4
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 February 29, 2004.
[ ] 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 401,714,992 as of April 5, 2004
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 - February 29, 2004 (unaudited)
and May 31, 2003 3
Condensed Statements of Operations -Three and nine months
ended February 29, 2004 and February 28,2003 (unaudited) 4
Condensed Statement of Stockholders' Deficit - Nine months
ended February 29, 2004 (unaudited) 5
Condensed Statements of Cash Flows - Three and nine months
ended February 29, 2004 and February 28, 2003 (unaudited) 6
Notes to the Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
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 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
Item 1. Condensed Financial Statements of Insynq, Inc.
Insynq, Inc.
Condensed Balance Sheets
February 29, 2004 May 31, 2003
----------------- -------------
Assets (unaudited)
Current assets
Cash $ 155,072 $ 53,059
Accounts receivable, net of allowance for doubtful
accounts of $25,000 at February 29, 2004 and
May 31, 2003 47,598 46,252
Employee advance 108 --
Related party receivables 80,189 9,361
------------ ------------
Total current assets 282,967 108,672
------------ ------------
Equipment, net 155,908 244,962
------------ ------------
Other assets
Prepaid licenses 202,772 202,772
Prepaid expenses -- 19,500
Deposits 8,763 6,553
------------ ------------
Total other assets 211,535 228,825
------------ ------------
Total assets $ 650,410 $ 582,459
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 657,835 $ 789,046
Accrued liabilities 2,256,387 2,396,215
Convertible debentures, net of unamortized discount of
$3,905 and $184,085, respectively 1,463,040 1,789,865
Related party notes payable 145,274 1,307,274
Capital lease obligations 3,497 878,704
Deferred compensation 256,634 159,017
Customer deposits 54,642 48,006
Notes payable 9,987 18,021
------------ ------------
Total current liabilities 4,847,296 7,386,148
------------ ------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, -0- issued and outstanding at February 29,
2004 and May 31, 2003 -- --
Class A common stock, $0.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding at
February 29, 2004 and May 31, 2003 -- --
Common stock, $0.001 par value, 500,000,000 shares
authorized, 360,119,772 shares issued and outstanding
at February 29, 2004 and 22,033,035 shares issued and
outstanding at May 31, 2003 360,120 22,033
Additional paid-in capital 21,833,954 18,807,516
Notes receivable and interest - stockholders and officers (100,000) (105,475)
Accumulated deficit (26,290,960) (25,527,763)
------------ ------------
Total stockholders' deficit (4,196,886) (6,803,689)
------------ ------------
Total liabilities and stockholders' deficit $ 650,410 $ 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 nine months ended:
--------------------------------- ---------------------------------
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
--------------- -------------- --------------- --------------
Revenues $ 318,960 $ 271,527 $ 908,798 $ 757,631
------------- ------------- ------------- -------------
Costs and expenses
Direct cost of services 227,407 195,341 633,531 576,452
Selling, general and
administrative
Non-cash compensation 614,014 342,778 1,812,543 595,339
Other 224,060 252,843 680,461 902,547
------------- ------------- ------------- -------------
Total costs and expenses 1,065,481 790,962 3,126,535 2,074,338
------------- ------------- ------------- -------------
Loss from operations (746,521) (519,435) (2,217,737) (1,316,707)
------------- ------------- ------------- -------------
Other income (expense)
Gain on forgiveness and
settlements of debts 5,856 7,218 1,899,330 449,123
Interest expense
Non-cash (87,788) (287,831) (452,567) (1,119,540)
Other (1,224) (16,162) (3,150) (57,972)
Other income 5,265 3,005 10,927 14,115
Loss from disposal of assets -- -- -- (32,739)
------------- ------------- ------------- -------------
Total other income (expense) (77,891) (293,770) 1,454,540 (747,013)
------------- ------------- ------------- -------------
Net loss $ (824,412) $ (813,205) $ (763,197) $ (2,063,720)
============= ============= ============= =============
Net loss per share:
Basic and diluted $ (0.00) $ (0.07) $ (0.00) $ (0.50)
============= ============= ============= =============
Weighted average of common shares:
Basic and diluted 340,776,936 11,180,930 204,418,178 4,109,708
============= ============= ============= =============
The accompanying notes are an integral part of these condensed financial
statements.
4
Insynq, Inc.
