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 quarter ended August 31, 2001.
( ) 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
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INSYNQ, INC.
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(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.)
1127 Broadway Plaza, Suite 10
Tacoma, Washington 98402
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(Address of principal executive offices)(Zip Code)
Telephone Number (253) 284-2000
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(Registrant's telephone number, including area code)
1101 Broadway Plaza, Tacoma Washington 98402
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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 --- 37,833,682 as of October 10, 2001
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INSYNQ, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001
PAGE
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 3
Item 1 Financial Statements of Insynq, Inc.
Balance Sheets as of August 31, 2001 and May 31, 2001 . . . . . 3
Statements of Operations for the three months ended
August 31, 2001 and 2000 and from Inception to August 31, 2001 4
Statement of Stockholder Deficit for the three months
ended August 31, 2001 . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for the three months ended
August 31, 2001 and 2000 and from Inception to August 31, 2001 6
Notes to the Financial Statements . . . . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of
Financial Condition of Results of Operations . . . . . . . . . 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2 Changes in Securities and Use of Proceeds . . . . . . . . . . . 15
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PART I
ITEM I FINANCIAL STATEMENTS
INSYNQ, INC.
(A Development Stage Company)
Balance Sheets
August 31, 2001 May 31, 2001
(unaudited) (audited)
------------ ------------
ASSETS
------
Current assets
Cash $ 30,130 $ 26,900
Accounts receivable, net of allowance
for doubtful accounts of $25,000 at
August 31, 2001 and May 31, 2001,
respectively 68,890 27,469
Related party receivables 42,990 98,990
Prepaid expenses 55,271 61,962
------------ ------------
Total current assets 197,281 215,321
Property and equipment, net 653,916 756,493
Other assets
Intangible assets, net 46,085 52,585
Deposits 5,791 72,000
------------ ------------
Total assets $ 903,073 $ 1,096,399
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities
Notes payable $ 33,964 $ 27,973
Related party notes payable 1,377,486 1,318,251
Accounts payable 950,595 1,001,395
Accrued liabilities 1,191,620 1,129,695
Customer deposits 43,080 49,684
Deferred compensation 124,363 107,175
Current portion of capital lease obligations 721,156 692,208
------------ ------------
Total current liabilities 4,442,264 4,326,381
Capital lease obligations,
net of current portion 23,360 29,256
Commitments and contingencies - -
Convertible debentures 650,000 -
Stockholders' deficit
Preferred stock, $0.001 par value,
10,000,000 shares authorized,
no shares issued and outstanding - -
Class A common stock, $0.001 par value,
10,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.001 par value,
100,000,000 shares authorized,
37,364,930 and 33,531,094 shares issued
and outstanding as of August 31, 2001
and May 31, 2001, respectively 37,366 33,532
Additional paid-in capital 15,832,348 15,430,507
Unearned compensation and services (549,224) (725,717)
Accumulated development stage deficit (19,533,041) (17,997,560)
------------ ------------
Total stockholders' deficit (4,212,551) (3,259,238)
------------ ------------
Total liabilities and stockholders' deficit $ 903,073 $ 1,096,399
============ ============
<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
Cumulative results
Three Months Ended of operations
August 31, since inception
-------------------------- -----------------
2001 2000 (August 31, 1998)
----------- ----------- -----------------
(unaudited) (unaudited) (unaudited)
Revenues $ 194,565 $ 67,760 $ 936,997
Costs and expenses
Direct cost of services 330,967 308,499 2,433,069
Selling, general and administrative
Non-cash compensation 516,668 647,800 5,880,663
Other 689,652 1,252,571 7,202,943
Network and infrastructure costs 29,327 37,414 285,113
Research and development 58,981 69,250 461,436
----------- ----------- -------------
1,625,595 2,315,534 16,263,224
----------- ----------- -------------
Loss from operations (1,431,030) (2,247,774) (15,326,227)
Other income (expense)
Other income 36,777 566 95,132
Loss on disposal of assets (46,897) - (161,361)
Interest expense
Non-cash (7,867) (526,177) (3,712,050)
Other (86,464) (35,114) (428,535)
----------- ----------- -------------
(104,451) (560,725) (4,206,814)
----------- ----------- -------------
Net loss $(1,535,481) $(2,808,499) $ (19,533,041)
=========== =========== =============
Net loss per common share -
basic and diluted $ (0.04) $ (0.14) $ (1.03)
=========== =========== =============
<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
(unaudited)
Unearned Accumulated Total
Common Stock Additional Compensation Development Stockholders'
-------------------- Paid-In and Stage Equity
Shares Amount Capital Services Deficit (Deficit)
---------- ------- ----------- ----------- ------------ -----------
Balance, May 31, 2001 33,531,094 $33,532 $15,430,507 $ (725,717) $(17,997,560) $(3,259,238)
Issuance of common stock at
