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 November 30, 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
Incorporation or Organization) Identification No.)
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 325,546,471 as of December 15, 2003
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
INSYNQ, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements of Insynq, Inc. 3
Condensed Balance Sheets - November 30, 2003 (unaudited)
and May 31, 2003 3
Condensed Statements of Operations -Three and six months
ended November 30, 2003 and 2002 (unaudited) 4
Condensed Statement of Stockholders' Deficit - Six months
ended November 30, 2003 (unaudited) 5
Condensed Statements of Cash Flows - Three and six months
ended November 30, 2003 and 2002 (unaudited) 6
Notes to the Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements of Insynq, Inc.
Insynq, Inc.
Condensed Balance Sheets
November 30, 2003 May 31, 2003
--------------------- ---------------------
Assets (unaudited)
Current assets
Cash $ 187,033 $ 53,059
Accounts receivable, net of allowance for doubtful
accounts of $25,000 at November 30, 2003 and
May 31, 2003 63,945 46,252
Employee advance 2,000 --
Related party receivables 10,718 9,361
------------ ------------
Total current assets 263,696 108,672
------------ ------------
Equipment, net 166,591 244,962
------------ ------------
Other assets
Prepaid licenses 202,772 202,772
Prepaid expenses 9,750 19,500
Deposits 8,761 6,553
------------ ------------
Total other assets 221,283 228,825
------------ ------------
Total assets $ 651,570 $ 582,459
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 641,903 $ 789,046
Accrued liabilities 2,193,886 2,396,215
Convertible debentures, net of unamortized discount of
$29,652 and $184,085, respectively 1,526,283 1,789,865
Related party notes payable 145,274 1,307,274
Capital lease obligations 5,476 878,704
Deferred compensation 216,876 159,017
Customer deposits 57,089 48,006
Notes payable 10,503 18,021
------------ ------------
Total current liabilities 4,797,290 7,386,148
------------ ------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, -0- issued and outstanding at November 30,
2003 and May 31, 2003 -- --
Class A common stock, $0.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding at
November 30, 2003 and May 31, 2003 -- --
Common stock, $0.001 par value, 500,000,000 shares
authorized, 254,046,267 issued and outstanding at
November 30, 2003; and 22,033,035 shares issued and
outstanding at May 31, 2003 254,046 22,033
Additional paid-in capital 21,066,781 18,807,516
Notes receivable and interest - stockholders and officers -- (105,475)
Accumulated deficit (25,466,547) (25,527,763)
------------ ------------
Total stockholders' deficit (4,145,720) (6,803,689)
------------ ------------
Total liabilities and stockholders' deficit $ 651,570 $ 582,459
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
Insynq, Inc.
Condensed Statements of Operations
(unaudited)
For the three months ended For the six months ended
November 30, November 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- -------------- --------------- --------------
Revenues $ 289,131 $ 251,942 $ 589,838 $ 486,104
------------- ------------- ------------- -------------
Costs and expenses
Direct cost of services 233,058 187,654 406,124 381,112
Selling, general and
administrative
Non-cash compensation 1,073,570 121,201 1,198,529 252,562
Other 259,387 329,358 456,401 649,702
------------- ------------- ------------- -------------
Total costs and expenses 1,566,015 638,213 2,061,054 1,283,376
------------- ------------- ------------- -------------
Loss from operations (1,276,884) (386,271) (1,471,216) (797,272)
------------- ------------- ------------- -------------
Other income (expense)
Gain on forgiveness and
settlements of debts 87,779 447,291 1,893,474 441,904
Interest expense
Non-cash (141,665) (409,213) (364,779) (827,210)
Other (967) (19,424) (1,927) (46,309)
Other income 3,084 7,742 5,664 11,112
Loss from disposal of assets -- (26,267) -- (32,739)
------------- ------------- ------------- -------------
Total other income (expense) (51,769) 129 1,532,432 (453,242)
------------- ------------- ------------- -------------
Net income (loss) $ (1,328,653) $ (386,142) $ 61,216 $ (1,250,514)
============= ============= ============= =============
Net income (loss) per share:
Basic $ (0.01) $ (0.62) $ 0.00 $ (1.98)
============= ============= ============= =============
Diluted $ (0.01) $ (0.62) $ 0.00 $ (1.98)
============= ============= ============= =============
Weighted average of common shares:
Basic 218,549,948 627,274 136,611,363 632,058
============= ============= ============= =============
Diluted 218,549,948 627,274 227,298,031 632,058
============= ============= ============= =============
The accompanying notes are an integral part of these condensed financial
statements.