Condensed Statement of Stockholders' Deficit
For the nine months ended February 29, 2004
(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 63,425,922 63,426 532,685 (596,111) -- -- --
Issuance of common stock for
non-employee compensation and
record unearned compensation 96,905,665 96,906 1,177,438 -- (1,054,916) -- 219,428
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 109,515,672 109,516 397,489 -- -- -- 507,005
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 -- -- 391,392 -- (391,392) -- --
Amortization of unearned
compensation -- -- -- -- 1,446,308 -- 1,446,308
Principal received on
stockholders' notes receivable -- -- 10,388 496,111 -- -- 506,499
Accrue interest on officers'
notes receivable -- -- -- (1,040) -- -- (1,040)
Net loss for the nine months
ended February 29, 2004 -- -- -- -- -- (763,197) (763,197)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, February 29, 2004 360,119,772 $ 360,120 $ 21,833,954 $ (100,000) $ -- $(26,290,960) $ (4,196,886)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this condensed financial
statement.
5
Insynq, Inc.
Condensed Statements of Cash Flows
(unaudited)
For the nine months ended:
--------------------------
February 29, February 28,
2004 2003
------------- -------------
Cash flows from operating activities
Net loss $ (763,197) $(2,063,720)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 118,232 165,874
Bad debts 27,312 50,954
Amortization of unearned compensation 1,446,308 198,013
Issuance of stock for services and compensation 219,428 217,765
Issuance of options and warrants for services to non-employees -- 30,450
Amortization of discounts related to convertible debentures 180,180 691,291
Capitalized interest on notes receivable and leased assets (7,253) 40,381
Gain on forgiveness and settlements of debts (1,899,330) (449,123)
Write down asset for impairment of value 19,500 --
Discount on capital lease -- 31,468
Loss on disposal of assets -- 32,739
Changes in operating assets and liabilities:
Accounts receivable - trade (22,446) (82,920)
Related party receivables (70,828) (32,220)
Employee advance (108) --
Deferred compensation 127,343 94,492
Accounts payable (401) 134,121
Accrued liabilities 289,420 459,844
Customer deposits 6,637 12,160
Prepaid expenses -- 14,799
----------- -----------
Net cash used in operating activities (329,203) (453,632)
----------- -----------
Cash flows from Investing activities:
Purchase of equipment (29,178) --
----------- -----------
Cash flows from financing activities:
Principal received on stockholders' notes receivable 506,499 --
Payments on capital lease obligations (41,579) (18,908)
Proceeds from bank note payable 6,325 4,887
Payments on notes payable (8,641) (15,462)
Increase deposits on credit cards (3,502) (2,250)
Deposit refund 1,292 1,390
Proceeds from related party notes payable -- 1,684
Proceeds from convertible debentures -- 490,000
Proceeds released from restricted cash - held in escrow -- 10,355
----------- -----------
Net cash provided by financing activities 460,394 471,696
----------- -----------
Net increase in cash 102,013 18,064
Cash at beginning of period 53,059 9,760
----------- -----------
Cash at end of period $ 155,072 $ 27,824
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
6
Insynq, Inc.
Notes To Condensed Financial Statements
February 29, 2004
(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 outsource 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 a broadband internet-enabled workstation.
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
periods ended February 29, 2004, 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 at
implementation of 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 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
7
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.
RECENT AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure -
an amendment of SFAS Statement No. 123, "Accounting for Stock Based
Compensation" which provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS No. 148 amends the disclosure requirements to SFAS No. 123 to
require disclosure in the significant accounting policy footnote of both annual
and interim financial statements of the method of accounting for stock- based
compensation and the related proforma disclosures when the intrinsic value
method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002, and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002.
The Company 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 proforma impact of the fair
value method on net income or net loss. Had the Company determined compensation
expense based on the fair value at the grant date for its stock options under
SFAS No. 123, the proforma effect on the net loss per share would have been
increased to the proforma amounts as indicated below for the nine months ended
February 29, 2004 and February 28, 2003:
2004 2003
-------------- ---------------
Net loss as reported $763,197 $2,063,720
Pro forma net loss $763,197 $2,245,696
Loss per share as reported $0.00 $0.50
Proforma loss per share $0.00 $0.55
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities; the right to receive the expected residual
returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by the
primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no later
than the end of the first reporting period
8
that ends after December 15, 2004. This effective date includes those entities
to which Interpretation 46 had previously been applied. However, prior to the
required application of Interpretation No. 46, a public entity that is a small
business issuer shall apply Interpretation 46 or this Interpretation to those
entities that are considered to be special-purpose entities no later than as of
the end of the first reporting period that ends after December 15, 2003
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of the provisions of Interpretation No. 46 is not expected to
have a significant effect on the Company's financial statement presentation or
disclosures.
