UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the Period Ended February 28, 2001.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number 0-22814
INSYNQ, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 74-2964608
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1101 Broadway Plaza
Tacoma, Washington 98402
--------------------------------
(Address of Principal Executive Office)(Zip Code)
Telephone Number (253) 284-2000
-------------------------------
(Registrant's telephone number, including area code)
-------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
===============================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value --- 28,616,830 shares as of April 13, 2001
===============================================================================
INSYNQ, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
ITEM PAGE
PART I
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II
2 Changes in Securities and Use of Proceeds 13
5 Other Information 14
6 Exhibits and Reports on Form 8-K 15
- 2 -
===============================================================================
PART I
ITEM I FINANCIAL STATEMENTS
INSYNQ, INC.
(A Development Stage Company)
Balance Sheets
February 28, 2001 May 31, 2000
(unaudited) (restated)
------------ ------------
ASSETS
- ------
CURRENT ASSETS
Cash $ 5,420 $ 106,806
Accounts Receivable, net of allowance
of $25,000 and $1,469 at February 28, 2001
and May 31, 2000, respectively 82,400 63,405
Other Receivables 35,740 16,912
Inventories - 29,512
Prepaid expenses - 29,186
------------ ------------
123,560 245,821
PROPERTY AND EQUIPMENT, net 1,021,929 1,031,675
OTHER ASSETS
Intellectual and other intangible property,
net 59,086 87,824
Deposits 50,330 165,584
------------ ------------
$ 1,254,905 $ 1,530,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,158,515 $ 296,946
Accrued taxes and other liabilities 805,923 183,565
Notes payable 1,087,913 39,470
Current portion of long-term obligations 503,960 166,869
------------ ------------
3,556,311 686,850
ADVANCES FROM STOCKHOLDER - 100,000
CAPITAL LEASE OBLIGATIONS, net of
current portion 32,696 442,087
PUT OPTION OBLIGATIONS 143,000 1,071,785
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value,
10,000,000 shares authorized, no shares
issued or outstanding - -
Common stock, $0.001 par value,
100,000,000 shares authorized, 27,487,716
and 19,620,846 shares issued and outstanding
as of February 28, 2001 and May 31, 2000,
respectively 27,488 19,621
Additional paid-in capital 13,536,479 3,132,903
Unearned compensation and services (590,680) -
Accumulated develop stage deficit (15,450,389) (3,922,342)
------------ ------------
Total stockholders' equity (deficit) (2,477,102) (769,818)
------------ ------------
$ 1,254,905 $ 1,530,904
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
- 3 -
===============================================================================
INSYNQ, INC.
(A Development Stage Company)
Statements of Operations
(unaudited)
Cumulative results
Three months ended Nine months ended of operations
February 28, February 28, since inception
----------------------- ------------------------ -----------------
2001 2000 2001 2000 (August 31, 1998)
---------- ---------- ----------- ---------- -----------------
REVENUES $ 150,991 $ 70,750 $ 324,923 $ 188,790 $ 574,348
COSTS AND EXPENSES
Direct cost of services 257,615 185,768 757,227 343,527 1,378,633
Network and infrastructure costs 36,128 35,760 115,309 54,610 222,822
Selling, general and administrative 2,208,816 1,039,053 6,630,653 1,568,029 9,622,365
Research and development 50,838 35,558 193,346 52,601 295,613
Advertising 12,806 - 133,289 - 219,066
Depreciation and amortization 89,758 51,524 226,396 109,902 431,653
---------- ---------- ----------- ---------- -----------
2,655,961 1,347,663 8,056,220 2,128,669 12,170,152
---------- ---------- ----------- ---------- -----------
Loss from operations 2,504,970 1,276,913 7,731,297 1,939,879 11,595,804
OTHER EXPENSE (INCOME)
Interest expense and financing costs 47,918 17,571 3,797,591 54,748 3,902,684
Other Income (163) (1,739) (841) (44,538) (48,099)
---------- ---------- ----------- ---------- -----------
NET LOSS $2,552,725 $1,292,745 $11,528,047 $1,950,089 $15,450,389
========== ========== =========== ========== ===========
Weighted average number of
common shares outstanding 26,281,906 13,803,254 23,221,800 12,833,694 15,719,208
========== ========== =========== ========== ===========
Net loss per share, basic and diluted $ .10 $ .09 $ .50 $ .15 $ .98
========== ========== =========== ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
- 4 -
===============================================================================
INSYNQ, INC.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
(unaudited)
Unearned Accumulated Total
Common Stock Additional Compensation Development Stockholders'
-------------------- Paid-In and Stage Equity