4
Insynq, Inc.
Condensed Statement of Stockholders' Deficit
For the six months ended November 30, 2003
(unaudited
Notes and
Interest
Receivable
Additional From Total
Common Stock Paid-In Stockholders' Unearned Accumulated Stockholders'
Shares Amount Capital and 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 34,259,256 34,259 351,852 (386,111) -- -- --
Issuance of common stock for
non-employee compensation and
record unearned compensation 57,655,665 57,656 786,186 -- (636,916) -- 206,926
Issuance of common stock for
trade debt 4,000,000 4,000 37,800 -- -- -- 41,800
Issuance of common stock in
conjunction with conversion of
debentures 71,858,833 71,859 346,156 -- -- -- 418,015
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 (760,822) (761) (105,754) 106,515 -- -- --
Issuance of options for
non-employee compensation and
record unearned compensation -- -- 247,637 -- (247,637) -- --
Amortization of unearned
compensation -- -- -- -- 884,553 -- 884,553
Principal received on
stockholders' notes receivable -- -- 10,388 386,111 -- -- 396,499
Accrue interest on notes
receivable from officers' -- -- -- (1,040) -- -- (1,040)
Net income for the six months
ended November 30, 2003 -- -- -- -- -- 61,216 61,216
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, November 30, 2003 254,046,267 $ 254,046 $ 21,066,781 $ -- $ -- $(25,466,547) $ (4,145,720)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this condensed financial
statement.
5
Insynq, Inc.
Condensed Statements of Cash Flows
(unaudited)
For the six months ended November 30,
------------------------------------------
2003 2002
---------------- -----------------
Cash flows from operating activities
Net income (loss) $ 61,216 $(1,250,514)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 78,371 113,108
Bad debts 13,548 49,855
Amortization of unearned compensation 884,553 96,932
Issuance of stock for services and compensation 206,927 10,139
Issuance of options and warrants for services to non-employees -- 30,450
Warrants and beneficial conversion features of debentures 154,433 533,326
Capitalized interest on notes receivable and leased assets (1,961) 42,776
Gain on forgiveness and settlement of debts (1,893,474) (441,904)
Write down asset for impairment of value 9,750 --
Discount on capital lease -- 15,734
Loss on disposal of assets -- 32,739
Changes in operating assets and liabilities:
Accounts receivable - trade (30,321) (72,690)
Related party receivables (1,357) (19,620)
Employee advance (2,000) --
Deferred compensation 87,585 60,500
Accounts payable (12,027) 119,459
Accrued liabilities 216,757 289,022
Customer deposits 9,083 9,654
Prepaid expenses -- 9,866
----------- -----------
Net cash used in operating activities (218,917) (371,168)
----------- -----------
Cash flows from financing activities:
Principal received on stockholders' notes receivable 396,499 --
Payments on capital lease obligations (39,600) (5,873)
Proceeds from bank note payable 6,325 4,887
Payments on notes payable (8,125) (13,872)
Increase deposits on credit cards (3,500) (1,250)
Deposit refund 1,292 --
Proceeds from related party notes payable -- 1,684
Proceeds from convertible debentures -- 400,000
Proceeds released from restricted cash - held in escrow -- 10,355
----------- -----------
Net cash provided by financing activities 352,891 395,931
----------- -----------
Net increase in cash 133,974 24,763
Cash at beginning of period 53,059 9,760
----------- -----------
Cash at end of period $ 187,033 $ 34,523
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
6
Insynq, Inc.