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type includes put options and forward purchase contracts, which involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This Statement shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15, 2004.
The implementation of the provisions of SFAS No. 150 is not expected to have a
significant effect on the Company's financial statement presentation or
disclosures.
Note 3 - Going Concern and Management's Plans
The Company's condensed financial statements as of and for the three and nine
months ended February 29, 2004 have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. For the nine months ended
February 29, 2004, the Company had a net loss of $763,197 and a negative cash
flow from operations of $329,203. The Company had a working capital deficit of
$4,564,329 and a stockholders' deficit of $4,196,886 at February 29, 2004. The
Company's working capital deficit as of February 29, 2004 may not enable it to
meet certain financial objectives as presently structured.
As of February 29, 2004 and April 5, 2004, 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 February 29, 2004 the Company was delinquent on approximately $826,800 of
its payroll and business taxes
9
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
approximately $780,000. 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 for the
same obligations. On March 8, 2004 Insynq remitted $100,000 to the IRS to
partially settle the past due tax obligation and submitted a written proposal
outlining its intention to pay off the remaining tax obligation. It is expected
that the Company and the IRS will reach a mutually agreeable workout within the
next sixty days. However, if the IRS and the Company do not agree to a workout
plan, 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 February 29, 2004, 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 $71,215 and is included in accrued
liabilities.
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 finance its operations and may seek such additional
funding through public or private equity or new debt. 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 financing.
Note 4 - Loss Per Common Share
Basic and diluted loss per share of common stock is computed by dividing the net
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 and nine months ended February 29, 2004 and February 28, 2003,
respectively, as their effect would be anti-dilutive.
Note 5 - Related Party Receivables
As of February 29, 2004, the Company has extended $80,189 of credit to three
business entities that are directly related to one or more officers/stockholders
of the Company. The following discusses the activities and balances due:
o Two of the businesses are related to an officer. Insynq provides these
two businesses monthly application hosting services, and other
management related services to include co-sharing of selected expenses
for promotional materials, marketing, advertising and seminars. At
February 29, 2004, the balance due from these two companies aggregates
$40,146.
o The third business is partially owned by two officers and four
stockholders of Insynq. For the nine months ended February 29, 2004,
Insynq has paid $52,043 for certain expenses on behalf of this business
and received reimbursements totaling $12,000. The balance due Insynq at
February 29, 2004 is $40,043.
Note 6 - Notes Receivable - Stockholders and Officers
STOCKHOLDERS
Between August 5, 2003, and December 1, 2003, the Company executed six
consulting agreements that granted a total of 63,425,922 options to purchase
shares of common stock within thirty to ninety days of each respective
agreement. The fair value of these options was estimated at $391,392 on the
grant dates, using the Black-Scholes option pricing model and was amortized to
consulting expense over the terms of the each respective agreement. Amortization
for the nine months ended February 29, 2004 was $391,392. The options were
exercised into 63,425,922 shares of common stock on August 5, 2003, September
24, 2003 and December 1, 2003. Upon exercise of the respective options, the
following secured promissory notes receivable, aggregating $636,111, with
interest at 8% per annum, were executed:
10
Date of Issuance Amount
-------------------------------- -------
August 5, 2003 $ 236,111
September 24, 2003 150,000
December 1, 2003 250,000
-------
Total $ 636,111
=======
At February 29, 2004, $140,000 was due from the December 1, 2003 notes
receivable, of which $100,000 was received on March 1, 2004. Subsequent to March
1, 2004 management learned that $40,000 of the note receivable was deemed not
collectible. Therefore, the Company recognized the loss as of February 29, 2004
and recorded $40,000 as a reduction to stockholders' notes receivable and paid
in capital. For the nine months ended February 29, 2004, total notes receivable
recognized, net of the uncollectible amount of $40,000, was $596,111.