Shares Amounts Capital Services (deficit) (deficit)
---------- ------- ----------- ----------- ------------ -----------
Balance, November 30, 2000 24,601,378 $24,602 $12,481,548 $(1,663,850) $(12,897,664) $(2,055,364)
========== ======= =========== =========== ============ ===========
Issuance of common stock for
the exercise of stock options
at $0.01 in December 2000 500,000 500 254,500 - - 255,000
Issuance of common stock for the
exercise of stock options at
$0.9675 in December 2000 15,504 16 14,984 (10,171) - 4,829
Issuance of common stock $0.34
pursuant to settlement agreement
in December 2000. 85,000 85 29,138 - - 29,223
Forfeiture of common stock issued
for services in December 2000 (43,170) (43) 43 - - -
Forfeiture of common stock issued
for services in December 2000 (20,000) (20) 20 - - -
Issuance of common stock in return
of put shares in January 2001 1,379,016 1,379 855,906 - - 857,285
Issuance of common stock for
services at $0.4062 in
January 2001 and record unearned
compensation over service period 600,000 600 243,120 (243,720) - -
Issuance of common stock in lieu
of note payable at $.3438 in
January 2001 148,488 148 50,902 - - 51,050
Issuance of common stock in return
of put shares in February 2001 118,000 118 71,382 - - 71,500
Issuance of common stock for
services in February 2001 3,500 3 2,622 - - 2,625
Issuance of common stock for the
exercise of warrants at $0.50 in
February 2001 100,000 100 44,310 - - 44,410
Amortization of compensation
for non-employees for three
months ended - - - 332,616 - 332,616
Amortization of compensation and
forfeiture of stock options for
three months ended - - (511,996) 994,445 - 482,449
Net loss for the three months ended - - - - (2,552,725) (2,552,725)
---------- ------- ----------- ----------- ------------ -----------
Balance, February 28, 2001 27,487,716 $27,488 $13,536,479 $ (590,680) $(15,450,389) $(2,477,102)
========== ======= =========== =========== ============ ===========
<FN>
The accompanying notes are an integral part of these financial statements.
- 5 -
===============================================================================
INSYNQ, INC.
Notes to Financial Statements
(unaudited)
Note 1 - Financial Statements
The unaudited financial statements of Insynq, Inc. (the Company) have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) have been condensed or omitted pursuant to such
rules and regulations. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year
ending May 31, 2001. The accompanying unaudited financial statements as
February 28, 2001 and 2000 and the related notes should be read in conjunction
with the Company's audited financial statements and notes, thereto, and
Form 10-KSB/A for its fiscal year ended May 31, 2000.
An independent certified public accounting firm has not reviewed the
accompanying quarterly financial statements as of February 28, 2001.
Note 2 - Basis of Presentation
The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting its efforts into
establishing a new business in the information technology industry, and, is
currently in the process of establishing applications for its existing
technologies and further developing products from technology. Accordingly, the
Company does not have adequate operating revenues to sustain its operations
without raising additional funds either through added debt and/or offerings of
equity.
Note 3 - Management Plans
The Company is devoting its efforts into establishing a business in the new
emerging Managed Services Provider ("MSP") industry. Insynq is establishing
alliances with Independent Software Vendors ("ISV") to provide access to their
applications for customers and building channels for marketing products to
customers. The Company is further developing new products to enable the
deployment and on going management of Insynq services. These new products and
alliances will provide additional services to customers and will generate
additional revenues.
Accordingly, the operating revenue has been minimal. To date, the Company's
operations have consumed substantial and increasing amounts of cash. The
Company's negative cash flow from operations is expected to continue and may
accelerate in the future. The Company has approximately $1,021,900 in trade
payables that are past due. Management is currently working with creditors to
refine the payment terms, to include offering stock and/or installment payment
plans.
The Company is continuing its efforts to raise substantial capital through
public and private equity or debt financing to fund its operations and to
reduce current debt. In doing so, the Company previously negotiated a
short-term promissory note for $1,120,000 and converted certain debentures
in the amount of $900,000 and certain promissory notes in the amount of
$755,000 into common stock in November 2000. From December 1, 2000 through
April 13, 2001, the Company has received $857,500 in the form of debt and
equity financing.
