UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2006
[ ] 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: 0-28541
QUINTEK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California 77-0505346
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
17951 Lyons Circle
Huntington Beach, California 92647
(Address of principal executive offices)
(714) 848-7741
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
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 past 12 months (or for such shorter period 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
Form 10-KSB.
Yes [ ] No [X] Delinquent filers are disclosed herein.
Total revenues for Fiscal Year Ended June 30, 2006 were $2,307,402.
The aggregate market value of the Common Stock held by non-affiliates (as
affiliates are defined in Rule 12b-2 of the Exchange Act) of the registrant,
computed by reference to the average of the high and low sale price on September
25, 2006, was $[ ].
As of September 25, 2006, there were 151,699,773 shares of issuer's common stock
outstanding.
1
QUINTEK TECHNOLOGIES, INC.
FORM 10-KSB
For the Fiscal Year Ended June 30, 2006
Part I Page
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Item 1. Description of Business. 3
Item 2. Description of Property. 13
Item 3. Legal Proceedings. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Part ll Page
------ ----
Item 5. Market for Common Equity and Related Stockholder Matters. 14
Item 6. Management's Discussion and Analysis or Plan of Operation. 16
Item 7. Financial Statements F-1
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 20
Item 8A. Controls and Procedures. 20
Item 8B. Other Information. 20
Part lll Page
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Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act. 21
Item 10. Executive Compensation. 22
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 23
Item 12. Certain Relationships and Related Transactions. 26
Item 13. Exhibits. 27
Item 14. Principal Accountant Fees and Services. 30
Signatures. 31
2
ITEM 1. - DESCRIPTION OF BUSINESS
This Annual Report on Form 10-KSB (including the section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not deemed to represent an all-inclusive
means of identifying forward-looking statements as denoted in this Annual Report
on Form 10-KSB. Additionally, statements concerning future matters are
forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our Management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.wpcs.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You
can obtain additional information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, including us.
We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report on Form 10-KSB. Readers are urged to carefully
review and consider the various disclosures made throughout the entirety of this
annual Report, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations
and prospects.
Overview
We are a California corporation. Our corporate headquarters are located at
17951 Lyons Circle, California, 92647. Quintek Electronics, Inc., our
predecessor company was founded in July 1991. On January 14, 1999, Quintek
Electronics, Inc. was acquired in a merger by Pacific Diagnostics Technologies,
Inc. and the surviving entity's name was changed to Quintek Technologies, Inc.
On February 24, 2000, we acquired all of the outstanding shares of common stock
of Juniper Acquisition Corporation. Upon effectiveness of that acquisition,
Quintek elected to become the successor issuer to Juniper for reporting purposes
under the Securities Exchange Act of 1934.
We provide back office services and solutions to improve efficiencies
within organizations. We accomplish this through out-sourcing/in-sourcing
services, consulting services and solution sales. Through our wholly owned
subsidiaries Quintek Services, Inc., or QSI, and Sapphire Consulting Services,
Inc. provides services to enable Fortune 500 and Global 2000 corporations to
reduce costs and maximize revenues.
Our QSI business unit provides back-office services to reduce our
customer's costs by enabling them to focus on their core competencies. We reduce
our customer's costs by converting their mission critical documents from paper
to electronic formats, making these documents readily organized and available
and automating the routing and approval processes related to electronic
documents via the internet. We deliver superior customer service, fast
turnaround time and competitive prices.
3
Market Overview
The outsourcing of jobs that can be performed via the Internet has come to
be called business process outsourcing or BPO. Forester Research, Inc estimates
that the market for BPO services will grow from $19 billion in 2004 to $146
billion in 2008. Additionally, in an August 2006 report from Business Insights,
titled "The BPO Market Outlook" they state that, "The BPO market is the single
fastest growing area of the IT services sector. Growing at 8% annually it is
expected to grow from $112.1 billion is 2005 to $144 billion in 2008." In a
report dated June 26, 2006 form Forrester entitled "Service Oriented
Architecture Will Shape the Future of BPO Delivery" states that, "Labor
arbitrage is the most straightforward element of BPO delivery." Quintek bridges
the gap of getting information to the outsourced laborer and is a key enabler of
SOA implementation.
We solve three major problems for the outsourcing market.
First, outsourced worker needs timely access to relevant information. The
most efficient and effective way is to have data and or source documents
converted to digital format. The information may then be easily shipped to the
worker electronically or via digital media (Disk, Hard Drive, Mag Tape, etc).
Quintek solves this problem through its high speed- high volume scanning and
data captue operations.
Second, closing a multi-year, multi-million dollar outsourcing deal
requires specialized sales skill. Proposal drafting and presentation, project
management, detailed costing are all needed to close and execute long term
contracts for BPO customers. Barriers exist, such as language, time and
distance, as BPO service providers are based in other countries. This creates
challenges in discovery and proposal creation, closing the sale and management
of the project. Quintek solves this problem with a management tea that has over
40 years of experience with sales and implementation technology services
industry.
Lastly, there are system integration requirements that must be supported
with a US presence. Quintek brings a US presence with specialized systems
integration experience to this growing market.
Recent activity in this space by large private equity groups further
validates the growth in the industry and attractiveness to institutional
investors. This past year ACS, a Fortune 500 company with reported annual
revenues of over $4 billion and more than 40,000 employees, was courted for a
buyout by major private equity firms including the Blackstone group. The company
declined offers and proceeded to make a tender offer for a significant portion
of their own stock. Additionally, SourceCorp, a business process outsourcing
solutions to clients throughout the U.S, with reported annual revenues of
approximately $415 million, was recently acquired by Apollo Management L.P., one
of the most active and successful private investment firms in the United States.
Market Opportunity
Our core competencies are converting mission critical documents from paper
to electronic formats, making these documents readily organized and available
and automating the routing and approval processes related to electronic
documents via the internet. We market these core competencies in three document
processing market segments: mortgages; healthcare and accounts payable.
According to the Mortgage Banking Association, there will be $1.8 trillion
in mortgage originations in 2006, down from $1.96 Trillion in 2005. We calculate
that this represents approximately 13 million loans to be processed. Our
experience is that each loan yields an average of 200 documents and that the
customer will pay approximately $0.10 per mortgage page. This yields an
addressable market of $260 million. According to Healthcare Informatics.com,
there were 15 billion health claims filed in 2004. Our experience is that
customers pay an average of $0.10 per claim for processing. This yields an
addressable market of $1.5 billion for healthcare claims processing service. In
2005, total revenues from the Fortune 500 companies were $8.2 trillion. Our
experience is that a company will spend 0.025% of its revenue on accounts
payable outsourcing. This yields an addressable market of $1.7 billion for A/P
processing services.
4
BPO Services Overview
Most BPO processes start by capturing data and organizing it into digital
formats. This has increased the need for service provider support. Companies
wanting to bring unstructured data on line have been faced with the task of
converting this information into electronic form. Unstructured data is
considered any media in paper, film, fiche or other forms that are not readily
available to the knowledge worker.
Companies electing to image capture their paper documents are turning to
service providers as a source of digitizing this information. Outsourcing this
business to service providers has proven less expensive than hiring permanent
staff. Temporary employees have proven ineffective since conversions are not
generally done all at once. Companies attempting to purchase equipment and train
staff to do their work in-house cannot keep up with the changing technologies in
hardware and software.
Our Core Competencies
Mailroom Outsourcing
The most efficient solution for a customer is for the customer to
outsource the mail handling function. We physically retrieve the mail directly
from the post office through a P.O. Box, sort, scan and capture key data fields
from each document. The scanned images and corresponding data are uploaded
directly to the customer's Enterprise Content Management , or ECM, or one of our
Application Service Provider partners' systems for online viewing by the
customer's end user. This service is sold per piece of mail processed. Our
mailroom outsourcing service is delivered from our Huntington Beach, California
facility.
High-Speed Scanning
Fortune 500 companies and other large organizations manage documents using
ECM systems such as OnBase from Hyland Software Inc., Documentum from EMC
Corporation or FileNet P8 from Filenet Corporation. These are very large
databases with web browser interfaces that allow people all over the world to
access and interact with document-based content in an organized manner
twenty-four hours a day/seven days a week.
The scope of work for a high speed scanning contract will usually include
us receiving paper documents and delivering these documents directly into the
customer's ECM system. Scanning is the process of converting a paper document
into a digital image saved in electronic format such as a TIFF or PDF file.
High-end scanners are similar to high-end copiers with sheet feeders, but they
output electronic files, not more paper. We provide the ground transportation
and secure facility for processing the documents, trained staff for processing
the documents, expertise to index, scan and categorize the documents, expertise
to re-assemble the original documents in the format and order they were
delivered and the expertise to upload the documents and the indexing into the
customer's ECM system. This often has to be done in less than 24 hours from
receipt of the document.
In its current configuration, our Huntington Beach facility can convert
6,550,000 images per month up from 2,400,000 per month last year. At a rate of
$0.05 an image this could result in approximately $300,000 a month in billings
and a gross profit of $120,000. Running two shifts at full capacity, the
facility could process 13,200,000 documents a month, this could result in
approximately $660,000 a month in billings and a gross profit of $264,000. This
would materially impact the financial status of the company.