$0.10 per share for services
in June 2001 20,000 20 1,980 - - 2,000
Issuance of common stock at
$0.09 per share in lieu of
employee compensation and
exercise of stock options 754,910 755 67,187 - - 67,942
Issuance of common stock at
$0.09 per share to non-employees
for services in July 2001 2,125,000 2,125 189,125 - - 191,250
Issuance of common stock at
$0.18 per share to non-employee
in lieu of cash payment of
accrued liability in July 2001 50,000 50 8,950 - - 9,000
Issuance of common stock at
$0.07 per share in lieu of
employee compensation and exercise
of stock options in July 2001 250,000 250 17,250 - - 17,500
Issuance of common stock at
$0.06 per share in lieu of
employee compensation and
exercise of stock options in
August 2001 633,926 634 37,401 - - 38,035
Record re-pricing of warrants
in June 2001 - - 79,948 - - 79,948
Record unearned compensation for
non-employee over service period - - - (180,000) - (180,000)
Amortization of unearned
compensation for three month
period ended August 31, 2001 - - - 356,493 - 356,493
Net loss for the three month
period ended August 31, 2001 - - - - (1,535,481) (1,535,481)
---------- ------- ----------- ----------- ------------ -----------
Balance, August 31, 2001 37,364,930 $37,366 $15,832,348 $ (549,224) $(19,533,041) $(4,212,551)
========== ======= =========== =========== ============ ===========
<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)
Three Months Ended Cumulative
August 31, cash flows
---------------------------- since inception
2001 2000 (August 31, 1998)
------------ ------------ -----------------
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss $ (1,535,481) $ (2,808,499) $ (19,533,041)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 62,179 72,357 546,765
Loss on disposal of assets 117,898 - 232,362
Forgiveness of debts (36,000) - (36,000)
Issuance of common stock for services 80,227 169,270 2,666,281
Issuance of options and warrants for
services, and amortization of
of unearned compensation 356,493 358,024 2,266,624
Issuance of options to employees under
fair market value - 120,506 867,810
Warrants issued with debt and capital
leases 7,867 145,267 1,424,434
Warrants and beneficial conversion
features of debentures 79,948 325,000 2,367,564
Interest capitalized 21,310 - 21,310
Changes in assets and liabilities:
Accounts receivable and related
party receivables 14,579 1,492 (111,880)
Inventories - 16,448 -
Prepaid expenses 6,691 (3,295) (67,282)
Deposits (4,791) - (76,791)
Accounts payable (12,800) 562,397 1,079,428
Accrued liabilities 45,689 (11,733) 1,396,720
Customer deposits (6,604) (671) 43,080
Deferred compensation 17,188 - 124,363
------------ ------------ -------------
Net cash used in operating activities (785,607) (1,053,437) (6,788,253)
------------ ------------ -------------
Cash flows from investing activities
Purchase of equipment - (135,608) (481,776)
Acquisition of intellectual property - - (1,548)
Deposit on future acquisition - (50,000) (35,000)
Cash received from Xcel acquisition - - 257
------------ ------------ -------------
Net cash used in investing activities - (185,608) (518,067)
------------ ------------ -------------
Cash flows from financing activities
Bank overdraft 47,736 - 47,736
Proceeds from notes payable and
related party notes payable 78,176 310,000 2,208,063
Proceeds from issuance of common stock 32,000 - 3,619,722
Proceeds from on convertible debentures 650,000 550,000 1,450,000
Payments on short term notes payable (12,950) (5,625) (61,613)
Payments on capital lease obligations (6,125) (2,136) (27,458)
Advances from stockholder - 280,000 100,000
------------ ------------ -------------
Net cash provided by financing activities 788,837 1,132,239 7,336,450
------------ ------------ -------------
Net increase (decrease) in cash 3,230 (106,806) 30,130
------------ ------------ -------------
Cash at beginning of period 26,900 106,806 -
------------ ------------ -------------
Cash at end of period $ 30,130 $ - $ 30,130
============ ============ =============
<FN>
The accompanying notes are an integral part of these financial statements.
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INSYNQ, INC.
(A Development Stage Company)
Notes to Financial Statements
August 31, 2001
(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, 2002. The accompanying unaudited financial statements as of
August 31, 2001 and 2000, respectively, and from inception (August 31, 1998),
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, 2001.
An independent certified public accounting firm has not reviewed the
accompanying quarterly financial statements as of August 31, 2001.
NOTE 2 - BASIS OF PRESENTATION
On February 18, 2000, the Company closed an asset purchase transaction
(Acquisition) in which Xcel Management, Inc. (Xcel), a non-operating public
shell company, acquired substantially all of the assets of Insynq. Under
accounting principles generally accepted in the United States of America, the
Acquisition is considered to be a capital transaction in substance, rather than
a business combination. That is, the Acquisition is equivalent to the issuance
of stock by Insynq for the net monetary assets of Xcel accompanied by a
recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the Acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the post-reverse-acquisition financial statements of the
"legal acquirer" Xcel, are those of the "legal acquiree" Insynq (the accounting
acquirer).
