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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended November 30, 2000.
[_] 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.
---------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 74-2964608
-------- ----------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
</TABLE>
1101 Broadway Plaza
Tacoma, Washington 98402
------------------------
(Address of Principal Executive Office)(Zip Code)
Telephone Number (253) 284-2000
-------------------------------
(Registrant's telephone number, including area code)
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value --- 25,146,088 shares as of January 15, 2001
================================================================================
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INSYNQ, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000
PART I
<TABLE>
<S> <C>
Item Page
----
1 Financial Statements 2
2 Management's Discussion and Analysis of Financial Condition and results of
Operations 10
PART II
5 Other Information 15
6 Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSYNQ, INC.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
November 30, 2000 May 31, 2000
(unaudited) (restated)
ASSETS ----------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 71,349 $ 106,806
Accounts Receivable, net of allowance of $9,920 and $1,469
at November 30, 2000 and May 31, 2000 73,218 63,405
Other Receivables 16,649 16,912
Inventories 11,873 29,512
Prepaid expenses 14,588 29,186
------------ -----------
187,677 245,821
PROPERTY AND EQUIPMENT, net 1,081,620 1,031,675
OTHER ASSETS
Intellectual and other intangible property, net 65,587 87,824
Deposits 61,831 165,584
------------ -----------
$ 1,406,715 $ 1,530,904
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 873,633 $ 296,946
Accrued and other liabilities 528,623 183,565
Notes payable 422,633 39,470
Current portion of long-term obligations 198,532 166,869
------------ -----------
2,023,421 686,850
ADVANCES FROM STOCKHOLDER -- 100,000
CAPITAL LEASE OBLIGATIONS, net of current portion 366,873 442,087
PUT OPTION OBLIGATIONS 1,071,785 1,071,785
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 24,601,378 and 19,620,846 shares issued and
outstanding as of November 30, 2000 and May 31, 2000,
respectively 24,602 19,621
Additional paid-in capital 12,481,548 3,132,903
Unearned compensation and services (1,663,850) --
Accumulated develop stage deficit (12,897,664) (3,922,342)
------------ -----------
Total Stockholders' equity (deficit) (2,055,364) (769,818)
------------ -----------
$ 1,406,715 $ 1,530,904
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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INSYNQ, INC.
(A Development Stage Company)
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended Cumulative
November 30, November 30, results
of operations
since inception
-------------------------- -------------------------- -----------------
2000 1999 2000 1999 (August 31, 1998)
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 106,172 $ 94,579 $ 173,933 $ 118,041 $ 423,357
COSTS AND EXPENSES
Direct cost of services 205,947 113,741 480,328 152,669 1,118,241
Network and infrastructure costs 41,768 12,901 79,182 18,851 180,523
Selling, general and administrative 2,320,320 480,261 4,452,978 534,065 7,418,443
Research and development 71,824 17,042 142,508 17,042 248,260
Advertising 55,474 - 108,515 - 206,260
Depreciation and amortization 64,281 48,014 136,638 58,378 341,895
------------ ------------ ------------ ------------ -------------------
2,759,614 671,959 5,400,149 781,005 9,513,622
------------ ------------ ------------ ------------ -------------------
Loss from operations 2,653,442 577,380 5,226,216 662,964 9,090,265
OTHER EXPENSE (INCOME)
Interest expense and financing costs 3,513,381 18,554 3,749,672 37,179 3,854,751
Other Income - (1,560) (566) (42,779) (47,352)
------------ ------------ ------------ ------------ ------------------
NET LOSS $ 6,166,823 $ 594,374 $ 8,975,322 $ 657,344 $ 12,897,664
============ ============ ============ ============ ==================
Weighted average number of common shares
outstanding 21,401,654 11,771,577 21,197,545 11,543,038 14,585,690
============ ============ ============ ============ ==================
Net loss per share, basic and diluted $ 0.29 $ 0.05 $ 0.42 $ 0.06 $ 0.88
============ ============ ============ ============ ==================
</TABLE>
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)
<TABLE>
<CAPTION>
Six months ended Cumulative results
November 30, of operations
since inception
2000 1999 (August 31, 1998)
------------- ------------ ----------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVIES
Net Loss $ (8,975,322) $ (657,344) $(12,897,664)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 136,638 58,378 341,895
Issuance of common stock for services 489,746 123,848 828,825
Issuance of option and warrants for services 1,163,572 202,631 1,946,416
Issuance of options to employees under fair market value 230,284 -- 230,284
Fair value of warrants issued with notes payable and
capital lease obligations 244,734 -- 268,334
Fair value of warrants issued and beneficial conversion
features on debentures and notes payable 3,415,294 -- 3,415,294