Domestic/Offshore Data Capture, OCR, and Indexing
We can use manual and OCR or Optical Character Recognition, technologies
to create indexing for converted digital images. Indexing of documents
facilitates a more efficient means of retrieving critical documents and
information for future use.
We guarantee our customers "Sigma Level 5," a 99.5% accuracy rate. We
ensure this by utilizing an "Enter - Enter - Compare" process, whereby two
separate operators independently index the same document, then compare results
using automated systems. If discrepancies are found between the two separate
operator versions, the batch is immediately rejected and routed to a senior
project manager for rework.
5
We can perform this service in-house or offshore. Services are priced by
the keystroke. A typical healthcare claim form may require between 400 and 1000
keystrokes. With volumes in the millions, our customers may pay $0.01- $0.02 per
keystroke.
ASP Hosting of Scanned Images
Once images have been scanned, end-users need an ECM system. We will
continue to provide clients with support for best of breed choice preferred by
the customer such as OnBase from Hyland Software Inc., Documentum and
Application Extender from EMC Corporation or FileNet P8 from Filenet
Corporation. For customers that do not want to install and maintain their own
ECM system, we resell web-based document hosting ASP services from our partners
such as Hyland Software's OnBase. This provides our clients the efficient and
immediate capability of viewing business critical documents online.
Workflow Automation
We design and install software systems for automating the routing and
approval processes related to electronic documents via the internet. [you only
have one sentence to describe a core function you provide? Please expand]
Delivery of products or services
Our high speed scanning, data capture, OCR & indexing and in-house imaging
solutions services are performed either in our Huntington Beach, California
facility or on client's site. We currently service clients in Thousand Oaks,
California; Los Angeles, California; San Francisco, California; Seattle,
Washington and Cambridge, Massachusetts.
Direct Sales
We currently have one full-time outside sales person and two inside sales
people. We hope to grow this to a national staff. These senior salespeople are
experienced and paid a base salary and a sales commission commensurate with that
experience and are expected to meet an annual sales quota. We provide an
incentive stock option plan to attract top sales talent.
Sales Incentives and Compensation
Salespeople receive a stock option bonus for meeting specific revenue
goals. Our sales people are compensated based on the gross profit of the sale.
Sales people receive no commission for jobs sold at less than 20% gross profit.
Partnership Agreement with FedEx Kinko's
On June 1, 2004, we signed a sales partner agreement with FedEx Kinko's.
With this relationship, FedEx Kinko's can resell our BPO services. Our sales
team has been working with FedEx Kinko's sales representatives on selling our
services. We have sold and delivered on several customer contracts under this
agreement. Under this agreement, we executed and delivered on one long-term
contract with a leading life sciences and biotechnology company. This contract
was expanded in the past year from one customer site to four and revenues have
increased incrementally. We are providing services in two California locations,
one location in Washington and one in Massachusetts.
COMPETITION
Our document imaging and BPO services are a mix of existing microfilm
conversion service providers, scanning service providers, document management
system integrators, and offshore data entry organizations. There are only a few
national providers of BPO and document imaging services, including Affiliated
Computer Services (NYSE:ACS) of Dallas, Texas, SourceCorp of Dallas, Texas and
Electronic Data Systems Corp of Plano, Texas (NYSE:EDS).
6
EDS is a Fortune 500 company with reported annual revenues of
approximately $20 billion that provides a broad portfolio of business and
technology solutions to help its clients worldwide improve their business
performance. The company's core portfolio comprises information-technology,
applications and business process services, as well as information-technology
transformation services.
ACS is a Fortune 500 company with reported annual revenues of over $4
billion more than 40,000 employees supporting client operations in nearly 100
countries provides business process and information technology outsourcing
solutions to world-class commercial and government clients. This past year, ACS
was courted for a buyout by major private equity firms. The company declined
offers and proceeded to make a tender offer for a significant portion of their
own stock.
SourceCorp is a business process outsourcing solutions to clients
throughout the U.S. SourceCorp reported annual revenues of approximately $415
million. This company focuses on business processes in information-intensive
industries including healthcare, legal, financial services, government,
transportation and logistics. This company has offices in 24 states and operates
in approximately 40 states, Washington D.C., Mexico and both domestically and
offshore through alliances. SourceCorp was recently acquired by Apollo
Management L.P., one of the most active and successful private investment firms
in the United States.
CUSTOMERS
We had two customers that individually represented more than 10% of our
revenues for the fiscal year ended June 30, 2006; GMAC represented 37% of our
revenue and FedEx Kinko's represented 16% of its revenue. In June 2006, we
ceased production for GMAC at their DiTech.com facility.
EMPLOYEES
As of September 25, 2006, we had 22 full time employees, of which 15 are
hourly employees and seven are salaried. We consider our relations with our
employees to be good.
RISKS RELATED TO BUSINESS
You should carefully consider the following risk factors and all other
information contained herein as well as the information included in this Annual
Report in evaluating our business and prospects. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties, other than those we describe below, that are not presently known
to us or that we currently believe are immaterial may also impair our business
operations. If any of the following risks occur, our business and financial
results could be harmed. You should refer to the other information contained in
this Annual Report, including our consolidated financial statements and the
related notes.
We Have a History of Losses Which May Continue, Requiring Us to Seek Additional
Sources of Capital Which May Not be Available, Requiring Us to Curtail or Cease
Operations
We had a net loss of $2,945,710 for the year ended June 30, 2006 compared
to a net loss of $7,417,687 for the fiscal year ended June 30, 2005. We cannot
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. If revenues grow more slowly than we anticipate, or if
operating expenses exceed our expectations or cannot be adjusted accordingly, we
will continue to incur losses. We will continue to incur losses until we are
able to establish significant sales of our software and hardware products and
our business process outsourcing services. Our possible success is dependent
upon the successful development and marketing of our services and products, as
to which there is no assurance. Any future success that we might enjoy will
depend upon many factors, including factors out of our control or which cannot
be predicted at this time. These factors may include changes in or increased
levels of competition, including the entry of additional competitors and
increased success by existing competitors, changes in general economic
conditions, increases in operating costs, including costs of supplies, personnel
7
and equipment, reduced margins caused by competitive pressures and other
factors. These conditions may have a materially adverse effect upon us or may
force us to reduce or curtail operations. In addition, we will require
additional funds to sustain and expand our sales and marketing activities,
particularly if a well-financed competitor emerges. Based on our current funding
arrangements, we anticipate that we will not require additional funds to
continue our operations for the next twelve months. In the event that we do not
receive the remaining funds under our financing arrangement with Cornell Capital
or if we need additional financing, there can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all. The
inability to obtain sufficient funds from operations or external sources would
require us to curtail or cease operations.
If We are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and if We do Obtain Additional Financing Our then Existing Shareholders
may Suffer Substantial Dilution
Additional capital may be required to effectively support the operations
and to make strategic acquisitions. However, there can be no assurance that
financing will be available when needed on terms that are acceptable to us. The
inability to obtain additional capital will restrict our ability to grow and may
reduce our ability to continue to conduct business operations. If we are unable
to obtain additional financing, we will likely be required to curtail our
marketing and development plans and possibly cease our operations. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Registered Public Accounting Firm Has Expressed Substantial
Doubt About Our Ability to Continue as a Going Concern, Which May Hinder Our
Ability to Obtain Future Financing
In their report dated September 15, 2006, our Independent Registered
Public Accounting Firm stated that our financial statements for the year ended
June 30, 2006 were prepared assuming that we would continue as a going concern.
Our ability to continue as a going concern is an issue raised as a result of
recurring losses from operations ($4,560,311), including net losses of
$2,945,710 and $7,417,687 for the fiscal years ending June 30, 2006 and 2005,
respectively. We continue to experience net losses. Our ability to continue as a
going concern is subject to our ability to generate a profit and/or obtain
necessary funding from outside sources, including obtaining additional funding
from the sale of our securities, increasing sales or obtaining loans and grants
from various financial institutions where possible. Our continued net losses and
stockholders' deficit increases the difficulty in meeting such goals and there
can be no assurances that such methods will prove successful.
Many of Our Competitors are Larger and Have Greater Financial and Other
Resources than We do and Those Advantages Could Make it Difficult for Us to
Compete With Them
The general market for our products and services is extremely competitive
and includes several companies which have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, have substantially greater financial, development and marketing resources
than we do. If overall demand for our products should decrease it could have a
materially adverse affect on our operating results.