- 6 -
===============================================================================
There can be no assurance, however, that such additional funding will be
available on acceptable terms, if at all. The Company's continued existence as
a going concern is ultimately dependent upon its ability to secure necessary
funding for completing and successfully marketing its technology and services.
As a result of the Company's recent reorganization of certain operations,
corporate overhead has been reduced by approximately $100,000 per month.
In addition, the Company is continuing to focus on the development and
refinement of its acquisition and expansion strategy.
The Company has been exploring various marketing strategies, in particular
niche focused to the Certified Public Accounting industry. Through these
efforts, the Company has begun to realize the anticipated growth. In addition,
the Company is negotiating with two national corporations to provide hosting
and application services. If one, or both, of these corporations agree to the
terms and services, the future revenues are anticipated to be significant.
Note 4 - Loss Per Common Share
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding available to common stockholders
during the period. The weighted average number of common shares outstanding
was 23,221,800 and 12,833,694 for the nine months ended February 28, 2001 and
2000, respectively, 26,281,906 and 13,803,254 for the three months ended
February 28, 2001 and 2000, respectively, and 15,719,208 since inception
(August 31, 1998). The computation for loss per common share assuming dilution
for the three and nine months ended February 28, 2001 and 2000 and since
inception was anti-dilutive, and therefore, is not included.
Note 5 - Stock Split
On August 3, 2000, the Company approved a two-for-one (2 for 1) stock split.
The accompanying financial statements have been accordingly restated to reflect
this split.
Note 6 - Notes Payable
On July 17, 2000, the Company entered into two stockholder loan agreements,
in the form of promissory notes, totaling $255,000. In addition, the
stockholders were granted warrants to purchase a total of 325,000 shares of
common stock at a price of $2.00 per share. The Company recorded a discount
on the loans totaling $229,000 for the fair value of warrants granted.
The Company recognized $229,000 of interest expense on the discount for the
nine months ended February 28, 2001. In November 2000, the loans were
converted into 510,000 shares of common stock at $0.50 per share.
In October 2000, the Company entered into three additional shareholder loans
totaling $500,000. These notes were also converted in November 2000 into
1,000,000 shares of common stock at $0.50 per share.
As an inducement to the holders to convert the above loans, the Company agreed
to convert the loans into common stock at a price below the fair market value
of the common stock at the time of conversion. This resulted in additional
interest expense totaling $1,132,500.
In November 2000, the Company entered into a promissory note agreement with
a stockholder for amounts up to $1,120,000. The agreement calls for three
equal monthly advances of $300,000 beginning November 1, 2000. The final
advance of $220,000, if needed, has certain restrictions and stipulations
before release to the Company. The outstanding balance due on the note as
of February 28, 2001 totaled $900,000. The note bears interest at ten percent
per annum and is due on November 2, 2001.
- 7 -
===============================================================================
On December 1, 2000 the Company entered into a promissory note agreement with
a stockholder for $50,000 with accrued interest of Prime, plus 3%.
The principal and accrued interest was converted to 148,488 shares of common
stock on January 30, 2001.
During the quarter ended February 28, 2001, the Company entered into three
promissory note agreements with existing stockholders that totaled $87,500.
Terms of the agreements call for payment of principal and interest
March 31, 2001. In addition, warrants were issued to one of the payees for
10,000 shares of common stock.
Note 7 - Convertible Debentures
On June 16, 2000, the Company entered into two loan agreements for a total of
$650,000, in the form of convertible debentures. The principal balance of the
loans and accrued interest were convertible into common stock at $1.42 and
$0.71 per share, respectively. In addition, the Company granted 457,746
warrants to purchase common stock at $2.00 per share.
On September 16, 2000, the Company entered into two additional convertible
debenture agreements totaling $250,000. The loans and accrued interest was
convertible into common stock at $1.00 per share. In addition, the Company
granted 250,000 warrants to purchase common stock at $1.00 per share to the
holders of the debentures.
The Company recorded a discount on the convertible debentures totaling $650,000
equal to the fair value of the warrants received and conversion feature.
The Company has recognized $650,000 of interest expense on the discount for the
six months ended November 30, 2000.