Change in assets and liabilities
Accounts receivables (9,813) (3,138) (73,218)
Other receivables 35,263 -- 18,351
Prepaid expenses 14,598 (18,089) (14,588)
Inventories 17,639 (23,988) (11,873)
Deposits and other assets 104,912 -- (59,556)
Accounts payable 506,790 19,369 803,736
Accrued and other liabilities 377,778 (50,333) 561,343
------------ ------------ ------------
Net cash used by operating activities (2,247,887) (348,666) (4,642,421)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (157,743) (178,324) (570,657)
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 (192,743) (178,324) (606,948)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (7,150) -- (14,477)
Borrowings from convertible debentures 800,000 -- 800,000
Proceeds from notes payable 1,144,000 -- 1,144,000
Payments on notes payable (5,837) -- (36,367)
Proceeds from the exercise of stock options and warrants 194,160 -- 194,160
Proceeds from the sale of common stock 280,000 553,501 3,133,402
Advances from stockholder -- -- 100,000
------------ ------------ ------------
Net cash provided by financing activities 2,405,173 553,501 (5,320,718)
NET INCREASE (DECREASE) IN CASH (35,457) 26,511 71,349
CASH AT BEGINNING OF PERIOD 106,806 501 --
------------ ------------ ------------
CASH AT END OF PERIOD $ 71,349 $ 27,012 $ 71,349
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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INSYNQ, INC.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Unearned Accumulated Total
Common Stock Additional Compensation Development Stockholders'
----------------------- Paid-In and Stage Equity
Shares Amounts Capital Services (deficit) (deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 2000 20,354,346 $ 20,354 $ 6,792,129 $ (1,853,159) $ (6,730,841) $(1,771,517)
========== ========= ============ ============= ============ ===========
Issuance of common stock for
services at $1.32 in September
2000 and record unearned
compensation over service period 250,000 250 327,250 (19,649) 307,851
Recognition of expense for
options issued for services in
November 2000 805,548 805,548
Issuance of common stock for the
exercise of stock options at
$0.30 in September 2000 600,000 600 179,400 180,000
Additional shares issued in
conjunction with the sale of
common stock for $0.30 in
November 2000 55,000 55 (55) -
Issuance of common stock for
exercising of warrants at $1.77
in September 2000 8,000 8 14,152 14,160
Forfeiture of common stock
issued for services (35,264) (35) 35 -
Issuance of common stock for
services 3,500 4 3,441 3,445
Issuance of common stock for
conversion of debentures and
accrued interest at $0.50 1,855,796 1,856 2,313,658 2,315,514
Issuance of common stock for
conversion of notes payable at
$0.50 1,510,000 1,510 1,885,990 1,887,500
Discount on Convertible
Debenture with conversion price
below fair market value on
grant date 250,000 250,000
Amortization of compensation and
forfeiture of stock options
under fair market value (90,000) 208,958 118,958
Net loss for the three months
ended (6,166,823) (6,166,823)
---------- --------- ------------ ------------- ------------ -----------
Balance, November 30, 2000 24,601,378 $ 24,602 $ 12,481,548 $ (1,663,850) $(12,897,664) $(2,055,364)
========== ========= ============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
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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
November 30, 2000 and 1999 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 or offerings of
equity.
Note 3 - Management Plans
The Company is devoting its efforts into establishing a business in the new
emerging Application Service Provider ("ASP") 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 products 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 $740,000 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 will continue to raise substantial capital through public
and private equity or debt financing to fund its operations and to plan for the
expansion of its sales force. In doing so, the Company has negotiated a short-
term promissory note for $1,120,000 and has 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.
7
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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.
The Company has been exploring various marketing strategies and has completed
its national test market plan. Through these efforts, the Company has recently
signed several national sales and marketing agreements. These relationships are
projected to bring over $300,000 per month in recurring revenues.
As a result of the Company's recent reorganization of certain operations,
corporate overhead has been reduced by approximately $100,000 per month. In
addition, the Company is continuing to focus on the development and refinement
of its acquisition and expansion strategy. From September 1, 2000 through
January 9, 2001, the Company has raised $2,064,280 in debt and equity financing.
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
21,197,545 and 11,543,038 for the six months ended November 30, 2000 and 1999,
respectively, 21,401,654 and 11,771,577 for the three months ended November 30,
2000 and 1999, respectively, and 14,585,690 since inception (August 31, 1998).