Our Products may Infringe Upon the Intellectual Property Rights of Others and
Resulting Claims Against Us Could be Costly and Require Us to Enter Into
Disadvantageous License or Royalty Arrangements
The business process outsourcing industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of intellectual property
rights. Although we attempt to avoid infringing upon known proprietary rights of
third parties, we may be subject to legal proceedings and claims for alleged
infringement by us or our licensees of third-party proprietary rights, such as
patents, trade secrets, trademarks or copyrights, from time to time in the
ordinary course of business. Any claims relating to the infringement of
third-party proprietary rights, even if not successful or meritorious, could
result in costly litigation, divert resources and our attention or require us to
enter into royalty or license agreements which are not advantageous to us. In
addition, parties making these claims may be able to obtain injunctions, which
could prevent us from selling our products. Furthermore, former employers of our
employees may assert that these employees have improperly disclosed confidential
or proprietary information to us. Any of these results could harm our business.
We may be increasingly subject to infringement claims as the number of, and
number of features of, our products grow.
8
If We are not Able to Manage Our Growth We may Never Achieve Profitability
Our success will depend on our ability to expand and manage our operations
and facilities. There can be no assurance that we will be able to manage our
growth, meet the staffing requirements of manufacturing scale-up or for current
or additional collaborative relationships or successfully assimilate and train
our new employees. In addition, to manage our growth effectively, we will be
required to expand our management base and enhance our operating and financial
systems. If we continue to grow, there can be no assurance that the management
skills and systems currently in place will be adequate or that we will be able
to manage any additional growth effectively. Failure to achieve any of these
goals could have a material adverse effect on our business, financial condition
or results of operations.
If We Are Unable to Retain the Services of Messrs. Steele and Haag or If We Are
Unable to Successfully Recruit Qualified Personnel, We May Not Be Able to
Continue Our Operations.
Our success depends to a significant extent upon the continued service of
Mr. Robert Steele, our Chief Executive Officer and Mr. Andrew Haag, our Chief
Financial Officer. Loss of the services of Messrs. Steele or Haag could have a
material adverse effect on our growth, revenues, and prospective business. We do
not maintain key-man insurance on the life of Messrs. Steele or Haag. In
addition, in order to successfully implement and manage our business plan, we
will be dependent upon, among other things, successfully recruiting qualified
personnel. Competition for qualified individuals is intense. There can be no
assurance that we will be able to find, attract and retain existing employees or
that we will be able to find, attract and retain qualified personnel on
acceptable terms.
Risks Relating to Our Current Financing Arrangement:
There Are a Large Number of Shares Underlying Our Secured Convertible Debentures
and Warrants That May be Available for Future Sale and the Resale of These
Shares May Depress the Market Price of Our Common Stock.
As of September 25, 2006, we had 151,699,773 shares of common stock issued
and outstanding, secured convertible debentures issued and outstanding that may
be converted into 31,578,948 shares of common stock based on current market
prices and outstanding warrants to purchase 56,397,000 shares of common stock.
In addition, we have an obligation pursuant to a securities purchase agreement
we entered into in May 2006 to issue additional secured convertible debentures
that may be converted into 38,596,492 shares of our common stock based on
current market prices. Additionally, the number of shares of common stock
issuable upon conversion of the outstanding secured convertible debentures may
increase if the market price of our stock declines. All of the shares, including
all of the shares issuable upon conversion of the secured convertible debentures
and upon exercise of our warrants, may be sold without restriction upon the
effectiveness of the registration statement registering their resale. The resale
of these shares may adversely affect the market price of our common stock.
The Continuously Adjustable Conversion Price Feature of Our Secured Convertible
Debentures Could Require Us to Issue a Substantially Greater Number of Shares,
Which Will Cause Dilution to Our Existing Stockholders.
Our obligation to issue shares upon conversion of our secured convertible
debentures is essentially limitless. The following is an example of the amount
of shares of our common stock that are issuable, upon conversion of our secured
convertible debentures (excluding accrued interest), based on market prices 25%,
50% and 75% below the market price as of September 25, 2006 of $0.03 per share.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 5% Issuable Stock
------ ----- ----- -------- -----
25% $0.0225 $0.021375 93,567,252 38.15%
50% $ 0.015 $ 0.01425 140,350,878 48.06%
75% $0.0075 $0.007125 380,701,755 71.51%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible debentures will increase if the market
price of our stock declines, which will cause dilution to our existing
stockholders.
9
The Continuously Adjustable Conversion Price Feature of Our Secured Convertible
Debentures May Encourage Investors to Make Short Sales in Our Common Stock,
Which Could Have a Depressive Effect on the Price of Our Common Stock.
The secured convertible debentures are convertible into shares of our
common stock at a 5% discount to the trading price of the common stock prior to
the conversion. The downward pressure on the price of the common stock as the
investor converts and sells material amounts of common stock could encourage
short sales by investors. This could place further downward pressure on the
price of the common stock. The investors could sell common stock into the market
in anticipation of covering the short sale by converting their securities, which
could cause the further downward pressure on the stock price. In addition, not
only the sale of shares issued upon conversion or exercise of the secured
convertible debentures, but also the mere perception that these sales could
occur, may adversely affect the market price of the common stock.
The Issuance of Shares Upon Conversion of the Secured Convertible Debentures and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
The issuance of shares upon conversion of the secured convertible
debentures and exercise of warrants may result in substantial dilution to the
interests of other stockholders since the investors may ultimately convert and
sell the full amount issuable on conversion. Although the investor may not
convert its secured convertible debentures and/or exercise its warrants if such
conversion or exercise would cause it to own more than 4.99% of our outstanding
common stock, this restriction does not prevent the investor from converting
and/or exercising some of its holdings and then converting the rest of its
holdings. In this way, the investor could sell more than this limit while never
holding more than this limit. There is no upper limit on the number of shares
that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Secured Convertible Debentures to be Registered Pursuant
To A Registration Statement May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
Have Allocated And Plan to Register Are Not Adequate And We Are Required To File
An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the secured
convertible debentures, we have made a good faith estimate as to the amount of
shares of common stock that we are required to register and allocate for
conversion of the secured convertible notes. Accordingly, we plan to allocate
and register, upon obtaining an increase in the authorized number of shares of
common stock, at least 150,000,000 shares to cover the conversion of the secured
convertible debentures. In the event that our stock price decreases, the shares
of common stock we have allocated for conversion of the secured convertible
debentures and plan to register may not be adequate. If the shares we allocate
and register pursuant to the registration statement are not adequate and we are
required to file an additional registration statement, we may incur substantial
costs in connection with the preparation and filing of such registration
statement.
10
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Secured Convertible
Debentures, If Required, Could Result in Legal Action Against Us, Which Could
Require the Sale of Substantial Assets.
In May 2006, we entered into a Securities Purchase Agreement for the sale
of $2,000,000 principal amount of secured convertible debentures. The secured
convertible debentures are due and payable, with 10% interest, three years from
the date of issuance, unless sooner converted into shares of our common stock.
Although we currently have $900,000 secured convertible debentures outstanding,
the investors are obligated to purchase additional secured convertible
debentures in the aggregate of $1,100,000. In addition, any event of default
such as our failure to repay the principal or interest when due, our failure to
issue shares of common stock upon conversion by the holder, our failure to
timely file a registration statement or have such registration statement
declared effective, breach of any covenant, representation or warranty in the
Securities Purchase Agreements or related convertible debentures, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
debentures, including default interest rate on the outstanding principal balance
of the secured convertible debentures if the default is not cured with the
specified grace period. We anticipate that the full amount of the secured
convertible debentures will be converted into shares of our common stock, in
accordance with the terms of the secured convertible debentures. If we were
required to repay the secured convertible debentures, we would be required to
use our limited working capital and raise additional funds. If we were unable to
repay the secured convertible debentures when required, the debenture holders
could commence legal action against us and foreclose on all of our assets to
recover the amounts due. Any such action would require us to curtail or cease
operations.
If an Event of Default Occurs under the Securities Purchase Agreement, Secured
Convertible Debentures or Security Agreement, the Investor Could Take Possession
of all Our Goods, Inventory, Contractual Rights and General Intangibles,
Receivables, Documents, Instruments, Chattel Paper, and Intellectual Property.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement in favor of the investor granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreement states that if an event of default
occurs under the Securities Purchase Agreement, Secured Convertible Debentures
or Security Agreement, the Investor has the right to take possession of the
collateral, to operate our business using the collateral, and have the right to
assign, sell, lease or otherwise dispose of and deliver all or any part of the
collateral, at public or private sale or otherwise to satisfy our obligations
under these agreements.
Risks Relating to Our Common Stock:
If We Fail to Remain Current in Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
11
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
12
ITEM 2. DESCRIPTION OF PROPERTY.
We lease 7,062 square feet for our executive offices at 17951 Lyons
Circle, Huntington Beach, California. The lease expires on June 30, 2008, with
an option to extend at the end of the commencement year. The current monthly
lease amount for this facility is $7,768.