On August 3, 2000, Xcel completed a re-incorporation as a Delaware corporation
and changed its' name to Insynq, Inc. In connection with the re-incorporation
of the Company in the State of Delaware, the shareholders unanimously voted for
the adoption of a plan of recapitalization pursuant to which the issued and
outstanding shares of the Company's common stock, would forward split, two-for-
one, so that holders of common stock would receive two shares of the Company's
$0.001 par value common stock for each share held. The 9,915,424 shares of
common stock outstanding immediately prior to the reorganization were converted
to 19,830,848 shares of common stock, and outstanding options and warrants to
purchase shares were converted into options and warrants entitling the holders
to purchase twice as many shares upon exercise of such options and warrants.
Loss per share calculations includes the Company's change in capital structure
for all periods presented.
NOTE 3 - MANAGEMENT PLANS
The Company is a development stage company as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting substantially
all of its present efforts to establishing a new business and its planned
operations have recently commenced. However, no significant operating revenues
have been derived to date. The Company has incurred recurring losses from
operations and has a total accumulated development stage deficit of $19,533,041
at August 31, 2001. As discussed in Note 8, the Company is in default on a
capitalized lease obligation. The underlying leased assets are critical to the
Company's operations. The Company has initiated contact to restructure the
lease obligation and, due to the current economic climate and current market
for the equipment, the Company anticipates that it can successfully restructure
this obligation. The development of the Company's technology and products will
continue to require a commitment of substantial funds. Currently, the Company
has no material capital commitments. However, should the Company be forced to
seek other equipment in the open market based on its inability to restructure
its capital lease obligation, the Company would attempt to raise the necessary
finances. These amounts, however, are currently not quantifiable.
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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's") to provide access to
their applications for customers and building new channels for marketing
products to customers. The Company is further developing new products to enable
the deployment and on going management of Insynq services. As a result of these
new alliances and products, the Company will be able to provide additional and
enhanced services to customers. In addition, the Company has been negotiating
with a national corporation to provide hosting and application services. The
negotiations are advancing and are currently in the procurement stage.
The Company has implemented cost restructuring strategies, cost-cutting
measures, and, in addition, the Company initiated vendor negotiations resulting
in improved payment terms or reductions in the total amounts due.
However, the rate at which the Company expends its resources is variable, may
be accelerated, and will depend on many factors. The Company will need to
raise substantial additional capital to fund its operations and may seek such
additional funding through public or private equity or debt financing. There
can be no assurance that such additional funding 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 additional funding
for completing and marketing its technology and the success of its future
operations.
Pursuant to Item 303(b)(1) and (3) of Regulation SB, the Company has no
material capital commitments. However, should the Company be forced to seek
other equipment in the open market based on its inability to restructure its
capital lease obligation, the Company would attempt to raise the necessary
finances. These amounts, however, are currently not quantifiable.
The rate at which the Company expends its resources is variable and depends on
many factors. The Company will need to raise substantial additional capital to
fund its operations and may seek such additional funding through public or
private equity or debt financing. There can be no assurance that such
additional funding 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 additional funding for completing and marketing its
technology and the success of its future operations.
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 35,663,143 and 19,972,841 for the three months ended August 31, 2001 and
2000, respectively, and 18,751,013 since inception (August 31, 1998). The
computation for loss per common share, assuming dilution, for the three months
ended August 31, 2001 and 2000, respectively, and since inception, was anti-
dilutive, and therefore, is not included. Outstanding warrants and options as
of August 31, 2001 total 18,850,779.
NOTE 5 - ACCRUED LIABILITIES
As of August 31, 2001, the Company was delinquent of approximately $650,000 of
its payroll and business taxes, and related penalties and interest. The
majority of the past due amount, or approximately $565,000, is for payroll
taxes, penalties and interest due to the Internal Revenue Service. The Company
and the Internal Revenue Service are currently negotiating an acceptable
installment payment plan for the obligation. The Company has been in contact
with other respective taxing authorities to initiate payment plans in
settlement of their respective past due taxes.
The Company has an outstanding tax lien in an amount of approximately $28,000
to a State for prior year's income taxes assessed to the predecessor company of
Insynq, Inc. This amount, included in the above past due taxes, is in dispute.
Amended returns to correct the assessed deficiency have been filed by the
Company.
NOTE 6 - RELATED PARTY NOTES PAYABLE
During the three month period ended August 31, 2001, the Company entered into
three additional short-term promissory notes, totaling $78,176. Each note is
unsecured and bears interest ranging from ten percent (10%) to twelve percent
(12%) per annum. Total related party notes payable, all with similar terms, as
of August 31, 2001 aggregate $1,377,486.
