
Notes payable and interest converted to common stock -- 806,050
Note 13 - Related Party Transactions
On December 1, 2001, the Company entered into a management services agreement
(MSA) and a co-location agreement with a Company wholly owned by a Director and
Officer of the Company. Terms of the agreement stipulate $16,550 per month will
be for services rendered and $6,550 will be a rental expense for equipment and
utilities. In addition, an employment agreement with this Officer and Director
calls for a monthly salary of $15,000 per month, of which $5,000 is deferred. A
signing bonus of $66,667 was also accrued for the officer. The term of the MSA
is through February 15, 2006, and the term of the employment agreement is for
three years.
Note 14 - New Authoritative Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after June 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
adoption of SFAS 141 did not have an impact on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001, with earlier application
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not been previously
issued. The statement is required to be applied at the beginning of the entity's
next fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements to that date. The Company is currently
evaluating the potential effect of the initial application of the SFAS 142 on
its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144 (SFAS 144), Accounting for the Impairment
or disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and
Accounting Principles Board Opinion 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for segments of a
business to be disposed of. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company is currently evaluating the potential
effect of the initial application of the SFAS 144 on its financial statements.
Note 15 - Subsequent Events
On April 2, 2002, the Company entered into an agreement with a former consultant
under which $162,500 in accrued consulting fees were forgiven in exchange for
$8,000 cash payment and the re-pricing of outstanding warrants to 115% of fair
market value. The resulting gain will be recorded in the fourth quarter of
fiscal year 2002.
15
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/A and in our May 31, 2001 annual report on Form 10-KSB/A.
Except for the historical information contained herein, this Amended
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,
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 as 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, Peregrine Corporation, Macola
16
Software, and Novell, Inc.
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
We had limited operational activity during the three-month and nine-month
periods ended February 28, 2002. Therefore, we believe that any comparison of
the results of operations for the respective periods have very limited value for
evaluating trends and/or as a basis for predicting future results.
We incurred a net loss of $706,230 and $3,030,154 for the three months
ended February 28, 2002 and 2001, respectively. For the nine months ended
February 28, 2002 and 2001, the net loss incurred was $3,570,406 and
$12,005,476, respectively. 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 the start-up of operations, (3) adjustments to salaries,
deferred compensation and other employee related benefits, (4) increased
professional and consulting fees, and, (5) the issuance of warrants and options
for services.
Total revenue for three months ended February 28, 2002 and February 28,
2001 was $285,626 and $150,990, respectively, representing an increase of
$134,636. The primary sources of revenue during the three month period ended
February 28, 2002: (1) seat subscription revenue of $166,437, net of discounts,
(2) managed software and support service revenue of $60,593, and (3) hardware
and software sales and other revenue of $58,596. Total revenue for the nine
months ended February 28, 2002 and February 28, 2001 was $707,919 and $324,923,
respectively. Primary revenue sources for the nine month period ended February
28, 2002 are: (1) seat subscription revenue of $492,026, net of discounts; (2)
managed software service revenue of $76,738; and, (3) hardware and software
sales and services revenue of $139,155. Seat revenue for the nine months ended
February 28, 2002 increased approximately 208% over the same period ended
February 28, 2001. For the nine months ended February 28, 2002, seat revenue
accounted for approximately 70% of total revenue. 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 third quarter, Fiscal
2002, 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
During the three months ended February 28, 2002, we recorded direct costs
of services of $278,118, a decrease
17
of $69,364 over the limited operations experienced in the same period one year
ago. Network and infrastructure costs were $3,741 for the quarter ended February
28, 2002, which is a decrease of $32,387 over the same quarter ended February
28, 2001. For the nine-month periods ended February 28, 2002 and February 28,
2001, we incurred $952,656 and $983,623 in direct costs, and, $36,526 and
$115,309 in network and infrastructure costs, respectively.
Selling, general, and administrative costs were $629,648 for the three
months ended February 28, 2002, representing a decrease of $2,043,904 over the
same three month period one year ago. For the nine months ended February 28,
2002, selling, general and administrative costs decreased $4,559,312 over the
same period ended February 28, 2001. The decrease can be directly attributed to
our management's committed efforts, beginning in the fall of 2000, to
restructure our operations and reduce our expenses. On December 31, 2001, two
key officers forgave $126,100 of deferred compensation. Of further significance
for the nine months ended February 28, 2002, is a $2,060,881 decrease of
comparable period expenses requiring cash payments. Non-cash expenses for the
quarter ended February 28, 2002 and February 28, 2001 was $180,872 and
$2,274,343, respectively. For the nine-month periods ended February 28, 2002 and
February 28, 2001, non-cash compensation was $959,514 and $3,457,945,
respectively, representing a decrease of $2,498,431. 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.
