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 28, 2005,
[ ] 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 IRS Employer
of Incorporation or Organization) Identification No.)
1127 BROADWAY PLAZA, SUITE 202
TACOMA, WASHINGTON 98402-3519
(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 107,707,254 as of April 15, 2005
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
PART I FINANCIAL INFORMATION.......................................................................................3
ITEM 1. CONDENSED FINANCIAL STATEMENTS OF INSYNQ, INC............................................................3
Condensed Balance Sheets........................................................................................3
Condensed Statements of Operations..............................................................................5
Condensed Statement of Stockholders' Deficit....................................................................6
Condensed Statements of Cash Flows..............................................................................8
Notes To Condensed Financial Statements.........................................................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................16
ITEM 3. CONTROLS AND PROCEDURES...............................................................................26
PART II. OTHER INFORMATION........................................................................................26
ITEM 1. LEGAL PROCEEDINGS........................................................................................26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..............................................26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..........................................................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................27
ITEM 5. OTHER INFORMATION........................................................................................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................................27
SIGNATURES...........................................................................................................29
2
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS OF INSYNQ, INC.
Insynq, Inc.
CONDENSED BALANCE SHEETS
February 28, 2005 May 31, 2004
--------------------- ----------------------
Assets (unaudited)
Current assets
Cash ................................................................ $ 1,437,601 $ 80,359
Accounts receivable, net of allowance for
doubtful accounts of $35,000 at February 28, 2005 and $25,000
at May 31, 2004 .................................................. 80,073 52,373
Related party receivables, net of allowance for
doubtful accounts of $-0- at February 28, 2005 and $25,000
at May 31, 2004 .................................................. 193,211 83,343
------------ ------------
Total current assets ........................................ 1,710,885 216,075
------------ ------------
Equipment, net .......................................................... 37,749 115,263
------------ ------------
Other assets
Licenses held for resale ............................................ 600,000 --
Prepaid interest and other assets ................................... 79,203 --
Deposits ............................................................ 8,146 8,943
Related Party receivables, net of allowance for
doubtful accounts of $77,500 at February 28, 2005
and $-0- at May 31, 2004 24,281 --
Prepaid licenses .................................................... -- 202,772
------------ ------------
Total other assets ........................................... 711,630 211,715
------------ ------------
Total assets ................................................. 2,460,264 $ 543,053
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable .................................................... $ 581,409 $ 583,073
Accrued liabilities ................................................. 1,958,057 2,250,585
Convertible debentures .............................................. 1,330,551 1,330,551
Notes payable ....................................................... 116,500 116,500
Accrued compensation ................................................ 334,042 287,934
Customer deposits ................................................... 47,191 34,679
Note payable, bank .................................................. 4,889 9,336
Capital lease obligations ........................................... -- 1,519
------------ ------------
Total current liabilities .................................... 4,372,639 4,614,177
------------ ------------
Long-term liability
Convertible notes payable, net of unamortized discount of
$2,697,534 at February 28, 2005 .................................. 2,466 --
------------ ------------
Commitments and contingencies ........................................... -- --
Stockholders' deficit
3
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
165,000 shares issued and outstanding at February 28, 2005 and
-0 shares issued and outstanding at May 31, 2004 ................. 165 --
Class A common stock, $0.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding at February 28,
2005 and May 31, 2004, respectively .............................. -- --
Common stock, $0.001 par value, 2 billion shares authorized at
February 28, 2005 and 10,000,000 shares authorized at May 31,
2004; 93,907,254 and 8,907,700 shares issued and outstanding at
February 28, 2005 and May 31, 2004, respectively ................. 93,907 8,908
Additional paid-in capital .......................................... 26,829,001 22,321,560
Unearned compensation and services .................................. (54,167) --
Accumulated deficit ................................................. (28,783,747) (26,401,592)
------------ ------------
Total stockholders' deficit .................................. (1,914,841) (4,071,124)
------------ ------------
Total liabilities and stockholders' deficit .................. $ 2,460,264 $ 543,053
============ ============
The accompanying notes are an integral part of these condensed financial statements.
4
INSYNQ, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended: For the nine months ended:
-------------------------------- --------------
February February 29, February 28, February 29,
28, 2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenues $ 266,438 $ 318,960 $ 863,370 $ 908,798
-------------- -------------- -------------- --------------
Costs and expenses
Direct cost of services 157,823 227,407 554,671 633,531
Selling, general and
administrative
Non-cash compensation 325,592 614,014 477,742 1,812,543
Other 362,754 224,060 970,666 680,461
-------------- -------------- -------------- --------------
Total costs and expenses 846,169 1,065,481 2,003,079 3,126,535
-------------- -------------- -------------- --------------
Loss from operations (579,731) (746,521) (1,139,709) (2,217,737)
-------------- -------------- -------------- --------------
Other income (expense)
Gain on forgiveness and
settlements of debts 3,530 5,856 131,602 1,899,330
Other income 13,911 5,265 20,232 10,927
Interest expense
Non-cash (706,772) (87,788) (1,064,022) (452,567)
Other (300) (1,224) (37,240) (3,150)
Call premium on early payment
of secured promissory notes (281,488) -- (281,488) --
Loss on disposal of assets (11,530) -- (11,530) --
-------------- -------------- -------------- --------------
Total other income (expense) (982,649) (77,891) (1,242,446) 1,454,540
-------------- -------------- -------------- --------------
Net loss $ (1,562,380) $ (824,412) $ (2,382,155) $ (763,197)
============== ============== ============== ==============
Net loss per share:
Basic and diluted $ (0.02) $ (0.12) $ (0.05) $ (0.19)
============== ============== ============== ==============
Weighted average of common shares:
Basic and diluted 88,685,032 6,815,539 50,398,203 4,088,364
============== ============== ============== ==============
The accompanying notes are an integral part of these condensed financial statements.
5
Insynq, Inc.
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
For the nine months ended February 28, 2005
(unaudited)
Preferred Stock Additional Notes Unearned Accumulated Total
(Series A, Common Stock Paid-In Receivable Compensation Deficit Stockholders'
Non-Participating) Capital Due From Deficit
Stockholders
----------------- --------------------- --------- ----------- -------- ------------ --------
Shares Amount Shares Amount
-------- -------- ------------ -------- ------------ ------------ ------------- ------------- ------------
Balance at May -- $ -- 8,907,700 $8,908 $22,321,560 $ -- $-- $(26,401,592) $(4,071,124)
31, 2004
Reduction of
common stock
resulting from
effects of
fractional shares
due to reverse -- -- (446) (1) 1 -- -- -- --
stock split
Discount on
convertible notes
payable issued
with warrants and
beneficial
conversion -- -- -- -- 3,441,640 -- -- -- 3,441,640
features
Issuance of
Series A, non-
participating
preferred stock 165,000 165 -- -- -- -- -- -- 165
Issuance of
common stock and
options for
non-employee
compensation and
record unearned
compensation -- -- 36,000,000 36,000 659,800 -- (590,800) -- 15,000
Cancellation of
shares due to
contractual
non-performance -- -- (10,000,000) (10,000) (140,000) -- 150,000 -- --
Issuance of
common stock for
acquisition of
licenses -- -- 40,000,000 40,000 569,800 -- -- -- 600,000
Issuance of
common stock in
conjunction with
exercise of
options and
record notes -- -- 19,000,000 19,000 76,000 (95,000) -- -- --
receivable
Principal
received on
stockholders' -- -- -- -- -- 20,000 -- -- 20,000
notes receivable
Write off
uncollectible
portion of notes
receivable -- -- -- -- -- 75,000 -- -- 75,000
6
Amortization of
unearned
compensation -- -- -- -- -- -- 386,633 -- 386,633
Net loss for the
nine months ended
February 28, 2005 -- -- -- -- -- -- -- (2,382,155) (2,382,155)
-------- -------- ------------ -------- ------------ ------------ ------------- ------------- ------------
Balance at
February 28, 2005 165,000 $165 93,907,254 $93,907 $26,829,001 $-- $(54,167) $(28,783,747) $(1,914,841)
======== ======== ============ ======== ============ ============ ============= ============= ============
The accompanying notes are an integral part of these condensed financial statements.