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NOTE 7 - CONVERTIBLE DEBENTURES
On June 29, 2001, the Company entered into a private financing transaction
with three investors under which the investors initially purchased a total of
$550,000 from a total of $1,200,000 12% convertible debentures.
On August 15, 2001 investors purchased an additional $100,000 under this
financing agreement. As of August 31, 2001 the Company has recorded a total of
$650,000 as convertible debentures. The debentures are convertible into shares
of common stock at the lesser of (i) $0.18 or (ii) the average of the lowest
three trading prices in the twenty-day trading period immediately preceding the
notice to convert, divided by two. The common stock carry attached warrants
that allow the investor, under the terms of the warrants, to purchase up to
2,400,000 shares of common stock at $0.04 per share. Terms of the debentures
provide for full payment on or before June 29, 2002 (maturity date), with
accrued interest of 12% per annum. Proceeds from these initial transactions,
net of fees, were $563,500. The Company anticipates receiving the remaining
$550,000, less certain fees, during the month of October 2001. Pursuant to the
agreement, the Company may not, without consent, (i) engage in any future
equity financing involving the issuance of common stock for a period of six
months from the date of closing, and (ii) may not engage in such transactions
for a period of two years without first giving the investors the opportunity to
purchase shares on a pro-rata basis.
NOTE 8 - CAPITAL LEASE OBLIGATION
The Company is in default on a capital lease obligation as of August 31, 2001;
accordingly, the lease has been classified as a current obligation.
NOTE 9 - STOCK OPTIONS
On March 31, 2000, the Company's Board of Directors adopted two long-term
incentive plans (Plans), described as follows:
2000 LONG TERM INCENTIVE PLAN (LTIP)
The LTIP provides for the issuance of incentive and non-qualified stock
options, stock appreciation rights and restricted stock to directors, officers,
employees and consultants. At the adoption of this plan, the Company set aside
16,675,300 shares of common stock, which may be issued upon the exercise of
options granted. As of August 31, 2001, incentive options available for
issuance are 4,560,122.
2000 EXECUTIVE LONG TERM INCENTIVE PLAN (EXECUTIVE LTIP)
The Executive LTIP provides for the issuance of incentive and non-qualified
stock options, stock appreciation rights and restricted stock to executive
officers of the Company. The Company set aside 5,400,000 shares of Class A
common stock under this plan at its adoption. As of August 31, 2001, two
corporate officers have been granted options to purchase a total of 5,000,000
shares of Class A common stock.
NOTE 10 - SUBSEQUENT EVENTS
On September 6, 2001, its former landlords served the Company with a summons
and complaint, which threatens litigation relating to the default by the
Company of its long-term lease obligation. The Company has not accrued a
liability associated with this claim and has initiated negotiations regarding
an out of court settlement.
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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 and including notes thereto, appearing in this
Form 10-QSB and in the Company's May 31, 2001 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.
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
management's current expectations and beliefs concerning future developments
and their potential effects upon us. Our actual results could differ materially
from those anticipated for many reasons. 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 the
Company's 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.
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, 2001 annual report on Form 10-KSB/A.
OVERVIEW
Insynq, Inc. was incorporated in the state of Washington on
August 31, 1998. We are a development stage company that provides Internet
appliances, known as customer premise equipment, 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 seek out a combination with a public
company. On February 18, 2000, Xcel Management, Inc., 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 the IQ Utility Service
while incorporating the customer premise equipment developed as part of the IQ
Delivery System.
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. 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
traditional local wide area networks and traditional client-server
implementations. Generally, we market our self as an Internet utility company
that can cost-effectively provide all of the computer software, hardware,
connectivity and Internet-access needs for its customers.
We currently have several independent software vendors' products on line
using the IQ Data Utility Service computing services and anticipate signing
various agreements with additional organizations in the next few months. We
expect to increase the subscriber base through these respective sales channels.
Software vendor relationships currently in place include Microsoft Corporation,
Network Associates, Inc./McAfee, Remedy Corporation, Macola Software, and
Novell, Inc.
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 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, our IQ Delivery System, which is
entirely managed and maintained by us. The system can also include Internet-
access services provided by us or by a user selected telecommunications
partner/provider. The final piece of the system is the data center, which is
located in Tacoma Washington. 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
services, customers are free to choose which components they use.
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In the process of developing the IQ Delivery System, our management
believes we have acquired valuable technological expertise. We have 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
During the three months ended August 31, 2000 (first quarter, Fiscal
2001), we had limited active operations, and therefore, we believe that
a comparison of the results of operations to the three months ended
August 31, 2001 (first quarter, Fiscal 2002) has limited value for evaluating
trends and/or as a basis for predicting future results.
We incurred a net loss of $1,535,481 for the three months ended
August 31, 2001 as compared to a net loss of $2,808,499 for the same period
a year ago. The respective quarterly losses resulted primarily from:
(1) providing discounted or free services as we test- marketed our products and
services, (2) initial network, infrastructure, and research and development
costs associated with start-up operations, (3) adjustments to salaries and
directly related benefits, (4) increased professional and consulting fees,
and, (5) the issuance of warrant and options for services.