Interest expense was $438,011 for the three months ended February 28, 2002
versus $47,919 for the three months ended February, 2001. For the nine-month
periods ended February 28, 2002 and February 28, 2001, interest expense was
$966,037 and $3,797,591, respectively. This decrease of $2,831,554 was due
primarily to the recognition in prior comparable periods of: (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)
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 $311,570 and $7,868 of the reported expense for the three months
ended February 28, 2002 and February 28, 2001, and, $658,964 and $3,700,615 for
the nine months ended February 28, 2002 and February 28, 2001, respectively. For
the nine months ended February 28, 2002, non-cash interest expense included
$635,365 related to discount amortization of the 12% convertible debentures.
We have reported other income of $488,913 for the nine months ended
February 28, 2002. The reported amount represents approximately $461,600 of
favorable vendor and creditor negotiated settlements. As of May 13, 2002, we
have settled an additional $195,400 of trade payables for $13,200.
Liquidity and Capital Resources
We had cash and cash equivalents of $15,586 as of February 28, 2002, and a
deficit in working capital of $4,861,141 at the same date. For the nine months
ended February 28, 2002, we used cash in our operating activities totaling
$1,525,419.
We finance our operations and capital requirements primarily through
private debt and equity offerings. For the nine months ended February 28, 2002,
we received cash totaling $1,601,076 from the issuance of promissory notes
payable and convertible debentures. For the nine months ended February 28, 2002,
we received $35,526 from the issuance of common stock and the exercise of
options and warrants.
As of February 28, 2002, we had approximately $5,316,608 in current
liabilities and past due debt. This amount includes a reclassification of our
convertible debentures, net of discounts, from `other liabilities' as previously
reported on our November 30, 2001 balance sheet. Of the $5,316,608 liability,
approximately $431,500 is deemed as a current trade payable or accrual.
We are late in payment of certain creditor trade payables of approximately
$772,500. 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
18
well received by our vendors. However, as of February 28, 2002, many creditors,
accepting one of the payment plans, have not been paid. The creditors who
accepted payments plans are now owed approximately $127,317, and are included in
current trade payables and in the past due amount of $772,500. As of February
28, 2002, payable balances due by each plan are: (a) plan 1 - $42,244; (b) plan
2 - $2,670; and, (c) plan 3 - $82,403. As a result of these plans and subsequent
additional negotiations with our vendors, we recorded over $461,600 of forgiven
creditor payables for the nine months ended February 28, 2002, and have settled
an additional $195,400 of debt for $13,200 between March 1, 2002 and May 13,
2002. Also, management has entered into re-negotiations, and has approached the
remaining outstanding creditors, with trade payables of approximately $454,000,
by offering them cash payments for substantially less than the amounts due, or
request a total forgiveness of the debt. To-date this has been well received by
many of these creditors. However, if we are not able to negotiate payment plans
or complete settlements with these vendors, or if we are not able to execute the
negotiated payment plans with those who have accepted such plans, we could
experience a severe negative impact on our business resources and we may be
forced to cease operations.
Prepaid expenses increased approximately $197,335 between reporting
periods May 31, 2001 and February 28, 2002. The increase is due primarily to
recognizing $184,450 of obligated licensing fees per terms of a contractual
agreement. A liability of an equal amount is included in accrued liabilities. We
are in the process of proposing material modifications to this agreement,
whereby the obligation and the recorded asset under this agreement may be
substantially reduced or totally eliminated.
In addition, we are determining the validity of an invoice of
approximately $47,350, recorded in accrued liabilities. This amount was billed
to the company as a result of a contract termination and we are currently
investigating the validity and propriety of this invoice.
We lease equipment under a capital leases expiring in 2003. As of February
28, 2002, our principal capital lease obligation for computer hardware, printers
and related infrastructure is in default in the amount of approximately
$757,560. 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, 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 $549,200 of business and payroll taxes is
delinquent, plus an estimated $157,000 of related assessed penalties and
interest. The Internal Revenue Service filed a Federal Tax Lien in April 2002
for the past due employment related taxes, penalties and interest. We have
retained legal counsel to represent us in our current negotiations 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 other 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., our
predecessor company. This amount is in dispute and amended returns to correct
this deficiency have been filed.
As of February 28, 2002, we have approximately $259,125 of employee
agreement related obligations in the form of accrued and deferred salaries.
These obligations are primarily a result of applying the terms of existing
employment agreements against that which we actually paid. Currently, management
is negotiating with employees with employment agreements in order to reduce all
deferred and accrued salaries and bonuses to-date. On December 31, 2001, two key
officers forgave $126,100 of deferred compensation.
19
We have approximately $1,468,050 in short-term notes, loans and related
accrued interest. In settlement of these debts, our board of directors may
authorize the issuance of class A preferred stock. To-date, we have received a
letter of intent to convert approximately $1,300,000 of this debt into preferred
stock.
We also have recorded outstanding convertible debentures of $1,435,950,
plus related accrued interest of $33,100 and unamortized discounts of $807,184.