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, which were
cancelled upon receipt. 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 7 - 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:
February 29, 2004 May 31, 2003
------------------- -------------------
Note payable to stockholder, past due, originally $ -- $ 1,162,000
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. (See also Note 13.)
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:
11
February 29, 2004 May 31, 2003
-------------------- -------------------
Salaries and benefits $ 184,514 $ 251,138
Taxes
Payroll 443,769 457,447
Business 43,240 55,147
Penalties and interest 350,363 323,163
Interest 611,553 702,108
Licenses, consulting and other 622,948 607,212
---------- ----------
$2,256,387 $2,396,215
========== ==========
As of February 29, 2004 the Company was delinquent on approximately $826,800 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
$780,000. 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
remitted $100,000 on March 8, 2004 to the IRS in partial settlement of its tax
obligation and submitted a written proposal to workout the remainder of the
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 February 29, 2004, the Company owes
approximately $17,340 pursuant to these workout agreements. Generally, each
taxing authority, with which a workout has been consummated, has filed a lien or
a warrant on the assets of the Company.
Additionally, a lien for approximately $28,000 has been filed by a state for
prior years' income taxes assessed to the predecessor company of Insynq, Inc.
This lien and the amount has been disputed; amended returns to correct this
deficiency were filed; but as of the date of this report, the state has not
responded to, nor approved the amended returns.
.
Note 9 - 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 date
of its original issuance or its amended date, if applicable, 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 April 5, 2004, no warrants have been exercised in conjunction with
the convertible debentures.
Summarized below are the net outstanding convertible debentures as of:
12
February 29, 2004 May 31, 2003
------------------- --------------
Total debentures issued $ 2,050,000 $ 2,050,000
Less: total principal redeemed (583,055) (76,050)
----------- -----------
Principal amount due 1,466,945 1,973,950
Less: total unamortized discount (3,905) (184,085)
----------- -----------
Convertible debentures, net $ 1,463,040 $ 1,789,865
=========== ===========
As of April 5, 2004, the Company is in default on all convertible debentures
because the respective maturity date of each issuance has expired. The following
table illustrates transactions related to the convertible debentures from March
1, 2004 to April 5, 2004:
Accrued
Principal Interest Total
------------- ----------- -----------
Balances, at February 29, 2004 $1,466,945 $ 540,147 $2,007,092
Less: Redemptions of principal 92,467 -- 92,467
Add: Accrued interest -- 28,205 28,205
---------- ---------- ----------
Balances, at April 5, 2004 $1,374,478 $ 568,352 $1,942,830
========== ========== ==========
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 nine months ended February 29, 2004 and February 28, 2003, the Company
recognized as interest expense, discounts on the convertible debentures totaling
$180,180 and $691,291, 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 10 - Capital Lease Obligations
As of February 29, 2004, the Company is in default on a capital lease obligation
of approximately $3,500. Accordingly, the lease has been classified as a current
obligation. The monthly lease payment is $659.
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. (See also Note 13.) In August 2003, the Company also paid
off a defaulted equipment lease obligation with an amount due of approximately
$4,000.
Note 11 -Stock-Based Compensation Plans
At February 29, 2004, the Company had three stock option plans, which are
described in detail in Note 14 in the Company's 2003 Annual Report on Form
10-KSB. 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. 148,
Accounting
13
for Stock-Based Compensation, Transition and Disclosure have been applied.
During the nine months ended February 29, 2004, the Company did not grant any
stock options to employees.
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 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 February 29, 2004 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. At February 29, 2004, 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 nine months ended
February 29, 2004 the Company settled approximately $2,598,330 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 $1,899,330.
