United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended August 31, 2003.
[ ] 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)
NEVADA 22-3894506
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1127 BROADWAY PLAZA, SUITE 202
TACOMA, WASHINGTON 98402
(Address of Principal Executive Office)(Zip Code)
(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, $0.001 Par Value --- 228,395,725 as of October 20, 2003
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements of Insynq, Inc.
Condensed Balance Sheets - August 31, 2003 (unaudited) and 3
May 31, 2003
Condensed Statements of Operations -Three months ended 4
August 31, 2003 and 2002 (unaudited)
Condensed Statement of Stockholders' Deficit - Three months 5
ended August 31, 2003 (unaudited)
Condensed Statements of Cash Flows - Three months 6
ended August 31, 2003 and 2002 (unaudited)
Notes to the Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 3. Controls and Procedures 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements of Insynq, Inc.
Insynq, Inc.
Condensed Balance Sheets
August 31, 2003 May 31, 2003
--------------------- ------------------
ASSETS (unaudited)
Current assets
Cash ................................................................ $ 37,083 $ 53,059
Accounts receivable, net of allowance for doubtful
accounts of $25,000 at August 31, 2003
and May 31, 2003 ................................................. 50,867 46,252
Related party receivables ........................................... 4,008 9,361
------------ ------------
Total current assets ................................ 91,958 108,672
------------ ------------
Equipment, net .......................................................... 205,776 244,962
------------ ------------
Other assets
Prepaid licenses .................................................... 202,772 202,772
Prepaid expenses .................................................... 19,500 19,500
Deposits ............................................................ 5,261 6,553
------------ ------------
Total other assets ........................................... 227,533 228,825
------------ ------------
Total assets ................................................. $ 525,267 $ 582,459
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable .................................................... $ 689,293 $ 789,046
Accrued liabilities ................................................. 2,177,069 2,396,215
Convertible debentures, net of unamortized discount of
$82,201 and $184,085, respectively ............................... 1,854,798 1,789,865
Related party notes payable ......................................... 145,274 1,307,274
Capital lease obligations ........................................... 6,136 878,704
Deferred compensation ............................................... 211,717 159,017
Customer deposits ................................................... 50,590 48,006
Notes payable ....................................................... 11,603 18,021
------------ ------------
Total current liabilities .................................... 5,146,480 7,386,148
------------ ------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, -0- issued and outstanding at August 31,
2003 and May 31, 2003 ............................................ -- --
Class A common stock, $0.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding at August
31, 2003 and May 31, 2003 ........................................ -- --
Common stock, $0.001 par value, 500,000,000 shares
authorized, 137,946,484 issued and outstanding at
August 31, 2003; and 22,033,035 shares issued and
outstanding at May 31, 2003 ...................................... 137,947 22,033
Additional paid-in capital .......................................... 19,867,286 18,807,516
Notes receivable and interest - stockholders and officers ........... (222,595) (105,475)
Unearned compensation and services .................................. (265,959) --
Accumulated deficit ................................................. (24,137,892) (25,527,763)
------------ ------------
Total stockholders' deficit .................................. (4,621,213) (6,803,689)
------------ ------------
Total liabilities and stockholders' deficit .................. $ 525,267 $ 582,459
============ ============
The accompanying notes are an integral part of these financial statements.
3
Insynq, Inc.
Condensed Statements of Operations
(unaudited)
For the three months ended
August 31,
-------------------------------
2003 2002
----------- ------------
Revenues ............................... $ 300,706 $ 234,163
------------- -------------
Costs and expenses
Direct cost of services ............. 173,066 193,459
Selling, general and administrative
Non-cash services and compensation . 124,959 131,361
Other .............................. 197,013 325,733
------------- -------------
Total costs and expenses ............... 495,038 650,553
------------- -------------
Loss from operations ................... (194,332) (416,390)
------------- -------------
Other income (expense)
Gain on forgiveness and settlements of
debts .............................. 1,805,695 --
Interest expense
Non-cash ........................... (223,113) (417,997)
Other .............................. (960) (26,885)
Other income ......................... 2,581 3,372
Loss from disposal of assets ......... -- (6,472)
------------- -------------
Total other (expense) .................. 1,584,203 (447,982)
------------- -------------
Net income (loss) ...................... $ 1,389,871 $ (864,372)
============= =============
Net income (loss) per share:
Basic .............................. $ 0.03 $ (1.36)
============= =============
Diluted ............................ $ 0.01 $ (1.36)
============= =============
Weighted average of common shares:
Basic .............................. 55,563,416 636,791
============= =============
Diluted ............................ 169,523,222 636,791
============= =============
The accompanying notes are an integral part of these financial statements.
4
Insynq, Inc.
Condensed Statement of Stockholders' Deficit
For the three months ended August 31, 2003
(unaudited)
Notes and
Interest
Receivable
From
Additional Stockholders' Total
Common Stock Paid-In and Unearned Accumulated Stockholders'
Shares Amount Capital Officers Compensation Deficit Deficit
------------ ---------- ------------ ------------ ------------- --------------- --------------
Balance, May 31, 2003 ............. 22,033,335 $ 22,033 $ 18,807,516 $ (105,475) $ -- $(25,527,763) $(6,803,689)
Issuance of common stock in
conjunction with exercise of
options and record stockholders'
notes receivable .................. 17,129,628 17,130 218,981 (236,111) -- -- --
Issuance of common stock for
non-employee compensation and
record unearned compensation ...... 25,406,818 25,407 233,510 -- (228,917) -- 30,000
Issuance of common stock for trade
debt .............................. 3,900,000 3,900 35,100 -- -- -- 39,000
Issuance of common stock in
conjunction with conversion of
debentures ........................ 5,237,525 5,238 31,713 -- -- -- 36,951
Issuance of common stock for
settlement of related party debt
and interest ...................... 65,000,000 65,000 585,000 -- -- -- 650,000
Satisfaction of officers' notes receivable
and accrued interest receivable in
exchange for common stock to be
received........................... (760,822) (761) (105,754) 106,515 -- -- --
Issuance of options for
non-employee compensation and
record unearned compensation ...... -- -- 61,220 -- (61,220) -- --
Amortization of unearned
compensation ...................... -- -- -- -- 24,178 -- 24,178
Principal received on stockholders'
notes receivable .................. -- -- -- 14,587 -- -- 14,587
Accrue interest on notes receivable
from stockholders and officers .... -- -- -- (2,111) -- -- (2,111)
Net income for the three months
ended August 31, 2003 ............. -- -- -- -- -- 1,389,871 1,389,871
------------ --------- ------------ ---------- --------- ------------ -----------
Balance, August 31, 2003 .... 137,946,484 $ 137,947 $ 19,867,286 $ (222,595) $(265,959) $(24,137,892) $(4,621,213)
============ ========= ============ ========== ========= ============ ===========
The accompanying notes are an integral part of these financial statements.
5
Insynq, Inc.
Condensed Statements of Cash Flows
(unaudited)
For the three months ended August 31,
---------------------------------------
2003 2002
---------------- --------------
Cash flows from operating activities
Net income (loss) ...................................................... $ 1,389,871 $ (864,372)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ...................................... 39,186 56,554
Bad debts .......................................................... 775 1,861
Amortization of unearned compensation .............................. 24,178 50,162
Issuance of stock for services and compensation .................... 69,000 10,048
Issuance of options and warrants for services to non-employees ..... -- 30,450
Warrants and beneficial conversion features of debentures .......... 101,884 292,192
Capitalized interest on notes receivable and leased assets ......... (2,111) 21,049
Gain on forgiveness and settlement of debts ........................ (1,805,695) --
Discount on capital lease .......................................... -- 7,867
Loss on disposal of assets ......................................... -- 6,472
Changes in assets and liabilities:
Accounts receivable - trade .................................... (5,390) (40,464)
Related party receivables ...................................... 5,353 (21,034)
Prepaid expenses ............................................... -- 4,933
Accounts payable ............................................... 18,330 89,717
Accrued liabilities ............................................ 121,120 89,385
Customer deposits .............................................. 2,584 6,676
Deferred compensation .......................................... 52,700 5,749
----------- -----------
Net cash provided by (used in) operating activities ......... 11,785 (252,755)
----------- -----------
Cash flows from financing activities:
Principal received on stockholders' notes receivable ................... 14,587 --
Payments on capital lease obligations .................................. (38,940) (6,839)
Proceeds from bank note payable ........................................ 3,000 2,175
Payments on notes payable .............................................. (7,700) (6,589)
Deposit refund ......................................................... 1,292 --
Proceeds from convertible debentures ................................... -- 250,000
Proceeds released from restricted cash - held in escrow ................ -- 10,355
----------- -----------
Net cash (used in) provided by financing activities ......... (27,761) 249,102
----------- -----------
Net decrease in cash ....................................................... (15,976) (3,653)
Cash at beginning of period ................................................ 53,059 9,760
----------- -----------
Cash at end of period ...................................................... $ 37,083 $ 6,107
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
Insynq, Inc.
