UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(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
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(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
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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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
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The purpose of this amendment is to restate the financial statements presented
in the Company's Quarterly Report on Form 10-QSB for the third quarter ended
February 28, 2001, filed April 20, 2001 (the "Original Filing"). In the course
of the review of the financial statements for the third quarter ended
February 28, 2001, the Company discovered material errors in its financial
statements as reported in its Original Filing. The following is a summary of
the most material errors discovered by the Company:
The Company did not properly record expenses related to options and
warrants for common stock issued/granted for services in the amount of
$477,429.
The statement of cash flows was inadvertently omitted.
The Company has taken steps to correct these errors and implement procedures to
ensure such errors do not recur.
Any items in the Original Filing not expressly changed herein shall be as set
forth in the Original Filing. All information in this Amendment 1 and the
Original Filing is subject to updating and supplementing as provided in the
Company's periodic reports filed with the Securities and Exchange Commission
subsequent to the date of such reports.
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INSYNQ, INC.
INDEX
ITEM PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Balance Sheets - Restated
as of February 28, 2001 and May 31, 2000 4
b) Statements of Operations - Restated
for the Three and Nine Months Ended
February 28, 2001 and 2000 and
from Inception to February 28, 2001 5
c) Statement of Stockholders' Deficit - Restated
for the Three Months Ended February 28, 2001 6
d) Statements of Cash Flows
for the Nine Months Ended February 28, 2001
and 2000 and from Inception to February 28, 2001 7
e) Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Signature 16
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INSYNQ, INC.
(A Development Stage Company)
Balance Sheets - Restated
February 28, 2001 May 31, 2000
(unaudited)
------------ ------------
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
Related party notes payable 1,087,913 39,470
Current portion of capital lease 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' 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 14,013,908 3,132,903
Unearned compensation and services (590,680) -
Accumulated development stage deficit (15,927,818) (3,922,342)
------------ ------------
Total stockholders' deficit (2,477,102) (769,818)
------------ ------------
$ 1,254,905 $ 1,530,904
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
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INSYNQ, INC.
(A Development Stage Company)
Statements of Operations - Restated
(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 $ 150,990 $ 70,749 $ 324,923 $ 188,790 $ 574,347
COSTS AND EXPENSES
Direct cost of services 276,899 190,858 757,227 343,527 1,395,140
Network and infrastructure costs 36,127 35,759 115,309 54,610 216,650
Selling, general and administrative 2,655,104 1,033,964 7,108,082 1,568,029 10,073,547
Research and development 50,838 35,559 193,346 52,601 299,098
Advertising 24,774 - 133,289 - 231,034
Depreciation and amortization 89,758 51,524 226,396 109,902 431,653
---------- ---------- ----------- ---------- -----------
3,133,500 1,347,664 8,533,649 2,128,669 12,647,122
---------- ---------- ----------- ---------- -----------
Loss from operations 2,982,510 1,276,915 8,208,726 1,939,879 12,072,775
OTHER EXPENSE (INCOME)
Interest expense and financing costs 47,919 17,569 3,797,591 54,748 3,902,670
Other Income (275) (1,739) (841) (44,538) (47,627)
---------- ---------- ----------- ---------- -----------
NET LOSS $3,030,154 $1,292,745 $12,005,476 $1,950,089 $15,927,818
========== ========== =========== ========== ===========
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 $ .12 $ .09 $ .52 $ .15 $ 1.01
========== ========== =========== ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
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INSYNQ, INC.
(A Development Stage Company)
Statement of Stockholders' Deficit - Restated
(unaudited)
Unearned Accumulated
Common Stock Additional Compensation Development Total
-------------------- Paid-In and Stage Stockholders'
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
granted with exercise price
below fair value at $0.01
in December 2000 500,000 500 491,500 - - 492,000
Issuance of common stock for the
exercise of stock options
granted for services at $0.9675
in December 2000 in exchange
for accounts payable 15,504 16 14,984 (10,171) - 4,829
Issuance of common stock at
$0.3438 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 option obligation 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 option obligation
shares in February 2001 118,000 118 71,382 - - 71,500
Issuance of common stock at $0.75
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 - - 661,767 332,616 - 994,383
Amortization of compensation and
forfeiture of stock options for
employees for three months ended - - (933,334) 994,445 - 61,111
Net loss for the three months ended - - - - (3,030,154) (3,030,154)
---------- ------- ----------- ----------- ------------ -----------
Balance, February 28, 2001 27,487,716 $27,488 $14,013,908 $ (590,680) $(15,927,818) $(2,477,102)
========== ======= =========== =========== ============ ===========
<FN>
The accompanying notes are an integral part of these financial statements.