Total revenue for three months ended August 31, 2001 was $194,565, an
increase of $126,805 over first quarter, Fiscal 2001. The primary sources of
first quarter, Fiscal 2002 revenue includes: (1) seat subscription revenue of
$142,448, net of discounts, (2) managed software and support service revenue
of $5,382, and (3) hardware and software sales and other revenue of $46,735.
The increase in total revenue over the first quarter, Fiscal 2001 was due
primarily to the strong demand for seat subscriptions. Seat revenue increased
279% over the same period one year ago and accounted for 82.7 % of the overall
net revenue increase over first quarter, Fiscal 2001. While we have experienced
growth in revenue in recent periods, prior growth rates should not be
considered as necessarily indicative of future growth rates or operating
results for Fiscal 2002. We expect future revenue from all sources to trend
away from our practice of providing discounts and free offerings experienced in
first quarter, Fiscal 2001 as we continue to develop our sales and implement
our sales and marketing strategies, increase consumer understanding and
awareness of our technology and prove our business model.
Our continued growth is significantly dependent upon our ability to
generate sales relating to our subscription and managed software services.
Our main priorities relating to revenue are: (1) increase market awareness of
our products and services through our strategic marketing plan, (2) growth in
the number of customers and seats per customer, (3) continue to accomplish
technological economies of scale, and (4) continue to streamline and maximize
efficiencies in our system implementation model.
COSTS AND EXPENSES
For the three months ended August 31, 2001, we recorded direct costs of
services of $330,967, a relatively modest increase of $22,468 over the limited
operations experienced in the same period one year ago. Network and
infrastructure costs were $29,327 for first quarter, Fiscal 2002, which is a
decrease of $8,087over the same period ended August 31, 2000.
Selling, general, and administrative costs were $1,206,320 for the three
months ended August 31, 2001, representing a decrease of $825,183 over the same
three month period one year ago. The decrease can be directly attributed to
management's committed efforts, beginning in the fall of 2000, to restructure
the company operations and reduce expenses. Of significance is the $694,051
decrease of comparable period expenses requiring cash payments. In addition,
non-cash compensation decreased by $131,132. Non-cash expenses for the first
quarters, Fiscal 2002 and 2001 was $516,668 and $647,800, respectively.
Non -cash compensation is generally representative of the fair value of common
stock, options and warrants issued for services, and the amortization of
unearned compensation.
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Total interest expense decreased to $94,331 during the first quarter,
Fiscal 2002 versus $561,291 during the first quarter, Fiscal 2001. The decrease
of $466,966 was due primarily to: (1) accounting for non-cash interest
recognized on the fair value of warrants issued with notes payable and
convertible debentures, (2) interest recognized for the beneficial conversion
features on the conversion of debentures and notes payable, (3) for the
reductions in the original conversion prices offered significantly below the
fair market value of the common stock on the conversion dates, and
(4) capitalized equipment lease obligations. Accounting for non-cash interest
resulted in $7,867 and $526,177 of the reported expense for first quarter,
Fiscal 2002 and 2001, respectively.
The Company reported other income of $36,677 for the first quarter, Fiscal
2002. The reported amount represents approximately $36,000 of favorable vendor
negotiated settlements.
LIQUIDITY AND CAPITAL RESOURCES
Insynq had cash and cash equivalents of $30,130 as of August 31, 2001, and
a deficit in working capital of $4,244,983 at the same date. During the first
quarter Fiscal 2002 Insynq used cash in its operating activities totaling
$785,607.
We finance our operations and capital requirements primarily through
private debt and equity offerings. For the three months ended August 31, 2001,
we received cash totaling $728,176 from the issuance of promissory notes
payable and convertible debentures. During first quarter Fiscal 2002, we
received $32,000 from the issuance of common stock for the exercise of options.
On June 29, 2001, the Company entered into a private financing transaction
with three investors under which the investors initially purchased $550,000
from a total of $1,200,000 12% convertible debentures. On August 15, 2001
investors purchased an additional $100,000 under this financing agreement.
The debentures are convertible into shares of common stock at the lesser of
(i) $0.18 or (ii) the average of the lowest three trading prices on the twenty
trading days prior to the notice of such conversion, divided by two.
The common stock carry attached warrants that allow the investor, under the
terms of the warrants, to purchase up to 2,400,000 shares of common stock at
$0.04 per share. Terms of the debentures provide for full payment on or before
June 29, 2002, with accrued interest of 12% per annum. Cash proceeds from
these initial transactions, net of fees, were $563,500. We anticipate
receiving the remaining $550,000, less fees, during the month of October 2001.
The Company has complied with all requirements of the financing agreement in
order to receive the final distribution(s). However, our continuation as a
going concern is dependent on our ability to obtain additional financing and
generate sufficient cash flow from operations to meet our obligations on a
timely basis.