Notes To Condensed Financial Statements
August 31, 2003
(unaudited)
Note 1 - Business and Background
Business
Insynq, Inc. (the Company) is a Nevada corporation headquartered in Tacoma,
Washington USA. The Company is an application hosting and managed software
service provider that provides server-based computing access and services to
customers who decide to augment all or part of their information technology
requirements. Customers pay a monthly fee for their services and connect to the
Company's server farm primarily through either the Internet, wireless or DSL
connection.
On July 25, 2002, the Board of Directors approved a re-incorporation merger of
the Company with its wholly-owned subsidiary, Insynq, Inc., a Nevada
corporation, and effectuated a 100 to 1 common stock exchange of the Company's
then issued and outstanding shares of common stock. The re-incorporation, which
was effective December 23, 2002, resulted in the exchange of 59,013,393 common
shares of the terminating entity, Insynq, Inc. - Delaware, for 590,134 common
shares of the surviving entity, Insynq, Inc. - Nevada.
All shares and per share amounts have been retroactively restated to reflect
this December 23, 2002 transaction.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
The interim financial statements included herein have been prepared by Insynq,
Inc. without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to such SEC rules and regulations.
Nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the audited financial statements and notes
thereto in the Company's latest Annual Report as found on Form 10-KSB. In the
opinion of management, all adjustments, including normal recurring adjustments
necessary to present fairly the financial position of the Company with respect
to the interim condensed financial statements and the results of its operations
for the interim period ended August 31, 2003, have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the full year.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying condensed financial statements is as follows:
Revenue Recognition
The Company's principal source of revenue is generated from application hosting,
managed software and related types of services. Application hosting and managed
services revenues are generated through a variety of contractual arrangements
directly with customers. The Company sells its services directly to customers
through annual service subscriptions or month-to-month subscriptions.
Subscription arrangements include monthly subscriber fees, user setup fees and a
last month deposit. New subscription service fees are prorated and invoiced
during the first month of service. Ensuing subscription revenues are invoiced at
the beginning of every month. Initial setup fees received in connection with
these arrangements are recognized in full at the fulfillment of such setup
service. Any prepaid amount, regardless if it is non-refundable, is recorded as
a customer deposit and is generally applied to the last month's service fee.
Customer discounts are recorded as a reduction of revenue.
Fair Value of Financial Instruments
Financial instruments consist principally of cash, accounts and related party
receivables, trade and related party payables, accrued liabilities, and short
and long-term debt obligations. The carrying amounts of such financial
7
instruments in the accompanying condensed balance sheets approximate their fair
values due to their relatively short-term nature. It is management's opinion
that the Company is not exposed to significant currency or credit risks arising
from these financial instruments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the previously reported amounts to
conform to the Company's current interim period presentation.
Note 3 - Going Concern and Management's Plans
The Company's condensed financial statements for the three months ended August
31, 2003 has been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. For the three months ended August 31, 2003, the
Company reported net income of $1,389,871 and a positive cash flow from
operations of $11,785. However, the Company had a deficit in working capital
$5,054,522 and a stockholders' deficit of $4,621,213 at August 31, 2003. The
Company's working capital deficit as of August 31, 2003 may not enable it to
meet certain financial objectives as presently structured.
As of August 31, 2003 and October 10, 2003, the Company is not in compliance
with the proper registration and licensing of certain software applications and
products critical to support the customer base and its own internal operations.
The Company has initiated negotiations with these software vendors in an effort
to purchase or lease/rent the licenses to meet the licensing requirements.
Should the Company not reach a satisfactory agreement with these vendors, and
due to the vital and critical nature of these licenses to support its services,
sales and operations it may be forced to cease operations and/or to file
bankruptcy.
As of August 31, 2003 the Company was delinquent on approximately $836,500 of
its payroll and business taxes and related penalties and interest, which is
included in accrued liabilities. The majority of the past due amount is for
payroll taxes, penalties and interest due to the Internal Revenue Service (IRS),
which in the aggregate, totals an estimated amount of approximately $761,000.
The IRS filed Federal Tax Liens in April 2003 and April 2002 on the assets of
the Company for all past due employment taxes, penalties and accrued interest.
The two liens are for the same tax periods and the same obligations. In October
2002, the Company submitted an Offer In Compromise to the IRS seeking relief on
a portion of its overall obligation and to structure a payment plan on the
settled amount of taxes due. The Company was notified on April 1, 2003 that the
Offer In Compromise was denied. In June 2003, the Company submitted its second
Offer In Compromise to the IRS. The IRS notified the Company in September 2003
that the Offer In Compromise was assigned to a specialist for examination of
documentation supporting the Company's offer. Unless the Company and the IRS
reach a mutually agreeable workout, the IRS could take possession of the
Company's assets and the Company will be forced to cease operations and/or to
file for bankruptcy protection.
As of August 31, 2003, the Company was past due on five related party notes
payable with principal totaling approximately $145,300. Total accrued interest
related to these obligations is approximately $55,500 and is included in accrued
liabilities.
The development and marketing of the Company's technology and products will
continue to require a commitment of substantial funds. Currently, pursuant to
Item 303(b)(1) and (3) of Regulation SB, the Company has no material capital
commitments.
The Company is devoting its efforts into establishing a business in the new
emerging Managed Services Provider industry. The Company is establishing
alliances with Independent Software Vendors and Internet Service Providers to
provide access to their applications for their customers and building new
channels for marketing products to potential
8
customers. As a result of these new alliances and products, the Company is
continuing to develop new products to enable the deployment and the on going
management of the Company's services.
The Company successfully implemented cost containment strategies and continues
to devote significant efforts in the development of new products and opening new
markets. Also, the Company continues to contact vendors with past due account
balances with the intention of settling the balance due for cash at either less
than face or structure a long-term payment plan. To date, Company negotiations
to settle creditors' debts have been very favorable and well received.
However, the rate at which the Company expends its resources is variable, may be
accelerated, and will depend on many factors. The Company will need to raise
substantial capital to fund its operations and may seek such additional funding
through public or private equity or debt financing. There can be no assurance
that such additional funding, if any, will be available on acceptable terms. The
Company's continued existence as a going concern is ultimately dependent upon
its ability to secure additional funding for completing and marketing its
technology and products, and, therefore, the success of its future operations.
Note 4 - Earnings/(Loss) Per Common Share
Basic and diluted earnings/(loss) per common share of stock is computed by
dividing the net income or loss by the weighted average number of common shares
outstanding available to common stockholders during the period. However, common
stock equivalents have been excluded from the computation of diluted loss per
share of common stock for the three months ended August 31, 2002, as their
effect would be anti-dilutive.
Following is a reconciliation of the denominators and numerators used in the
computation of basic and diluted earnings/(loss) per share for the quarters
ended August 31:
2003 2002
-------------- ----------------
Denominator:
Weighted average per share of
common stock outstanding .... 55,563,416 636,791
Assumed conversion of
convertible securities ...... 113,959,806 --
------------ ------------
Diluted weighted average
shares of common stock
outstanding ................. 169,523,222 636,791
============ ============
Numerator:
Net income (loss) ........... $ 1,389,871 $ (864,372)
Interest adjustment for
conversion of debt .......... 71,540 --
------------ ------------
Diluted net income (loss) ... $ 1,461,411 $ (864,372)
============ ============
Earnings (loss) per share:
Basic ....................... $ 0.03 $ (1.36)
============ ============
Dilutive .................... $ 0.01 $ (1.36)
============ ============
Note 5 - Notes Receivable - Stockholders and Officers
Stockholders
On August 5, 2003, the Company executed two consulting agreements that granted
17,129,628 options to purchase common stock within ninety days of the agreement.
The fair value of options was estimated at $61,220, on the grant date, using the
Black-Scholes pricing model and is being amortized to consulting expenses over
the term of the agreements. Amortization for the three months ended August 31,
2003 was $5,102. The options were exercised into
9
shares of common stock on August 5, 2003 and, four secured promissory notes
receivable, aggregating $236,111, with interest at 8% per annum, were executed.
As of August 31, 2003, the total amount due on the notes receivable, plus
accrued interest, aggregated $222,595. The notes receivable and related accrued
interest have been recorded in the Condensed Statement of Stockholders' Deficit.
As of October 3, 2003 the notes and related accrued interest have been paid in
full.