We lease on a month-to-month basis, 1,800 square feet of office and
warehouse space at 720 N. 4th Street, Montpelier, Idaho, for our accounting and
purchasing function. The current monthly rent is $675. We believe that our
current office space and facilities are sufficient to meet our present needs and
do not anticipate any difficulty securing alternative or additional space, as
needed, on terms acceptable to us.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
On April 16, 2004, Decision One Corporation filed suit in the County of
Bannock, Idaho against us for $22,661.56 for goods provided. Since 2000,
Decision One (formerly Imation) has been both a vendor to us and a reseller of
our Q4300 Printers. We filed a counterclaim on August 1, 2004. We assert that
Decision One used its authority as a dealer of our product to disparage us, in
violation of its dealer agreement with us, and we sought relief for the hundreds
of thousands of dollars in business lost because of it. On January 11, 2005, the
Court granted Judgment for the sum of $21,000 in favor of the Decision One
Corporation. The Court has ruled that we would be allowed to file the
counterclaim under this action, rather than a separate lawsuit. In March 2005, a
stipulation settlement was accepted by Decision One where they agreed to accept
$15,000 in full satisfaction of their debt. We agreed to pay $2,000 upon
execution of the stipulation plus $1,000 for 13 months thereafter. In April
2006, we made a payment of $16,827 to satisfy our obligations pursuant to the
terms of the judgment and a Satisfaction of Judgment was entered in the matter.
An action which was pending in the Superior Court of the State of
California for Orange County against one of our competitors, a former employee
and a former officer of ours, has been resolved by mutual agreement. The
settlement includes an injunction which prevents the defendants from soliciting
or initiating contact with 23 accounts until February 28, 2007. There was no
admission or acknowledgment of any wrongdoing by the defendants in stipulating
to the injunction. We, the plaintiff, and defendants Robert Brownell, Chris De
Lapp and Document Imaging Technologies, Inc. entered into a stipulated
injunction in the matter which provides, among other things, that Defendants and
all of their respective officers, agents, representatives, directors,
affiliates, employees, successors in interest, and all persons acting in concert
or participating with them, are restrained and enjoined from soliciting or
initiating contact with 23 clients listed in the injunction. Additionally, the
Defendants shall not use, disclose, disseminate or publish in any manner our
confidential business information and/or trade secrets including lists of
clients, candidates, information regarding contracts or prospective Quintek
contracts with clients and candidates, computer programs, business plans and
strategies, prices, job descriptions, contracts, budgets, and similar
confidential or proprietary materials or information respecting us or our
clients' or candidates' business affairs, as well as confidential information of
a personal nature of us and our employees, managers and officers, without our
prior written consent. All other related claims and causes of action were
dismissed with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board under the symbol
"QTEK".
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Fiscal Year 2005
----------------
High Low
---- ---
First Quarter $0.21 $0.14
Second Quarter $0.26 $0.16
Third Quarter $0.20 $0.10
Fourth Quarter $0.18 $0.10
Fiscal Year 2006
----------------
High Low
---- ---
First Quarter $0.12 $0.07
Second Quarter $0.08 $0.05
Third Quarter $0.09 $0.06
Fourth Quarter $0.07 $0.04
Fiscal Year 2007
----------------
High Low
---- ---
First Quarter (1) $0.05 $0.03
Second Quarter xxx Xxx
Third Quarter xxx Xxx
Fourth Quarter xxx Xxx
(1) As of September 25, 2006.
Holders
As of September 25, 2006, we had approximately 500 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is
Interwest Transfer Co., Inc., 1981 E. Murray Holladay Road, Suite 100, Salt Lake
City Utah 84117.
Dividends
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
Recent Sale of Unregistered Securities
On April 12, 2006, we issued 1,183,184 shares of common stock upon
conversion of $5,000 of a previously issued convertible debenture.
14
On April 12, 2006, we issued 50,000 shares of common stock valued at
$50,000 upon exercise of outstanding warrants.
On June 15, 2006, we issued 4,000,000 shares of common stock to a
consultant valued at $160,000 pursuant to a fee agreement in regards to raising
funding. The common shares were valued at the closing market price of the shares
on the date of issuance.
On June 15, 2006, we issued 1,370,286 common shares to a marketing partner
for an engagement fee valued at $58,811. The common shares were valued at the
closing market price of the shares on the date of issuance.
On June 23, 2006, we issued 234,375 common shares to a consultant for
settlement in full of agreement fees valued at $7,500. The common shares were
valued at the closing market price of the shares on the date of issuance.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with Cornell Capital Partners L.P., an accredited investor,
on May 17, 2006, and amended on September 15, 2006, for the sale of $2,000,000
in secured convertible debentures and warrants. The investors are obligated to
provide us with an aggregate of $2,000,000 as follows:
o $750,000 was disbursed on May 17, 2006;
o $150,000 was disbursed on September 15, 2006;
o $600,000 will be disbursed two business days prior to the date a
registration statement registering for resale the shares of common stock
underlying the secured convertible debentures and warrants is filed by us with
the Securities and Exchange Commission; and
o $500,000 will be disbursed upon the effectiveness of the registration
statement registering the shares of common stock underlying the secured
convertible debentures and warrants.
Accordingly, we have received a total of $900,000 pursuant to the
Securities Purchase Agreement.
The secured convertible debentures bear interest at 10%, mature three
years from the date of issuance, and are convertible into our common stock, at
the investor's option, at the lower of (i) $0.0662 or (ii) 95% of the lowest
daily volume weighted average price of our common stock, as quoted by Bloomberg,
LP, during the 30 trading days immediately preceding the date of conversion.
In connection with the securities purchase agreement, as amended, we
agreed to issue Cornell warrants to purchase an aggregate of 56,397,000 shares
of our common stock, exercisable for a period of five years; including warrants
to purchase 17,857,000 shares at an exercise price of $0.05, warrants to
purchase 15,625,000 shares at an exercise price of $0.055, warrants to purchase
12,500,000 shares at an exercise price of $0.065 and warrants to purchase
10,415,000 shares at an exercise price of $0.08. All of the warrants were issued
upon closing. We have the option to force the holder to exercise the warrants,
as long as the shares underlying the warrants are registered pursuant to an
effective registration statement, if the closing bid price of our common stock
trades above certain levels. In the event that the closing bid price of our
common stock is greater than or equal to $0.10 for a period of 20 consecutive
days prior to the forced conversion, we can force the warrant holder to exercise
the $0.05 warrants. In the event that the closing bid price of our common stock
is greater than or equal to $0.11 for a period of 20 consecutive days prior to
the forced conversion, we can force the warrant holder to exercise the $0.055
warrants. In the event that the closing bid price of our common stock is greater
than or equal to $0.13 for a period of 20 consecutive days prior to the forced
conversion, we can force the warrant holder to exercise the $0.065 warrants. In
the event that the closing bid price of our common stock is greater than or
equal to $0.16 for a period of 20 consecutive days prior to the forced
conversion, we can force the warrant holder to exercise the $0.08 warrants.
The investor has contractually agreed to restrict its ability to convert
the debentures or exercise the warrants and receive shares of our common stock
such that the number of shares of common stock held by it and its affiliates
after such conversion does not exceed 4.99% of the then issued and outstanding
shares of common stock.
Unless otherwise noted, the sales set forth above involved no
underwriter's discounts or commissions and are claimed to be exempt from
registration with the Securities and Exchange Commission pursuant to Section 4
(2) of the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering, the issuance and sale by us of shares of our common
stock to financially sophisticated individuals who are fully aware of our
activities, as well as our business and financial condition, and who acquired
said securities for investment purposes and understood the ramifications of
same.
15
Item 6 Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect Management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such as
"may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or
similar words. Those statements include statements regarding the intent, belief
or current expectations of us and members of its management team as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures
made by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to Management could cause
actual results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that our assumptions are
based upon reasonable data derived from and known about our business and
operations. No assurances are made that actual results of operations or the
results of our future activities will not differ materially from its
assumptions. Factors that could cause differences include, but are not limited
to, expected market demand for our services, fluctuations in pricing for
materials, and competition.
Results of Operations for the Fiscal Year ended June 30, 2006 Compared to Fiscal
Year Ended June 30, 2005
Our revenues totaled $2,307,402 and $1,547,923 for the twelve months ended
June 30, 2006 and 2005, respectively, an increase of $759,479 (149%) in 2006 was
due to our investment in sales and marketing efforts and resultant increase in
new sales contracts.
For the twelve months ended June 30, 2006 and 2005, cost of revenue was
$1,522,814 and $1,070,001 respectively, an increase of $452,813 (142%). Cost of
revenue for both periods consisted mostly of labor and production costs. Cost of
revenue increased in 2006 due to increase in revenues from increase in new sales
contracts we received.
Total operating expenses were $5,344,899 for the twelve-month period ended
June 30, 2006 as compared to $5,982,314 for the same period in 2005. The
decrease in operating expenses of $637,415 (12%) in 2006 as compared to 2005
resulted primarily due to a permanent decline in the market value of marketable
securities we held as investment. Selling, general and administrative expenses
in 2006 were $3,832,925 compared to $2,200,476, an increase of $1,631,449 (77%)
primarily due to increased funding costs, legal fees, penalties and salary
expenses.