Notes To Condensed Financial Statements
November 30, 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 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 condensed 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. The condensed balance sheet information as
of May 31, 2003 was derived from the audited financial statements included in
the Company's annual report on Form 10-KSB. The interim condensed financial
statements should be read in conjunction with that report. 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 November 30, 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, application hosting
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
7
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 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 and six months ended
November 30, 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. Although the Company reported net
income of $61,216 for the six months ended November 30, 2003, it reported a
negative cash flow from operations of $218,917. The Company had a working
capital deficit of $4,533,594 and a stockholders' deficit of $4,145,720 at
November 30, 2003. The Company's working capital deficit as of November 30, 2003
may not enable it to meet certain financial objectives as presently structured.
As of November 30, 2003 and December 15, 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 November 30, 2003 the Company was delinquent on approximately $837,800 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 $775,800.
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 for the same obligations. The
Company has 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. 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 November 30, 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 $63,000 and is included in accrued
liabilities.
8
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 continues to devote its efforts into establishing a business in the
new emerging Managed Services Provider industry. The Company is establishing
alliances with Independent Software Vendors and Internet Service Providers to
provide access to their applications for their customers and building new
channels for marketing products to potential customers. As a result of these new
alliances and products, the Company 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 share of common 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 November 30, 2003 and 2002,
respectively, and for the six months ended November 30, 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 periods
ended:
For the three months ended For the six months ended
November 30, November 30,
------------------------------- --------------------------------
2003 2002 2003 2002
-------------- ------------ ------------- -------------
Denominator:
Weighted average per
share of common
stock outstanding 218,549,948 627,274 136,611,363 632,058
Assumed conversion of
convertible securities -- -- 90,686,668 --
------------- ------------- ------------- -------------
Diluted weighted
average shares of
common stock
outstanding 218,549,948 627,274 227,298,031 632,058
============= ============= ============= =============
Numerator:
Net income (loss) $ (1,328,653) $ (386,142) $ 61,216 $ (1,250,514)
9
Interest adjustment
for conversion of debt -- -- 137,700 --
------------- ------------- ------------- -------------
Diluted net income
(loss) $ (1,328,563) $ (386,142) $ 198,916 $ (1,250,514)
============= ============= ============= =============
Earnings (loss) per
share:
Basic $ (0.01) $ (0.62) $ 0.00 $ (1.98)
============= ============= ============= =============
Diluted $ (0.01) $ (0.62) $ 0.00 $ (1.98)
============= ============= ============= =============
Note 5 - Notes Receivable - Stockholders and Officers
STOCKHOLDERS
On August 5, 2003 and September 24, 2003, the Company executed four consulting
agreements that granted a total of 34,259,256 options to purchase common stock
within thirty to ninety days of each respective agreement. The fair value of
these options were estimated at $247,637, on the grant dates, using the
Black-Scholes pricing model and was amortized to consulting expense over the
term of the agreements. Amortization for the six months ended November 30, 2003
was $247,637. The options were exercised into 34,259,256 shares of common stock
on August 5, 2003 and September 24, 2003, and, six secured promissory notes
receivable, aggregating $386,111, with interest at 8% per annum, were executed.
As of November 30, 2003, the total amount due on the notes receivable, plus
accrued interest, has been paid in full. The notes receivable and related
accrued interest have been recorded in the Condensed Statement of Stockholders'
Deficit.