Officers
In January 2002, the Company entered into two promissory notes totaling $90,000
with two of its officers in conjunction with the exercise of non-qualified class
A common stock options. Each note recognized interest at 12% per annum, payable
on or before June 2003 and was secured with shares of common stock. The notes
receivable, plus related accrued interest of $16,515, had been recorded in the
Condensed Statement of Stockholders' Deficit. On June 18, 2003 the two
promissory notes and accrued interest, amounting to $106,515, will be exchanged
for a total of 760,822 shares of common stock held by the officers. The common
stock was valued at market based on the closing price of the Company's common
stock on the date of the exchange agreement, which was $0.14 per share.
Note 6 - Notes Payable
The Company has the following notes payable:
August 31, 2003 May 31, 2003
--------------- ------------
Note payable to bank, $15,000 revolving line of
credit, bearing interest at prime plus 6.0% and is
unsecured. Prime rate of interest at August 31,
2003 and May 31, 2003 is 4.00%..................... $ 7,453 $12,152
Note payable to a vendor totaling $4,150 at August
31, 2003, payable at $25 per month, without interest
At May 31, 2003, two past due, unsecured
notes payable were outstanding ..................... 4,150 5,869
------- -------
$11,603 $18,021
======= =======
Note 7 - Related Party Notes Payable
The Company has short-term promissory notes with stockholders, a corporate
officer, and a prior employee. All related party notes, plus accrued interest
are generally due within one year of issuance or on demand and consist of the
following at:
10
August 31, 2003 May 31, 2003
--------------- ------------
Note payable to stockholder, past due, originally
due November 2, 2001, plus accrued interest; bearing
interest at 10% and is unsecured. On August 5, 2003
the Company settled this obligation by issuing 65
million shares of common stock in satisfaction of
the note and accrued interest ...................... $ -- $1,162,000
Various notes payable to related parties, past due,
with various due dates ranging through April 20,
2002; bearing default interest ranging from 18% to
21%, and are unsecured ............................. 145,274 145,274
---------- ----------
$ 145,274 $1,307,274
========== ==========
Note 8 - Accrued Liabilities
Accrued liabilities consist of the following at:
August 31, 2003 May 31, 2003
--------------- ------------
Salaries and benefits ........ $ 251,484 $ 251,138
Taxes
Payroll ................. 454,564 457,447
Business ................ 51,151 55,147
Penalties and interest .. 338,406 323,163
Interest ..................... 467,750 702,108
Licenses, consulting and other 613,714 607,212
---------- ----------
$2,177,069 $2,396,215
========== ==========
As of August 31, 2003 the Company was delinquent on approximately $836,500 of
its payroll and business taxes and related penalties and interest. The majority
of the past due amount is for payroll taxes, penalties and interest due to the
IRS, which in the aggregate totals an estimated amount of approximately
$761,000. The IRS has filed Federal Tax Liens on the assets of the Company for
all past due employment taxes, penalties and accrued interest. The Company has
submitted an Offer In Compromise to the IRS seeking relief on a portion of its
overall obligation and structure a payment plan on the settled amount of taxes
due. The IRS notified the Company in September 2003 that the Offer In Compromise
was assigned to a specialist for a detail and extensive examination of the
Company's financial condition and the other submitted documents supporting the
offer. As of October 10, 2003 the Company has not received any further
inquiries, or comments, from the IRS. Unless the Company and the IRS reach a
mutually agreeable workout, the IRS could take possession of the Company's
assets or the Company will be forced to cease operations and/or to file for
bankruptcy protection.
The Company has workout arrangements with state and city taxing authorities to
pay its past due taxes. As of August 31, 2003, the Company owes approximately
$17,200 pursuant to these workout agreements. Terms of these workouts require
payments ranging from $150 to $2,000 per month, which includes varying rates of
interest, over remaining periods ranging from approximately two to twenty-one
months.
Additionally, two liens have been filed by two other states for past due taxes,
plus accrued penalties and interest. One lien, for approximately $28,000, is to
a state for prior years' income taxes assessed to the predecessor company of
Insynq, Inc. This amount has been disputed and amended returns to correct this
deficiency have been filed, but not yet approved. The second lien is to another
state for payroll taxes, penalties and interest totaling approximately $27,500.
On October 8, 2003 the Company submitted its second workout proposal and a good
faith deposit of $5,000 to be
11
applied toward the tax liability and the settlement on this state's payroll
taxes. There has not been a response from the State as of the date of this
report.
Note 9 - Convertible Debentures
As of August 31, 2003, the Company is obligated to the investors who purchased
secured convertible debentures over three separate private financing
transactions. On March 6, 2003, the Company entered into an agreement with two
groups of the investors to extend the maturity dates of certain debentures, and,
modify the conversion prices and certain other provisions of all three issuances
as described below.
A summary of the balances at August 31, 2003 is as follows:
Warrants
Total Amount Issued in
Due Per Connection
Issued Convertible with
Convertible Unamortized Principal Principal Accrued Debenture Convertible
Date of Issuance Date of Maturity* Debentures Discount Redeemed Amount Due Interest Issuance Debentures
- ----------------- --------------------- ------------ ------------ ------------ ------------ ------------- -------------- -----------
First Issuance
June 29, 2001 March 6, 2004* $550,000 $-- $113,001 $436,999 $122,549 $559,548 1,100,000
August 10, 2001 March 6, 2004* 100,000 -- -- 100,000 24,922 124,922 200,000
October 17, 2001 March 6, 2004* 150,000 -- -- 150,000 37,172 187,172 300,000
November 2, 2001 March 6, 2004* 400,000 -- -- 400,000 97,820 497,820 800,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Totals $1,200,000 $-- $113,001 $1,086,999 $282,463 $1,369,462 2,400,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Second Issuance
January 24, 2002 March 6, 2004* $300,000 $-- $-- $300,000 $64,356 $364,356 1,200,000
July 3, 2002 March 6, 2004* 250,000 -- -- 250,000 36,642 286,642 1,000,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Totals $550,000 $-- $-- $550,000 $100,998 $650,998 2,200,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Third Issuance
September 30, 2002 September 30, $120,000 $9,616 $-- $120,000 $13,942 $133,942 240,000
2003**
November 6, 2002 November 6, 2003 30,000 5,433 -- 30,000 3,083 33,083 60,000
December 6, 2002 December 6, 2003 30,000 8,014 -- 30,000 2,706 32,706 60,000
January 31, 2003 January 31, 2004 60,000 25,233 -- 60,000 4,330 64,330 120,000
March 20, 2003 March 20, 2004 30,000 16,500 -- 30,000 1,664 31,664 60,000
March 31, 2003 March 31, 2004 30,000 17,405 -- 30,000 1,550 31,550 60,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Totals $300, 000 $82,201 $-- $300,000 $27,275 $327,275 600,000
------------ ------------ ------------ ------------ ------------- -------------- -----------
Grand Total $2,050,000 $82,201 $113,001 $1,936,999 $410,736 $2,347,735 5,200,000
============ ============ ============ ============ ============= ============== ===========
* Amended Maturity
Dates
** In Default
Summarized below are the net outstanding convertible debentures as of:
August 31, 2003 May 31, 2003
--------------- ------------
Principal amount due ...... $ 1,936,999 $ 1,973,950
Less unamortized discount . (82,201) (184,085)
----------- -----------
Convertible debentures, net $ 1,854,798 $ 1,789,865
=========== ===========
12
Terms of the First Issuance of Convertible Debentures
On June 29, 2001, the Company entered into a private financing transaction with
three investors for a total of $1,200,000, 12% secured convertible debentures.
Pursuant to the amended terms dated March 6, 2003, the debentures are
convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the
average of the lowest three trading prices in the twenty-day trading period
immediately preceding the notice to convert, discounted by sixty percent (60%).
The convertible debentures carry attached warrants that allow the investors,
under the terms of the warrants, to purchase up to 2,400,000 shares of common
stock at $0.25 per share. The terms of the debentures provide for full payment
on or before one year from the date of issuance, plus accrued interest at 12%
per annum. However, these convertible debentures have been amended to provide a
maturity date of March 6, 2004 upon which these obligations are to be repaid or
converted into common stock at the investors' option. All other terms of the
debentures remain the same. As of August 31, 2003, principal in the amount of
$1,086,999 plus accrued interest of $282,463 is outstanding. Since August 31,
2003, pursuant to twenty-two notices to convert, a total of $276,100 of
principal, due on the June 29, 2001 convertible debentures, was converted into
44,470,766 shares of common stock.
Terms of the Second Issuance of Convertible Debentures
On January 24, 2002, the Company entered into a private financing transaction
with three investors for a total of $550,000, 12% secured convertible
debentures. Pursuant to the amended terms dated March 6, 2003, the debentures
are convertible into shares of common stock at the lesser of (i) $0.30 or (ii)
the average of the lowest three trading prices in the twenty-day trading period
immediately preceding the notice to convert, discounted by sixty percent (60%).