NON-CASH INVESTING AND FINANCING
Non-cash investing and financing activities included the following for the nine
months ended:
February February
29, 2004 28, 2003
------------- --------------
Conversion of debentures into common stock $ 507,005 $ 4,500
Note and interest payable converted into common stock 650,000 --
Notes receivable issued for options exercised 636,111 --
Principal written down on notes receivable 40,000 --
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 --
14
Reclassify note payable to accrued liability 4,000 --
Discount on convertible debentures -- 490,000
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest for the nine months ended February 29, 2004 and February
28, 2003 was $3,150 and $12,745, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR THE NINE MONTHS ENDED ARE:
February 29, February 28,
2004 2003
--------------------------------
Salaries and benefits $ 519,074 $ 502,063
Rent 21,354 20,433
Consulting 1,674,984 534,787
Legal, accounting and professional 111,967 180,238
Telephone and utilities 19,452 17,072
Taxes 47,033 48,488
Administration, supplies and repairs 22,457 22,850
Travel and entertainment 15,749 16,616
Insurance 1,574 4,417
Other and settlements 59,360 150,922
---------- ----------
Total $2,493,004 $1,497,886
========== ==========
Non-cash compensation $1,812,543 $ 595,339
Other 680,461 902,547
---------- ----------
Total $2,493,004 $1,497,886
========== ==========
Note 15 - Subsequent Events
CONVERTIBLE DEBENTURES
Between March 1, 2004 and April 5, 2004, the Company converted a total of
$92,467 of principal due on the convertible debentures into 41,595,220 shares of
common stock.
As of April 5, 2004 the Company is in default $1,374,478 of convertible
debentures, plus an estimated $535,000 of accrued interest. (See also Note 9.)
STOCKHOLDERS' NOTES RECEIVABLE
On March 1, 2004, the Company received $100,000 on the balance due on the notes
receivable. (See also note 6.)
ACCRUED LIABILITIES
On March 8, 2004, the Company remitted $100,000 to the Internal Revenue Service
for partial payment on its delinquent taxes. (See also Note 8.)
COMMON STOCK OUTSTANDING
At April 5, 2004, outstanding shares of common stock totaled 401,714,992 shares.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the 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 nine months ended February 29, 2004. 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 on the 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
16
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 services are invoiced at the beginning of each
month. User setup fees received are recognized upon completion of a customer's
deployment. 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.
Sale and promotional discounts are recorded as a reduction of revenues.
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.
RECENT AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure - an amendment of SFAS Statement No. 123, "Accounting for Stock Based
Compensation" which provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS No. 148 amends the disclosure requirements to SFAS No. 123 to
require disclosure in the significant accounting policy footnote of both annual
and interim financial statements of the method of accounting for stock- based
compensation and the related proforma disclosures when the intrinsic value
method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002, and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002.
The Company 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 proforma impact of the fair
value method on net income or net loss. Had we determined compensation expense
based on the fair value at the grant date for its stock options under SFAS No.
123, the proforma effect on the net loss per share would have been increased to
the proforma amounts as indicated below for the nine months ended February 29,
2004 and February 28, 2003:
2004 2003
-------------- ----------------
Net loss as reported $763,197 $2,063,720
Pro forma net loss $763,197 $2,245,696
Loss per share as reported $0.00 $0.50
Proforma loss per share $0.00 $0.55
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated
17
support from other parties, which is provided through other interest that will
absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest: the direct or indirect ability to make decisions
about the entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after December 15,
2004. This effective date includes those entities to which Interpretation 46 had
previously been applied. However, prior to the required application of
Interpretation No. 46, a public entity that is a small business issuer shall
apply Interpretation 46 or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of the provisions of Interpretation No. 46 is not
expected to have a significant effect on our financial statement presentation or
disclosures.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting For
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting for certain financial instruments
with characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This Statement shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15, 2004.
The implementation of the provisions of SFAS No. 150 is not expected to
have a significant effect on our financial statement presentation or
disclosures.
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
18
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 as components or as an integrated
whole, and generally sold on a monthly or annual 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. 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.
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.
RESULTS OF OPERATIONS
We reported a net loss of $824,412 for the three months ended February 29,
2004 and net loss of $763,197 for the nine months ended February 29, 2004. For
the same comparable periods one year ago, we incurred a net loss of $813,205 for
the three months ended February 28, 2003 and a net loss of $2,063,720 for the
nine months ended February 28, 2003. For the nine months ended February 29,
2004, we recognized approximately $1,899,000 of gain on the forgiveness and
settlements of debts. Had we not been able to settle certain obligations with
our creditors and vendors, we possibly would have reported a net loss for the
nine months ended February 29, 2004 of approximately $2,750,000.