7
Insynq, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended:
------------------------------------------
February 28, February 29,
2005 2004
------------------ --------------------
Cash flows from operating activities
Net loss $(2,382,155) $ (763,197)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 65,984 118,232
Loss on disposition of assets 11,530 --
Bad debts 122,583 27,312
Provision for doubtful accounts - related party receivable 52,500 --
Gain on forgiveness and settlements of debts (131,602) (1,899,330)
Amortization of unearned compensation 386,634 1,446,308
Issuance of stock for services and compensation to non-employees 15,000 219,428
Amortization of discounts and beneficial conversion feature related to
convertible securities 744,106 180,180
Asset impairment -- 19,500
Capitalized interest on notes receivable and leased assets -- (7,253)
Changes in operating assets and liabilities:
Accounts receivable (75,297) (22,554)
Related party receivables (186,649) (70,828)
Licenses held for resale and prepaid licenses 202,772 --
Deposits and other assets (79,009) --
Accounts payable 16,928 (401)
Accrued liabilities (179,521) 289,420
Accrued compensation 46,108 127,343
Customer deposits 12,512 6,637
----------- -----------
Net cash used in operating activities (1,357,576) (329,203)
----------- -----------
Cash flows from investing activities:
Purchase of equipment -- (29,178)
----------- -----------
Cash flows from financing activities
Proceeds from convertible notes payable 3,600,000 --
Payment on convertible notes payable (900,000) --
Principal received on stockholders' notes receivable 20,000 506,499
Proceeds from issuance of preferred stock 165 --
Deposit refund 657 1,292
Payments on notes payable - bank (4,447) (8,641)
Payments on capital lease obligations (1,519) (41,579)
Increase deposits on credit cards (38) (3,502)
Proceeds from bank note payable -- 6,325
----------- -----------
Net cash provided by financing activities 2,714,818 460,394
----------- -----------
Net increase in cash 1,357,242 102,013
Cash at beginning of the period 80,359 53,059
----------- -----------
Cash at end of the period $ 1,437,601 $ 155,072
=========== ===========
The accompanying notes are an integral part of these condensed financial statements.
8
INSYNQ, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
February 28, 2005
(unaudited)
Note 1 - Business and Overview
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 have decided to outsource all or part of their information
technology requirements. Customers pay a monthly fee for services and connect to
the Company's server farm through a broadband internet-enabled workstation.
On July 16, 2004, the Board of Directors approved a 1 for 50 reverse split of
the Company's authorized common stock. The date of record and the effective date
was August 2, 2004. Par value remained unchanged at $.001 per share. In
conjunction with the reverse split, the Company reduced the number of authorized
shares from 500,000,000 to 10,000,000 and the reverse split reduced the number
of outstanding and issued shares of common stock from 445,384,987 shares to
8,907,700 shares. (See also Note 7.)
All shares of common stock and per share amounts in the accompanying condensed
financial statements and notes to the condensed financial statements have been
retroactively restated to reflect this 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 as of May 31,
2004 was derived from the audited financial statements included in the Company's
annual report, Form 10-KSB. These condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto in the
Company's latest Annual Report as found on Form 10-KSB. In the opinion of
management, all adjustments, including normal recurring adjustments necessary to
present fairly the financial position of the Company with respect to the interim
condensed financial statements and the results of its operations for the interim
period ended February 28, 2005, have been included. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
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 service 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 each month. Revenue is
recognized as services are provided and accepted by the customer. 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.
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
9
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.
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 condensed financial instruments.
Stock-Based Compensation
The Company accounts for stock based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 - "Accounting for Stock Issued to Employees"' and the related
interpretations, and complies with the disclosure provisions of SFAS No. 148 - "
Accounting for Stock-Based Compensation". Under APB No. 25, compensation expense
is based on the difference, if any, on the date the number of shares receivable
is determined, between the estimated fair value of our stock and the exercise
price of the options to purchase that stock.
The Company applies the provisions of SFAS No. 123 for stock-based awards to
those entities 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 or net loss.
On February 11, 2005, two officers of the Company were granted a total of
14,000,000 options to purchase shares of common stock at an exercise price
$0.0061 per share, the market price of the Company's common stock at the close
of trading that day. The total value of these grants was $85,400, based on the
Black-Scholes pricing model. The proforma impact for the nine months ended
February 28, 2005 would increase the Company's reported net loss of $2,382,155
to a proforma net loss of $2,467,555. Both the reported and proforma net loss
per share for the nine months ended February 28, 2005 is $0.05 per share. The
options were fully vested upon grant and have an expiration date of ten years
from date of issuance.
There was no proforma impact for the nine months ended February 29, 2004.
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 28, 2005, as their effect would be
anti-dilutive.
Recent Authoritative Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 153, " Exchanges of
Non-Monetary Assets, an Amendment of Accounting Principles Board ("APB") No.
29". This statement amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". Earlier guidance had been based on the principle that exchanges
of nonmonetary assets should be based on the fair value of the assets exchanged
and APB No. 29 included certain exceptions to this principle. However, FASB 153
eliminated the specific exceptions for nonmonetary exchanges with a general
exception rule for all exchanges of nonmonetary assets that do not have
commercial and economic substance. A nonmonetary exchange has commercial
substance
10
only if the future cash flows of the entity is expected to change significantly
as a result of the exchange. This statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The
implementation of this SFAS No. 153 is not expected to have a material impact on
the Company's financial statement presentation or its disclosures.
In December 2004, the FASB issued a revised SFAS No. 123, Accounting for
Stock-Based Compensation, which supersedes APB opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. This
statement requires a public entity to recognize and measure the cost of employee
services it receives in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). These costs will
be recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period (usually the
vesting period). This statement also establishes the standards for the
accounting treatment of these share-based payment transactions in which an
entity exchanges its equity instruments for goods or services. It addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This statement
shall be effective the first interim or annual reporting period that begins
after December 15, 2005. Implementation of the revised SFAS No. 123 is not
expected to have a significant effect on the Company's financial statement
presentation or its disclosures.
Note 3 - Going Concern and Management's Plans
The Company's condensed financial statements as of and for the nine months ended
February 28, 2005 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
28, 2005, the Company had a net loss of $2,382,155 and a negative cash flow from
operations of $1,357,576. The Company had a working capital deficit of
$2,661,754 and a stockholders' deficit of $1,914,841 at February 28, 2005. The
condensed financial statements do not include any adjustments that might result
from the ultimate outcome of this uncertainty. The Company's working capital
deficit as of February 28, 2005 may not enable it to meet certain financial
objectives as presently structured.
As of February 28, 2005 and through April 15, 2005, 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 remedy this deficiency by either offering 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.
The rate at which the Company expends its financial resources is variable, may
be accelerated, and will depend on many factors. The Company may need to raise
more capital to finance its future 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 grow sales and secure additional financing.
Note 4 - Related Party Receivables
As of February 28, 2005, the Company has extended $294,992 of unsecured credit
to four 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 a corporate officer,
stockholder and director. The Company provides these two businesses
monthly application hosting services, and other management services
to include co-sharing of selected expenses for promotional
materials, marketing, advertising and seminars. At February 28,
2005, the balance due from these two companies aggregated $101,781,
with an allowance for doubtful accounts of $77,500, and classified
on the balance sheet as an other asset. At May 31, 2004, the balance
due on these accounts aggregated $57,267, with an allowance for
doubtful accounts of $25,000, and classified as a current asset on
the balance sheet.