The convertible debentures carry attached warrants that allow the investors,
under the terms of the warrants, to purchase up to 2,200,000 shares of common
stock at $0.25 per share. The terms of the debentures provide for full payment
on or before one year from the date of issuance, plus accrued interest at 12%
per annum. However, these convertible debentures have been amended to provide a
maturity date of March 6, 2004 upon which these obligations are to be repaid or
converted into common stock at the investors' option. All other terms of the
debentures remain the same. As of August 31, 2003, principal in the amount of
$550,000 plus accrued interest of $100,998 is outstanding.
Terms of the Third Issuance of Convertible Debentures
On September 27, 2002, the Company entered into a third securities purchase
agreement with four investors for the sale of (i) $450,000 in secured
convertible debentures and (ii) the issuance of warrants to buy 900,000 shares
of its common stock. As of August 31, 2003 the investors are obligated to
provide the Company with the funds as follows: (a.) $300,000 has been disbursed,
and, (b.) disburse the remaining $150,000 at the rate of $30,000 per month on
the final business day of each successive month ending September 2003. As of
October 10, 2003, the investors have not funded any remaining portion of the
$150,000 balance due the Company pursuant to the terms of the agreement.
The debentures bear interest at 12% per annum, mature one year from the date of
issuance, and are convertible into common stock, at the investors' option, at
the lower of:
o $0.30 per share; or
o 40% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days prior to, but
not including, the conversion date.
The full principal amount of the convertible debentures is due upon default
under the terms of the convertible debentures. On September 30, 2003, $120,000
plus accrued interest of approximately $15,220 was due. As of October 10, 2003,
this debenture instrument remains in default and interest is calculated at the
default rate of 15% per annum. The Company has contacted the investors
requesting an extension period on this debenture. As of the date of this report,
the Company has not received approval of its request. The Company's management
believes the investors will extend this debenture's due date because
historically all debentures previously in default had been extended under mutual
agreement. However, there is no assurance that a mutual agreement will be
reached.
13
The Company granted the investors a security interest in all assets, to include
intellectual property and registration rights. Warrants are exercisable until
five years from the date of issuance at a purchase price of $0.25 per share. In
addition, the exercise price of the warrants will be adjusted in the event the
Company issues common stock at a price below market. The conversion price of the
debentures and the exercise price of the warrants may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the investors'
position.
As of August 31, 2003, investors have purchased a total of $2,050,000 of
convertible debentures, and have converted $113,001 of debentures and $27,993 of
accrued interest into 5,430,757 shares of common stock. During the three months
ended August 31, 2003, the Company converted $36,951 of principal on the June
29, 2001 debenture into 5,237,525 shares of common stock. As of October 10,
2003, the Company has issued a total of 49,901,523 shares of common stock to the
investors holding the convertible debentures. Principal due on the convertible
debentures as of October 10, 2003 is $1,660,900.
For the three months ended August 31, 2003 and 2002, the Company recognized as
interest expense, discounts on the convertible debentures totaling $101,884 and
$292,192, respectively, which are equal to the fair value of the warrants, as
determined using the Black-Scholes pricing model, and the intrinsic value of the
beneficial conversion features. The unamortized discount balance at August 31,
2003 and May 31, 2003 is $82,201 and 184,085, respectively.
As of October 10, 2003, no warrant has been exercised in conjunction with the
convertible debentures.
Note 10 - Capital Lease Obligations
As of August 31, 2003, the Company was in default on one capital lease
obligation in the amount of $6,136. Accordingly, the lease has been classified
as a current obligation.
In June 2003, the Company settled an equipment lease obligation in default
amounting to $868,600 for $35,000 for an approximate gain on the settlement of
this debt of $833,600. In August 2003, the Company also paid off a defaulted
equipment lease obligation with an amount due of approximately $4,000.
Note 11 - Common Stock
On December 23, 2002, pursuant to a July 2002 plan of reorganization and the
re-incorporation merger with its wholly-owned subsidiary, the Company
effectuated a 100:1 common stock exchange of its then 59,013,393 shares of
common stock of Insynq, Inc. - Delaware into 590,134 shares of common stock of
Insynq, Inc. - Nevada. All historical amounts and shares have been retroactively
restated to reflect this transaction.
Note 12 - Incentive Stock Based Compensation Plans
At August 31, 2003, The Company had three incentive stock option plans, which
are describe in detail in Note 14 in the Company's 2003 Annual Report on Form
10-K. The Company accounts for stock options using the intrinsic value method
under the provisions of Accounting Principles Board ("APB") Opinion No. 25 and
provides proforma net income or loss and proforma earnings or loss per share
disclosures for employee stock options grants as if the fair-value-based method,
defined in Statement of Financial Accounting Standards ("SFAS') No. 123,
Accounting for Stock-Based Compensation, had been applied. During the three
months ended August 31, 2003, the Company did not grant any incentive stock
options to employees.
The Company applies the provisions of SFAS No. 123 for stock-based awards to
those other than employees. Stock-based compensation expense for these awards is
calculated over related service or vesting periods. Companies choosing the
intrinsic-value method are required to disclose the pro forma impact of the fair
value method on net income (loss). Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the pro forma effect on net income (loss) per share would have been
increased to the proforma amounts as indicated below for the three months ended
August 31:
14
2003 2002
------------ -----------
Net income (loss) as reported ..... $ 1,389,871 $ (864,372)
Pro forma net income (loss) ....... $ 1,389,871 $ (925,057)
Income (loss) per share as reported $ 0.03 $ (1.36)
Pro forma income (loss) per share $ 0.03 $ (1.45)
Note 13 - Commitments and Contingencies
Lawsuits
On September 6, 2001, the Company was served with a summons and complaint by its
former landlords, asserting: (a.) a breach of a settlement agreement entered
into in May 2001 to register 5,000 shares of common stock, valued at $80,000, in
partial settlement of its then existing lease, and, (b.) a default by the
Company on two new long-term lease obligations. Terms of the first lease call
for base monthly payments of $12,046 for the period of August 1, 2001 to July
31, 2006, plus triple net charges estimated at approximately $3,038 per month
and beginning in year two, an increase equal to the change in the annual
consumer price index but not less than annual increase of 3%. Minimum aggregate
lease payments and triple net charges approximate $954,500 over the term of the
lease. Terms of the second lease call for monthly payments, beginning in June
2001 of approximately $4,000 per month, or a total of $80,000 for the remaining
term of the lease from August 1, 2001 to May 31, 2003. On October 4, 2001, the
Company's former landlords filed a summons and complaint with local
jurisdictional court for a summary judgment motion on all claims. All claims
under this motion were initially denied. However, on May 10, 2002, the Court
awarded a partial summary judgment in favor of the former landlords for
approximately $170,000. The Company has previously recorded approximately
$170,000 of expense related to this award.
It is the opinion of management and its legal counsel that the settlement
agreement signed in May 2001 requiring the signing of the two new leases was
entered into under economic duress, based on misrepresentation, and, was signed
in bad faith on the part of the former landlords. As such, it is management's
opinion that the settlement agreement and the two lease agreements are void.
Management believes that the ultimate outcome of this litigation will be that
the former landlords will not be successful in their assertions under their
claim(s). Any additional claim under this dispute is not recognized in the
accompanying financial statements. The Company denies the allegations under this
claim and believes this claim is without merit and intends to continuously and
vigorously defend against this lawsuit.
The Company is also subject to other legal proceedings and business disputes
involving ordinary and routine claims. The ultimate legal and financial
liability with respect to such matters cannot be estimated with certainty and
requires the use of estimates in recording liabilities for potential litigation
settlements. Estimates for losses from litigation are made after consultation
with outside counsel. If estimates of potential losses increase or the related
facts and circumstances change in the future, the Company may be required to
record either more or less litigation related expense. It is management's
opinion that none of the open matters at August 31, 2003 will have a material
adverse effect on the Company's financial condition or operations.
Defaults
The Company has defaulted on a Software License Agreement dated September 29,
2000. The agreement required the Company to purchase 10,000 licenses totaling
$235,000. The Company has paid a total of $1,500 toward this obligation and the
term of this agreement expired March 30, 2003. The Company has been in contact
with the party to the agreement in an effort to amend the agreement and change
the contractual obligation to reflect actual licenses sold. Management
anticipates settling this matter within the next few months by paying for the
actual licenses sold since entering this agreement. At August 31, 2003, the
remaining obligation under the agreement is included in accrued expenses and
prepaid licenses in the accompanying balance sheets.
15
Note 14 - Other Disclosures
Gain on Forgiveness and Settlements of Debts
The Company has executed complete settlements and reductions of the outstanding
obligations due certain creditors and vendors. For the three months ended August
31, 2003 the Company settled approximately $2,496,700 of debt, lease and trade
obligations for approximately $41,000 in cash and 65,000,000 shares of common
stock valued at market of $.01 per share for $650,000, based on the then closing
market price of the Company's common stock. Gain recognized on the settlement of
these obligations is approximately $1,805,700.