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INSYNQ, INC.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
Cumulative results
Nine months ended of operations
February 28, since inception
2001 2000 (August 31, 1998)
------------ ----------- -----------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(12,005,476) $(1,950,089) $(15,927,818)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 226,396 110,762 431,653
Loss on disposal of assets 5,200 - 5,200
Issuance of common stock for services 521,594 253,822 860,673
Issuance of options and warrants for services 4,673,250 1,261,063 2,940,799
Issuance of options to employees under fair market value 778,395 - 778,395
Fair value of warrants issued with notes payable
and capital lease obligations 252,601 - 276,201
Fair value of warrants issued and beneficial conversion
features on debentures and notes payable 900,000 - 3,415,294
Change in assets and liabilities
Accounts receivables (18,995) (40,797) (82,400)
Other receivables 16,172 - (740)
Prepaid expenses 29,186 - -
Inventories 29,512 (21,674) -
Deposits and other assets 116,413 (186,732) (48,055)
Accounts payable 809,653 172,429 1,106,599
Accrued taxes and other liabilities 656,127 46,242 839,693
------------ ----------- ------------
Net cash used in operating activities (3,009,972) (354,974) (5,404,506)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (176,509) (352,491) (589,423)
Acquisition of intellectual property - - (1,548)
Deposit on future acquisition (35,000) - (35,000)
Cash received from Xcel acquisition - - 257
------------ ----------- ------------
Net cash used by investing activities (211,509) (352,491) (625,714)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (12,508) - (19,835)
Borrowings from convertible debentures 800,000 - 800,000
Proceeds from related party notes payable 1,859,596 - 1,859,596
Payments on related party notes payable (6,153) - (36,683)
Proceeds from the exercise of stock options and warrants 199,160 (70,000) 194,160
Proceeds from the sale of common stock 280,000 265,000 3,138,402
Advances from stockholder - 900,000 100,000
------------ ----------- ------------
Net cash provided by financing activities 3,120,095 1,095,000 6,035,640
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH (101,386) 387,535 5,420
CASH AT BEGINNING OF PERIOD 106,806 501 -
------------ ----------- ------------
CASH AT END OF PERIOD $ 5,420 $ 388,036 $ 5,420
============ =========== ============
<FN>
The accompanying notes are an integral part of these financial statements.
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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 of
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.
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 $898,418 in the form of debt and
equity financing.
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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 internal restructuring 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 its
niche focused to the Certified Public Accounting industry. Through these
efforts, the Company has begun to realize its 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. Outstanding
warrants and options as of February 28, 2001 total 22,336,815.
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.
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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.
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.
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 nine months ended February 28, 2001.
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 - Capital Lease Obligation
The Company is in default on its capital lease obligation as of
February 28, 2001; accordingly, the lease has been classified as a
current obligation.
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Note 9 - Stock Options
In accordance with APB Opinion 25, the Company had recorded in June 2000,
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, which reduced unearned compensation by $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. The exercise price was exchanged for consideration of
outstanding payables with the consultant.
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 Company
recognized $487,000 of expense for the difference between the fair value on the
date of grant and the exercise price. The options were exercised into common
stock as of February 28, 2001.
In December 2000, the Company granted options to a former employee to purchase
114,114 shares of common stock at an exercise price of $0.71. The market price
at date of grant was $0.828 per share, resulting in compensation expense of
approximately $60,000 for the nine months ended February 28, 2001.
The Company entered into a Consulting Agreement on January 2, 2001 pursuant
to which a consultant was granted options to purchase 200,000 shares of common
stock at an exercise price of $0.3438 equal to market value on the date of
grant, resulting in compensation expense of approximately $68,760 for the nine
months ended February 28, 2001.
In January 2001, the Company entered into three separate employment agreements
that granted options to purchase a total of 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 and is equal to market value on the date of
grant.
For the quarter ended February 28, 2001, the Company granted to employees
non-qualified stock options totaling 1,855,039 at an exercise price equal to
market value at dates of grant.
Note 10 - 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, in exchange for
amounts due to the consultant for previously rendered services.