For the three months ended February 29, 2004, net revenues increased
approximately $47,400 or 17.5% over the same period one year ago. Net revenues
for the nine months ended February 29, 2004 increased approximately $151,100 or
20.0%. There are several reasons for the increase in revenues. First, it can be
directly attributed to our existing customers adding accounting and management
applications to their initial and basic "host on demand" subscription of
products. Our customer base is finding immediate and long term advantages to the
"host on demand" concept, both administratively and financially, because it
allows them to be able to have immediate access to their corporate computing
needs anytime and anywhere in the world for a reasonable fee. Second, our
increase in revenues can be attributed to our expanded marketing and sales
efforts via the Internet, an
19
enhanced and improved website and the offering of more professional products.
Management will attempt to grow the revenues of our core business principally
through web-based contacts.
In order to provide competitive pricing to our customers, and to encourage
new customers to use our service, we offer short-term discounts and, for limited
periods, free product usage through promotional offerings. Discounted seat
revenue for the three and nine months ended February 29, 2004 favorably
decreased by approximately 13.2 % and 21.1%, respectively, over the same
comparable periods one year ago. Discounts for the quarter ended and year to
date ended February 29, 2004, were $23,919 and $68,733, respectively or
approximately 10.8% and 10.5% of seat sales. As a percentage of total sales,
discounts for the current periods ended February 29, 2004 accounted for 6.9% and
7.0%, respectively. As we grow our customer base, we expect discounted offerings
to continue to decrease as a percentage of total sales. In the beginning we had
to demonstrate and educate consumers of the real value and simplicity of
operations, whereby encouraging signups by offering discounts on selected
products and services. Now that we have proven our business model as a reliable
worthwhile commodity for a fair fee, new customers are interested and attracted
to us for what we can do to improve their business environment, and not by just
what we charge.
This past year, we have increased our sales and marketing departments with
the addition of experienced sales representatives and marketing personnel. As a
result of this effort, we are expecting a moderate growth in sales revenue
through the end of this fiscal 2004. We believe, due to our marketing and our
improved website and links to our other partner websites, we have increased
consumer understanding and awareness of our "host on demand" technology,
thereby, increasing sales. 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 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.
As a result of these efforts, we should be able to sustain a reasonable and
controlled growth rate as reported upon these past periods. Regardless, even
though we have experienced continued growth in revenue, prior growth rates
should not be considered necessarily indicative of future growth rates or
operating results for the last quarter of fiscal year 2004.
COSTS AND EXPENSES
During the quarter ended February 29, 2004, we incurred direct costs of
services totaling $227,407 or 71.3% of revenues as compared to $195,341 or 71.9%
of revenues for the same period one year ago. For the nine months ended February
29, 2004 and February 28, 2003, we incurred direct costs totaling $633,531, or
69.7% of revenues, and $576,452 or 76.1% of revenues, respectively. We believe
that we have held these costs as a percent of revenues as planned and at
acceptable percentages.
Selling, general and administrative expenses were $838,074 and $595,621 for
the three months ended February 29, 2004 and February 28, 2003, respectively,
and $2,493,004 and $1,497,886 for the nine months ended February 29, 2004 and
February 28, 2003, 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.
Professional and consulting fees, as a component of the selling general and
administrative expenses, accounted for approximately 71.5% and 71.8% for the
three and nine month periods ended February 29, 2004 or approximately $596,600
and $1,787,000, respectively. Approximately $574,000 and $1,670,000 of the total
professional and consulting fees are in the form of non-recurring, non-cash
compensation.
Because of the recent emphasis on sales, marketing and promotional
programs, we also anticipated an increase in sales related wages, commissions
and certain other related costs, such as payroll taxes and communications. For
example, for the nine months ended February 29, 2004, sales related wages and
commissions increased approximately $101,600 over the same period one year ago.
We expect this category to stabilize now, as planned.
20
Overall, our total operating expenses for fiscal periods ended February 29,
2004 increased significantly over the prior comparable periods. However, the
increase may be directly attributable to the non-cash compensatory consulting
fees as discussed above.