Non-cash Investing and Financing
Non-cash investing and financing activities included the following for the three
months ended:
August 31:
2003 2002
---------------------------
Conversion of debentures into common stock ........................ $ 36,951 $ 4,500
Note and interest payable converted into common stock ............. 650,000 --
Issuance of notes receivables due from stockholders ............... 236,111 --
Unearned compensation recorded relative to issuance of common stock
to consultants ............................................... 290,137 --
Promissory notes receivable due from officers exchanged for common
stock held by officers ....................................... 106,515 --
Record discount on convertible debentures ......................... -- 250,000
Supplemental Cash Flows Information
Cash paid for interest for the three months ended August 31, 2003 and 2002 was
$960 and $6,903, respectively.
Selling, general and administrative expenses for the three months ended are:
August 31,
2003 2002
---------- ----------
Salaries ........................... $ 177,408 $ 159,762
Benefits ........................... -- 6,815
Rent ............................... 7,246 5,046
Consulting ......................... 58,258 133,231
Legal, accounting and professional . 48,021 60,461
Telephone and utilities ............ 5,970 4,213
Taxes .............................. 15,684 16,708
16
Administration, supplies and repairs 6,180 5,087
Travel and entertainment ........... 2,761 6,901
Insurance .......................... 1,443 502
Other and settlements .............. (6,909) 58,368
--------- ---------
Total ..................... $ 316,062 $ 457,094
========= =========
Non-cash compensation .............. $ 124,959 $ 131,361
Other .............................. 197,013 325,733
--------- ---------
Total ..................... $ 316,062 $ 457,094
========= =========
Asset Purchase Agreement
On August 22, 2003 the Company entered into an Asset Purchase Agreement to sell
a certain portion of its customer base for a price between $100,000 to $150,000.
The purchaser has escrowed the $100,000 until certain closing obligations have
been met. In order to complete the sale of this asset, the Company must obtain a
release from the IRS, who has filed a Federal Tax Lien on the Company's assets,
and the Company's convertible debenture holders. The Company intends to use the
proceeds, if successful, only for the purpose of negotiating a settlement with
the IRS. The asset (customer base) sale represents approximately 45% of the
Company's current monthly revenue. As of October 10, 2003 this agreement has not
been consummated because approval of certain details are still in negotiations.
Note 15 - Subsequent Events
Convertible Debentures
Between September 1, 2003 and October 10, 2003, the Company converted, pursuant
to twenty-two notices to convert, a total of $276,100 of principal due on the
convertible debentures originally issued June 29, 2001, into 44,470,766 shares
of common stock.
On September 30, 2003, pursuant to terms within the third issuance of
convertible debentures, $120,000 of principal became due. As of October 10, 2003
the principal amount due plus the accrued interest of approximately $15,220 is
in default. Management has requested an extension of the terms but has not
received confirmation as of the date of this report.
Consulting Agreements
In September and October 2003, the Company entered into several short-term
agreements with various independent consultants/advisors, in which the
consultants will provide business expertise, advice and negotiations in
strategic corporate planning, private financing, mergers and acquisitions and
investor relations, and such other areas as deemed necessary by company
management. Terms of these agreements generally require compensation to be paid
at the effective date of the agreement. The Company issued approximately 45.5
million shares of common stock at market value of approximately $1.0 million.
Common Stock Outstanding
At October 10, 2003, outstanding shares of common stock totaled 228,395,725
shares.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the condensed financial statements, including notes thereto, appearing in
this Form 10-QSB and in our May 31, 2003 annual report on Form 10-KSB.
Except for the historical information contained herein, this Quarterly
Report contains forward-looking statements within the meaning of Section 27A if
the Securities Act and Section 21E of the Securities Exchange Act. We believe it
is important to communicate our expectations.
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. However, there may be events in the future that
we are not able to accurately predict or over which we have no control. Our
actual results could differ materially from those anticipated for many reasons
in these forward-looking statements. 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,
2003 annual report on Form 10KSB.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed financial statements as of and for the
three months ended August 31, 2003. We have made certain estimates, judgments
and assumptions that management believes are reasonable based upon the
information available. We base these estimates on our historical experience,
future expectations and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for our
judgments that may not be readily apparent from other sources. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. These estimates and assumptions relate to estimates of collectibility
of accounts receivable, the expected term of a customer relationship, accruals
and other factors. We evaluate these estimates on an ongoing basis. Actual
results could differ from those estimates under different assumption or
conditions, and any differences could be material.
The condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) and, in
the opinion of management, includes all adjustments necessary for a fair
presentation of the results of operations, financial position, and cash flows
for the periods presented.
A summary of the significant accounting policies which we believe are
the most critical to aid in fully understanding and evaluating the accompanying
condensed financial statements include the following:
REVENUE RECOGNITION
Our principal source of revenue is generated from application hosting,
managed software and related types of services. Application hosting and managed
services revenues are generated through a variety of contractual arrangements
directly with customers. We sell our services directly to customers through
annual service subscriptions or month-to-month subscriptions. Subscription
arrangements include monthly subscriber fees, user setup fees and a
18
last month deposit. New subscription service fees are prorated and invoiced
during the first month of service. Ensuing subscription revenues are invoiced at
the beginning of every month. Initial setup fees received in connection with
these arrangements are recognized in full at the fulfillment of such setup
service. Any prepaid amount, regardless if it is non-refundable, is recorded as
a customer deposit and is generally applied to the last month's service fee.
Customer discounts are recorded as a reduction of revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, accounts and related
party receivables, trade and related party payables, accrued liabilities, and
short and long-term debt obligations. The carrying amounts of such financial
instruments in the accompanying balance sheets approximate their fair values due
to their relatively short-term nature. It is management's opinion that the
Company is not exposed to significant currency or credit risks arising from
these financial instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
OVERVIEW
We were originally incorporated as Xcel Management, Inc. in the state
of Utah on May 22, 1980, under the name Ward's Gas & Oil, to engage in the oil
and gas business, which business was terminated a few years after operations
commenced. Xcel then changed its name to Palace Casinos, Inc. and from November
1992 until approximately 1995, it was engaged, through its wholly owned
subsidiary, in the development of a dockside gaming facility in Biloxi,
Mississippi. On December 1, 1994, Xcel and its wholly owned subsidiary each
filed voluntary petitions for bankruptcy under Chapter 11 of the federal
bankruptcy laws. On June 16, 1999, the bankruptcy court confirmed a plan of
reorganization whereby the obligations of Xcel's creditors were satisfied. On
February 18, 2000, Xcel and Insynq, Inc., a Washington company formed on August
31, 1998, closed an asset purchase transaction in which Xcel acquired
substantially all of the assets of Insynq. Subsequent to the asset purchase
transaction, Xcel continued to develop the business of Insynq. On August 3,
2000, at a special meeting of Xcel's stockholders, Xcel completed a
re-incorporation merger with its wholly owned subsidiary, Insynq, Inc., a
Delaware corporation. On July 25, 2002, the Board of Directors approved the
re-incorporation merger of the Company with its wholly owned subsidiary, Insynq,
Inc., a Nevada corporation, and a 1-for-100 reverse stock split of the Company's
currently issued and outstanding shares of common stock. Insynq, Inc.
re-incorporated in the state of Nevada upon entering into the Plan and Agreement
of Merger with its wholly owned subsidiary, Insynq, Inc., a Nevada corporation
on December 23, 2002. As a result of the re-incorporation, the surviving Company
exchanged 59,013,393 shares of common stock of the terminating entity, Insynq,
Inc. (Delaware), for 590,134 shares of common stock of the surviving entity,
Insynq, Inc. (Nevada).
Today, as the combined and surviving entity, Insynq, Inc. (Nevada)
continues to develop the IQ Data Utility Service.
We manage and host software service, Web hosting services, Web-based
local and wide area networks, and access to Internet marketing assistance and
other related services. These services are offered as components or as an
integrated whole, either sold directly or on a fee or subscription basis.
We target small and medium enterprises and the high-end segment of the
small office and home office market for the sale of hardware and hosted software
and access to internet-related services. We provide services to our customer
subscriber base, which allows our customers to adopt "web-based" computing that
serves as an alternative to both traditional local wide area networks and
traditional client-server implementations. Generally, we market ourselves as an
internet utility company that can provide all of the computer software,
connectivity and internet-
19
access needs for its customers on a cost effective basis.