Total non-operating income for the twelve months ended June 30, 2006 was
$1,615,401 compared to total non-operating expense of $1,912,495 for the same
period in 2005. During 2006, we realized a gain on sale of investment of
$113,700 and recorded a change in fair value of warrants of $2,171,921. We
recorded a beneficial conversion feature expense of $110,924 and interest
expense of $571,674. During 2005, we recorded a loss of $594,892 due to
conversion of debt, beneficial conversion feature expense of $317,021 and
interest expense of $1,122,703. As a result, we incurred a reduction in net loss
of $2,945,710 for the period ending June 30, 2006 compared to a net loss of
$7,417,687 for the same period in 2005. This reduction in net loss is attributed
to the increase in net revenue, reduction in the permanent decline of marketable
securities, and the non-operating income recorded pursuant to the change in the
fair value of warrants.
In June 2006, we ceased production of mortgage processing services for
GMAC at their DiTech.com facility. This customer represented a material portion
of our revenues over the past 12 months. We are focused on obtaining additional
business to replace this contract and grow revenues. There can be no assurance
that we will be able to obtain a significant amount of new business to replace
these revenues.
16
At June 30, 2006, our total assets were $1,417,374 compared to $1,402,264
as of June 30, 2005. The assets increased by $15,110 (1.1%) primarily due to
receipt of cash funding from a financing conducted with Cornell Capital
resulting in an increase in cash and cash equivalents. Total current liabilities
at June 30, 2006 were $2,196,415 compared to $2,168,067 as of June 30, 2005. The
current liabilities increased by $28,348 (1.3%) primarily due to an increase in
accrued expenses, loans payable and convertible debentures as a result of growth
of business. The long term debt decreased to $28,741 as of June 30, 2006
compared to $128,162 at June 30, 2005.
We are currently in default on two outstanding convertible bonds totaling
$62,495. Interest continues to accrue against the principal. The notes are
unsecured. The holders of the bonds that are in default have indicated that they
do not want to convert their debt to stock and wish to be repaid in cash. At
present, we do not have the funds to repay the indebtedness. It is not known
whether we will be able to repay or renegotiate this debt. Additionally, our
current liabilities exceeded our current assets by $1,558,787 at June 30, 2006.
If we are unable to cure the default or renegotiate our debt, we may not be able
to continue as a going concern.
We owe $96,661 in payroll withholding taxes that were assumed in a merger
and are past due.
Liquidity and Capital Resources
Our principal capital requirements during the fiscal year 2007 are to fund
the internal operations and acquisitions of profitable and growth-oriented
businesses. We plan to raise necessary funds by selling our own common shares to
selected investors and bringing in business partners whose contributions include
the necessary cash. In view of low borrowing interest rates, we are actively
pursuing additional credit facilities with financial institutions as a means to
obtain new funding. Our management estimates that it currently has the funding
facilities in place to operate for at least twelve months. We have historically
financed operations from the sale of our common stock and the conversion of
common stock warrants. At June 30, 2006, we had cash on hand of $410,007 as
compared cash on hand of $12,669 at June 30, 2005.
Net cash used in operating activities for the year ended June 30, 2006 was
$1,208,903, primarily attributable to the increase in accounts payable and
accrued expenses of $163,508, decrease in accounts receivable of $87,657,
decrease in prepaid expenses of $5,562, and decrease in deferred revenue of
$16,656.
Net cash provided by investing activities for the year ended June 30, 2006
was $457,879, primarily due to the proceeds from sale of marketable securities
of $233,938 and removal of restrictions on cash of $260,087. We used $36,146 of
cash to acquire equipment during the year ended June 30, 2006.
Net cash provided by financing activities for the year ended June 30, 2006
was $1,148,361. The increase was primarily attributable to proceeds from
issuance of debentures of $750,000, proceeds from issuance of convertible notes
of $50,500, proceeds from sale of shares to be issued of $151,750, proceeds from
sale of common shares of $265,000, proceeds from prepayments for warrants to be
issued for note conversion of $125,000, proceeds from issuance of common stock
upon exercise of warrants of $59,400. We made lease payments of $128,540,
payments on notes payable of $22,914, and net payments on factoring payables of
$101,834.
As a result of the above activities, we experienced a net increase in cash
and cash equivalents of $397,338 as of June 30, 2006 as compared to $2,931 net
decrease in cash as of June 30, 2005. Our ability to continue as a going concern
is still dependent on our success in obtaining additional financing from
institutional investors or by selling our common shares and fulfilling our
business plan. Other than as described below, we do not have any commitments for
capital and we cannot give any assurances that capital will be available on
terms we deem favorable or at all.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with Cornell Capital Partners L.P., an accredited investor,
on May 17, 2006, and amended on September 15, 2006, for the sale of $2,000,000
in secured convertible debentures and warrants. The investors are obligated to
provide us with an aggregate of $2,000,000 as follows:
17
o $750,000 was disbursed on May 17, 2006;
o $150,000 was disbursed on September 15, 2006;
o $600,000 will be disbursed two business days prior to the date a
registration statement registering for resale the shares of common stock
underlying the secured convertible debentures and warrants is filed by us with
the Securities and Exchange Commission; and
o $500,000 will be disbursed upon the effectiveness of the registration
statement registering the shares of common stock underlying the secured
convertible debentures and warrants.
Accordingly, we have received a total of $900,000 pursuant to the
Securities Purchase Agreement.
The secured convertible debentures bear interest at 10%, mature three
years from the date of issuance, and are convertible into our common stock, at
the investor's option, at the lower of (i) $0.0662 or (ii) 95% of the lowest
daily volume weighted average price of our common stock, as quoted by Bloomberg,
LP, during the 30 trading days immediately preceding the date of conversion.
In connection with the securities purchase agreement, as amended, we
agreed to issue Cornell warrants to purchase an aggregate of 56,397,000 shares
of our common stock, exercisable for a period of five years; including warrants
to purchase 17,857,000 shares at an exercise price of $0.05, warrants to
purchase 15,625,000 shares at an exercise price of $0.055, warrants to purchase
12,500,000 shares at an exercise price of $0.065 and warrants to purchase
10,415,000 shares at an exercise price of $0.08. All of the warrants were issued
upon closing. We have the option to force the holder to exercise the warrants,
as long as the shares underlying the warrants are registered pursuant to an
effective registration statement, if the closing bid price of our common stock
trades above certain levels. In the event that the closing bid price of our
common stock is greater than or equal to $0.10 for a period of 20 consecutive
days prior to the forced conversion, we can force the warrant holder to exercise
the $0.05 warrants. In the event that the closing bid price of our common stock
is greater than or equal to $0.11 for a period of 20 consecutive days prior to
the forced conversion, we can force the warrant holder to exercise the $0.055
warrants. In the event that the closing bid price of our common stock is greater
than or equal to $0.13 for a period of 20 consecutive days prior to the forced
conversion, we can force the warrant holder to exercise the $0.065 warrants. In
the event that the closing bid price of our common stock is greater than or
equal to $0.16 for a period of 20 consecutive days prior to the forced
conversion, we can force the warrant holder to exercise the $0.08 warrants.
The investor has contractually agreed to restrict its ability to convert
the debentures or exercise the warrants and receive shares of our common stock
such that the number of shares of common stock held by it and its affiliates
after such conversion does not exceed 4.99% of the then issued and outstanding
shares of common stock.
Subsequent Events
On August 3, 2006, we issued 3,529,169 common shares pursuant to a warrant
conversion and convertible note valued at $151,750 reported as shares to be
issued from the year ending June 30, 2006.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Revenue Recognition
Revenue is recognized when earned. We recognize our revenue in accordance
with the SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" and The American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition," as amended as
amended by SOP 98-4 and SOP 98-9.
18
Stock-based Compensation
We follow the prescribed accounting and reporting standards for all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights in accordance
with SFAS No. 148 "Accounting for Stock-Based Compensation". SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used, on reported results.
Issuance of Shares for Services
We account for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended by SFAS No. 137, is effective for fiscal years beginning after
June 15, 2000. SFAS No. 133 requires us to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
After adoption, we are required to adjust hedging instruments to fair value in
the balance sheet and recognize the offsetting gains or losses as adjustments to
be reported in net income or other comprehensive income, as appropriate.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
amendment of ARB No. 43, Chapter 4. This statement clarifies the criteria of
"abnormal amounts" of freight, handling costs, and spoilage that are required to
be expensed as current period charges rather than deferred in inventory. In
addition, this statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. We do not expect the adoption of this statement will have any
material impact on our results or financial position.
In December 2004, the FASB issued SFAS no. 153, Exchanges of Nonmonetary
Assets an amendment of APB Opinion No. 29. This statement addresses the
measurement of exchanges of nonmonetary assets. It eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions,
and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. We do not expect the adoption of this
statement will have any material impact on our results or financial position.
SFAS No. 154, Accounting Changes and Error Corrections, was issued in May
2005 and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. At such, we are required to adopt these
provisions at the beginning of the fiscal year ending June 30, 2007. We are
currently evaluating the impact of SFAS 154 on our consolidated financial
statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which amends SFAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities" and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". SFAS 155 amends SFAS 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only such
strips representing rights to receive a specified portion of the contractual
interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instruments. We are currently evaluating the impact this new Standard, but
believe that it will not have a material impact on our financial position.