The computation for loss per common share assuming dilution for the three and
six months ended November 30, 2000 and 1999 and since inception was anti-
dilutive, and therefore, is not included.
Note 5 - Stock Split
On August 3, 2000, the Company approved a two-for-one (2 for 1) stock split.
The accompanying financial statements have been accordingly restated to reflect
this split.
Note 6 - Notes Payable
On July 17, 2000, the Company entered into two stockholder loan agreements, in
the form of promissory notes, totaling $255,000. In addition, the stockholders
were granted warrants to purchase a total of 325,000 shares of common stock at a
price of $2.00 per share. The Company recorded a discount on the loans totaling
$229,000 for the fair value of warrants granted. The Company recognized
$229,000 of interest expense on the discount for the six months ended November
30, 2000. 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 stockholder 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.
8
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As an inducement to the holders to convert the above loans, the Company agreed
to convert the loans into common stock at a price below the fair market value of
the common stock at the time of conversion. This resulted in additional
interest expense totaling $1,132,500.
In November 2000, the Company entered into a promissory note agreement with a
stockholder for $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 November 30, 2000 totaled
$300,000. The note bears interest at ten percent per annum and is due on
November 2, 2001.
Note 7 - Convertible Debentures
On June 16, 2000, the Company entered into two loan agreements for a total of
$650,000, in the form of convertible debentures. The principal balance of the
loans and accrued interest were convertible into common stock at $1.42 and $0.71
per share, respectively. In addition, the Company granted 457,746 warrants to
purchase common stock at $2.00 per share.
On September 16, 2000, the Company entered into two additional convertible
debenture agreements totaling $250,000. The loans and accrued interest was
convertible into common stock at $1.00 per share. In addition, the Company
granted 250,000 warrants to purchase common stock at $1.00 per share to the
holders of the debentures.
The Company recorded a discount on the convertible debentures totaling $650,000
equal to the fair value of the warrants received and conversion feature. The
Company has recognized $650,000 of interest expense on the discount for the six
months ended November 30, 2000.
As an inducement to convert the balance of principal and related accrued
interest of the debentures, the Company reduced the original conversion share
prices to $0.50. This resulted in an additional interest charge in the amount
of $1,387,616.
In November 2000, the Company converted the debentures totaling $900,000, plus
accrued interest of $55,796, into common stock at $0.50.
Note 8 - Stock Options
In accordance with APB Opinion 25, the Company had recorded unearned
compensation of $1,307,500 for stock options issued to employees under fair
market value. For the six months ended November 30, 2000, $230,284 of expense
was recognized related to these options. In addition, employees terminated
during the period ended November 30, 2000, resulting in the forfeiture of their
options totaling $90,000.
In September 2000, the Company granted options to purchase 600,000 shares of
common stock at an exercise price of $0.30 to consultants for services totaling
approximately $800,000. The options were exercised into common stock as of
November 30, 2000.
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Note 9 - Contingencies
As of November 30, 2000, the lawsuit filed on August 14, 2000 by the widow of a
former principal and stockholder of Insynq, Inc. was settled without any damages
being assessed against the Company.
Note 10 - Tax Delinquency
As of November 30, 2000, the Company is past due on the payment of its payroll
taxes for the quarter ended September 30, 2000. The amount of the delinquencies
is approximately $245,000 and is due primarily to the Internal Revenue Service.
Note 11- Subsequent Events
In December 2000, the Company settled a claim filed by a former president and
officer of the Company. The settlement was for the issuance of 85,000 shares of
common stock and $10,000 in cash.
On December 29, 2000, two officers and stockholders rescinded the issuance of
common stock for services valued at $30,672 and were granted non-qualified stock
options.
In January 2001, pursuant to four agreements dated November 1, 2000 with
individual stockholders, the Company will convert its put option obligation
totaling $1,071,785 into 2,143,570 shares of common stock.
On January 2, 2001, the Company entered into a Consulting Agreement with Michael
duPont for the term of one year with payment of consulting fees in the form of
the granting of 200,000 non-qualified stock options to purchase 200,000 shares
of common stock with an exercise price equal to the fair value of the stock at
the close of market on the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements, including notes thereto, appearing in this Form 10-QSB
and in the Company's May 31, 2000 annual report on Form 10-KSB/A.
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
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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. (Insynq), was incorporated in the State of Washington on
August 31, 1998. The Company is a development stage enterprise that provides
Internet Appliances, managed and hosted software services (through customer
premises equipment, CPE, and application hosting), 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 as
components or as an integrated whole, either sold directly or on a fee or
subscription basis.