11
o The third and fourth businesses are partially owned by two
officers/stockholders of the Company. The balances due the Company
at February 28, 2005 and May 31, 2004 aggregated $193,211 and
$51,075, respectively. (See also Note 10)
Note 5 - Accrued Liabilities
Accrued liabilities consist of the following at:
February 28, 2005 May 31, 2004
-------------------- ---------------
Interest $ 920,634 $ 671,508
Licenses, consulting and other 594,278 668,074
Taxes
Penalties and interest 262,232 357,875
Business 34,444 38,499
Payroll 5,225 338,176
Salaries and benefits 141,244 176,453
--------------- ---------------
$ 1,958,057 $ 2,250,585
=============== ===============
On August 31, 2004, the Internal Revenue Service executed a Conditional
Commitment to Withdraw Notice of Federal Tax Lien because the Company paid the
entire tax deficiency pertaining to the four Federal Tax Lien periods. In
addition, the IRS agreed to abate certain penalties and execute a long-term
workout (payment) schedule for the unabated accrued penalties and interest. (See
also Note 9.)
Note 6 - Convertible Securities
Convertible Debentures
Between June 2001 and March 2003, the Company issued a total of $2,050,000 of
secured convertible debentures, under three separate private financing
transactions with several investor groups. Terms of each of the three private
financing transactions, are essentially the same: the debentures are convertible
into shares of common stock at the lesser of (i) $15 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%). Pursuant to an amendment in June 2004, the due date of the debentures was
extended for an additional two years until June 25, 2006. As of February 28,
2005, the Company owes $1,330,551 on the convertible debentures, and $841,756 of
accrued interest related to the debentures. Accrued interest is included in
accrued liabilities in the accompanying condensed balance sheets.
Warrants were also granted to the investors in conjunction with the convertible
debenture transactions. Investors may exercise each warrant at $12.50 per share.
As of February 28, 2005, 104,000 warrants are issued and unexercised with an
amended expiration period until June 25, 2009.
For the nine months ended February 28, 2005 and February 29, 2004, the Company
recognized as interest expense, discounts on the convertible debentures of $0.00
and $180,180, respectively, which were 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.
As of February 28, 2005, the Company is in default on these securities because
of non-compliance with certain terms and conditions underlying the debentures.
Therefore, these securities are classified as a current liability.
Convertible Notes Payable
On February 28, 2005, the Company entered into a $2,700,000 Securities Purchase
Agreement with four investor groups, who are also holders of the Company's
convertible debentures. Under terms of the agreement, the Company: (a.) issued
four 8% callable secured convertible notes that aggregated $2,700,000, and, (b.)
granted 5,400,000 warrants with an exercise price of $0.007 and are exercisable
from time to time until February 28, 2010.
12
The notes are due three years from the date of issuance, bear interest at 8% per
annum, payable quarterly in cash. No interest will be charged in any month in
which the reported intraday trading price is greater than 125% of the initial
market price ($0.005) or $0.0063 for each trading day of that month. The notes
or portions of these notes are immediately convertible into shares of the
Company's common stock during the term. The conversion price is equal to the
lesser of: (a.) $0.0075, the fixed conversion price, and, (b.) the average of
the lowest three (c.) intraday trading prices during the twenty days immediately
prior to the conversion date discounted by 60%.
The Company recorded a discount on the convertible notes payable totaling
$2,700,000, an amount equal to the fair value of the warrants, as determined by
applying the Black-Scholes pricing model, and the intrinsic value of the
beneficial conversion feature, which is the difference between the conversion
price and the fair market value of the common stock on the date of issuance. The
amount attributable to the beneficial conversion feature was recorded as a
discount on the debt and accretes over a thirty -six month period as interest
expense in accordance with paragraph 19 of Emerging Issues Task Force ("EITF")
No. 00-27.
In the event of default under the terms of these Notes, the investors have the
right to redeem the Notes at 130% of the outstanding principal balance, plus
accrued and unpaid interest, plus default interest and other penalty payments
that may be due. The default interest is 15% per annum. At the option of the
investors, such redemption payments may be made in shares of common stock. If
certain conditions are satisfied, the Company may elect to prepay the Notes
before the scheduled maturity at a premium. The premium ranges from 125% to 150%
of the outstanding principal balance plus accrued and unpaid interest, plus
default interest and other penalty payments due, depending on when the
prepayments occurs.
The Company granted a security interest in all assets to the investors of the
convertible securities.
As a condition of the above financing agreement, the Company paid off the
principal balance of four 12% callable secured convertible notes totaling
$900,000 issued on June 25, 2004, also to the same four investors. In addition
to the $900,000 principal balance paid, the Company paid accrued interest of
$38,292 and a call premium of $281,488.
At the time of issuance, the Company had recorded a discount on the $900,000
convertible notes payable which totaled $741,640, an amount equal to the fair
value of the warrants, (as discussed below), determined by applying the
Black-Scholes pricing model, and the intrinsic value of the beneficial
conversion feature, which is the difference between the conversion price and the
fair market value of the common stock on the date of issuance. The amount
attributable to the beneficial conversion feature was recorded as a discount on
the debt and accreted over a twenty-four month period as interest expense in
accordance with paragraph 19 of Emerging Issues Task Force ("EITF") No. 00-27.
The Company recognized the remaining unamortized portion of the discount of
$488,331 as interest expense in February 2005. For the nine months ended
February 28, 2005, the Company recognized $741,640 as interest expense from the
amortization of this discount.
In conjunction with the issuance of the $900,000 convertible notes payable, the
Company granted the note holders a total of 54,000 warrants to purchase common
stock at an exercise price of $0.05 per share, exercisable through June 25,
2011. These warrants, and the warrants granted on February 28, 2005, have not
been exercised.
Note 7 - Common Stock and Agreements
On July 16, 2004, the Board of Directors approved a 1 for 50 reverse split of
the Company's authorized common stock. The date of record and the effective date
for the split was August 2, 2004. In conjunction with the reverse split, the
Company reduced the number of authorized shares from 500,000,000 to 10,000,000.
Par value remained at $.001 per share. As a result of the reverse split, the
number of outstanding shares of common stock was reduced from 445,384,987 to
8,907,700. Upon the conversion, all resulting fractional shares were rounded up
to the nearest whole share. In addition, the Company cancelled all of the stock
of the shareholders holding nine or less shares of post split stock.
On July 16, 2004, the Board of Directors adopted, by unanimous consent, to
approve the increase in the number of authorized shares of common stock from 10
million to 2 billion shares. On August 2, 2004, the Company received the written
consent in lieu of a meeting of stockholders from stockholders who were entitled
to vote a majority of the common stock and Series A Preferred Stock, which
approved the July 16, 2004 action of the Board of Directors.
13
A privately held company holds approximately 42.6% of the outstanding shares of
common stock at February 28, 2005. This company is a related party to certain
officers and directors the Company.
Consulting Agreements
In October 2004, the Company entered into seven consulting agreements with
independent financial and business advisors, in which the consultants were to
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. Under the terms of the
agreements, the consultants received 21,000,000 shares of common stock from the
Company's 2002 Directors, Officers, and Consultants Stock Option Plan. The stock
was valued at the closing market price of $0.015 per share on the date of the
execution of the agreements. The total value of the services was $315,000: (a.)
$300,000 was recorded as unearned compensation in the stockholders' equity
section and was being ratably amortized over one year, per the terms of six
agreements, and (b.) $15,000 was deemed earned in October 2004.
In December 2004, the Company agreed to accept the return of 10 million shares
of common stock related to three consulting agreements because of contractual
nonperformance. The effective date canceling the issuance of this stock was
December 14, 2004. Accordingly, the Company reversed the unamortized portion
of the original $150,000 consultants' unearned compensation, and reduced: (a.)
the outstanding number of shares of common stock by 10 million shares, (b.)
common stock by $10,000, and (c.) additional paid-in capital by $140,000.