As of October 10, 2001, we were late in payment of certain creditor trade
payables of $743,886. In June 2001, our management negotiated either
substantial reduction of amounts owed or negotiated more favorable long-term
payment plans. We offered three payment plans: (1) seventy percent reduction
in the amount owed with payment due in one installment; (2) fifty percent
reduction of the amount owed with payment in twelve installments; and
(3) no reduction of the amount owed with payment in twenty-four installments.
We believe that these negotiations were well received by our vendors. As of
October 10, 2001, creditors whose payables totaled $432,351 (including the
discounts described above) have accepted such plans as follows: (i) $55,964 in
trade payables have accepted option 1; (ii) $2,887 have accepted option 2;
(iii) $125,308 have accepted option 3; and (iv) $175,133 have accepted various
payment plans of varying time periods ranging from 2-18 months. In addition,
vendors forgave $75,659 in trade payables.
We lease equipment under a capital leases expiring in 2003. Our principal
capital lease obligation for computer hardware, printers and related
infrastructure is in default in the amount of $697,314. We have initiated
discussions to restructure this obligation and, given the current market
conditions, believe we will be successful in such attempt. If we are unable to
successfully restructure this obligation, options remain open to us including,
for example, returning the equipment and purchasing new equipment on the open
market. However, there can be no assurance that we will able to locate other
equipment or raise the funds necessary to make such purchases. In addition, if
all other methods fail, we might be able to outsource our data center function;
however, there is no assurance that such methods will be available to us on
favorable terms, or at all. If this were to occur then we may be unable to
deliver to our customers their contracted services.
In addition, approximately $523,000 of business and payroll taxes is
delinquent, plus $127,000 of related assessed penalties and interest. We are
currently negotiating with the Internal Revenue Service about a payment plan
for the past due taxes. The IRS has imposed certain conditions on the Company
in order to proceed with negotiations, one of which requires the Company to
remain current on all future payroll tax deposits. We have also been in
contact with other respective taxing authorities to initiate payment plans in
settlement of their respective past due taxes. There can be no assurances,
however, that we will be able to agree or commit to any proposed terms set
forth by the Internal Revenue Service or favorably negotiate terms with other
taxing authorities. If we are unsuccessful, the taxing authorities could
obtain a lien against some or all of our assets. Should this occur, we likely
would be forced to cease our operations.
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Additionally, there is one lien for approximately $28,000, filed by the
State of Utah, for prior year's income taxes, plus accrued penalties and
interest. The State of Utah assessed these taxes to Xcel Management, Inc.,
the predecessor company of Insynq, Inc. This amount is in dispute and amended
returns to correct this deficiency have been filed.
We have been served with a summons and complaint by Howe/Horizon
Holdings I, LLC and Horizon Holdings, our former landlords, which threatens
litigation against us relating to the default by us of our lease obligation.
We have initiated negotiations regarding an out of court settlement.
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.
Since September 2000, we began implementation of an internal cost
restructuring of our operations, both in sales and marketing, as well in
the executive management team, and other critical cost cutting measures.
In June 2001, we negotiated with many of our vendors to materially reduce
amounts owed or attain more favorable long-term payment terms. As a result of
these measures, we have tightened the controls over our use of cash and,
additionally, have taken steps to improve the billing and collection process.
Our management forecasts the continuing effects of these changes will result in
a substantial improvement of monthly cash flows. In addition to these changes,
we have implemented a marketing program through our recently developed
accounting vertical, which has dramatically reduced customer acquisition costs.
The combination of the internal restructuring efforts and increased operational
efficiencies will allow us to move toward profitability and to achieve our
business plan and goals. We are also aggressively pursuing opportunities to
merge and/or acquire compatible companies with which to leverage management,
financial and operational resources. We believe these changes and strategies
will position us well for future opportunities.
We have recently signed several sales and marketing agreements.
In particular, an agreement with an accounting affiliation of approximately
60,000 subscribers has recently been finalized. The adoption of the IQ Data
Utility Service solution by these and other accountants is providing access to
professional accounting organizations and their client bases. There can be no
assurance that our entering into this agreement will substantially increase our
monthly recurring revenues. In addition, we are currently negotiating with a
large national corporation to provide hosting and application services.
The immediate performance in this market indicates that use of enabling
technologies for accounting on-line and business process outsourcing is gaining
momentum. There can be no assurances, however, that we will successfully
negotiate and execute these agreements.
We believe that technology outsourcing, focused on business fundamentals,
such as finance, accounting, customer relationship management and sales force
automation, will be the primary adopters application service provider and
managed service solutions in the next year. We are focusing all possible
resources in developing our domain expertise in these areas to gain additional
leverage and build broader service offerings that compliment our current
services already being delivered to those markets.
We cannot be sure that we 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 we 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, our
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 our 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.