In late 1999, Insynq decided to target a combination with a public company.
On February 18, 2000, Xcel Management, Inc. (Xcel), a publicly held company, and
Insynq closed an asset purchase transaction in which Xcel acquired substantially
all of the assets of Insynq. Xcel continued to develop the business of Insynq,
and on August 3, 2000, at a special meeting of Xcel's stockholders, Xcel
completed a re-incorporation merger with its wholly owned subsidiary, Insynq,
Inc., a Delaware corporation. Today, as a combined and surviving entity,
Insynq, Inc. continues to develop and deliver application hosting and managed
software services while incorporating the Internet Appliances 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 is marketed as an Internet utility company that can cost-effectively
provide all of the computer software, hardware, connectivity and Internet-access
needs for its customers.
Insynq currently has several independent software vendors' products on line
using the IQ server-based computing services and anticipates signing various
agreements with additional organizations in the next few months and expects to
increase the subscriber base through the respective sales channels. Key software
vendor relationships currently in place include Microsoft Corporation, Network
Associates, Inc./McAfee, Remedy Corporation, Macola Software, and Novell, Inc.
The Company believes its core competency is providing products and services
related to server-based and hosted computing. It is believed, currently, 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
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with Insynq in various capacities that combine the hardware, software, and
access required to build a successful delivery mechanism for the Internet
Utility services.
The complete IQ Delivery System and Internet Utility Service includes
managed network and application services, and can span from a customer's
keyboard to the Insynq Data Center. Insynq provides certain equipment, which is
kept on its customer's premises, including a simplified, diskless workstation or
thin client, and a multi-function router that is entirely managed and maintained
by Insynq. The system can also include Internet-access services provided by a
user selected telecommunications partner/provider. The final piece of the
system is the Insynq Data Center, which is located at the Tacoma Technology
Center. This facility, with redundant power, bandwidth, and cooling, houses the
server equipment and routers. While this is the recommended configuration for
customer use to take advantage of the full IQ Delivery System, they are free to
choose which components they use.
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
Insynq had very limited operational activity during the three months ended
November 30, 1999; therefore, management believes that any comparison of the
results of operations of the three months ended November 30, 1999 ("Second
Quarter 2000") to the three months ended November 30, 2000 ("Second Quarter
2001"), has very limited value for evaluating trends and/or as a basis for
predicting future results.
The Company incurred a net loss of $6,166,823 for the Second Quarter 2001,
as compared to a net loss of $594,374 for the Second Quarter 2000. The Second
Quarter 2001 loss resulted primarily from: (1) discounted or free services as
Insynq continued to test-market products and services, (2) additional network,
infrastructure, and research and development costs associated with start-up
operations, (3) increased 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) interest expense resulting from the issuance of
warrants with debt and beneficial conversion of debt into common stock.
Total revenue for Second Quarter 2001 was $106,172, an increase of $11,593
as compared to the Second Quarter 2000. The primary sources of Second Quarter
2001 revenue are: (1) seat subscription revenue of $75,564, net of discounts,
(2) managed software service revenue of $19,207, and, (3) hardware and
software sales and services revenue of $2,840. Management expects future
revenue generated from seat subscriptions to trend away from the practice of
providing discounts and free offerings experienced in Second Quarter 2001 as the
Company
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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 Second Quarter 2001, Insynq recorded direct costs of services of
$205,947, an increase of $92,206 over the limited operations in Second Quarter
2000. Network and infrastructure costs were $41,768 for the Second Quarter
2001, which is an increase of $28,867 over Second Quarter 2000.
Selling, general, and administrative costs increased to $2,230,320 in the
Second Quarter 2001, an increase of $1,840,059 over the Second Quarter 2000.
The increase is a direct result of the continuing build-out of the Company's
infrastructure, including hiring management and support staff, the development
of the sales and delivery systems, and increased incidence of professional and
consulting fees.
Depreciation and amortization expense increased to $64,281 in Second
Quarter 2001, an increase of $16,267 over Second Quarter 2000, due to the
acquisition and capitalization of depreciable equipment, primarily computer
equipment needed for infrastructure in support and development of the day to day
business operations.
Interest expense was $3,513,381 for the Second Quarter 2001 versus $18,554
for the Second Quarter 2000. 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
original conversion prices offered below the fair market value of the common
stock on the conversion date; and, capitalized equipment lease obligations.
Liquidity and Capital Resources
Insynq had cash and cash equivalents of $71,349 as November 30, 2000, and a
deficit in working capital of $1,835,744. For the six months ended November 30,
2000, Insynq used cash in the operating activities and financing activities
totaling $2,247,887 and $192,743, respectively.