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 components of our interest expense are:
Three months ended: Nine months ended:
-------------------------- -------------------------
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Amortization of discounts on
convertible debentures $ 25,747 $ 157,965 $ 180,180 $ 691,291
Accrued interest on
debentures and notes 71,290 114,133 251,183 313,266
Other (8,025) 16,162 24,354 141,488
Accrued interest and discount
on capitalized lease -- 15,733 -- 31,467
---------- ---------- ---------- ----------
Totals $ 89,012 $ 303,993 $ 455,717 $1,177,512
========== ========== ========== ==========
Non-cash interest $ 87,788 $ 287,831 $ 452,567 $1,119,540
Other interest 1,224 16,162 3,150 57,972
---------- ---------- ---------- ----------
Totals $ 89,012 $ 303,993 $ 455,717 $1,177,512
========== ========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES
Our financial statements as of and for the nine months ended February 29,
2004 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. For the nine months ended February 29, 2004, we had a
net loss of $763,197 and negative cash flows from operations of $329,203, and at
February 29, 2004 we had a working capital deficit of $4,564,329 and a
stockholders' deficit of $4,196,886. Our working capital deficit at February 29,
2004 may not enable us to meet certain financial objectives as presently
structured.
We had a cash balance of $155,072 at February 29, 2004. We finance our
operations and capital requirements primarily from private debt and equity
offerings. For the nine months ended February 29, 2004 and February 28, 2003 we
received cash from the following sources:
Sources of Cash 2004 2003
- -------------------------------- --------- ----------
Stockholders' notes receivable $506,499 $ --
Bank line of credit 6,325 4,887
Capitalized lease deposit refund 1,292 1,390
Related party notes payable -- 1,684
Secured convertible debentures -- 490,000
-------- --------
Total $514,116 $497,961
======== ========
As of February 29, 2004, we had $4,847,296 in current liabilities. Of the
total current debt, approximately $4,591,000, or 95%, is deemed past due.
21
During this past nine months we negotiated with many of our creditors and
vendors, and offered them cash payments for substantially less than the amounts
due, or in some instances requested a total forgiveness of the debt. As a result
of these negotiations, we were able to settle past due obligations totaling
$2,598,330. 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 by how much, is
not determinable, nor quantifiable. 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
assets and resources and we may be forced to cease operations.
As of February 29, 2004, we are delinquent in the payment of approximately
$826,800 of business and payroll taxes, penalties and interest. The majority of
the past due amount, approximately $780,000, 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. We had an Offer In Compromise being processed by
the Internal Revenue Service, but on January 5, 2004 we withdrew our offer and
requested we workout a payment plan with the local IRS Collections Division. On
March 8, 2004 we remitted $100,000 in partial payment of our past due tax
obligations and submitted a formal proposal to pay our delinquent taxes. We
expect to have a structured payment plan in place within the next sixty days.
However, if the Internal Revenue Service and Insynq cannot agree to a mutually
agreeable workout plan, 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 February 29, 2004, we have four workout agreements with four taxing
authorities for past due taxes now totaling approximately $17,340. Terms of
these workouts require us to pay between $150 and $1,000 per month until each
respective tax obligation is fulfilled. Generally, each taxing authority, with
which a workout has been consummated, has filed a lien or a warrant on the
assets of the company to protect their position during the respective workout
periods.
Additionally, a lien has been filed by a state for past due taxes, plus
accrued interest and penalties. This lien was filed for approximately $28,000
for prior year's income taxes assessed to our predecessor company. This
liability has been disputed and an amended return was filed to correct this
deficiency, but to date, we have never received notice of clearance on this
issue.
If we fail to make our workout payments timely, and/or if we are
unsuccessful in our efforts to negotiate a workout plan with the IRS, these
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:
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 intend to vigorously defend against the 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 February 29, 2004 will have a material adverse
effect
22
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 by paying for
the actual licenses sold since entering this agreement.
As of March 12, 2004, 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 March 12, 2004, no warrant has been exercised in
conjunction with the convertible debentures.
Summarized below are the net outstanding convertible debentures as of:
February 29, May 31,
2004 2003
---------------- ------------
Total debentures issued $ 2,050,000 $ 2,050,000
Less: total principal redeemed (583,055) (76,050)
----------- -----------
Principal amount due 1,466,945 1,973,950
Less: total unamortized discount (3,905) (184,085)
----------- -----------
Convertible debentures, net $ 1,463,040 $ 1,789,865
=========== ===========
As of April 5, 2004, we are in default on all convertible debentures
because the respective maturity date of each issuance has expired. The following
table illustrates transactions related to the convertible debentures from March
1, 2004 to April 5, 2004:
Principal Accrued Total
Interest
-------------- ------------ -------------
Balances, at February 29, 2004 $1,466,945 $ 540,147 $2,007,092
Less: Redemptions of principal 92,467 -- 92,467
Add: Accrued interest -- 28,205 28,205
---------- ---------- ----------
Balances, at April 5, 2004 $1,374,478 $ 568,352 $1,942,830
========== ========== ==========
The unredeemed principal of a convertible debenture is due upon any default
under the terms of the convertible debentures.