19
ITEM 7. FINANCIAL STATEMENTS.
QUINTEK TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of June 30, 2006 and June 30, 2005 F-3
Consolidated Statements of Operations for the years ended
June 30, 2006 and 2005 F-4
Consolidated Statement of Stockholders' Equity for the years ended June
30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Quintek Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Quintek
Technologies, Inc. and subsidiary (a California Corporation) as of June 30, 2006
and the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the two years ended June 30, 2006 and 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quintek Technologies, Inc. and
subsidiary as of June 30, 2006 and the results of its operations and its cash
flows for the years ended June 30, 2006 and 2005 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 21 to
the consolidated financial statements, the Company's significant operating
losses and insufficient capital raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 21. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KABANI & COMPANY, INC.
KABANI & COMPANY, INC.
Los Angeles, California
September 15, 2006
F-2
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30 2006
ASSETS
Current assets
Cash and cash equivalents $ 410,007
Accounts receivable, net of allowance for doubtful accounts of $370 227,621
------------
Total current assets 637,628
Property and equipment, net 448,197
Other assets
Deposits 108,935
Other assets 222,614
------------
Total other assets 331,549
------------
Total Assets $ 1,417,374
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 990,737
Factoring payable 136,722
Payroll and payroll taxes payable 181,565
Payroll taxes assumed in merger 96,661
Advances from lenders 36,736
Loans payable 326,681
Notes payable 62,590
Convertible bonds 62,495
Convertible debentures 210,674
Convertible notes 50,500
Deferred revenue 8,421
Dividend payable 32,633
------------
Total current liabilities 2,196,415
Long-term debt 28,741
Stockholders' deficit
Preferred stock, convertible, no par value, 50,000,000 shares authorized,
3,154,750 shares issued and outstanding 681,605
Common stock, $0.01 par value, 200,000,000 shares authorized,
148,170,604 shares issued and outstanding 1,481,706
Additional paid-in capital 31,349,818
Shares to be issued 156,750
Stock subscription receivable (776,250)
Prepaid consulting (113,455)
Unrealized loss on marketable securities (90,859)
Investments held in escrow (40,002)
Accumulated deficit (33,457,095)
------------
Total stockholders' deficit (807,782)
------------
Total liabilities and stockholders' deficit $ 1,417,374
============
The accompanying notes are an integral part of these financial statements
F-3
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the years ended June 30
2006 2005
------------- -------------
Net revenue $ 2,307,402 $ 1,547,923
Cost of revenue 1,522,814 1,070,001
------------- -------------
Gross margin 784,588 477,922
Operating expenses:
Selling, general and administrative 3,832,925 2,200,476
Permanent decline on value of marketable securities -- 2,338,321
Stock-based compensation 485,456 41,000
Stock-based consulting fee 1,026,518 1,402,517
------------- -------------
Total operating expenses 5,344,899 5,982,314
------------- -------------
Loss from operations (4,560,311) (5,504,392)
Non-operating income (expense):
Realized gain on investment 113,700 --
Other income 15,810 6,961
Loss on conversion of debt -- (594,892)
Uncollectible from employees (10,989) 104,051
Beneficial conversion feature (110,924) (317,021)
Change in Fair Value of Warrants 2,171,921 --
Interest Income 7,557 11,109
Interest expense (571,674) (1,122,703)
------------- -------------
Total non-operating income (expense) 1,615,401 (1,912,495)
------------- -------------
Loss before provision for income taxes (2,944,910) (7,416,887)
Provision for income taxes 800 800
------------- -------------
Net loss (2,945,710) (7,417,687)
Dividend requirement for preferred stock 16,057 16,575
------------- -------------
Net loss applicable to common shareholders (2,961,767) (7,434,262)
Other comprehensive (loss)/gain:
Reclassification adjustment (4,080) --
Unrealized gain for the period 9,317 --
------------- -------------
Comprehensive loss $ (2,956,530) $ (7,434,262)
============= =============
Basic and diluted net loss per share $ (0.02) $ (0.10)
Basic and diluted net loss per share for dividend
for preferred stock $ 0.00 $ 0.00
Basic and diluted net loss per share applicable to
common shareholders ------------- -------------
$ (0.02) $ (0.10)
============= =============
Basic and diluted weighted average
shares outstanding 125,051,937 77,455,774
============= =============
Weighted average number of dilutive shares has not been taken since the effect
of dilutive securities is anti dilutive.
The accompanying notes are an integral part of these financial statements
F-4
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
Preferred Stock Common Stock
------------------------- ---------------------------
Number of Number of Additional
Shares Amount Shares Amount Paid in Capital
---------- ------------ ------------ ------------ ------------
Balance at June 30, 2004 -- $ -- 48,749,994 $ 487,500 20,475,680
Issuance of shares for cash -- -- 2,750,000 27,500 196,000
Issuance of shares for debt settlement 1,027,602 280,262 12,132,736 121,327 578,679
Conversion of preferred stocks (1,345,184) (696,315) 3,624,320 36,243 660,072
Issuance of shares for services 2,342,000 367,400 3,894,560 38,946 510,731
Issuance of shares for conversion of bond 1,372,332 760,658 7,426,098 74,260 225,240
Issuance of shares for purchase of investment -- -- 14,000,000 140,000 2,520,000
Shares to be issued for services -- -- -- -- --
Shares issued for services 40,000 40,000 -- -- --
Common stock options granted -- -- -- -- 1,676,375
Issuance of shares upon exercise of warrants -- -- 5,902,824 59,028 720,940
Amortization of warrants granted -- -- -- -- 2,950
Investment held in escrow -- -- -- -- --
Unrealized loss on investment -- -- -- -- --
Beneficial conversion feature -- -- -- -- 427,948
Preferred dividends -- -- -- -- --
Net loss for the year ended June 30, 2005 -- -- -- -- --
---------- ------------ ------------ ------------ ------------
Balance at June 30, 2005 3,436,750 $ 752,005 98,480,532 $ 984,805 $ 27,994,614
========== ============ ============ ============ ============
Issuance of shares for cash -- -- 8,666,666 86,667 178,333
Issuance of shares for debt settlement -- -- -- -- --
Conversion of preferred stocks (282,000) (70,400) 410,000 4,100 66,300
Issuance of shares for services -- -- 13,647,498 136,475 957,377
Issuance of shares for conversion of debenture -- -- 9,529,866 95,299 (49,408)
Issuance of shares for purchase of investment -- -- -- -- --
Issuance of shares before cash receipt -- -- 16,500,000 165,000 611,250
Shares to be issued for services -- -- -- -- --
Shares to be issued for conversion and sales -- -- -- -- --
Common stock options granted to employees -- -- -- -- 485,456
Warrants granted for services -- -- -- -- 619,547
Issuance of shares upon exercise of warrants -- -- 936,042 9,360 483,304
Amortization of warrants expense -- -- -- -- 3,045
Investment held in escrow -- -- -- -- --
Unrealized loss on investment -- -- -- -- --
Beneficial conversion feature -- -- -- -- --
Preferred dividends -- -- -- -- --
Net loss for the year ended Jun 30, 2006 -- -- -- -- --
---------- ------------ ------------ ------------ ------------
Balance at June 30, 2006 3,154,750 $ 681,605 148,170,604 $ 1,481,706 $ 31,349,818
========== ============ ============ ============ ============
Other Total
Shares to Prepaid Investment Stock Accumulated Comprehensive Stockholders'
be Issued Consulting Fees in Escrow Subscription Deficit Loss Deficit
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30,
2004 $ 40,000 $ (35,798) $ -- -- (23,061,065) -- $ (2,093,683)
Issuance of shares
for cash -- -- -- -- -- -- 223,500
Issuance of shares for
debt settlement -- -- -- -- -- -- 980,269
Conversion of preferred
stocks -- -- -- -- -- -- --
Issuance of shares for
services -- -- -- -- -- -- 917,077
Issuance of shares for
conversion of bond -- -- -- -- -- -- 1,060,159
Issuance of shares for
purchase of investment -- -- -- -- -- -- 2,660,000
Shares to be issued for
services 8,000 -- -- -- -- -- 8,000
Shares issued for services (40,000) -- -- -- -- -- --
Common stock options
granted -- -- -- -- -- -- 1,676,375
Issuance of shares upon
exercise of warrants -- -- -- -- -- -- 779,968
Amortization of warrants
granted -- 32,678 -- -- -- -- 35,628
Investment held in escrow -- -- (126,567 -- -- -- (126,567)
Unrealized loss on
investment -- -- -- -- -- (8,374) (8,374)
Beneficial conversion
feature -- -- -- -- -- -- 427,948
Preferred dividends -- -- -- -- (16,576) -- (16,576)
Net loss for the year
ended June 30, 2005 -- -- -- -- (7,417,687) -- (7,417,687)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2005 $ 8,000 $ (3,120) $ (126,567 -- (30,495,328) $ (8,374) $ (893,965)
============ ============ ============ ============ ============ ============ ============
Issuance of shares
for cash -- -- -- -- -- -- 265,000
Issuance of shares
for debt settlement -- -- -- -- -- -- --
Conversion of preferred
stocks -- -- -- -- -- -- --
Issuance of shares for
services -- (110,335) -- -- -- -- 983,517
Issuance of shares for
conversion of debenture -- -- -- -- -- -- 45,891
Issuance of shares for
purchase of investment -- -- -- -- -- -- --
Issuance of shares
before cash receipt -- -- -- (776,250) -- -- --
Shares to be issued
for services (8,000) -- -- -- -- -- (8,000)
Shares to be issued
for conversion and sales 156,750 -- -- -- -- -- 156,750
Common stock options
granted to employees -- -- -- -- -- -- 485,456
Warrants granted for
services -- -- -- -- -- -- 619,547
Issuance of shares upon
exercise of warrants -- -- -- -- -- -- 492,664
Amortization of warrants
expense -- -- -- -- -- -- 3,045
Investment held in escrow -- -- 86,565 -- -- -- 86,565