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, were 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 - Related Party Notes Payable
The Company has short-term promissory notes with stockholders 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:
November 30, 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
10
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 7 - Accrued Liabilities
Accrued liabilities consist of the following at:
November 30, 2003 May 31, 2003
------------------- --------------
Salaries and benefits $ 202,146 $ 251,138
Taxes
Payroll 447,538 457,447
Business 50,445 55,147
Penalties and interest 353,615 323,163
Interest 540,188 702,108
Licenses, consulting and other 599,954 607,212
---------- ----------
$2,193,886 $2,396,215
========== ==========
As of November 30, 2003 the Company was delinquent on approximately $837,800 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
$775,800. 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 to structure a payment plan on the settled amount of
taxes due. 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 four workout arrangements with certain state and city taxing
authorities to pay its past due taxes. As of November 30, 2003, the Company owes
approximately $12,400 pursuant to these workout agreements.
Additionally, two liens have been filed by two other states for past due taxes,
penalties and interest.
o The first lien is approximately $28,000, and 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.
o The second lien is to another state for past due payroll taxes,
penalties and interest. On October 8, 2003 the Company submitted its
second workout proposal and good faith deposits totaling $6,000 to be
applied toward the tax liability. As of November 30, 2003, the total
tax liability is approximately $21,600.
Note 8 - Secured Convertible Debentures
The Company is obligated to investors who purchased a total of $2,050,000 of
secured convertible debentures over three separate private financing
transactions between June 2001 and March 2003. Amended terms of all three
private financing transactions are essentially the same: the debentures are
convertible into shares of common stock at the lesser of (i) $0.30 per share and
(ii) the average of the lowest three intraday trading prices in the twenty-day
trading period immediately preceding the notice to convert, discounted by sixty
percent (60%). Generally, each debenture is due, in full, one year from the
11
date of its original issuance or its amended date, if applicable, of March 6,
2003, plus accrued interest at 12% per annum. Default rate of interest is 15%
per annum.
The convertible debentures also carry attached warrants that allow the investors
to exercise each warrant at $0.25 per share. A total of 5,200,000 warrants have
been issued with expiration dates ranging between March 6, 2008 and March 31,
2008. As of December 15, 2003, no warrant has been exercised in conjunction with
the convertible debentures.
Summarized below are the net outstanding convertible debentures as of:
November 30, 2003 May 31, 2003
------------------- --------------
Total debentures issued $ 2,050,000 $ 2,050,000
Less principal redeemed (494,065) (76,050)
----------- -----------
Principal amount due 1,555,935 1,973,950
Less unamortized discount (29,652) (184,085)
----------- -----------
Convertible debentures, net $ 1,526,283 $ 1,789,865
=========== ===========
The following table summarizes the issuances of convertible debentures by their
respective maturity periods:
Accrued
Principal Interest Total
-------------- ------------ -------------
Past due, as of November 30, 2003 $ 150,000* $ 22,840* $ 172,840*
Due December 6, 2003, past due 30,000* 3,695* 33,695*
Due January 2004 60,000 6,274 66,274
Due March 2004 1,315,935 444,087 1,760,022
---------- ---------- ----------
$1,555,935 $ 476,896 $2,032,831
========== ========== ==========
* In default
The unredeemed principal of a convertible debenture is due upon any default
under the terms of the convertible debentures.
The Company has contacted the investors requesting an extension period on the
debentures in default. 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.
The Company granted the investors a security interest in all assets.
For the six months ended November 30, 2003 and 2002, the Company recognized as
interest expense, discounts on the convertible debentures totaling $154,433 and
$533,326, 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.
Note 9 - Capital Lease Obligations
As of November 30, 2003, the Company is in default on a capital lease obligation
in the amount of $5,476. Accordingly, the lease has been classified as a current
obligation.
12
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 10 - 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 11 -Stock-Based Compensation Plans
At November 30, 2003, The Company had three 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 six months
ended November 30, 2003, the Company did not grant any 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 six months ended
November 30:
2003 2002
------------ -------------
Net income (loss) as reported $ 61,216 $(1,250,514)
Pro forma net income (loss) $ 61,216 $(1,371,831)
Income (loss) per share as reported $ 0.00 $ (1.98)
Proforma income (loss) per share $ 0.00 $ (2.17)
Note 12 - 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 that if carried to term would
aggregate approximately $1,034,500 in lease payments. 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
has not recognized any amount associated with this claim in the accompanying
condensed financial statements.