In conjunction with the consulting agreements, four advisors were granted 19
million options to purchase common stock at an exercise price of $.005 per
share, with an exercise period until November 2, 2004. The options were valued
using the Black-Scholes pricing model resulting in a total value of
approximately $215,800, which was recorded as unearned compensation and was to
be amortized over one year, the term of each respective consulting agreement.
The options were exercised on October 4, 2004, and, in conjunction with the
exercise, the Company issued 19,000,000 shares of common stock and received four
promissory notes for a total of $95,000. The notes were unsecured, did not bear
interest and were due on February 28, 2005.
On February 10, 2005, the Company received $20,000 in full consideration of the
consultants' $95,000 notes receivable. As of the date of the cash receipt, the
Company wrote off the remaining $75,000 to bad debts because the balance was
deemed uncollectible.
In January 2005, the Company entered into an agreement with an independent
consultant. Under the terms of the agreement, the consultant received 15,000,000
shares of common stock from the Company's 2002 Directors, Officers, and
Consultants Stock Option Plan. The stock was valued at the closing market price
of $0.005 per share on the date of the execution of the agreement. The total
value of the services was $75,000; (a.) $75,000 was recorded as unearned
compensation in the stockholders' equity section and was being ratably amortized
over six months, the term of the agreement, and (b.) $12,500 was deemed earned
in the third quarter ended February 28, 2005.
Prepaid Licenses and a Non-Exclusive Master License Application Hosting
Agreement
On October 4, 2004, the Board of Directors authorized the issuance of 40,000,000
shares of common stock to Aptus Corp, a Company partially owned by two officers
of Insynq, Inc. for 1,500 licenses to either resell and/or rent certain
proprietary accounting and management software owned by Aptus Corp. The fair
value of this transaction was $600,000 and is classified as prepaid licenses on
the condensed balance sheets. The stock was valued at the market price, $0.015
per share, of the Company's common stock at the close of business on October 4,
2004. (See also Note 10.)
In addition to the purchase of the licenses, Aptus granted Insynq a
non-exclusive Master License Application Hosting Agreement to host this
internet-based accounting software program. (See also Note 10.)
Note 8 - Series A Non-Participating Preferred Stock
14
The Board approved and authorized in its July 16, 2004 meeting, the designation
of 1,000,000 shares of "Series A, Non-Participating Preferred Stock" as part of
the 10,000,000 preferred shares authorized. The par value of this series of
preferred stock is $0.001 per share, with each share having 1,000 votes on all
matters upon which the shareholders are entitled to vote. The Board then issued
165,000 shares of this stock in equal amounts to its three corporate officers
for cash of $165.
Note 9 - Other Disclosures
Gain on Forgiveness and Settlements of Debts
For the nine months ended February 28, 2005 the Company recognized a gain of
$131,602 for the forgiveness of: (a.) $111,600 in penalties due the IRS (see
also Note 5), and (b.) $20,002 due certain creditors.
For the nine months ended February 29, 2004, the Company recognized a gain of
$1,899,330 from creditor settlements.
Non-cash Investing and Financing
Non-cash investing and financing activities included the following for the nine
months ended:
February 28, February 29,
2005 2004
------------- --------------
Record discount on convertible notes payable issued with warrants $ 3,441,640 $ --
Issuance of common stock for prepaid licenses 600,000 --
Issuance of common stock for notes receivable in conjunction with
exercise of options 95,000 --
Issuance of common stock and options recorded as unearned
compensation in conjunction with services to be rendered by
non-employees 590,800 --
Conversion of debentures into common stock -- 507,005
Promissory notes and interest receivable due from officers
exchanged for common stock held by officers -- 106,515
Conversion of accrued liabilities and accounts payable into common
stock -- 41,800
Principal written down on notes receivable -- 40,000
Reclassify note payable to accrued liability -- 4,000
Notes receivable issued for options exercised -- 636,111
Note and interest payable converted into common stock -- 650,000
Supplemental Cash Flows Information
Cash paid for interest for the nine months ended February 28, 2005 and February
29, 2004 was $74,312 and $3,150, respectively.
Note 10 - Subsequent Events
On March 24, 2005, the Company paid $95,000 in the full and complete
satisfaction of an April 2002, Summary Court Judgment entered against the
Company for a breach of a lease agreement. The Company had accrued approximately
$124,000 of expense on this judgment in 2002, which is included in accrued
liabilities as of February 28, 2005.
As of March 31, 2005, the Company has advanced funds of approximately $266,800
to a related company, Aptus Corp. (Aptus). On April 10, 2005, the Company
executed a letter of intent to acquire, for a credit memo equal to the
15
advances, all rights and titles from Aptus for a suite of enterprise-type
accounting software applications and quoting software application. (See also
Note 4.)
On October 4, 2004, the Company had entered into a Master Licensing Agreement,
under the terms of which, the Company purchased 1,500 licenses of MyBooks
Professional for 40,000,000 shares of the Company's common stock with a value of
$0.015 per share. As part of the letter of intent, both parties agreed that
Aptus shall return the 40,000,000 shares of the Company's common stock in return
for the cancellation of the 1,500 licenses sold to the Company by Aptus. As a
result of this rescission, the Company will reduce its number of outstanding
shares of common stock by 40,000,000 shares and reduce the Company's current
assets by $600,000. (See also Note 7.)
On April 10, 2005, the Company entered into memorandum of understanding with a
second related Company whereby the intentions of the parties are:
a. Insynq will assist in the comprehensive development and
integration of the related party's accounting and operational
support systems and associated public website services,
b. Insynq will deposit up to $100,000 to fund such development,
and
c. In consideration of these efforts, Insynq will be awarded a
long-term (five-year) application management services
agreement for an anticipated fee rate of $7,000 per month.
As of March 31, 2005, the Company has advanced approximately $91,900 to this
related party in support of the development and integration services. (See also
Note 4.)
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, 2004 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 of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended. 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,
2004 Annual Report on Form 10-KSB.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Our discussion and analysis of our financial condition and results of
operations are based upon our
16
condensed financial statements as of and for the three and nine months ended
February 28, 2005. 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
assumptions or conditions, and any differences could be material.
The condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) and, in
the opinion of management, includes all adjustments necessary for a fair
presentation of the results of operations, financial position, and cash flows
for the periods presented.
A summary of the significant accounting policies which we believe are
the most critical to aid in fully understanding and evaluating the accompanying
condensed financial statements include the following:
REVENUE RECOGNITION
Our principal source of revenue is generated from application hosting,
managed software and related types of services. Application hosting and managed
services revenues are generated through a variety of contractual arrangements
directly with customers. We sell our services directly to customers through
annual service subscriptions or month-to-month subscriptions. Subscription
arrangements include monthly subscriber fees, user setup fees and a 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 for that month of service. 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 condensed balance sheets approximate their fair
values due to their relatively short-term nature. It is our 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.
STOCK-BASED COMPENSATION
We account for stock based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 - "Accounting for Stock Issued to Employees"' and the related
interpretations, and complies with the disclosure provisions of SFAS No. 148 - "
Accounting for Stock Based Compensation". Under APB No. 25, compensation expense
is based on the difference, if any, on the date the number of shares receivable
is determined, between the estimated fair value of our stock and the exercise
price of the options to purchase that stock.
We apply the provisions of SFAS No. 123 for stock-based awards to those
entities other than our
17
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
its net income or net loss.
On February 11, 2005, two of our officers were each granted options to
purchase 7, 000,000 shares of common stock at an exercise price $0.0061 per
share, the market price of the Company's stock at the close of trading that day.
The total value of these grants was $85,400, based on the Black-Scholes pricing
model. The proforma impact for the nine months ended February 28, 2005 would
have increased our reported net loss of $2,382,155 to a proforma net loss of
$2,467,555. Both the reported and proforma net loss per share for the nine
months ended February 28, 2005 was $0.05 per share.
There was no proforma impact for the nine months ended February 29,
2004.