As an inducement to convert the balance of principal and related accrued
interest of the debentures, the Company reduced the original conversion share
prices to $0.50. This resulted in an additional interest charge in the amount
of $1,387,616.
In November 2000, the Company converted the debentures totaling $900,000, plus
accrued interest of $55,796, into common stock at $0.50.
Note 8 - Stock Options
In accordance with APB Opinion 25, the Company had recorded unearned
compensation of $1,307,500 for stock options issued to employees under fair
market value. For the nine months ended February 28, 2001, $291,395 of expense
was recognized related to these options. In addition, employees terminated
during the period ended February 28, 2001, resulted in the forfeiture of their
options totaling $1,023,334.
In December 2000, the Company granted options to purchase 15,504 shares of
common stock at an exercise price of $0.96 to a consultant for services
totaling approximately $15,000. The options were exercised into common stock
as of February 28, 2001.
In December 2000, the Company granted options to purchase 500,000 shares of
common stock at an exercise price of $0.01 to an employee. The options were
exercised into common stock as of February 28, 2001.
The Company entered into a Consulting Agreement on January 2, 2001 pursuant to
which the consultant was granted options to purchase 200,000 shares of common
stock at an exercise price of $0.3438 for services equal to market value at
date of grant.
- 8 -
===============================================================================
In January 2001, the Company entered into three separate identical employment
agreements that granted options to purchase a total 450,000 shares of common
stock upon successful completion of the anniversary date of the agreement.
The exercise price of the options is $0.3438 at date of grant.
For the quarter ended February 28, 2001, the Company granted to employees
non-qualified stock options totaling 880,039 at an exercise price equal to
market value at dates of grant.
Note 9 - Warrants
In December 2000, the Company issued warrants to a consultant for 100,000
shares of common stock at an exercise price of $0.50 per share. The warrants
were exercised into common stock as of February 28, 2001.
Note 10 - Tax Delinquency
As of February 28, 2001, the Company is past due on the payment of its business
and payroll taxes of approximately $430,000. This amount is due primarily to
the Internal Revenue Service. The Company and the Internal Revenue Service
have agreed to payment arrangements. Management has initiated contact with the
respective taxing authorities to work out an arrangement for payment plans in
settlement of these tax obligations.
Note 11- Subsequent Events
In March 2001, the Company entered into agreements with three investor relation
consultants. Payment of consulting fees was either in the form of cash or
shares of the Company's common stock totaling of 517,000 issued at market value
at date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements, including notes thereto, appearing in this
Form 10-QSB and in the Company's May 31, 2000 annual report on Form 10-KSB/A.
An independent certified public accounting firm has not reviewed the
accompanying quarterly financial statements as of February 28, 2001.
Except for the historical information contained herein, this Quarterly
Report contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and other similar expressions or variations of such words are
intended to identify these forward-looking statements. Additionally,
statements concerning future matters such as the development of new products,
enhancements, or technologies, possible changes in legislation and other
statements regarding matters that are not historical fact are forward-looking
statements. Forward-looking statements involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, availability of financial
resources adequate for short-, medium- and long-term needs, demand for the
Company's products and services and market acceptance, as well as those factors
discussed in this "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations " and elsewhere in this Report.
- 9 -
===============================================================================
The Company 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 the Company's
May 31, 2000 annual report on Form 10-KSB/A.
OVERVIEW
Insynq, Inc. was incorporated in the State of Washington on
August 31, 1998. The Company is a development stage company that provides
Internet Appliances, known as customer premise equipment ("CPE"), managed and
hosted software services, Web hosting services, Web-based local and wide area
networks, and access to Internet marketing assistance and related equipment and
services. These products and services are offered a components or as an
integrated whole, either sold directly or on a fee or subscription basis.
In late 1999, Insynq decided to target a combination with a public
company. On February 18, 2000, Xcel Management, Inc. (Xcel), a publicly held
company, and Insynq closed an asset purchase transaction in which Xcel acquired
substantially all of the assets of Insynq. Xcel continued to develop the
business of Insynq, and on August 3, 2000, at a special meeting of Xcel's
stockholders, Xcel completed a re-incorporation merger with its wholly owned
subsidiary, Insynq, Inc., a Delaware corporation. Today, as a combined and
surviving entity, Insynq, Inc. continues to develop and deliver application
hosting and managed software services while incorporating the CPE developed as
part of the IQ Delivery System.