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
13
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 November
30, 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 November 30, 2003, the
remaining obligation under the agreement is included in accrued expenses and
prepaid licenses in the accompanying condensed balance sheets.
Note 13 - Other Disclosures
GAIN ON FORGIVENESS AND SETTLEMENTS OF DEBTS
The Company has executed complete settlements or reduction of outstanding
obligations due certain creditors and vendors. For the six months ended November
30, 2003 the Company settled approximately $2,592,500 of debt, lease and trade
obligations for approximately $49,000 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 settlements
of these obligations is approximately $1,893,500.
NON-CASH INVESTING AND FINANCING
Non-cash investing and financing activities included the following for the six
months ended:
November 30:
2003 2002
------------- --------------
Conversion of debentures into common stock $418,015 $4,500
Note and interest payable converted into common stock 650,000 --
Promissory notes and interest receivable due from officers
exchanged for common stock held by officers 106,515 --
Accrued liabilities and accounts payable converted into common
stock 41,800 --
Reclassify note payable to accrued liability 4,000 --
Discount on convertible debentures -- 400,000
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest for the six months ended November 30, 2003 and 2002 was
$1,927 and $11,584, respectively.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR THE SIX MONTHS ENDED ARE:
November 30,
2003 2002
------------------- ---------------
Salaries and benefits $ 365,068 $ 331,894
Rent 14,540 10,756
Consulting 1,099,229 214,082
Legal, accounting and professional 91,130 145,248
Telephone and utilities 14,260 10,292
Taxes 32,169 28,574
Administration, supplies and repairs 12,659 11,963
Travel and entertainment 7,699 7,500
Insurance 1,574 2,305
Other and settlements 16,602 139,650
------------------- ---------------
Total $ 1,654,930 $ 902,264
=================== ===============
Non-cash compensation $ 1,198,529 $ 252,562
Other 456,401 649,702
------------------- ---------------
Total $ 1,654,930 $ 902,264
=================== ===============
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 escrowed $100,000 until certain conditions and obligations
precedent to closing were met. In order to complete the sale of this asset, the
Company must obtain releases from: (a.) the IRS, who has filed a Federal Tax
Lien on the Company's assets, and, (b.) the holders' of the convertible
debentures. The Company intended to use the proceeds for the purpose of
negotiating a settlement with the IRS. Because the conditions and obligations
precedent to the agreement were not met, the agreement was mutually rescinded in
late November 2003.
Note 15 - Subsequent Events
CONVERTIBLE DEBENTURES
Between December 1, 2003 and December 15, 2003, the Company converted a total of
$11,409 of principal due on the convertible debentures originally issued June
29, 2001, into 3,083,538 of common stock.
On December 6, 2003, pursuant to terms within the third issuance of convertible
debentures, $30,000 of principal became due. As of December 15, 2003 the
principal amount due plus the accrued interest of approximately $3,890 is in
default
CONSULTING AGREEMENTS
In December 2003, the Company entered into three short-term consulting
agreements with independent financial and business advisors, in which the
consultants will provide business expertise, advice and negotiations in
strategic corporate planning, private financing, mergers and acquisitions, and
such other business areas as deemed necessary by company management. Terms of
these agreements generally require compensation to be paid at the effective date
of the agreement. Pursuant to terms of these agreements, the Company issued in
December 2003 approximately 67 million shares of common stock at a market value
of approximately $668,000.
In December 2003, the company issued 1,250,000 shares of common stock to two
business advisors for
15
consulting services rendered. The stock was valued at fair market value on the
date of issuance at the close of market. Total value of the issued stock was
$12,500.