LOSS PER COMMON SHARE
We compute basic and diluted loss per common share by dividing the net
loss by the weighted average number of common shares outstanding available to
common stockholders during the respective reporting 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 28, 2005
because their effect would be anti-dilutive.
RECENT AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 153, " Exchanges
of Non-Monetary Assets, an Amendment of APB No. 29". This Statement amends APB
Opinion No. 29, "Accounting for Nonmonetary Transactions". Earlier guidance had
been based on the principle that exchanges of nonmonetary assets should be based
on the fair value of the assets exchanged and APB No. 29 included certain
exceptions to this principle. However, FASB 153 eliminated the specific
exceptions for nonmonetary exchanges with a general exception for all exchanges
of nonmonetary assets that do not have commercial and economic substance. A
nonmonetary exchange has commercial substance only if the future cash flows of
our company is expected to change significantly as a result of the exchange.
This Statement is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005. The implementation of this SFAS No. 153
is not expected to have a material impact on our financial statement
presentation or our disclosures.
In December 2004, the FASB issued a revised SFAS No. 123, Accounting
for Stock-Based Compensation. This statement supersedes Accounting Principles
Board (APB) opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. This statement requires a public entity to
recognize and measure the cost of employee services it receives in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). These costs will be recognized over the period during
which an employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). This statement also
establishes the standards for the accounting treatment of these share-based
payment transactions in which we exchange equity instruments for these goods or
services It addresses transactions in which we would incur liabilities in
exchange for goods or services that are based on the fair value of the our
equity instruments or that which we may settle by the issuance of our equity
instruments. This statement shall be effective as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005.
Implementation of the revisions is not expected to have a significant effect on
our financial statement presentation or our disclosures.
OVERVIEW
On July 16, 2004, our Board of Directors approved a 50 for 1 reverse
split of our authorized common stock. Accordingly, the date of record and the
effective date was August 2, 2004. Par value remained unchanged at $.001 per
share. The effect of the reverse split reduced the number of authorized shares
from 500,000,000 to 10,000,000 and reduced the number of outstanding and issued
shares of common stock from 445,384,987 at August 2, 2004
18
shares to 8,907,700. Upon the conversion, all resulting fractional shares were
rounded up to nearest whole share. In addition, we cancelled all of the
shareholders holding nine or less shares of post-split stock.
For comparative purposes, all shares of common stock and per share
amounts in the Form 10-QSB, and the accompanying condensed financial statements
and notes to financial statements have been retroactively restated to reflect
this August 2, 2004 transaction.
In addition, our Board approved in its July 16, 2004 meeting, the
authorization of 1,000,000 shares of its 10,000,000 shares of preferred stock to
be specifically designated as, "Series A Non-Participating Preferred Stock",
with a par value at $0.001 per share. Also, each share has 1,000 votes on all
matters upon which the shareholders are entitled to vote. Our Board then issued
165,000 shares of this stock in equal amounts to its three corporate officers.
As a result of the reverse split on August 2, 2004 and the July 16, 2004
issuance of the 165,000 shares of Series A, Non-Participating Preferred Stock,
our three corporate officers have the ability to control the outcome of any item
coming to a vote before the stockholders.
On July 16, 2004, the Board of Directors adopted, by unanimous consent,
to approve the increase of the number of authorized shares of common stock from
10 million to 2 billion shares. On August 2, 2004, we received the written
consent in lieu of a meeting of stockholders from stockholders who were entitled
to vote a majority of the common stock and Series A Preferred Stock, which
approved the July 16, 2004 action of the Board of Directors.
OUR BUSINESS
We manage and host software applications and data, Web hosting
services, Web-based local and wide area networks, and access to Internet
marketing assistance and other related equipment and services. These products
and services are offered as components or as an integrated whole, either sold
directly or on a fee or a subscription basis.
We target small and medium enterprises and the high-end segment of the
small office and home office market for the sale of hardware and hosted software
and access to internet-related services. We provide 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.
Our complete IQ Delivery System and Internet Utility Service include
managed network and application services, which can span from a customer's
keyboard to the data center. The service can also include internet-access
provided by us or by a user selected telecommunications partner/provider. The
final pieces of the system are the two secured data centers, which are located
in Everett and Bellingham, Washington. These facilities, with redundant power,
bandwidth and cooling, house our servers, routers and other critical equipment.
RESULTS OF OPERATIONS
We reported a net loss of $1,562,380 and $824,412 for the quarters ended
February 28, 2005 and February 29, 2004, respectively. The current quarter's net
loss increased by approximately 89.5% over the same period one year ago. The
increase was attributed primarily to two charges associated with paying off our
$900,000 notes payable on February 28, 2005. The these two charges are described
as follows:
a. Recognizing an unamortized discount of $488,331 as interest
expense, and
b. Recording a call premium of $281,488 for paying off the notes
prior to maturity. The premium was calculated at 130% of the
principal and accrued interest.
For the nine-month periods ended February 28, 2005 and February 29, 2004
we reported net losses of $2,382,155 and $763,197, respectively. The net losses
are significantly different because in fiscal 2004 we favorably settled over
$1,899,000 in creditor debt, whereas in fiscal 2005 we only settled
approximately $131,600. Had we not been able to settle these obligations, we
estimate our adjusted net loss for these nine-month periods ended February 28,
2005 and February 29, 2004 may have been approximately $2.51 million and $2.67
million, respectively, a more comparative results of our operations.
19
For the three months ended February 28, 2005, net revenues decreased
approximately $52,500 or 16.5% over the same period one year ago. Although we
are reporting a revenue decrease for the current quarter, this decrease can be
directly attributable to the loss of a few enterprise customers. For the nine
months ended February 28, 2005 our net revenues decreased by approximately
$45,500 or 5.0% over the same period one year ago. Again, the decrease is
primarily a result of the impact of losing these enterprise customers. Although
we are reporting a decrease in net revenues for the current reporting periods,
our seat count for the nine months ended February 28, 2005 increased 12.6% over
the same period one year ago. Regardless of the increase in the number of seats
for the first three quarters of fiscal 2005 over fiscal 2004, we were not able
to generate new revenues equal to the loss of the customer's who had cancelled
because of the pricing structure per seat. In order to attract new customers, we
have granted larger than planned discounts during this current period. In
addition, those few enterprise customers who had cancelled generated
disproportionately higher revenues per seat, and, generally without discounts.
We believe, however, 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.
We have intensified our marketing and sales efforts via the Internet,
enhanced and improved our website and now offer even more professional products.
Management believes it will 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 will offer short-term discounts and, for
limited periods, free product usage through various promotional offerings.
Discounts for the three and nine-months ended February 28, 2005 were $26,246 and
$73,932, respectively, or 8.9% and 7.9% of gross revenues. For the same periods
one year ago, we recorded discounts of $24,131 and $68,945 for the three and
nine months ended February 29, 2004, respectively, or 7.0% and 7.1% of gross
revenues. Since we grew the number of seats by 12.6% over the same nine-month
period one year ago, we had expected our discounts to also increase because of
offering new customers an incentive to try our hosted products. For this
nine-month comparable period our discounts increased approximately 7.2%.
In the beginning of our existence, 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, easily
assessable for a predictable monthly fee, new customers are attracted to our
services and products for what we can do to improve their business environment,
and not just by what we charge.
We believe, due to our marketing, our improved website and our links to
other partner websites, we have increased consumer understanding and awareness
of our "host on demand" technology. Thereby, resulting in increased sales. Our
main priorities relating to the generation of new customers and improved revenue
are:
o Increase market awareness of our products and services through our
strategic marketing plan,
o 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 of new customers as reported upon this past period.
Even though we have experienced a loss of revenue this fiscal period, our seat
count is favorably up and new customers are continually added. The decline in
fiscal 2005 revenues, as compared to prior periods revenues, should not be
considered necessarily indicative or interpolated as the trend to forecast the
operating results for fiscal year 2005.