The Company targets small and medium enterprises and the high-end segment
of the small office and home office market for the sale of hardware and hosted
software and access to Internet-related services. The products and services are
provided by developing a customer subscriber base that adopts a cost-effective,
on-line solution to building and maintaining an information technology system
through the adoption of "Web-based" computing as an alternative to both local
area networks and traditional client-server implementations. Generally, the
Company markets itself as an Internet utility company that can cost-effectively
provide all of the computer software, hardware, connectivity and Internet-
access needs for its customers.
The Company currently has several independent software vendors' products
on line using the IQ server-based computing services and anticipates signing
various agreements with additional organizations in the next few months and
expects to increase the subscriber base through the respective sales channels.
Key software vendor relationships currently in place include Microsoft
Corporation, Network Associates, Inc./McAfee, Remedy Corporation, Macola
Software, and Novell, Inc.
The Company believes its core competency is providing products and
services related to server-based and hosted computing. It is believed Insynq
has gained credibility in the industry with strategic relationships with
companies such as Hewlett-Packard Company and Citrix Systems, Inc. Management
believes these companies have chosen to strategically align with Insynq in
various capacities that combine the hardware, software, and access required to
build a successful delivery mechanism for the Internet Utility Services.
The complete IQ Delivery System and Internet Utility Service includes
managed network and application services, and can span from a customer's
keyboard to the Insynq Data Center. Insynq provides certain equipment, which
is kept on its customer's premises, including a simplified, diskless
workstation or thin client, and a multi-function router that is entirely
managed and maintained by Insynq. The system can also include Internet-access
services provided by a user selected telecommunications partner/provider.
The final piece of the system is the Insynq Data Center, which is located at
the Tacoma Technology Center. This facility, with redundant power, bandwidth,
and cooling, houses the server equipment and routers. While this is the
recommended configuration for customer use to take advantage of the full IQ
Delivery System, they are free to choose which components they use.
- 10 -
===============================================================================
In the process of developing the IQ Delivery System, management believes
the Company has acquired valuable technological expertise. The Company has
created new methodologies and produced proprietary hardware and software that
is believed to be essential to the configuration and effective management of
Internet-based networks and outside deployment of shared software applications.
RESULTS OF OPERATIONS
The Company had very limited operational activity during the three months
ended February 29, 2000; therefore, management believes that any comparison of
the results of operations of the three months ended February 29, 2000 ("Third
Quarter 2000") to the three months ended February 28, 2001 ("Third Quarter
2001"), has very limited value for evaluating trends and/or as a basis for
predicting future results.
The Company incurred a net loss of $2,552,725 for the Third Quarter 2001,
as compared to a net loss of $1,292,745 for the Third Quarter 2000. The Third
Quarter 2001 loss resulted primarily from: (1) discounted or free services as
Insynq continued to test-market products and services, (2) additional network,
infrastructure, and research and development costs associated with start-up
operations, (3) increases in salaries and related benefits, reflecting
increased staffing in the technical, development, sales, marketing, finance,
accounting, and administrative departments, (4) increased professional and
consulting fees, and (5) the issuance of warrants and options for services.
Total revenue for Third Quarter 2001 was $150,991, an increase of $80,241
as compared to the Third Quarter 2000. The primary sources of Third Quarter
2001 revenue are: (1) seat subscription revenue of $127,480, net of discounts,
(2) managed software service revenue of $4,250, and, (3) hardware and software
sales and services revenue of $19,261. Management expects future revenue
generated from seat subscriptions to trend away from the practice of providing
discounts experienced in Third Quarter 2001 as the Company continues to develop
sales, implement sales and marketing strategies, and prove the IQ Delivery
System model.
Continued growth is significantly dependent upon the Company's ability to
generate sales through new customers, increased seat subscriptions and managed
software services. Management's main priorities relating to revenue are:
(1) increase market awareness of its products and services through a revised
strategic sales and marketing plan targeting vertical markets and industries,
(2) growth in the number of customers and the number of seats per customer,
(3) continue to develop and accomplish technological economies of scale, and
(4) continue to streamline and maximize operational and logistical efficiencies
of the IQ implementation model.
COSTS AND EXPENSES
During Third Quarter 2001, Insynq recorded direct costs of services of
$257,615, an increase of $71,847 over the limited operations in Third
Quarter 2000. Network and infrastructure costs were $36,128 for the Third
Quarter 2001, which is a mere increase of $368 over Third Quarter 2000.