The Company finances its operations and capital requirements primarily
through private debt and equity offerings. For the six months ended November
30, 2000, the Company received
13
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cash totaling $1,944,000 from the issuance of notes payable and convertible
debentures, which were converted into common stock in November 2000. The Company
also received $474,160 from the sale of common stock and the issuance of common
stock for the exercising 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 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 ASP solution by these and other
accountants is providing access to professional accounting organizations and
their client bases. Management conservatively projects that these agreements
are expected to reach $300,000 per month in recurring revenues within the
initial 12 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 ASP
solutions in the next year. The Company is focusing all possible resources in
developing our domain expertise in these areas to gain additional leverage and
build broader service offerings that compliment our current services already
being delivered to those markets.
The Company recently implemented a reorganization of its operations, both
in sales and marketing, as well in the executive management team, and
implemented certain cost-cutting measures. Management forecasts the effects of
these changes will result in approximately $100,000 a month in improved cash
flow. In addition to these reductions, the Company has implemented a marketing
program through its recently developed accounting vertical, which has
dramatically reduced customer acquisition costs. The combination of the
reorganization and increased operational efficiencies allow the Company to move
toward profitability and achieving its business plan and goals.
As part of the corporate reorganization, all sales activities have been
consolidated into the corporate headquarters in Tacoma. Management plans a
redeployment of a national direct sales force in the future to augment the
strategic alliance program.
Management believes these changes position Insynq well for future growth
opportunities, as there is now the right mix of technology and sales know-how to
help the strategic relationships be more effective promoting the Company's
products and services.
From September 1 2000, through January 9, 2001, Insynq raised additional
funds in the amount of $194,280 through the exercise of options and warrants,
$750,000 in short-term loans and debentures and a short-term promissory note of
$1,120,000 from a stockholder of the Company.
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As of January 9, 2001, the Company is late in payment of certain
creditor trade payables of approximately $740,000. Management is currently
working with these creditors to accept stock or long-term payment plans. These
negotiations have been well received and it is believed that the Company will
settle and/or restructure a significant number of these accounts. In addition,
approximately $245,000 of payroll tax is delinquent. Again, management has
initiated contact with the respective taxing authorities to work out an
arrangement for payment plans in settlement of these payroll 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.
Insynq's continuation as a going concern is currently dependent on its
ability to obtain additional financing, and generate sufficient cash flow from
its operations to meet, and in certain cases, restructure certain obligations on
a timely basis. Based on revised Pro Forma projections, the Company expects
profitability will be achieved in late 2001. Management also believes the need
for additional capital going forward will be met from public and private debt
and equity offerings. In essence, future operations will be dependent upon the
Company's ability to secure sufficient sources of financing and continuation of
adequate vendor credit.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 23, 2000, former president and chief operating officer,
Donald L. Manzano, filed a lawsuit against Insynq in the Superior Court of
California, Placer County. The lawsuit alleged that the Company breached a
written employment contract and an alleged oral employment contract, breached an
alleged duty of good faith and fair dealing, committed fraud and deceit, and
intentionally inflicted emotional distress upon him. Each of Mr. Manzano's
allegations related to the cessation of his employment with the Company in
approximately June 2000. He alleged that he had been damaged in an amount in
excess of $3,000,000, the majority of such alleged damages stemming from his
allegation that he may be unable to obtain employment with other employers in a
position with compensation comparable to that which he alleges the Company would
have paid him had his employment continued with the Company. He also sought
punitive damages. The parties have now reached a resolution of the lawsuit. The
Company has agreed to provide the following to Mr. Manzano in exchange for a
complete release by Mr. Manzano of Insynq, as well as a dismissal of the lawsuit
with prejudice: (a) a $10,000 payment and (b) 85,000 shares of restricted common
stock.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the three months ended
November 30, 2000, one of which was described in the Company's Form 10-QSB for
the quarter ended August 31, 2000 and filed on October 23, 2000:
In its Form 8-K filed October 13, 2000, the Company reported that on
October 11, 2000, it terminated its accountant, G. Brad Beckstead, and engaged
Grant Thornton LLP as the Company's accountants for the year ending May 31,
2001.
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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 January 15, 2001.
INSYNQ, INC.
By: /s/ JOHN P. GORST
-----------------
John P. Gorst
Chief Executive Officer
(Principal Executive Officer)
By: /s/ STEPHEN C. SMITH
--------------------
Stephen C. Smith
Interim Chief Financial Officer
(Principal Financial Officer)
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