23
We have 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. Our management believes the investors may
extend these debentures' due dates 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.
We granted the investors a security interest in all our 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 begun to re-focus our marketing efforts to that of the Internet
service provider and telecommunications industries. Both of these industries are
marketing their digital data lines to both their business and homes users. In
order for these providers to operate in this highly competitive market, they
look for products and service that will differentiate themselves among their
competition. Our service and product offerings integrate with the business
requirements of the small to medium office or the small business home/office.
We renewed our contract for another year with a large U.S.
telecommunication firm who will re-market, via private label, hosted software
applications and managed services, such as, MS Exchange, virus protection, data
storage and other products and services to be bundled with broadband solutions.
These bundled services or products, which are delivered on a subscription basis.
Our intention is to initially target the regional ISPs and
telecommunication companies and create a similar product offering. We would gain
access to their customer base to sell our products and services, or depending on
their size our services would be private labeled and re-sold through their own
sales infrastructure.
We have developed a brand of business solutions called e-Accounting, 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 hiss
remote customers' data. This gives the CPA the ability to manage more customers
with fewer staff, thereby, generating greater profitability for the CPA firm.
During the quarter ended February 2004, we provided administrative and
financial assistance to Aptus Corp., (Aptus) a Delaware corporation, partially
owned by two of our officers, directors and stockholders. Aptus is an
application service provider and has filed a registration on Form SB-2 in
December 2003. The Aptus business plan states that it will offer and host their
proprietary accounting software and a sales quoting software, along with other
hosted business solutions. We will negotiate, subject to Aptus raising the
minimum amount of proceeds from their offering, a sole and exclusive,
non-compete, master licensing agreement of our e-Accounting business model and
brand consisting of our proprietary software and third party products and
services. Aptus will have the right to further enhance the e-Accounting business
model as the market dictates. We believe that the overall future benefit derived
from the relationship will allow us to focus on a single industry instead of
dividing our efforts among many divergent marketing initiatives, and, it is
anticipated we will be able to reduce our expenses and improve our cash flow
from operations. As of February 29, 2004, we have advanced Aptus approximately
$52,000 and have received $12,000, for a net amount due us of approximately
$40,000.
We 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
24
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 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 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
As of February 29, 2004, we are delinquent in the payment of approximately
$826,800 of business and payroll taxes, penalties and interest. The majority of
the past due amount, approximately $780,000, 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. We had an Offer In Compromise being processed by
the Internal Revenue Service, but on January 5, 2004 we withdrew our offer and
requested we workout a payment plan with the local IRS Collections Division. On
March 8, 2004 we remitted $100,000 in partial payment of our past due tax
obligations and submitted a formal proposal to pay our delinquent taxes. We
expect to have a structured payment plan in place within the next sixty days.
However, if the Internal Revenue Service and Insynq cannot agree to a mutually
agreeable workout plan, 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 February 29, 2004, we have four workout agreements with four taxing
authorities for past due taxes now totaling approximately $17,340. Terms of
these workouts require us to pay between $150 and $1,000 per month until each
respective tax obligation is fulfilled. Generally, each taxing authority, with
which a workout has been consummated, has filed a lien or a warrant on the
assets of the company to protect their position during the respective workout
periods.
Additionally, a lien has been filed by a state for past due taxes, plus
accrued interest and penalties. This lien was filed for approximately $28,000
for prior year's income taxes assessed to our predecessor company. This
liability has been disputed and an amended return was filed to correct this
deficiency, but to date, we have never received notice of clearance on this
issue.
If we fail to make our workout payments timely, and/or if we are
unsuccessful in our efforts to negotiate a workout plan with the IRS, these
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:
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 intend to vigorously defend against the 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 February 29, 2004 will have a material adverse
effect on our financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 5, 2004 debentures, in the amount of $1,374,478 plus accrued
interest of approximately $568,400, were 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. The
debenture holders have a security interest in all of our assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
25
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 April 14, 2004.
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
27