Selling, general, and administrative costs increased to $2,208,816 in the
Third Quarter 2001, an increase of $1,169,763 over the Third Quarter 2000.
The increase is a direct result of the continuing build-out of the Company's
infrastructure, including hiring management and support staff, the development
of the sales and delivery systems, continued increase of professional and
consulting fees, and the issuance of options and warrants.
Depreciation and amortization expense increased to $89,758 in Third
Quarter 2001, an increase of $38,234 over Third Quarter 2000, due to the
acquisition and capitalization of depreciable equipment, primarily computer
equipment needed for infrastructure in support and development of the day to
day business operations.
- 11 -
===============================================================================
Interest expense was $47,918 for the Third Quarter 2001 versus $17,571
for the Third Quarter 2000. The increase was due primarily to accounting for
interest recognized on notes payable and capitalized equipment lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $5,420 as February 28, 2001,
and a deficit in working capital of $3,432,751. For the nine months ended
February 28, 2001, Insynq used cash in the operating activities and investing
activities totaling $3,015,172 and $206,309, respectively.
The Company finances its operations and capital requirements primarily
through private debt and equity offerings. For the nine months ended
February 28, 2001, the Company received cash totaling $2,659,596 from the
issuance of notes payable and convertible debentures, most of which was
converted into common stock as of February 28, 2001. The Company also received
$479,160 from the sale of common stock and the issuance of common stock for the
exercising of options and warrants. In addition, the Company has negotiated a
letter of intent to establish a $20,000,000 equity line of credit with a
current stockholder.
The Company recently signed several sales and marketing agreements and
management anticipates that revenues will take a significant upward movement
over the twelve months as a result of these agreements. In particular, an
agreement with an accounting affiliation of approximately 140 members has
recently been finalized. The adoption of the IQ MSP solution by these and
other accountants is providing access to professional accounting organizations
and their client bases. In addition, the Company is currently negotiating with
two large national corporations to provide hosting and application services.
Management conservatively estimates that key these agreements are expected to
reach $400,000 per month in recurring revenues over the next twelve months.
The immediate performance in this market indicates that use of enabling
technologies for accounting on-line and business process outsourcing is gaining
momentum.
Industry analysts have indicated that technology outsourcing focused on
business fundamentals, such as finance, accounting, customer relationship
management and sales force automation will be the primary adopters of MSP
solutions in the next year. The Company is focusing all possible resources in
developing our domain expertise in these areas to gain additional leverage and
build broader service offerings that compliment our current services already
being delivered to those markets.
The Company recently implemented a reorganization of its operations, both
in sales and marketing, as well in the executive management team, and
implemented critical cost-cutting measures. As a result of the restructuring,
the Company has tightened the controls over its use of cash and has taken steps
to improve the billing and collection process. Management forecasts the
effects of these changes will result in approximately $100,000 a month in
improved cash flow. In addition to these changes, the Company implemented a
marketing program through its recently developed accounting vertical, which has
dramatically reduced customer acquisition costs. The combination of the
reorganization and increased operational efficiencies allow the Company to move
toward profitability and achieving its business plan and goals. The Company is
also aggressively pursuing opportunities to merge and/or acquire compatible
companies with which to leverage management, financial and operational
resources. Management believes these immediate changes and strategies will
position the Company well for future opportunities.
From December 1, 2000, through April 13, 2001, the Company has raised
additional funds in the amount of $5,000 through the exercise of options and
$857,500 in short-term loans and promissory notes.
As of April 13, 2001, the Company is late in payment of certain creditor
trade payables and lease payments of approximately $1,021,900 and $148,000
respectively. Management is currently working with these creditors to accept
stock or long-term payment plans. These negotiations have been well received
and it is believed that the Company will settle and/or restructure a
significant number of these accounts. In addition, approximately $430,000 of
business and payroll taxes are delinquent. Again, management has initiated
contact with the respective taxing authorities to work out an arrangement for
payment plans in settlement of these tax obligations.
- 12 -
===============================================================================
Management cannot be sure that it will be able to obtain the additional
financing to satisfy the cash requirements or to implement the growth strategy
on acceptable terms, or at all. If management cannot obtain such financing on
acceptable terms, the ability to fund the planned business expansion and to
fund the on-going operations will be materially adversely affected.