The complete IQ Data Utility Service includes managed network and
application services, which can span from a customer's keyboard to the data
center. The service can also include internet-access provided by us or by a user
selected telecommunications partner/provider. The final piece of the system is
the two secured data centers. Both centers are located in Washington State, one
in the city of Bellingham, and, one in the city of Kent. These facilities, with
redundant power, bandwidth, and cooling, house our servers, routers and other
equipment.
In fiscal 2004 (fiscal year ending May 31, 2004), we plan to focus on
increasing revenue from increased customer sales through acquisitions and
mergers, and, an intense marketing and advertising campaign beginning in the
fall of 2004. We strive to build our core values around quality and timely
customer service and the delivery of our hosted services at a competitive,
value-added price.
RESULTS OF OPERATIONS
We reported net income of $1,389,871 for the three months ended August
31, 2003 as compared to a reported net loss of $864,372 for the three months
ended August 31, 2002. The net income for the quarter ended August 31, 2003
resulted from the recognition of gain of $1,805,695 on the settlements of four
creditor debts.
If we had not recognized the gain from the debt settlements, we
would have incurred a net loss for the quarter ended August 31, 2003 of
approximately $416,000, or approximately 52% less loss than the same comparable
quarter ended August 31, 2002. Management continues to hold down costs, all the
while growing revenues of our core business from web-based sales.
Revenues for the three months ended August 31, 2003 and 2002 were
$300,706 and $234,163, respectively, representing an increase of $66,543, or
approximately 28.4%. The primary sources of revenues and the changes are as
follows:
QUARTER ENDED AUGUST 31, 2003 QUARTER ENDED AUGUST 31, 2002 2003 INCREASE OVER 2002
----------------------------- ---------------------------- -----------------------
Revenue Source Amount Percent Amount Percent Amount Percent
- ---------------------------- --- -------------- ------------ --- ------------ ---------------- -- ----------- ----------------
1. Seat subscriptions, net
of discounts $ 227,083 75.5% $ 189,535 80.9% $ 37,548 19.8%
2. Managed services 23,247 7.7% 5,558 2.4% 17,689 318.3%
3. License rentals and
other 50,376 16.8% 39,070 16.7% 11,306 28.9%
-------------- ------------ --- ------------ ---------------- -- ----------- ----------------
Total $ 300,706 100.0% $ 234,163 100.0% $ 66,543 28.4%
============== ============ === ============ ================ == =========== ================
The increase in revenues can be directly attributed to our increased
marketing efforts over the Internet, an enhanced and improved website and the
offering of more professional products. 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 the
fiscal ending 2004. We are continually striving to reduce and/or eliminate our
past practice of providing discounts and free offerings, yet still provide
competitive pricing to our customers. We recently enhanced our sales and
marketing departments with professional, experienced sales representatives and
marketing personnel. Although we cannot provide any assurances, as a result of
our efforts to improve our sales and marketing departments, we expect our sales
and marketing strategies will result in consistent growth in sales revenue over
this next fiscal year, increase consumer understanding and awareness of our
technology, and, ultimately, prove our business model.
Our continued growth is significantly dependent upon our ability to
generate sales relating to our subscriptions and other related services. Our
main priorities relating to the generation of revenue are:
o increase market awareness of our products and services through our
strategic marketing plan,
o increase the number of customers and an incrementally increase the
number of seats per customer,
20
o continue to accomplish technological economies of scale, and
o continue to streamline and maximize efficiencies in our system
implementation model.
COSTS AND EXPENSES
During the quarter ended August 31, 2003, we incurred direct costs
totaling $173,066 as compared to $193,459 for the same period one year ago. This
represents a reduction of expenses of 10.5%.
Selling, general and administrative expenses were $321,972 and $457,094
for the three months ended August 31, 2003 and 2002, respectively, and the
expenses are allocated between non-cash and cash compensation. Non-cash
compensation is generally representative of the fair value of common stock,
options and warrants issued for certain services, and the amortization of
unearned compensation. Non-cash compensation for the three months ended August
31, 2003 and 2002 was $124,959 and 131,361, respectively. Cash expenses for the
three months ended August 31, 2003 and 2002 were $197,013 and $325,733,
respectively. Overall, we had a significant decrease, of $135,122 or 29.6%, over
the same period one year ago.
Of particular significance to this category is the reduction of the
professional and consulting fees. These specific expenses accounted for
approximately 33.6% and 42.4% of the total selling, general and administrative
expenses for the three months ended August 31, 2003 and 2002, respectively.
Consulting fees were reduced by approximately $87,400 between these two
comparable periods. The decrease between these two periods accounts for over 61%
of the total selling, general and administrative reduction. The overall
reduction in the category is a direct result from management's concerted and
diligent efforts to reduce and control these critical expenses.
Because of the recent emphasis on sales and marketing, we anticipated
an increase in sales related wages and certain other related costs, such as
payroll taxes and communications. For the three months ended August 31, 2003,
sales related wages increased approximately $23,700 over the same period one
year ago. We expect this category of expenses to increase, as planned, over the
next two quarters.
Overall, we reduced total operating expenses for the three months ended
August 31, 2003, as compared to the quarter ended August 31, 2002, by over
$155,500, or 23.9%, and, at the same time we increased total revenues by 28.4%
over the prior period's revenues. These results are strong indicators that our
business and marketing plans are working well together.
Interest expense was $224,073 for the three months ended August 31,
2003 as compared to $444,882 for the same period ended August 31, 2002. Interest
expense is primarily the result of: (a) accruing interest on promissory notes
and convertible debentures, and, (b) recognizing non-cash interest resulting
from the amortization of discount originating from the fair value of warrants
and the beneficial conversion features in connection with convertible debenture
issuances.
The primary classifications of interest expense for the three months
ended August 31, 2003 and 2002 are as follows:
<table>
<caption>
2003 2002
------------- -------------
o amortization of discounts on convertible
debentures $ 101,884 $ 292,192
o accrued interest on debentures and notes 105,986 94,031
o other 16,203 24,159
o accrued interest and discount on capitalized
lease -- 34,500
------------ ------------
Totals $ 224,073 $ 444,882
============ ============
Non-cash interest $ 223,113 $ 417,997
Other interest 960 26,885
------------ ------------
$ 224,073 $ 444,882
============ ============
</table>
21
LIQUIDITY AND CAPITAL RESOURCES
Our financial statements for the three months ended August 31, 2003
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. For the quarter ended August 31, 2003, although we had net income
of $1,389,871 and positive cash flows from operations of $11,785, we had a
working capital deficit of $5,054,522 and a stockholders' deficit of $4,621,213
at August 31, 2003. Our working capital deficit at August 31, 2003 may not
enable us to meet certain financial objectives as presently structured.
We recorded our first historical positive cash flows from operations of
$11,785 for the three months ended August 31, 2003. This represents
approximately a $264,500 improvement in operational cash flows over the same
comparable period one-year ago. The improvement in the usage of cash was the
direct result of: (a.) managements' continued execution of tight fiscal cash
management, (b.) increasing revenues, and, (c.) reducing the days in collections
of its accounts receivable. As a result, the Company turned around an
approximate $40,700 net contribution from revenues less direct expenses in
quarter ended August 31, 2002 to approximately $127,600 net contribution from
revenues less direct expenses in quarter ended August 31, 2003.
In the past, we have principally financed our operations and capital
requirements primarily through private debt and equity offerings. For the three
months ended August 31, 2003, we received limited cash from our financing
activities, which totaled $18,879:
o borrowings on our credit line - $3,000;
o principal received on stockholders' notes receivable - $14,587; and
o refund of a deposit - $1,292.
For the same comparable period one-year ago we received financing
totaling $262,530, of which $250,000 was from the issuance of convertible
debentures. Therefore, we received approximately $243,650 less from outside
financing than we did during the same period one-year ago. The result of less
financing over the same comparable period one-year ago, is an indicator that our
premise for our business plan is developing as planned and the impact of cost
containment is in place, reducing the need for additional financing.
As of August 31, 2003, we had $5,146,480 in current liabilities and
past due obligations. Of the total current debt, approximately $4,867,755 are
deemed past due obligations.
Recently, management increased its efforts to negotiate with many of its
creditors, by offering them cash payments for substantially less than the
amounts due, or request a total forgiveness of the debt. As a result of these
creditor negotiations, we were able to settle past due obligations totaling more
than $2,496,000. In settlement of these obligations, we incurred a cash outlay
of $41,000 and issued 65,000,000 shares of common stock at a market value of
$0.01 per share, or $650,000, for a full and complete settlement of these
respective debts.
We believe that by continuing with these concerted efforts to settle
with our creditors, we will be able to significantly reduce our past due trade
obligations over this next year, but at what rate and how much, is not
determinable. If we are not able to negotiate and execute mutually agreeable
settlements and/or payments with certain of these critical creditors/vendors, we
could experience a severe negative impact on our business resources and we may
be forced to cease operations.