In February 2001, the Company reduced the exercise prices of 2,000,000
warrants outstanding to exercise prices ranging from $0.50 to $2.00.
The Company recognized additional expense of approximately $180,000 as a
result of the modification to the warrant exercise prices for the period
ended February 28, 2001.
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Note 11 - 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. No definitive workouts have been arranged
for paying back the liabilities.
Note 12- 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 the date of grant.
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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.
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.
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.
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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. The
Company expects to increase the subscriber base through these 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, customers are free to choose which components they use.
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 limited operational activity during the three month and
nine month periods ended February 29, 2000 and February 28, 2001; therefore,
management believes that any comparison of the results of operations for the
respective periods have very limited value for evaluating trends and/or as a
basis for predicting future results.
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The Company incurred a net loss of $3,030,154 and $1,292,745 for the three
months ended February 28, 2001 and February 29, 2000 respectively. For the
nine months ended February 28, 2001 and February 29, 2000, the net loss
incurred was $12,005,476 and $1,950,089, respectively. These period losses
resulted primarily from a combination of: (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 the three months ended February 28, 2001 and
February 29, 2000 was $150,990 and $70,749, an increase of $80,241.
The primary sources of revenue during the three month period ended
February 28, 2001 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 $19,260. Total revenue for the nine
months ended February 28, 2001 and February 29, 2000 was $324,923 and $188,790,
respectively, representing an overall increase of 72%. Primary revenue sources
for the nine month period ended February 28, 2001 are: (1) seat subscription
revenue of $241,913, net of discounts; (2) managed software service revenue of
$28,300; and (3) hardware and software sales and services revenue of $54,710.
Management expects future revenue generated from seat subscriptions to trend
away from the practice of providing discounts 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 the three months ended February 28, 2001, the Company recorded
direct costs of services of $276,899, an increase of $86,041 over the limited
operations in February 29, 2000. Network and infrastructure costs were
$36,127 for the February 28, 2001, which is an increase of $368 over
February 29, 2000. For the nine-month periods ended February 28, 2001 and
February 29, 2000, the Company incurred $757,227 and $343,527 in direct costs,
and $115,309 and $54,610 in network and infrastructure costs, respectively.
Selling, general, and administrative costs increased to $2,655,104 in the
three months ended February 28, 2001, an increase of $1,621,140 over the three
months ended February 29, 2000. For the nine months ended February 28, 2001,
selling, general and administrative costs increased $5,540,053 over the same
period ended February 29, 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 during the
three months ended February 28, 2001 resulting in an increase of $38,234 over
the same period ended February 29, 2000. For the nine-month periods ended
February 28, 2001 and February 29, 2000, depreciation and amortization expense
was $226,396 and $109,902, respectively. The increases were due to the
acquisition and capitalization of depreciable equipment, primarily computer
equipment needed for infrastructure in support of development and the
day-to-day business operations.
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Interest expense was $47,919 for the three months ended February 28, 2001
versus $17,569 for the three months ended February 29, 2000. For the
nine-month periods ended February 28, 2001 and February 29, 2000, interest
expense was $3,797,591 and $54,748, respectively. The increase was due
primarily to accounting for interest recognized on the fair value of warrants
issued with notes payable and convertible debentures; interest recognized for
the beneficial conversion features on the conversion of debentures and notes
payable; for the reductions in the original conversion prices offered
significantly below the fair market value of the common stock on the conversion
dates; and capitalized equipment lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $5,420 as of
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 its operating
activities and investing activities totaling $3,221,481.
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 were
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
exercise of options and warrants.
The Company recently signed several sales and marketing agreements and
management anticipates that revenues will take a significant upward movement
over the next 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 these key 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 an internal cost restructure of its
operations, both in sales and marketing, as well in the executive management
team, and implemented critical cost-cutting measures. As a result, 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. Management believes that the combination
of the internal reorganization and increased operational efficiencies will
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.
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From December 1, 2000, through April 13, 2001, the Company has raised
additional funds in the amount of $898,418 through: (a) the exercise of
options; (b) short-term loans; and (c) 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 management believes 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.
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. 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.
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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 July 18, 2001.
INSYNQ, INC.
By: __________________
John P. Gorst
Chief Executive Officer
(Principal Executive Officer)
By: ______________________________
Stephen C. Smith
Interim Chief Financial Officer
(Principal Financial Officer)
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