COSTS AND EXPENSES
During the quarter ended February 28, 2005, we incurred direct costs of
services totaling $157,823 or 59.2% of revenues as compared to $227,407 or 71.3%
of revenues for the same period one year ago. For the nine months ended February
28, 2005 we incurred direct costs of services totaling $554,671 or 64.2% of
revenues as compared to $633,531 or 69.7% of revenues for the same period one
year ago.
20
The net decrease, or approximately $78,860, as compared between the nine
months ended February 28, 2005 and February 29, 2004 resulted primarily from:
o A decrease in depreciation expense of $52,000. This change is
due to the fact that the estimated economic useful lives of
most personal property have expired.
o A decrease in technical and customer service salaries of
approximately $38,500. Compared to the same nine month period
one year ago, we are down effectively one and one-half
full-time equivalent employees.
o A decrease in our co-location costs of approximately $26,700.
This decrease is a result of consolidating our co-location
expenses with only one provider for all of 2005, whereas in
2004, we had two providers, which substantially increased our
overhead expenses.
o A decrease in commission expense of $17,600. The sales
commission program was suspended from April 1, 2004 through
November 30, 2004 in order to preserve working capital.
o A reduction in the use of outside/independent contractors of
approximately $7,700.
o An increase of in licensing costs of $14,800. Licensing
increased over 2004 because of the net increase number (1,361)
of billed seats we are currently hosting.
o An increase of $50,700 in software and project costs. This
increase is due to expensing unsold, prepaid licenses that
expired in fiscal 2005, and the other costs associated with
the completion of special project. o An overall net decrease
in all other direct expenses was approximately $1,860.
Selling, general and administrative expenses were $1,448,408 and
$2,493,004 for the nine months ended February 28, 2005 and February 29, 2004,
respectively. The expenses were 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 non-employee
services, amortization of unearned compensation and accrued officer
compensation.
A net decrease of approximately $1,044,600 occurred between the comparable
periods ended February 2005 and 2004 and can be quantified as follows:
o Professional, accounting and consulting fees decreased by
approximately $1,277,700. Primarily the change occurred in the
elimination and reduction of independent business consulting
and advisory expenses, of which, compensation was generally
recognized in the form of common stock.
o Legal fees increased approximately $94,600. This increase can
be correlated directly to the execution of two security
purchase agreements during this current period, of which the
fees were approximately $81,700.
o Officer compensation decreased by approximately $77,900. This
reduction is a result of amending each officer's compensation
agreement whereby the base salaries were reduced over the
prior year's base. This modification was made effective in
February 2004.
o Bad debts increased by approximately $158,000. Of significance
to this change is the decision by our management to increase
the allowance for doubtful accounts of certain related party
receivables this nine-month period by $52,500 and increase the
allowance for doubtful trade accounts receivable by $10,000.
o Marketing, advertising and sales expenses increased an overall
$51,300. This increase can be directly related to the
elimination of a program whereby certain marketing and sales
staff costs were shared with a related party.
o A net increase of $7,100 represents all other expenses in this
category.
Our total operating expenses for the three and nine months ended February
28, 2005 decreased by approximately 20.6 % and 35.9% respectively, over the same
comparable periods one year ago. For each period reported, the results of our
total operating expenses would be very comparable if we eliminate the business
and advisory consulting fees, and, apply better control over the collections of
our trade accounts receivable.
21
Under the circumstances, we believe our costs are under control, as planned,
and, within the range of management's forecasts.
The primary components of our interest expense are:
Three months ended: Nine months ended:
------------------------------------- ----------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
----------------- ---------------- ------------------- ----------------
o Amortization of discounts on
convertible securities $ 583,503 $ 25,747 $ 744,107 $ 180,180
o Interest on debentures, notes
and other 123,569 63,265 357,155 275,537
-------------- ------------ -------------- -------------
Totals $ 707,072 $ 89,012 $ 1,101,262 $ 455,717
============== ============ ============== =============
Non-cash interest $ 706,772 $ 87,788 $ 1,064,022 $ 452,567
Other interest 300 1,224 37,240 3,150
-------------- ------------ -------------- -------------
Totals $ 707,072 $ 89,012 $ 1,101,262 $ 455,717
============== ============ ============== =============
LIQUIDITY AND CAPITAL RESOURCES
Our condensed financial statements as of February 28, 2005 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-month ended February 28, 2005, we had a net loss of
$2,382,155 and negative cash flows from operations of $1,357,576, and at
February 28, 2005 we had a working capital deficit of $2,661,754 and a
stockholders' deficit of $1,914,841. Our working capital deficit at February 28,
2005 may not enable us to meet certain financial objectives as presently
structured.
We had a cash balance of $1,437,601 at February 28, 2005. We finance our
operations and capital requirements primarily from private debt and equity
offerings. On June 25, 2004 and February 28, 2005, we borrowed $900,000 and
$2,700,000, respectively, in the form of convertible notes payable, from the
same four entities that are also the holders of our convertible debentures. In
August 2004, we used $340,000 of these funds to settle our tax deficiency with
the Internal Revenue Service and negotiated an abatement of certain penalties
and executed a long-term workout for the unabated accrued penalties and
interest. We paid off the $900,000 loan, plus the related accrued interest,
$38,292, and a 130% call premium, $281,488, with the net proceeds derived from
the issuance of the $2,700,000 convertible notes payable. On March 24, 2005, we
paid $95,000 in the full and complete settlement of an April 2002 Summary Court
Judgment in which it was determined that we were in breach of a long-term real
estate lease agreement.
As of February 28, 2005, we had $4,372,639 in current liabilities and
$2,700,000 in long-term liabilities.
On October 2004, we entered into seven 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 our management. Under the terms of the agreements,
the consultants received 21,000,000 shares of common stock from the 2002
Directors, Officers, and Consultants Stock Option Plan. The stock was valued at
the closing market price of $0.015 per share on the date of the execution of the
agreements. The total value of the services was $315,000.
In conjunction with the consulting agreements, four advisors were granted
19 million options to purchase common stock at an exercise price of $.005 per
share, with an exercise period until November 2, 2004. The options were valued
using the Black-Scholes pricing model resulting in a total value of
approximately $215,800, which was recorded as unearned compensation and was to
be amortized over one year, the term of each respective consulting agreement.
The options were exercised on October 4, 2004, and, in conjunction with the
exercise, we issued 19,000,000 shares of common stock and received four
promissory notes for a total of $95,000. The notes were unsecured, did not bear
interest and were due on February 28, 2005.
In December 2004, we agreed to accept the return of 10 million shares of
common stock related to three
22
consulting agreements because of contractual nonperformance. The effective date
of canceling the issuance of this stock was December 14, 2004. Accordingly, we
reversed the unamortized portion of the original $150,000 of unearned
compensation associated with consultants, and reduced: (a.) the outstanding
number of shares of common stock by 10 million shares, (b.) common stock by
$10,000, and (c.) paid-in capital by $140,000.
On February 10, 2005, we received $20,000 in full consideration
of the consultants' $95,000 notes receivable. As of the date of the cash
receipt, we wrote off the remaining $75,000 to bad debts because the
balance was deemed uncollectible.
In January 2005, we entered into an agreement with an independent
consultant. Under the terms of the agreement, the consultant received 15,000,000
shares of common stock from our 2002 Directors, Officers, and
Consultants Stock Option Plan. The stock was valued at the closing market price
of $0.005 per share on the date of the execution of the agreement. The total
value of the services was $75,000; (a.) $75,000 was recorded as unearned
compensation in the stockholders' equity section and is being ratably amortized
over six months, the term of the agreement, and (b.) $12,500 was deemed earned
in the third quarter ended February 28, 2005.
On October 4, 2004, the Board of Directors authorized the issuance of
40,000,000 shares of common stock to Aptus Corp, a Company partially owned by
two of our officers, for the purchase of 1,500 licenses, held for resale, of
"MyBooks Professional", a business accounting software application. In addition,
Aptus granted to us the exclusive right to host this internet-based accounting
software program. The stock was valued at $600,000 and was based on the market
price ($0.015 per share) of our common stock at the close of business on October
4, 2004.