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Our continuation as a going concern is currently dependent on our ability
to obtain additional financing, acquire strategic business entities and
generate sufficient cash flow from our operations to meet, and in certain
cases, restructure certain obligations on a timely basis. We also believe 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 our ability to secure sufficient sources of financing, continuation of
adequate vendor credit and increased sales of services.
We currently have no arrangements or commitments for accounts or accounts
receivable financing. We believe our need for additional capital going forward
will be met from private debt and equity offerings, and, increasingly, from
revenues from operations as we continue to implement our strategic plan;
however, future operations will be dependent upon our ability to secure
sufficient sources of financing and adequate vendor credit. However, there can
be no assurance that we will achieve any or all of these requirements.
We are currently developing and refining our acquisition and expansion
strategy. If we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations, or if we consummate
acquisitions, we will need to raise additional capital from equity or debt
sources. We cannot be sure that we will be able to obtain the additional
financings to satisfy our cash requirements or to implement our growth strategy
on acceptable terms or at all. 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. We are
presently pursuing a variety of sources of debt and equity financings. 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.
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PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We have been served with a summons and complaint by Howe/Horizon
Holdings I, LLC and Horizon Holdings, our former landlords, which threatens
litigation against us relating to the default by us of our lease obligation.
We have initiated negotiations regarding an out of court settlement.
We have been served with a summons and complaint by Business Careers,
a temporary staffing company, which threatens litigation against us relating to
nonpayment of trade payables. We have initiated negotiations regarding an out
of court settlement.
Certain of our vendors, including Sprint PCS, RR Donnelley and Sons
Company, Accountants on Call, HSC Real Estate, Inc., Merrill Corporation and
Veca Electric have also indicated in writing that they might file suit against
us if they do not receive satisfactory payment of their trade payables.
We have initiated discussions regarding the negotiation of payment schedules.
On August 29, 2001, subsequent to threatened litigation by Chuckals Inc.
for office products purchased last year, we entered into a settlement agreement
with Chuckals that provided for a $3,000 payment to Chuckals.
On September 3, 2001, subsequent to threatened litigation by
Mr. Martin E. Darrah, the owner of a former acquisition target, relating to
allegations of an improper termination of acquisition proceedings and the
repayment of a $14,000 loan, we entered into a settlement agreement with
Mr. Darrah. The settlement agreement provided for the issuance of (a) 200,000
options to purchase shares of our common stock at an exercise price of $0.07
per share to Mr. Darrah; and, (b) 50,000 options to purchase shares of our
common stock at an exercise price of $0.07 per share to Mr. Darrah's attorneys.
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 June 29, 2001, we entered into a private financing transaction with
three investors, AJW Partners LLC, New Millennium Capital Partners II, LLC, and
AJW/New Millennium Offshore, Ltd. (collectively, the Buyers), under the terms
of which the Buyers purchased (a) 12% convertible debentures in the aggregate
principal amount of up to $1,200,000 (together with any debenture(s) issued in
replacement thereof or as a dividend thereon or otherwise with respect thereto
in accordance with the terms thereof, convertible into shares of our common
stock, $0.001 par value per share, and (b) warrants to purchase up to 2,400,000
shares of our common stock, each as described below. The terms of debentures
provide for full payment on or before June 29, 2002, with interest of 12% per
annum. The terms of the warrants entitle each buyer to purchase shares of our
common stock at a price equal to the lesser of (i) $.04 per share and (ii) the
average of lowest three (3) trading prices during the twenty trading days
immediately prior to exercise, at any time after June 29, 2001 and before
June 29, 2003.
On July 10, 2001, we entered into an agreement to provide professional
services with Central Software Services Inc. (Central Software).
Under the terms of the agreement, the previous agreement with VJ, dated
February 20, 2000, was cancelled in its entirety. For a term of six months,
Central Software will provide professional services in the form of identifying
and negotiating acquisition opportunities and other merger consulting as
appropriate. Under the terms of the agreement, Central Software will receive
2,000,000 shares of restricted common stock at $0.07 per share and a monthly
payment of $10,000. In addition, we will issue an additional 500,000 shares of
restricted shares of common stock upon the successful completion of each
acquisition.
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On September 3, 2001, in settlement of a loan dispute, we entered into a
settlement agreement with Martin E. Darrah. In connection with the settlement,
we issued the following: (a) 200,000 options to purchase shares of common stock
with an exercise price per share of $0.07 to Mr. Darrah, and (b) 50,000 options
to purchase shares of common stock with an exercise price of $0.07 per share to
John Spencer, legal counsel to Mr. Darrah, as consideration for legal fees.