COMMON STOCK OUTSTANDING
At December 15, 2003, outstanding shares of common stock totaled 325,546,471
shares.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the condensed financial statements, 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 and six months ended November 30, 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
condensed 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
17
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 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 condensed 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 services, Web hosting services, Web-based
local and wide area networks, and access to Internet marketing assistance and
other related services. These services are offered
18
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 hosted software and access to
internet-related services. We provide products and services to our customer
subscriber base, which allows our customers to adopt "web-based" computing that
serves as an alternative to both traditional local wide area networks and
traditional client-server implementations. Generally, we market ourselves as an
internet utility company that can provide all of the computer software,
connectivity and internet-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 a 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 Everett. These
facilities, with redundant power, bandwidth, and cooling, house our servers,
routers and other equipment.
In fiscal 2004 (fiscal year ending May 31, 2004), although we cannot
provide guarantees, we have been focusing on growing revenue from:
o increased customer sales through acquisitions and mergers, and,
o an intense marketing and advertising campaign that began in the fall
of 2003.
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 a net loss of $1,328,653 for the three months ended
November 30, 2003 and net income of $61,216 for the six months ended November
30, 2003. For the same comparable periods one year ago, we incurred a net loss
of $386,142 for the three months ended November 30, 2002 and a net loss of
$1,250,514 for the six months ended November 30, 2002. Our three-month current
period's loss was impacted primarily by incurring approximately $1,035,000 of
consulting fees. For the six months ended November 30, 2003, our net income was
primarily a result of recognizing a gain on the forgiveness and settlements of
debts aggregating approximately $1,894,000. If we had not been able to negotiate
these settlements with our vendors and creditors during this current period, we
would have reported a net loss for the six months ended November 30, 2003 of
approximately $1,832,000. Management believes it will be able to continue to
grow its revenues of our core business from our web-based sales.
For the three months ended November 30, 2003, net revenues increased
approximately $37,000 or 14.8% over the same period one year ago. Net revenues
for the six months ended November 30, 2003 increased approximately $103,700 or
21.3%. For the three-month and six-month periods ended November 30, 2003, we
have increased our seat revenue by 14.2% and 12.4%, respectively. Other revenue
sources, exclusive of seat revenue, accounted for approximate increases of 16.1%
and 43.2%, respectively, for the three-month and six-month periods ended
November 30, 2003, respectively, over the same period one year ago. The reason
for these increases in the other revenue category can be directly attributed to
our existing customers adding accounting and management applications to their
initial host on demand products. Our continued revenue growth supports the fact
that our customers are finding immediate and long term advantages, both
administrative and financial, in that our concept of host on demand allows them
to be able to have access to their corporate computing needs anytime and
anywhere in the world for a reasonable fee.
Our 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.
19
We recently enhanced our sales and marketing departments with
professional, experienced sales representatives and marketing personnel. As a
result of this effort, and initiating other national marketing campaigns, we
expect a constant growth in sales revenue over this next fiscal year although we
cannot provide guarantees that this will occur. In the interim, we believe our
enhanced sales and marketing departments and the initiation of other national
marketing campaigns will result in increased consumer understanding and
awareness of our technology. Although we cannot provide definitive assurances,
as a result of these efforts, we believe that we should be able to sustain
balanced growth rate as experienced during these past periods. 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 increase the number of seats
and applications per customer,
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 November 30, 2003, we incurred direct costs
totaling $233,058 as compared to $187,654 for the same period one year ago. This
represents an increase of expenses of approximately 24%. For the six months
ended November 30, 2003 and 2002, we incurred direct costs totaling $406,124 and
$381,112, respectively. This represents an increase of 6.6% over the same
comparable period one year ago. The current periods increases over the
comparable prior periods are principally a result of:
o more licensing fees accrued because more licenses are hosted,
o higher co-location costs due to higher usage requirements for added
customers and seats,
o higher technical and engineering salaries, and,
o increased sales commissions.