Presently, management is pursuing a variety of sources of debt and equity
financing. If debt is incurred, the financial risks associated with the
business and with owning the Company's common stock could increase. If enough
capital is raised through the sale of equity securities, the percentage
ownership of the current stockholders will be diluted. In addition, any new
equity securities may have rights, preferences, or privileges senior to those
of the common stock.
The Company's continuation as a going concern is currently dependent on
its ability to obtain additional financing, and generate sufficient cash flow
from its operations to meet, and in certain cases, restructure certain
obligations on a timely basis. Based on revised Pro Forma projections, the
Company expects profitability will be achieved in late 2001. Management also
believes the need for additional capital going forward will be met from public
and private debt and equity offerings. In essence, future operations will be
dependent upon the Company's ability to secure sufficient sources of financing
and continuation of adequate vendor credit.
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER
The following sets forth information regarding all sales of the Company's
unregistered securities during the past three years. All of these shares were
exempt from registration under the Securities Act by reason of Section 4(2) of
the Securities Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering, or were exempt by reason of the
application of Regulation S. The recipient of securities in the transaction
represented its intention to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution of the
securities, and appropriate legends were affixed to the share certificates and
warrants issued in such transaction. The recipient has had adequate access,
through its relationship with the Company or otherwise, to information about
the Company. Unless otherwise indicated, the issuance of the securities
described below was affected without the involvement of underwriters.
On or about January, 29, 2001, the Company entered into a
non-exclusive financial advisory agreement with Morgan Brewer
Securities, Inc., a Texas corporation, which is a member of the
NASD, under the terms of which the Company has engaged Morgan Brewer,
on a non-exclusive basis, to provide financial advisory services and
advice. In consideration of the services undertaken by Morgan Brewer,
the Company issued to Morgan Brewer a total of 600,000 shares of
restricted common stock.
- 13 -
===============================================================================
ITEM 5. OTHER INFORMATION
The Company is currently operating without officers and director's
insurance, as well as, general liability insurance. It is uncertain when
coverage will be renewed. The economic downturn caused the insurance industry
to dramatically increase premiums over prior years. The policies lapsed due to
lack of adequate funding to pay for the substantial premium increases.
On February 19, 2001, the Company entered into a business advisory and
consulting services agreement with Tarshish Capital Markets, Ltd., an Israel
corporation, under the terms of which the Company has engaged Tarsish, on a
best efforts basis, to seek funding sources for a private offering exempt from
registration requirements. In consideration of the services undertaken by
Tarsish, the Company will compensate Tarsish in the form of a success fee equal
to 13% of funds so invested and warrants equal to 10% of the funds raised at an
exercise price of 110% of the sales price of each transaction.
The Company entered into a letter of intent for a $20 million equity line
of credit with Plazacorp Investments Ltd. The proposal includes purchases of
the Company's common stock of up to $20 million dollars over a 24-month period.
There is no assurance that the Company will be able to consummate this
transaction.
Effective April 1, 2001, James R. Leigh, III, stepped down as the
Company's President and Chief Technology Officer. Mr. Leigh will assume the
role of General Manager and will oversee the Company's technical divisions.
On February 20, 2001, the Company borrowed $40,000 from TCA Investments,
Inc. in exchange for a promissory note and warrant agreement, with registration
rights, to purchase 10,000 shares of common stock at an exercise price of
$0.30. The note bears interest at ten percent per annum and is due
April 20, 2001.
- 14 -
===============================================================================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
4.2* Amendment No. 7 dated February 1, 2001 and Amendment No. 8 dated
February 27, 2001 to Warrant Agreement issued to Consulting & Strategy
International, LLC. (1)
4.7* Amendment No. 6 dated February 28, 2001 to Warrant Agreement issued to
TCA Investments, Inc. (1)
4.9* Amendment No. 6 dated February 27, 2001 to Warrant Agreement issued to
Garnier Holdings, Ltd. (1)
4.44* Promissory Note dated December 1, 2000 between One Click Investments,
LLC and Insynq, Inc.
4.45* Agreement dated January 30, 2001 between One Click Investments, LLC
and Insynq, Inc.
4.46* Registration Agreement dated January 30, 2001 between One Click
Investments, LLC and Insynq, Inc.