Unrealized loss on
investment -- -- -- -- -- (82,485) (82,485)
Beneficial conversion
feature -- -- -- -- -- -- --
Preferred dividends -- -- -- -- (16,057) -- (16,057)
Net loss for the year
ended June 30, 2006 -- -- -- -- (2,945,710) -- (2,945,710)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2006 $ 156,750 $ (113,455) $ (40,002 $ (776,250) (33,457,095) $ (90,859) $ (807,782)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F-5
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended June 30
2006 2005
----------- -----------
OPERATING ACTIVITIES
Net loss $(2,945,710) $(7,417,687)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 173,379 130,666
Inventory write-off -- (6,758)
Discount on factor 12,091 --
Expenses paid by a note payable 13,564 --
Issuance of shares for consulting services 983,517 918,129
Loss on conversion of debt -- 594,892
Shares to be issued for compensation -- 8,000
Permanent decline on value of marketable securities -- 2,338,321
Bad Debts 370 --
Uncollectible from employees 10,989 --
Gain on the sale of the investment (113,700) --
Change in Fair value of Warrants (2,171,921) --
Beneficial conversion feature expense 110,924 317,021
Amortization of the Unamortized discount 109,214 --
Finance Expense 1,185,904 --
Stock options granted 485,456 1,636,652
Warrants granted for services 619,547 --
Commission paid out of investments -- 66,500
Note Conversion Expense 104,674 --
Gain on legal settlement (7,827) --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 87,657 (286,542)
(Increase) decrease in inventory -- 6,758
(Increase) decrease in other current assets -- 6
(Increase) in prepaid expenses 5,562 (300)
(Increase) in deposits 643 (101,162)
(Decrease) in accounts payable 163,508 424,494
(Decrease) in payroll taxes payables (20,090) 14,517
(Decrease) in deferred revenue (16,656) (61,963)
----------- -----------
Net cash used in operating activities (1,208,903) (1,418,456)
----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (36,146) (175,764)
(Increase) decrease in restricted cash 260,087 (252,625)
Proceeds from sale of marketable securities 233,938 --
----------- -----------
Net cash provided by/ (used in) investing activies 457,879 (428,389)
----------- -----------
FINANCING ACTIVITIES
Payments on factoring payable (466,160) (135,586)
Proceeds from factor 364,326 229,292
Payments on leases (128,540) (48,260)
Proceeds from issuance of debentures 750,000 300,000
Proceeds from convertible bonds -- 250,000
Proceeds from convertible notes 50,500 200,000
Cash received for shares to be issued 151,750 --
Proceeds from sale of stocks 265,000 --
Prepayments for warrants to be issued for note conversion 125,000 295,000
Proceeds from issuance of common stock upon exercise of warrants 59,400 1,003,468
Payments of notes payable (22,914) (250,000)
----------- -----------
Net cash provided by financing activities 1,148,361 1,843,914
----------- -----------
Net increase (decrease) in cash and cash equivalents 397,338 (2,931)
Cash and cash equivalents, beginning balance 12,669 15,600
----------- -----------
Cash and cash equivalents, ending balance $ 410,007 $ 12,669
=========== ===========
The accompanying notes are an integral part of these financial statements
F-6
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
The Company was originally incorporated under the laws of the State of
California on April 16, 1993, as Quintek Electronics, Inc. On January 14, 1999,
the Company merged with Pacific Diagnostic Technologies, Inc. in a business
combination accounted for as a purchase. The acquisition took place under a plan
of reorganization. Quintek Electronics, Inc. ("QEI") became public when it was
acquired by Pacific Diagnostic Technologies, Inc. ("PDX") through a reverse
merger and Chapter 11 Plan of Reorganization. Under the plan, all assets of QEI
were sold to PDX, all PDX management resigned once the Plan was confirmed, and
QEI's management and operating plan were adopted by the new operating entity.
Shortly after the confirmation of the plan, the name of the reorganized debtor
was changed to Quintek Technologies, Inc. ("QTI"). QTI assumed the assets,
liabilities, technology and public position of both QEI and PDX.
On February 24, 2000, the Company acquired all of the outstanding common stock
of Juniper Acquisition Corporation ("Juniper"). For accounting purposes, the
acquisition was treated as a capitalization of the Company with the Company as
the acquirer (reverse acquisition).
On May 5, 2005, the Company formed Sapphire Consulting Services to focus its
efforts on the Supply Chain Services market. Sapphire provides back office
services and solutions to improve efficiencies within organizations. The Company
accomplishes this through out-sourcing/in-sourcing services, consulting services
and solution sales.
Quintek provides business process outsourcing services to Fortune 500, Russell
2000 companies and public sector organizations. The Company's business process
includes outsourcing services range from consulting, digitizing, indexing, and
uploading of source documents through simple customer-specific, rules-based
decision making. .
Since 1991, the Company's primary business focus and source of revenue was sales
of hardware, software and service related to a patented, chemical-free desktop
microfilm printer used for printing aperture cars directly from electronic files
used for document management and archival storage. The patents on this
technology were set to begin expiring in 2007. In November of 2005, the Company
entered into a purchase agreement wherein all rights, title, and interest in
assets, equipment, and inventory relating to the chemical-free desktop microfilm
printer for aperture cards were sold to an interest party. The Company's
continuing focus is on BPO document management services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES & REALIZATION OF ASSETS
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis. Allowance for doubtful debts amounted to $370 as
at June 30, 2006.
F-7
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Inventories
Inventories are valued at the lower of cost (determined on FIFO, first-in,
first-out) or market. The Management compares the cost of inventories with the
market value and allowance is made for writing down the inventories to there
market value, if lower.
Equity Method of Accounting for Investments
Investments in companies in which the Company has a 20% to 50% interest or has
significant influence over the operating and financial policies of the investee,
are carried at cost, adjusted for the Company's proportionate share of
undistributed earnings or losses.
Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line over
the estimated useful lives (3-7 years) of the assets.
Intangible Assets
Intangible assets consist of patents and purchased proprietary processes and are
being amortized using straight-line method over their remaining useful lives of
four years. The Company evaluates intangible assets for impairment, at least on
an annual basis and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 is being evaluated in accordance with SFAS No. 142.
The SFAS No. 142 is applicable to the financial statements of the Company
beginning July 1, 2002.
Long-lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal.
F-8
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Accounts Payable & Accrued Expenses
Accounts payable and accrued expenses consist of the following as of June 30,
2006:
Accounts payable $510,014
Accrued interest 321,070
Accrued legal fees 38,250
Other accrued expenses 121,403
--------
$990,737
========
Software Development Costs
The Company has adopted Statement of Position 98-1 ("SOP 98-1") "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use", as its
accounting policy for internally developed computer software costs. Under SOP
98-1, computer software costs incurred in the preliminary development stage are
expensed as incurred. Computer software costs incurred during the application
development stage are capitalized and amortized over the software's estimated
useful life.
The Company makes on-going evaluations of the recoverability of its capitalized
software by comparing the amount capitalized for each product to the estimated
net realizable value of the product. If such evaluations indicate that the
unamortized software development costs exceed the net realizable value, the
Company writes off the amount which the unamortized software development costs
exceed net realizable value.
Research and Development
Expenditures for software development costs and research are expensed as
incurred. The amounts charged to operations for the years ended June 30, 2006
and 2005 were $0 and $866, respectively.
Income Taxes
Deferred taxes are provided for on a liability method for temporary differences
between the financial reporting and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will be realized. For the year ended June 30,
2006, such differences were insignificant.
Stock Based Compensation
The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No.
123R"), under the modified-prospective transition method on January 1, 2006.
SFAS No. 123R requires companies to measure and recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value. Share-based compensation recognized under the
modified-prospective transition method of SFAS No. 123R includes share-based
compensation based on the grant-date fair value determined in accordance with
the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for all share-based payments granted prior to and not yet vested
as of January 1, 2006 and share-based compensation based on the grant-date
fair-value determined in accordance with SFAS No. 123R for all share-based
payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to
account for the award of these instruments under the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and allowed under the original provisions of SFAS No.