Selling, general and administrative expenses were $1,332,957 and
$450,559 for the three months ended November 30, 2003 and 2002, respectively,
and $1,654,930 and $902,264 for the six months ended November 30, 2003 and 2002,
respectively. 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, amortization of
unearned compensation and deferred compensation.
Non-cash compensation for the three months ended November 30, 2003 and
2002 was $1,073,570 and $121,201, respectively. Cash expenses for the three
months ended November 30, 2003 and 2002 were $259,387 and $329,358,
respectively.
Of particular significance to this category's current period reported
expense is the increase in professional and consulting fees. These specific
expenses aggregated $1,078,000 and accounted for approximately 80.9% of the
selling, general and administrative expenses for the quarter ended November 30,
2003. Approximately $1,023,200 of the total professional and consulting fees is
the form of non-cash compensation.
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 example, for the six months ended November
30, 2003, sales related wages increased approximately $41,200 over the same
period one year ago. We expect this category of expense to stabilize now, as
planned.
Overall, our total operating expenses increased significantly over the
prior comparable periods.
20
For the three months ended November 30, 2003 and 2002 we incurred a net increase
overall of $928,000, primarily due to the non-cash compensation recognized for
consultant fees. For the six months ended November 30, 2003 and 2002 we incurred
a net increase of $777,700. The net increases for the two comparable periods is
generally accountable in the form non-cash compensation; however there is a
significant decrease in cash related compensation for the three and six month
periods ended November 2003 and 2002 of 21% and 29%, respectively.
Interest expense is primarily the result of:
o accruing interest on promissory notes and convertible debentures, and,
o 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 periods are:
Three months ended November 30, Six months ended November 30,
------------------------------------- ---------------------------------------
2003 2002 2003 2002
----------------- ---------------- ------------------- ---------------
o Amortization of discounts on
convertible debentures $ 52,549 $ 241,134 $ 154,433 $ 533,326
o Accrued interest on
debentures and notes 73,907 105,103 179,893 199,134
o Other 16,176 74,534 32,380 125,325
o Accrued interest and discount
on capitalized lease -- 7,866 -- 15,734
-------------- ------------ -------------- ----------
Totals $ 142,632 $ 428,637 $ 366,706 $ 873,519
============== ============ ============== ==========
Non-cash interest $ 141,665 $ 409,213 $ 364,779 $ 827,210
Other interest 967 19,424 1,927 46,309
-------------- ------------ -------------- ----------
Totals $ 142,632 $ 428,637 $ 366,706 $ 873,519
============== ============ ============== ==========
LIQUIDITY AND CAPITAL RESOURCES
Our financial statements for the six months ended November 30, 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 six months ended November 30, 2003, we had net income of
$61,216 and negative cash flows from operations of $218,917, and we had a
working capital deficit of $4,533,594 and a stockholders' deficit of $4,145,720
at November 30, 2003. Our working capital deficit at November 30, 2003 may not
enable us to meet certain financial objectives as presently structured.
We had a cash balance of $187,033 as of November 30, 2003. We finance
our operations and capital requirements primarily from and private debt and
equity offerings. For the six months ended November 30, 2003 we received cash
for a total of $404,116 from our:
o bank credit line - $6,325;
o stockholders' notes receivable - $396,499; and
o capitalized lease deposit refund - $1,292.
For the same comparable period one-year ago we received financing
totaling $416,926, of which $400,000 was from the issuance of convertible
debentures. No convertible debentures have been issued during the six-month
period ended November 30, 2003.
As of November 30, 2003, we had $4,797,290 in current liabilities. Of
the total current debt, approximately $3,172,019 is deemed a past due.
21
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 $2,592,400. In settlement of these obligations, we incurred cash outlays of
$49,000 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
and creditor 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 November 30, 2003, we are delinquent in the payment of
approximately $837,800 of business and payroll taxes, penalties and interest.