As of August 31, 2003, we are delinquent in the payment of
approximately $498,000 of business and payroll taxes, plus an estimated $338,500
of related assessed penalties and interest. The majority of the past due amount
is for payroll taxes, penalties and interest due to the Internal Revenue
Service. The Internal Revenue Service has filed Federal Tax Liens on our assets
for all past due employment taxes, penalties and accrued interest. Currently, we
have an Offer In Compromise being processed by the Internal Revenue Service. Our
proposal to the Internal Revenue Service essentially is that of seeking relief
on a portion of our overall obligation and/or to structure a onetime payment or
establish a long-term payment plan on the settled amount of taxes due. If the
Internal Revenue Service and Insynq cannot agree to a mutually agreeable and
beneficial workout, the Internal Revenue Service could take possession of our
22
assets and we may be forced to file for bankruptcy protection and/or to cease
operations altogether.
On August 22, 2003, we entered into an asset purchase agreement to sell
a certain portion of our customer base for between $100,000 and $150,000. The
purchaser has escrowed $100,000 until certain closing obligations have been met.
In order to complete the sale of this asset, we must obtain releases from: (a.)
all Federal Tax Liens filed by the Internal Revenue Service and, (b.) the
holders of our convertible debentures, of which are secured by corporate assets.
Management will use the proceeds from the sale of these corporate assets for the
purpose of negotiating a full and complete settlement with the IRS. The asset to
be sold by us is a portion of our customer base, which approximates 45% of
current monthly revenue.
As of October 10, 2003, we have workout agreements with three taxing
authorities for past due taxes totaling approximately $15,000. Terms of these
workouts require us to pay between $150 and $2,000 per month until each
respective tax obligation is fulfilled. Two of the three taxing agencies have
either filed a lien or a warrant with the local county authorities to protect
their position during the respective workout periods.
Additionally, two liens have been filed by two other states for past
due taxes, plus accrued interest and penalties. One lien was filed by a state
for approximately $28,000 for prior year's income taxes assessed to our
predecessor company. This amount is disputed and amended returns to correct this
deficiency have been filed, but not yet approved or denied. The second lien was
filed by another state for past due payroll taxes, penalties and interest
totaling approximately $27,500. On October 8, 2003, we submitted formal request
to mitigate the tax liability for less than the amount due and/or establish for
a long-term workout of the tax debt. We believe our proposal to settle this
payroll tax liability will be seriously considered by the state authorities.
There can be no assurances, however, that we will be able to agree or
commit to any proposed terms set forth by the Internal Revenue Service or
favorably negotiate terms with any of the other state taxing authorities. If we
are unsuccessful in our efforts to negotiate or fail to make our workout
payments timely, the taxing authorities could take possession of some or all of
our assets. Should this occur, we likely would be forced to cease our
operations.
On September 6, 2001, we were served with a summons and complaint by
our former landlords, asserting: (a.) a breach of a settlement agreement entered
into in May 2001 to register 5,000 shares of common stock, valued at $80,000, in
partial settlement of the then existing lease, and, (b.) a default by us on two
new long-term lease obligations. Terms of the first lease call for base monthly
payments of $12,046 for the period of August 1, 2001 to July 31, 2006, plus
estimated triple net charges currently at $3,038 per month and beginning in year
two, annual consumer price index with a minimum annual increase of 3%. Minimum
aggregate lease payments and triple net charges approximate $954,500 over the
term of the lease, excluding late fees, interest, legal fees and other charges.
Terms of the second lease called for monthly payments, beginning in June 2001 of
approximately $4,000 per month, or a total of $80,000 for the remaining term of
the lease from August 1, 2001 to May 31, 2003. On October 4, 2001, our former
landlords filed a summons and complaint with the Superior Court of Washington
for Pierce County for a summary judgment motion on all claims. All claims under
this motion were denied. On May 10, 2002, the Court awarded a partial summary
judgment in favor of the former landlords for approximately $170,000. We
anticipate filing a motion requesting the court to vacate the summary judgment
in light of new evidence and/or appeal the court's decision.
We deny the allegations under this claim and believe it is without
merit. It is the opinion of our management and our legal counsel that the
settlement agreement signed in May 2001 that required the signing of the new
leases were entered into under economic duress, based on misrepresentation and
fraud and were signed in bad faith on the part of the former landlords. As such,
it is our managements' opinion that the settlement agreement and the lease
agreement are void. We intend to vigorously defend against this lawsuit.
We are also subject to other legal proceedings and business disputes
involving ordinary and routine claims. The ultimate legal and financial
liability with respect to such matters cannot be estimated with certainty and
requires the use of estimates in recording liabilities for potential litigation
settlements. Estimates for losses from litigation are made after consultation
with outside counsel. If estimates of potential losses increase or the related
facts and circumstances change in the future, we may be required to
record either more or less litigation related expenses. It is management's
opinion that none of the other open matters at August 31, 2003 will have a
material adverse effect on our financial position.
23
We have defaulted on a software license agreement dated September 29,
2000. Our agreement required us to purchase 10,000 licenses totaling $235,000.
We have paid a total of $1,500 toward this obligation and the term of this
agreement expired March 30, 2003. We have been in contact with the party to the
agreement in an effort to amend the agreement and change the contractual
obligation to reflect actual licenses sold. We anticipate settling this matter
within the next few months by paying for the actual licenses sold since entering
this agreement.
As of October 10, 2003, we are not in compliance with the proper
registration and licensing of certain software applications and products
critical to support the customer base and our own internal operations.
Management has initiated negotiations with these software vendors in an effort
to purchase or lease/rent the licenses to meet the licensing requirements.
As of August 31, 2003, we have approximately $463,000 of employee
related obligations in the form of accrued and deferred salaries and vacation
benefits. These obligations are primarily a result of applying the terms of
existing employment agreements or company personnel policies against that which
we actually owed and that which we actually paid.
As of August 31, 2003, we owe approximately $200,700 in short-term
promissory notes, loans and related accrued interest. All these obligations are
past due and are unsecured.
We are obligated to four groups of investors who purchased secured
convertible debentures over three separate private financing transactions. On
March 6, 2003, we entered into an agreement with two groups of the investors to
extend the maturity dates of certain debentures that were past due, and modify
the conversion prices as described below. As of October 10, 2003, we have
outstanding convertible debentures totaling $1,660,900. A summary of the
balances due as of October 10, 2003 is as follows:
24
Warrants
Total Amount Issued in
Due Per Connection
Issued Convertible with
Convertible Unamortized Principal Principal Accrued Debenture Convertible
Date of Issuance Date of Maturity* Debentures Discount Redeemed Amount Due Interest Issuance Debentures
- ----------------- ------------------- ------------- ------------ ------------ ------------ ------------- -------------- -----------
FIRST ISSUANCE
June 29, 2001 March 6, 2004* $550,000 $-- $389,100 $160,900 $127,489 $288,389 1,100,000
August 10, 2001 March 6, 2004* 100,000 -- -- 100,000 26,154 126,154 200,000
October 17, 2001 March 6, 2004* 150,000 -- -- 150,000 39,479 189,479 300,000
November 2, 2001 March 6, 2004* 400,000 -- -- 400,000 102,730 502,730 800,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
Totals $1,200,000 $-- $389,100 $810,900 $295,852 $1,106,752 2,400,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
SECOND ISSUANCE
January 24, 2002 March 6, 2004* $300,000 $-- $-- $300,000 $67,950 $367,950 1,200,000
July 3, 2002 March 6, 2004* 250,000 -- -- 250,000 39,469 289,469 1,000,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
Totals $550,000 $-- $-- $550,000 $107,419 $657,419 2,200,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
THIRD ISSUANCE
September 30, September 30, $120,000 $-- $-- $120,000 $15,264 $135,264 240,000
2002 2003**
November 6, 2002 November 6, 2003 30,000 2,933 -- 30,000 3,409 33,409 60,000
December 6, 2002 December 6, 2003 30,000 5,514 -- 30,000 3,029 33,029 60,000
January 31, 2003 January 31, 2004 60,000 20,233 -- 60,000 4,965 64,965 120,000
March 20, 2003 March 20, 2004 30,000 14,000 -- 30,000 1,976 31,976 60,000
March 31, 2003 March 31, 2004 30,000 14,905 -- 30,000 1,861 31,861 60,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
Totals $300, 000 $57,585 $-- $300,000 $30,504 $330,504 600,000
------------- ------------ ------------ ------------ ------------- -------------- -----------
Grand Total $2,050,000 $57,585 $389,100 $1,660,900 $433,775 $2,094,675 5,200,000
============= ============ ============ ============ ============= ============== ===========
* Amended
Maturity Dates
** In Default
TERMS OF THE FIRST ISSUANCE OF CONVERTIBLE DEBENTURES
On June 29, 2001, we entered into a private financing transaction with
three investors for a total of $1,200,000, 12% secured convertible debentures.