On June 29, 2001,we entered into a private financing transaction with
three investors under which the investors initially purchased $550,000 from a
total of $1,200,000 of our 12% convertible debentures. Investors purchased an
additional $100,000 on August 15, 2001, $150,000 on October 18, 2001, and,
$400,000 on November 2, 2001 under this financing agreement. The debentures are
convertible into shares of our 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 an exercise
price per share equal to the lesser of (i) $.04 and (ii) the average of lowest
three (3) trading prices during the twenty (20) trading days immediately prior
to exercise of the warrants. If the 2,400,000 warrants were exercised on May 13,
2002, the warrant conversion price would be $0.003. 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. Through May 13, 2002, all the net proceeds
were used to fund our necessary day-to-day operations, which included payroll
and related taxes; infrastructure and delivery costs; and, certain legal and
accounting fees.
On January 24, 2002, we entered into a second private financing
transaction to sell our 12% convertible debentures, to four investors, under
which, the investors initially purchased $300,000. Proceeds from this initial
transaction, net of fees and expenses, were $221,000, of which $77,000 was
specifically escrowed and reserved for selected vendor settlements. The
conversion price of the debentures is the lesser of $0.008, the fixed conversion
price, or, the average of the lowest three inter-day trading prices during the
twenty days immediately prior to the conversion date, discounted by 50%. For
each one-dollar ($1.00) of debenture investment, we will issue warrants to
purchase four (4) shares of common stock. The warrant is exercisable from time
to time up to two (2) years from date of issuance, at an exercise price equal to
the lesser of $0.007 or the average of the three lowest inter-day trading prices
during the twenty days immediately prior to the exercise. If the 2,200,000
warrants were exercised on May 13, 2002, the warrant conversion price would be
$0.003.
On June 29, 2002 we will be obligated to repay any unconverted funds plus
accrued interest pursuant to our June 29, 2001 debenture, and through January
24, 2003, we will be obligated to repay all unconverted remaining funds pursuant
to both our June 29, 2002 and January, 24, 2002 debenture agreements. We do not
currently have the funds to repay the amounts that may become due under such
debentures and we may not have the funds available to meet those requirements
when they come due. Pursuant to the June 2001 and the January 2002 debenture
agreements, any amount of principal or interest which is not paid when due shall
bear interest at the rate of fifteen percent (15%) per annum from the due date
thereof until the same is paid.
We anticipate receiving the remaining $250,000, less approximately $30,000
in applicable fees. Our management believes that the likelihood of receiving the
remaining $250,000 is good; however, our ability to receive the remaining
$250,000 pursuant to the securities purchase agreement is subject to conditions,
which include, but are not limited to:
(i) that our representations and warranties in the securities purchase
agreement are true and correct in all material respects as of the date when made
and as of the closing date and that we have performed, satisfied and complied in
all material respects with the covenants, agreements and condition required by
the securities purchase agreement; (ii) that no litigation, statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by or in any court or governmental
authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby which prohibits the consummation
of any of the transactions contemplated by the securities purchase agreement;
and (iii) that our shares of common stock shall have been authorized for
quotation on the OTCBB and trading in our common stock on the OTCBB shall not
have been suspended by the SEC or the OTCBB.
20
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. 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 and January 24, 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.
From December 1, 2001 to May 13, 2002, we have received $144,000 in cash
from the issuance of $300,000 of convertible debentures. Certain investment
related fees and payments to creditors totaling $156,000 were either deducted or
held back through escrow pursuant to the terms of our financing agreement.
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 500,000 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 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, 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 plus legal
fees of $16,000. Later in May, 2002, the Company will file a motion asking the
Court to vacate the summary judgment in light of new evidence. 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 management's
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 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. In October 2001 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.
We have recently signed several sales and marketing agreements. In
particular, we have completed negotiations with a large U.S. telecommunication
firm who will re-market, via private label, various services which began in
December 2001. These services include the delivery of Windows(TM) desktops, data
storage and virus protection delivered on a subscription bases for a fixed
monthly cost. We have recently launched our e-Accounting Center portal located
at WWW.CPA-ASP.COM, which has been designed to help the accounting
21
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. 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. There can be no
assurances, however, that we will substantially increase our monthly recurring
revenues.
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 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.
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- ---------------- ---------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
4.1 Amendment No. 1 to Securities Purchase Agreement dated April 8, 2002
between AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW/New
Millennium Offshore, LTD and Pegasus Capital Partners, LLC and Insynq, Inc.
(Incorporated by reference to Exhibit 4.73 to the Company's Amended
Registration Statement on Form SB2/A filed on April 11, 2002)
- --------------------------------------------------------------------------------
* filed herewith
(b) Reports on Form 8-K
None
22
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 May 15, 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)
INDEX TO EXHIBIT LISTING
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
4.1 Amendment No. 1 to Securities Purchase Agreement dated April 8, 2002
between AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW/New
Millennium Offshore, LTD and Pegasus Capital Partners, LLC and Insynq, Inc.
(Incorporated by reference to Exhibit 4.73 to the Company's Amended
Registration Statement on Form SB2/A filed April 11, 2002)
- --------------------------------------------------------------------------------
* Filed Herewith