The majority of the past due amount is for payroll taxes, penalties and interest
due to the Internal Revenue Service approximating $775,800. 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 assets and we
may be forced to file for bankruptcy protection and/or to cease operations
altogether.
As of November 30, 2003, we have four workout agreements with three
taxing authorities for past due taxes now totaling approximately $12,400. Terms
of these workouts require us to pay between $150 and $500 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. The first lien was filed by a
state for approximately $28,000 for prior year's income taxes assessed to our
predecessor company. This liability has been disputed and an amended return has
been filed to correct this deficiency, but we have never received notice of
clearance on this issue. The second lien was filed by another state for past due
payroll taxes, penalties and interest. We have recently discussed this matter
with the State in an effort to reach a mutually agreeable workout arrangement
that would allow for long-term monthly payments but as of the date of this
report we have not reached an agreement. During the three months ended November
30, 2003 we paid a total of $6,000 toward this liability and at November 30,
2003 our liability is approximately $21,600.
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
fail to make our workout payments timely and if we are unsuccessful in our
efforts to negotiate with the taxing authorities, they 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:
o 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,
o a default by us on two new long-term lease obligations that if carried
to term would have aggregated approximately $1,034,500 in lease
payments.
We deny the allegations under this claim and believe it is without
merit and intends to vigorously defend against the lawsuit.
We are also subject to other legal proceedings and business disputes
involving ordinary and
22
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
November 30, 2003 will have a material adverse effect on our financial position.
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 December 15, 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.
The Company is obligated to investors who purchased a total of
$2,050,000 of secured convertible debentures over three separate private
financing transactions between June 2001 and March 2003. Amended terms of all
three private financing transactions are essentially the same: the debentures
are convertible into shares of common stock at the lesser of (i) $0.30 per share
and (ii) the average of the lowest three intraday trading prices in the
twenty-day trading period immediately preceding the notice to convert,
discounted by sixty percent (60%). Generally, each debenture is due, in full,
one year from the date of its original issuance or its amended date, if
applicable, of March 6, 2003, plus accrued interest at 12% per annum. The
default rate of interest is 15% per annum.
The convertible debentures also carry attached warrants that allow the
investors to exercise each warrant at $0.25 per share. A total of 5,200,000
warrants have been issued with expiration dates ranging between March 6, 2008
and March 31, 2008. As of December 15, 2003, no warrant has been exercised in
conjunction with the convertible debentures.
Summarized below are the net outstanding convertible debentures as of:
November 30, May 31,
2003 2003
---------------- ------------
Total debentures issued $ 2,050,000 $ 2,050,000
Less principal redeemed (494,065) (76,050)
---------------- ------------
Principal amount due 1,555,935 1,973,950
Less unamortized discount (29,652) (184,085)
---------------- ------------
Convertible debentures, net $ 1,526,283 $ 1,789,865
================ ============
The following table summarizes the issuances of convertible debentures
by their respective maturity periods:
Accrued
Principal Interest Total
-------------- ------------ ------------
Past due, as of November 30, 2003 $ 150,000* $ 22,840* $ 172,840*
Due December 6, 2003, past due 30,000* 3,695* 33,695*
Due January 2004 60,000 6,274 66,274
Due March 2004 1,315,935 444,087 1,760,022
---------- ---------- ----------
23
$1,555,935 $ 476,896 $2,032,831
========== ========== ==========
* In default
The unredeemed principal of a convertible debenture is due upon any
default under the terms of the convertible debentures.
The Company has contacted the investors requesting an extension period
on the debentures in default. 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.
The Company granted the investors a security interest in all assets.
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 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 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 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
24
of our common stock.
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 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 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.
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 Principal
Accounting 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 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
Principal Accounting 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
As of December 15, 2003, debentures in the amount of $180,000 plus
accrued interest of approximately $26,535 was due. These debenture instruments
remain 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.
25
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
(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.
26
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 December 22, 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