As of March 31, 2005, we have advanced funds of approximately $266,800 to
a related company, Aptus Corp (Aptus). On April 10, 2005, we executed a letter
of intent to acquire, for a credit memo equal to the advances, all rights and
titles from Aptus for a suite of enterprise-type accounting software
applications and quoting software application.
On October 4, 2004, we entered into a Master Licensing Agreement, under
the terms of which, we purchased 1,500 license of MyBooks Profession for
40,000,000 shares of our common stock with a value of $0.15 per share. As part
of the letter of intent, both parties agreed that Aptus shall return the
40,000,000 shares of our common stock in return for the cancellation of 1,500
licenses sold to us by Aptus.
On April 10, 2005, we entered into a memorandum of understanding with a
second related company, Gotaplay Interactive, Inc. (Gotaplay) whereby the
intentions of the two related parties are:
a. Have us assist Gotaplay in the development and integration of its
(i.) accounting and operational support systems, and (ii.)
associated website services,
b. We will advance up to $100,000 to fund such development, and
c. In consideration of these efforts, Gotaplay will award us a
long-term (five-year) application management services agreement for
an anticipated monthly base rate of $7,000.
We have advanced approximately $91,900 as of March 31, 2005 to this
related party in support of the ongoing development and integration services.
Convertible Debentures
Between June 2001 and March 2003, we sold to four investor
groups a total $2,050,000 in the form of three private financing transactions
for 12% secured convertible debentures. At various times, we have been in
default on these instruments and, accordingly, have classified the balances due
on these debentures as a current liability. However, on June 25, 2004, we were
able to negotiate an extension of the past due maturity dates for an additional
two years, until June 25, 2006. However, because of our non-compliance with
certain provisions of these securities, we have classified the entire balance of
$1,330,551 as a current liability on our condensed balance sheets. As of
February 28, 2005, we have accrued interest of approximately $842,000 due the
holders of these debentures.
23
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) $15.00 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 60%. Interest accrues at 12% and default
rate of interest is 15%.
The convertible debentures also carry attached warrants that allow the
investors to exercise each warrant at $12.50 per share. A total of 104,000
warrants have been issued with an expiration date of June 25, 2009.
Convertible Notes Payable
On February 28, 2005, we entered into a $2,700,000 Securities Purchase
Agreement with four investor groups, who are also holders of our convertible
debentures. Under terms of the agreement, we: (a.) issued four 8% callable
secured convertible notes that aggregated $2,700,000, and, (b.) granted
5,400,000 warrants with an exercise price of $0.007 and are exercisable from
time to time until February 28, 2010.
The notes are due three years form the date of issuance, bear interest
at 8% per annum, payable quarterly in cash. No interest will be charged in any
month in which the reported intraday trading price is greater than 125% of the
initial market price ($0.005) or $0.0063 for each trading day of that month. The
notes or portions of these notes are immediately convertible into shares of our
common stock during the term. The conversion price is equal to the lesser of:
(a.) $0.0075, the fixed conversion price, and, (b.) the average of the lowest
three (c.) intraday trading prices during the twenty days immediately prior to
the conversion date discounted by 60%.
We also recorded a discount on the convertible notes payable totaling
$2,700,000, an amount equal to the fair value of the warrants, as determined by
applying the Black-Scholes pricing model, and the intrinsic value of the
beneficial conversion feature, which is the difference between the conversion
price and the fair market value of the common stock on the date of issuance. The
amount attributable to the beneficial conversion feature was recorded as a
discount on the debt and accretes over a thirty -six month period as interest
expense in accordance with paragraph 19 of Emerging Issues Task Force ("EITF")
No. 00-27.
In the event of default under the terms of these Notes, the investors
have the right to redeem the Notes at 130% of the outstanding principal balance,
plus accrued and unpaid interest, plus default interest and other penalty
payments that may be due. The default interest is at 15% per annum, if any
amounts due under the Notes are not paid when due. At the option of the
investors, such redemption payments may be made in shares of common stock. If
certain conditions are satisfied, we may elect to prepay the Notes before the
scheduled maturity at a premium. The premium ranges from 125% to 150% of the
outstanding principal balance plus accrued and unpaid interest, plus default
interest and other penalty payments due, depending on when the prepayments
occur.
We have granted a security interest in all assets to the investors of
the convertible securities.
As a condition of the above financing agreement, we paid off the
principal balance of four 12% callable secured convertible notes totaling
$900,000 issued on June 25, 2004, also to the same four investors. In addition
to the $900,000 principal balance paid, we paid accrued interest of $38,292 and
a call premium of $281,488.
At the date of issuance, we had recorded a discount on the $900,000
convertible notes payable which totaled $741,640, an amount equal to the fair
value of the warrants (as discussed below), determined by applying the
Black-Scholes pricing model, and the intrinsic value of the beneficial
conversion feature, which is the difference between the conversion price and the
fair market value of the common stock on the date of issuance. The amount
attributable to the beneficial conversion feature was recorded as a discount on
the debt and accreted over a twenty-four month period as interest expense in
accordance with paragraph 19 of Emerging Issues Task Force ("EITF") No. 00-27.
We charged the remaining unamortized discount of $488,331 as interest expense in
February 2005. For the nine months ended February 28, 2005, we recognized
$741,640 as interest expense from the amortization of this discount.
In conjunction with the issuance of the $900,000 convertible notes
payable, we granted the note holders a total of 54,000 warrants to
purchase common stock at an exercise price of $0.05 per share, exercisable
through June 25, 2011. These warrants, and the warrants granted on February 28,
2005, have not been exercised.
24
The conversion price of the convertible securities and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the investor's position. We have also granted
the above holders of our convertible securities a security interest in all our
assets. If we should default under any of the terms of our convertible
securities, the outstanding principal balance on the convertible debentures and
convertible notes is due, plus the accrued interest. The fair market values of
our warrants are estimated on the grant date using the Black-Scholes option
pricing method as required under SFAS 123. As of the date of this report, no
warrant granted in conjunction with the above convertible securities has been
exercised.
As of April 15, 2005, 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.
Our continuation as a going concern is dependent on our ability to grow
revenues, 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 investors prohibit us from entering into any financial
arrangement, which would involve the issuance of common stock for a period of
two years without offering a right of first refusal to the debenture investors.
Moreover, our ability to raise capital would also be difficult because our
convertible securities have floating conversion features which, when converted,
would cause purchasers of our common stock to experience a substantial dilution
of their investment.
We currently have no material commitments for capital requirements. If
we were forced to purchase new equipment to replace the equipment we currently
lease, any new leases would constitute a material capital commitment; however,
we are currently unable to quantify such amounts. If this occurs, we will
attempt to raise the necessary finances to make such purchases, but there is no
assurance that we will be able to do so. Without the ability to quantify these
amounts, we nonetheless believe that it would have a material impact on our
business and our ability to maintain our operations.
We have developed a brand of business solutions called e-Accounting,
which has been designed to assist the accounting professional manage and expand
their business. Our e-Accounting Center portal is located at www.cpaasp.com. 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, such as QuickBooks, in our secure data centers
for accounting professional firms throughout the country. By centrally hosting
the application and data in our data centers, we give the professional secure
central access remotely to their customers' data. This gives the accounting
professional the ability to manage more customers with fewer staff, thereby, we
believe, generating greater profitability for their accounting or bookkeeping
firm.
We also intend to target regional Internet service providers and
telecommunication companies and create similar product offerings for them. We
would gain access to their customer base to sell our products and services, and
depending on their relative size, our services could then be private labeled and
re-sold through their own sales infrastructure.