4.47* Warrant Agreement dated February 20, 2001 between TCA Investments,
Inc. and Insynq, Inc.
4.48* Registration Agreement dated February 20, 2001 between TCA
Investments, Inc. and Insynq, Inc.
10.3* Amendment No. 6 dated February 6, 2002 to Business Services Contract
between Consulting & Strategy International and Insynq, Inc. (1)
10.5* Amendment No. 3 to Consulting Agreement dated January 30, 2001 between
One Click Investments, LLC and Insynq, Inc. (1)
10.9* Amendment No. 3 dated January 30, 2001 to Employment Agreement between
John P. Gorst and Insynq, Inc. (1)
10.10* Amendment No. 2 dated January 30, 2001 to Employment Agreement between
M. Carroll Benton and Insynq, Inc. (1)
10.55* Independent Consultant Agreement dated January 2, 2001 between One
Click Investments, LLC and Eric Estoos and Insynq, Inc.
10.56* Independent Consultant Agreement dated January 2, 2001 between
Michael duPont and Insynq, Inc.
10.57* Non-Exclusive Financial Advisory Agreement dated January 26, 2001
between Morgan Brewer Securities, Inc. and Insynq, Inc.
10.58* Business Advisory and Consulting Services Agreement dated
February 19, 2001 between Tarshish Capital Markets, LTD. and
Insynq, Inc.
<FN>
* Filed Herewith
(1) Original agreement and prior amendments included as the corresponding
Exhibit to the Company's Registration Statement on Form SB-2 filed
with the Commission on December 14, 2000 (Registration No. 333-51808),
and is incorporated by reference herein.
(b) Reports on Form 8-K
None
- 15 -
===============================================================================
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 20, 2001.
INSYNQ, INC.
By: __________________
John P. Gorst
Chief Executive Officer
(Principal Executive Officer)
By: ______________________________
Stephen C. Smith
Interim Chief Financial Officer
(Principal Financial Officer)
- 16 -
===============================================================================
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
4.2* Amendment No. 7 dated February 1, 2001 and Amendment No. 8 dated
February 27, 2001 to Warrant Agreement issued to Consulting & Strategy
International, LLC. (1)
4.7* Amendment No. 6 dated February 28, 2001 to Warrant Agreement issued to
TCA Investments, Inc. (1)
4.9* Amendment No. 6 dated February 27, 2001 to Warrant Agreement issued to
Garnier Holdings, Ltd. (1)
4.44* Promissory Note dated December 1, 2000 between One Click Investments,
LLC and Insynq, Inc.
4.45* Agreement dated January 30, 2001 between One Click Investments, LLC
and Insynq, Inc.
4.46* Registration Agreement dated January 30, 2001 between One Click
Investments, LLC and Insynq, Inc.
4.47* Warrant Agreement dated February 20, 2001 between TCA Investments,
Inc. and Insynq, Inc.
4.48* Registration Agreement dated February 20, 2001 between TCA
Investments, Inc. and Insynq, Inc.
10.3* Amendment No. 6 dated February 6, 2002 to Business Services Contract
between Consulting & Strategy International and Insynq, Inc. (1)
10.5* Amendment No. 3 to Consulting Agreement dated January 30, 2001 between
One Click Investments, LLC and Insynq, Inc. (1)
10.9* Amendment No. 3 dated January 30, 2001 to Employment Agreement between
John P. Gorst and Insynq, Inc. (1)
10.10* Amendment No. 2 dated January 30, 2001 to Employment Agreement between
M. Carroll Benton and Insynq, Inc. (1)
10.55* Independent Consultant Agreement dated January 2, 2001 between One
Click Investments, LLC and Eric Estoos and Insynq, Inc.
10.56* Independent Consultant Agreement dated January 2, 2001 between
Michael duPont and Insynq, Inc.
10.57* Non-Exclusive Financial Advisory Agreement dated January 26, 2001
between Morgan Brewer Securities, Inc. and Insynq, Inc.
10.58* Business Advisory and Consulting Services Agreement dated
February 19, 2001 between Tarshish Capital Markets, LTD. and
Insynq, Inc.
<FN>
* Filed Herewith
(1) Original agreement and prior amendments included as the corresponding
Exhibit to the Company's Registration Statement on Form SB-2 filed
with the Commission on December 14, 2000 (Registration No. 333-51808),
and is incorporated by reference herein.
- 17 -
===============================================================================