Pursuant to the amended terms dated March 6, 2003, the debentures are
convertible into shares of common stock at the lesser of (i) $0.30 or (ii) the
average of the lowest three trading prices in the twenty-day trading period
immediately preceding the notice to convert, discounted by sixty percent (60%).
The convertible debentures carry attached warrants that allow the investors,
under the terms of the warrants, to purchase up to 2,400,000 shares of common
stock at $0.25 per share. The terms of the debentures provide for full payment
on or before one year from the date of issuance, plus accrued interest at 12%
per annum. However, these convertible debentures have been amended to provide a
maturity date of March 6, 2004 upon which these obligations are to be repaid or
converted into common stock at the investor's option.
TERMS OF THE SECOND ISSUANCE OF CONVERTIBLE DEBENTURES
On January 24, 2002, we entered into a private financing transaction
with three investors for a total of $550,000, 12% secured convertible
debentures. Pursuant to the amended terms dated March 6, 2003, the debentures
are convertible into shares of common stock at the lesser of (i) $0.30 or (ii)
the average of the lowest three trading prices in the twenty-day trading period
immediately preceding the notice to convert, discounted by sixty percent (60%).
The convertible debentures carry attached warrants that allow the investors,
under the terms of the warrants, to purchase up to 2,200,000 shares of common
stock at $0.25 per share. The terms of the debentures provide for full payment
on or before one year from the date of issuance, plus accrued interest at 12%
per annum. However, these convertible
25
debentures have been amended to provide a maturity date of March 6, 2004 upon
which these obligations are to be repaid or converted into common stock at the
investor's option.
TERMS OF THE THIRD ISSUANCE OF CONVERTIBLE DEBENTURES
On September 27, 2002, we entered into a third securities purchase
agreement with four investors for the sale of (i) $450,000 in convertible
debentures and (ii) the issuance of warrants to buy 900,000 shares of its common
stock. As of May 31, 2003 the investors are obligated to provide us with the
funds as follows: (a.) $300,000 has been disbursed, and, (b.) disburse the
remaining $150,000 at the rate of $30,000 per month on the final business day of
each successive month ending September 2003. As of the date of this report, the
investors have not funded any remaining portion of the $150,000 balance due
pursuant to the terms of the agreement. The debentures bear interest at 12% per
annum, mature one year from the date of issuance, and are convertible into
common stock, at the investors' option, at the lower of:
o $0.30 per share; or
o 40% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days prior to,
but not including, the conversion date.
The full principal amount of the convertible debentures is due upon
default under the terms of convertible debentures. In addition, we granted the
investors a security interest in substantially all of our assets and
intellectual property and registration rights. The warrants are exercisable
until five years from the date of issuance at a purchase price of $0.25 per
share. In addition, the exercise price of the warrants will be adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of this warrant. The investors have
contractually agreed to restrict their ability to convert their convertible
debentures or exercise their exercise of warrants and receive shares of our
common stock such that the number of shares of common stock in the aggregate,
held by them and their affiliates, after such conversion or exercise does not
exceed 4.9% of the then issued and outstanding shares of common stock. On
September 30, 2003, $120,000 plus accrued interest of approximately $15,220 was
due. As of October 10, 2003, this debenture instrument remains in default and
interest is calculated at the default rate of 15% per annum. We have contacted
the investors requesting an extension period on this debenture. As of the date
of this report, we have not received approval of our request. Our management
believes the investors will extend this debenture's due date because
historically all debentures previously in default had been extended under mutual
agreement. However, there is no assurance that a mutual agreement will be
reached.
The conversion price of the debentures and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the investor's position.
The fair values of the warrants are estimated on the grant date using
the Black-Scholes pricing model. As of the date of this report no warrants
issued in conjunction with a convertible debenture have been exercised.
As of October 10, 2003, investors have purchased a total of $2,050,000
of convertible debentures, and have converted $389,100 of debentures and $27,993
of accrued interest into 49,901,523 shares of common stock.
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 will also be difficult because our debentures
issued in connection with the June 29, 2001, January 24, 2002 and September 27,
2002 private placements have floating conversion features which, when converted,
would cause purchasers of our common stock to experience a substantial dilution
of their investment.
We currently have no material commitments for capital requirements.
However, if we are forced to replace certain equipment we currently use, we will
be required to raise the necessary funds to finance the acquisition through
either debt of equity financing, There can be no assurance that we will be able
raise funds in this manner on short
26
notice because of our poor credit history. If we are not successful in rising
adequate funding to purchase necessary equipment, we nonetheless believe that it
would have a material impact on our business and our ability to maintain our
current state of operations.
We have recently launched our e-Accounting Center portal located at
WWW.CPAASP.COM, which has been designed to help the accounting professional
manage and expand their business. It includes resources for marketing,
promotion, professional education, and web design, as well as, step-by-step tips
for transforming a traditional accounting business into an e-Accounting
practice. In addition, we host many popular accounting software applications in
our secure data centers for CPA firms throughout the country. By centrally
hosting the application and data in our data centers, we give the CPA secure
central access to all his remote customers' data. This gives the CPA the ability
to manage more customers with fewer staff, thereby, generating greater
profitability for the CPA firm.
We also provide other services, which include business functions such
as e-commerce, sales force automation, customer support, human resource and
financial management, messaging and collaboration, and professional services
automation. We believe that technology outsourcing, focused on these business
fundamentals, will be the primary adopters of application service providers and
managed service solutions in the next year. We are focusing all possible
resources in developing our domain expertise in these areas to gain additional
leverage and build broader service offerings that compliment our current
services already being delivered to those markets. There can be no assurances,
however, that we will substantially increase our monthly recurring revenues.
We currently have no arrangements or commitments for accounts
receivable financing. We believe our need for additional capital going forward
will be met from private debt and equity offerings, and, increasingly, from
revenues from operations as we continue to implement our strategic plan;
however, future operations will be dependent upon our ability to secure
sufficient sources of financing and adequate vendor credit. However, there can
be no assurance that we will achieve any or all of these requirements.
We are currently developing and refining our acquisition and expansion
strategy. If we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations, or if we consummate acquisitions,
we will need to raise additional capital from equity or debt sources. We cannot
be sure that we will be able to obtain the additional financings to satisfy our
cash requirements or to implement our growth strategy on acceptable terms or at
all. Our ability to raise capital in the future will be difficult because our
securities purchase agreements with our debenture investors prohibit us from
entering into any financial arrangement which would involve the issuance of
common stock for a period of two years from the date this registration statement
becomes effective without offering a right of first refusal to the debenture
investors. If we cannot obtain such financings on terms acceptable to us, our
ability to fund our planned business expansion and to fund our on-going
operations will be materially adversely affected. If we incur debt, the risks
associated with our business and with owning our common stock could increase. If
we raise capital through the sale of equity securities, the percentage ownership
of our stockholders will be diluted. In addition, any new equity securities may
have rights, preferences, or privileges senior to those of our common stock.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) of the Exchange Act) designed to ensure that
information required to be disclosed in the reports of the Company filed under
the Exchange Act is recorded, processed, summarized, and reported within the
required time periods. The Company's Chief Executive Officer and Chief Financial
Officer has concluded, based upon their evaluation of these disclosure controls
and procedures as of the date of this report, that, as of the date of their
evaluation, these disclosure controls and procedures were effective at ensuring
that the required information will be disclosed on a timely basis in the reports
of the Company filed under the Exchange Act.
(b) Changes in Internal Controls.
The Company maintains a system of internal controls that is designed to provide
reasonable assurance that the books
27
and records of the Company accurately reflect the Company's transactions and
that the established policies and procedures of the Company are followed. There
were no significant changes to the internal controls of the Company or in other
factors that could significantly affect such internal controls subsequent to the
date of the evaluation of such internal controls by the Chief Executive Officer
and Chief Financial Officer, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On September 30, 2003, a debenture in the amount of $120,000 plus accrued
interest of approximately $15,220 was due. As of October 10, 2003, this
debenture instrument remains in default and interest is calculated at the
default rate of 15% per annum. We have contacted the investors requesting an
extension period on this debenture. As of the date of this report, we have not
received approval of its request. However, there is no assurance that a mutual
agreement will be reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
(a) Exhibits
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Principal Accounting Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Principal Accounting Officer, Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
28
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form 10-QSB and has duly caused this Quarterly
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tacoma, State of Washington, on October 20, 2003.
INSYNQ, INC.
By: /S/ JOHN P. GORST
------------------
John P. Gorst
Chief Executive Officer
By: /S/ M. CARROLL BENTON
----------------------
M. Carroll Benton
Principal Accounting Officer
Principal Financial Officer
29