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 June 21, 2001, in exchange for the waiver of certain registration
rights by One Click Investments, LLC, John P. Gorst gifted to One Click
1,000,000 shares of common stock with voting rights retained by Gorst and
agreed that One Click's securities dated August 2000 and January 2001 will be
included in the next SB-2 Registration we file (excluding the one to be filed
by August 1, 2001), and the February 2000 warrants were re-priced at an
exercise price of $0.25 per share of common stock with an exercise date
extending to December 31, 2004, with a cashless provision.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
4.64 Securities Purchase Agreement dated June 29, 2001 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC,
AJW/New Millennium Offshore, Ltd and Insynq. Inc. (Incorporated
by reference to Exhibit 4.64 to the Company's Annual Report on
Form 10-KSB filed July 31, 2001).
4.65 Form of Stock Purchase Warrant dated June 29, 2001 between
AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to
Exhibit 4.65 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
4.66 Form of Secured Convertible Debenture dated June 29, 2001 between
AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to
Exhibit 4.66 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
4.67 Guaranty and Pledge Agreement dated June 29, 2001 between
M. Carroll Benton, AJW Partners, LLC, New Millennium Capital
Partners II, LLC, and AJW/New Millennium Offshore, Ltd. (Incorporated
by reference to Exhibit 4.67 to the Company's Annual Report on
Form 10-KSB filed July 31, 2001).
4.68 Registration Rights Agreement dated June 29, 2001 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC Millennium
Capital Partners II, LLC and Insynq, Inc. (Incorporated by reference
to Exhibit 4.68 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.75 Agreement to Provide Professional Service dated July 10, 2001 between
Central Software Services and Insynq, Inc. (Incorporated by reference
to Exhibit 10.75 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.78 Acquisition Purchase Agreement dated June 1, 2001 between Omnibus
Subscriber Computing, Inc. and Insynq, Inc. (Incorporated by reference
to Exhibit 10.78 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.79 Settlement Agreement dated June 21, 2001 between One Click
Investments, LLC and John P. Gorst. (Incorporated by reference to
Exhibit 10.79 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.80 Lease Agreement dated July 6, 2001 between Simon-Marten, LLC and
Insynq, Inc. for 1127 Broadway Plaza, Suite 10, Tacoma,
Washington, 98402. (Incorporated by reference to Exhibit 10.80
to the Company's Registration Statement on Form SB-2 filed
September 19, 2001.)
10.81 Settlement Agreement dated September 6, 2001 between Martin E. Darrah
and Insynq, Inc. (Incorporated by reference to Exhibit 10.81
to the Company's Registration Statement on Form SB-2 filed
September 19, 2001.)
(b) Reports on Form 8-K
None
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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 October 15, 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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EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
4.64 Securities Purchase Agreement dated June 29, 2001 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC,
AJW/New Millennium Offshore, Ltd and Insynq. Inc. (Incorporated
by reference to; Exhibit 4.64 to the Company's Annual Report on
Form 10-KSB filed July 31, 2001).
4.65 Form of Stock Purchase Warrant dated June 29, 2001 between
AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to;
Exhibit 4.65 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
4.66 Form of Secured Convertible Debenture dated June 29, 2001 between
AJW Partners, LLC and Insynq, Inc. (Incorporated by reference to;
Exhibit 4.66 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
4.67 Guaranty and Pledge Agreement dated June 29, 2001 between
M. Carroll Benton, AJW Partners, LLC, New Millennium Capital
Partners II, LLC, and AJW/New Millennium Offshore, Ltd. (Incorporated
by reference to; Exhibit 4.67 to the Company's Annual Report on
Form 10-KSB filed July 31, 2001).
4.68 Registration Rights Agreement dated June 29, 2001 between
AJW Partners, LLC, New Millennium Capital Partners II, LLC
Millennium Capital Partners II, LLC and Insynq, Inc.
(Incorporated by reference to; Exhibit 4.68 to the Company's
Annual Report on Form 10-KSB filed July 31, 2001).
10.75 Agreement to Provide Professional Service dated July 10, 2001 between
Central Software Services and Insynq, Inc. (Incorporated by reference
to Exhibit 10.75 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.78 Acquisition Purchase Agreement dated June 1, 2001 between Omnibus
Subscriber Computing, Inc. and Insynq, Inc. (Incorporated by reference
to Exhibit 10.78 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.79 Settlement Agreement dated June 21, 2001 between One Click
Investments, LLC and John P. Gorst. (Incorporated by reference to
Exhibit 10.79 to the Company's Annual Report on Form 10-KSB filed
July 31, 2001).
10.80 Lease Agreement dated July 6, 2001 between Simon-Marten, LLC and
Insynq, Inc. for 1127 Broadway Plaza, Suite 10, Tacoma,
Washington, 98402. (Incorporated by reference to Exhibit 10.80
to the Company's Registration Statement on Form SB-2 filed
September 19, 2001.)
10.81 Settlement Agreement dated September 6, 2001 between Martin E. Darrah
and Insynq, Inc. (Incorporated by reference to Exhibit 10.81
to the Company's Registration Statement on Form SB-2 filed
September 19, 2001.)
<FN>
* Filed Herewith
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