Other services 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 complement 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
25
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 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 holders of our securities. If we cannot obtain such financings on terms
acceptable to us, our ability to fund our planned business expansion and to fund
our on-going operations will be materially adversely affected. If we incur debt,
the risks associated with our business and with owning our common stock could
increase. If we raise capital through the sale of equity securities, the
percentage ownership of our stockholders will be diluted. In addition, any new
equity securities may have rights, preferences, or privileges senior to those of
our common stock.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-14(c) and Rule 15d-14(c) of the Exchange Act) designed to ensure that
information required to be disclosed in the reports of the Company filed under
the Exchange Act is recorded, processed, summarized, and reported within the
required time periods. The Company's Chief Executive Officer and 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 28, 2005, we entered into a $2.700,000 Securities Purchase
Agreement with four investor groups, who are also holders of our convertible
debentures. Under terms of the agreement, we: (a.) issued four 8% callable
secured convertible notes that aggregated $2,700,000, and, (b.) granted
5,400,000 warrants with an exercise price of $0.007 and are exercisable from
time to time until February 28, 2010.
The notes are due three years form the date of issuance, bear interest
at 8% per annum, payable quarterly in cash. No interest will be charged in any
month in which the reported intraday trading price is greater than 125% of the
initial market price ($0.005) or $0.0063 for each trading day of that month. The
notes or portions of these notes are immediately convertible into shares of our
common stock during the term. The conversion price is equal to the lesser of:
(a.) $0.0075, the fixed conversion price, and, (b.) the average of the lowest
three (c.) intraday trading prices during the twenty days immediately prior to
the conversion date discounted by 60%.
In the event of default under the terms of these Notes, the investors
have the right to redeem the Notes at
26
130% of the outstanding principal balance, plus accrued and unpaid interest,
plus default interest and other penalty payments that may be due. The default
interest is at 15% per annum, if any amounts due under the Notes are not paid
when due. At the option of the investors, such redemption payments may be made
in shares of common stock. If certain conditions are satisfied, we may elect to
prepay the Notes before the scheduled maturity at a premium. The premium ranges
from 125% to 150% of the outstanding principal balance plus accrued and unpaid
interest, plus default interest and other penalty payments due, depending on
when the prepayments occur.
We have granted a security interest in all assets to the investors of
the convertible securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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
- ----------------- -------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------
10.1* Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Jon Pearman.
- -------------------------------------------------------------------------------------------------------------
10.2* Note Payable dated October 4, 2004 between Insynq, Inc. and Jon Pearman.
- -------------------------------------------------------------------------------------------------------------
10.3* Cancellation Letter dated December 14, 2004 between Insynq, Inc. and Jon Pearman.
- ----------------- -------------------------------------------------------------------------------------------
10.3a* Schedule C to Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Jon
Pearman.
- -------------------------------------------------------------------------------------------------------------
10.4* Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Harvey Levin.
- -------------------------------------------------------------------------------------------------------------
10.5* Note Payable dated October 4, 2004 between Insynq, Inc. and Harvey Levin.
- -------------------------------------------------------------------------------------------------------------
10.6* Cancellation Letter dated December 14, 2004 between Insynq, Inc. and Harvey Levin.
- -------------------------------------------------------------------------------------------------------------
10.6a* Schedule C to consulting Agreement dated October 4, 2004 between Insynq, Inc. and Harvey
Levin.
- -------------------------------------------------------------------------------------------------------------
10.7* Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Lisa Fincher.
- -------------------------------------------------------------------------------------------------------------
10.8* Note Payable dated october 4, 2004 between Insynq, Inc. and Lisa Fincher.
- -------------------------------------------------------------------------------------------------------------
10.9 Cancellation Letter dated December 14, 2004 between Insynq, Inc. and Lisa Fincher.
- -------------------------------------------------------------------------------------------------------------
10.9a* Schedule C to Consuslting Agreement dated october 4, 2004 between Insynq, Inc. and Lisa
Fincher.
- -------------------------------------------------------------------------------------------------------------
10.10* Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Richard Russotto.
- -------------------------------------------------------------------------------------------------------------
10.11* Not Used
- -------------------------------------------------------------------------------------------------------------
10.12* Cancellation Letter dated December 14, 2004 between Insynq, Inc. and Richard Russotto.
- -------------------------------------------------------------------------------------------------------------
10.13* Consulting Agreement dated October 4, 2004 between Insynq, Inc. and D. Scott Elliott.
- -------------------------------------------------------------------------------------------------------------
10.14* Cancellation Letter dated December 14, 2004 between Insynq, Inc. and D. Scott Elliott.
- -------------------------------------------------------------------------------------------------------------
10.15* Consulting Agreement date October 4, 2004 between Insynq, Inc. and Ted Davis.
- -------------------------------------------------------------------------------------------------------------
27
10.16* Note Payable dated Octboer 4, 2004 between Insynq, Inc. and Ted Davis.
- -------------------------------------------------------------------------------------------------------------
10.17* Cancellation Letter dated December 14, 2004 between Insynq, Inc. and Ted Davis.
- -------------------------------------------------------------------------------------------------------------
10.18* Schedule C to Consulting Agreement dated October 4, 2004 between Insynq, Inc. and Ted Davis.
- --------------------------------------------------------------------------------------------------------------
10.19* Consulting Agreement dated Janaury 10, 2005 between Insynq, Inc. and Cliff Mastricola.
- --------------------------------------------------------------------------------------------------------------
10.20* Securities Purchase Agreement dated February 28, 2005 between Insynq, Inc. and AJW Partners,
LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium Capital
Partners II, LLC.
- --------------------------------------------------------------------------------------------------------------
10.21* Security Agreement dated February 28, 2005 between Insynq, Inc. and AJW Partners,
LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium Capital
Partners II, LLC.
- --------------------------------------------------------------------------------------------------------------
10.22* Intellectual Property Security Agreement dated February 28, 2005 between Insynq, Inc. and
AJW Partners, LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium
Capital Partners II, LLC.
- --------------------------------------------------------------------------------------------------------------
10.23* Guaranty and Pledge Agreement dated February 28, 2005 between Insynq, Inc. and
AJW Partners, LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium
Capital Partners II, LLC.
- ---------------------------------------------------------------------------------------------------------------
10.24* Callable Secured Convertible Note dated February 28, 2005 between Insynq, Inc. and AJW
Offshsore, Ltd.
=--------------------------------------------------------------------------------------------------------------
10.25* Callable Secured Convertible Note dated February 28, 2005 between Insynq, Inc. and AJW
Partners, LLC.
- ---------------------------------------------------------------------------------------------------------------
10.26* Callable Secured Convertible Note dated February 28, 2005 between Insynq, Inc. and AJW
Qualified Partners, LLC.
- ---------------------------------------------------------------------------------------------------------------
10.27* Callable Secured Convertible Note dated February 28, 2005 between Insynq, Inc. and New
Millennium Capital Partners II, LLC.
- ---------------------------------------------------------------------------------------------------------------
10.28* Form of Stock Purchase Warrant dated February 28, 2005 between Insynq, Inc. and
AJW Partners, LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium
Capital Partners II, LLC.
- ---------------------------------------------------------------------------------------------------------------
10.29* Registration Rights Agreement dated February 28, 2005 between Insynq, Inc. and AJW Partners,
LLC., AJW Offshsore, Ltd., AJW Qualified Partners, LLC. and New Millennium Capital Partners
II, LLC.
- ----------------------------------------------------------------------------------------------------------------
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.
- ----------------- --------------------------------------------------------------------------------------------
* Filed herewith
(b) Reports on Form 8-K
1. March 8, 2005
28
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form 10-QSB and has duly caused this Quarterly
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Tacoma, State of Washington, on April 15, 2005.
INSYNQ, INC.
By: /s/ John P. Gorst
John P. Gorst
Chief Executive Officer
By: /s/ M. Carroll Benton
M. Carroll Benton
Chief Administrative Officer,
Principal Accounting Officer and
Principal Financial Officer
29