123. Prior to the adoption of SFAS No. 123R, the Company accounted for our stock
option plans using the intrinsic value method in accordance with the provisions
of APB Opinion No. 25 and related interpretations.
F-9
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
As a result of adopting SFAS No. 123R, the Company recognized $485,456 in
share-based compensation expense for the six months ended June 30, 2006. The
fair value of our stock options was estimated using the Black-Scholes option
pricing model.
Fair Value of Financial Instruments
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for assets and liabilities qualifying as financial
instruments are a reasonable estimate of fair value.
Basic and Diluted Net Loss Per Share
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
Revenue Recognition
Revenue is recognized when earned. The Company recognizes its revenue in
accordance with the Securities and Exchange Commissions ("SEC") Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104") and
The American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended as amended by
SOP 98-4 and SOP 98-9.
Issuance of Shares for Services
The Company accounts for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires the Company to recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the derivative instruments.
After adoption, the Company is required to adjust hedging instruments to fair
value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate.
F-10
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Reporting Segments
Statement of financial accounting standards No. 131, Disclosures about segments
of an enterprise and related information (SFAS No. 131), which superseded
statement of financial accounting standards No. 14, Financial reporting for
segments of a business enterprise, establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances. Currently,
SFAS 131 has no effect on the Company's consolidated financial statements as
substantially all of the Company's operations are conducted in one industry
segment.
Reclassifications
Certain comparative amounts have been reclassified to conform with the current
year's presentation.
Recent Pronouncements
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. The Company has not evaluated the impact of this
pronouncement its financial statements.
In March 2006 FASB issued SFAS 156 `Accounting for Servicing of Financial
Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract.
2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose `Amortization method' or Fair value
measurement method' for each class of separately recognized
servicing assets and servicing liabilities:
4. At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the
treatment of other available-for-sale securities under Statement
115, provided that the available-for-sale securities are identified
in some manner as offsetting the entity's exposure to changes in
fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities.
F-11
This Statement is effective as of the beginning of the Company's first fiscal
year that begins after September 15, 2006. Management is still in the process of
determining the effect of the statements on the consolidated financial
statements.
3. RESTRICTED CASH
The Company entered into a consulting agreement with General Motors Acceptance
Corporation under which it is required to provide at its own cost a performance
bond. Such bond shall be solely for the protection of its client GMAC. The
initial bond was drafted in the amount of $250,000 and will cover a period of
twelve (12) months starting October 1, 2004 and renews annually. On June 1,
2006, GMAC issued a Performance Bond Release Letter releasing the Company from
the requirement and obligation to maintain this performance bond.
The Company reclassified $260,087 of restricted cash as cash and cash
equivalents in the accompanying balance sheet as of June 30, 2006.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2006, consists of the following:
Computer and office equipment $ 817,158
Other depreciable assets 102,881
Furniture and fixture 40,653
---------
960,692
Accumulated depreciation (512,495)
---------
$ 448,197
=========
5. EMPLOYEE RECEIVABLES
Notes receivable from employees, unsecured,
due on June 30, 2019, interest at 4% per annum $ 260,854
Interest receivable in connection with the above
employee receivables 38,592
---------
299,446
Valuation allowance (299,446)
---------
--
=========
6. OTHER ASSETS
Subscription Receivable $ 58,349
Allowance on Subscription Receivable (57,466)
Warrant Asset 221,731
---------
$ 222,614
=========
7. NOTE PAYABLE
On April 10, 2006, the Company executed a note payable to a third party for
$62,590. The term of the note was for a period of six months bearing an annual
interest at 11.5%. The note carries a repayment provision wherein the Company
will repay the third party from proceeds in the event of funding capital
totaling a cumulative amount of one million dollars is received.
F-12
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
8. FACTORING PAYABLE
The Company entered into an agreement with a factoring company ("the Factor") to
factor purchase orders with recourse. The Factor funds 97% or 90% based upon the
status of the purchase order. The Factor agreed to purchase up to $4,800,000 of
qualified purchase orders over the term of the agreement; however, the Factor
does not have to purchase more than $200,000 in any given month. The term of the
agreement term was from June 2, 2003 to June 2, 2005. The Company agreed to pay
a late fee of 3% for payments not made within 30 days and 5% for those not made
in 60 days. At the option of the Factor, the late fees may be paid with Company
stock. If paid by Company stock, the stock bid price will be discounted 50% in
computing the shares to be issued in payment of the late fee.
Pursuant to the terms of the factor agreement, the Factor is entitled to receive
two (2) bonus warrants for each dollar of purchase orders purchased. The bonus
warrants will be exercisable at the average closing price of the Company's
common stock for the 90 days prior to the purchase order transactions they
represent or a 50% discount to the closing price of the Company's stock at the
time exercised at the option of the Factor. The warrants are exercisable over a
five year period. The Company has recorded $70,259 as interest expense in regard
to these bonus warrants for the twelve months ended June 30, 2006. The Company
has not issued any bonus warrants during the twelve months ending June 30, 2006.
There were no purchases of purchase orders during the twelve months ended June
30, 2006. At June 30, 2006, the Company had a factoring payable balance of
$116,722 associated with this factor. The Company has accrued $107,344 for
interest for late payments of this factor payable as of June 30, 2006.
During the twelve months ended June 30, 2006, the Company entered into an
agreement to factor $465,945 of qualified invoices for a cash remittance of
$364,326. As of June 30, 2006, the Company had no payable associated with this
factor. The Company recorded $12,091 as interest expense in regard to this
factor in the accompanying financial statements as of June 30, 2006.
At June 30, 2006, the Company had a factoring balance associated with two
individual factors of $20,000. The Company has accrued $11,803 for interest of
these factoring payables as of June 30, 2006.
9. PAYROLL TAXES-ASSUMED IN MERGER
The Company assumed $205,618 of payroll tax liabilities in the merger with
Pacific Diagnostic Technologies, Inc. The balance was $96,661 at June 30, 2006.
The Company is delinquent on payments of these payroll tax liabilities.
10. LOANS PAYABLE
Leases payable, interest at 7.9% to 20%, due various dates $268,972
in 2005 to 2008 ( the company is in default for these loans)
Lease payable, interest at 17.8%, due in 2007 17,083
Note payable, interest at 5.75%, due July 30, 2006 13,564
(the company is in default and default interest is 12%)
Notes payable, interest at 8%, due 2006 27,061
(the company is in default of these notes)
--------
$326,681
========
F-13
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
11. ADVANCES FROM LENDER
On August 2, 2004 the Company signed a convertible debenture agreement with an
accredited investor whereby the Company received an advance of $905,000 for
prepayment of warrants to be exercised. The agreement expires on August 2, 2006.
The accredited investor has exercised 868,264 warrants into common shares valued
at $868,264 as of the twelve month period ended June 30, 2006. The remaining
$36,736 is recorded as an advance from lender in the accompanying financial
statements as of June 30, 2006.
12. CONVERTIBLE BONDS
Bonds payable with interest at 9%, due on October 2001,
convertible to shares of common stock in increments of $1,000 or more $21,354
Bonds payable with interest at 12%, due July 2001, convertible to
shares of common stock in increments of $500 or more 41,141
-------
$62,495
=======
The above convertible bonds have matured as of July 2001 and October 2001. The
holders of the matured bonds do not wish to renew the bonds and have asked for
payment; however, the Company does not have the cash to repay these bonds. The
Company has recorded the $62,495 as convertible bonds as a current liability in
the accompanying financial statements as of June 30, 2006.
13. CONVERTIBLE DEBENTURES
The Company raised $300,000 through the issuance of convertible debentures as of
June 30, 2005. The term of the convertible debentures are as follows: pursuant
to the terms of conversion, debenture in the amount of $300,000 pays interest at
5 3/4% interest and includes 3,000,000 warrants to purchase common stock for a
period of three years at the exercise price of $1.00. The "Conversion Price
shall be equal to the lesser of (i) $0.50, or (ii) 75% of the average of the 5
lowest Volume Weighted Average Prices during the 20 trading days prior to
Holder's election to convert, or (iii) 75% of the Volume Weighted Average Price
on the trading day prior to the Holders election to convert market price of the
Company's common stock prior to conversion. Upon conversion of the debenture,
the holder is obligated to simultaneously exercise the $1.00 warrants providing
added funding to the Company. The warrant must be exercised concurrently with
the conversion of this debenture in an amount equal to ten times the dollar
amount of the Debenture conversion. Upon execution of the securities purchase
agreement, $225,000 of the purchase price was due and paid to the Company. The
remaining $75,000 was paid to the Company on February 7, 2005 upon effectiveness
of the Securities and Exchange Commission's Registration Statement. As of June
30, 2006, the Holder of the debenture converted $89,326 of the debenture amount
into 14,555,964 common shares of the Company and exercised 893,264 warrants.
The Company allocated the proceeds from the debenture between the warrant and
the debt based on relative fair value of the warrant and the debt. The value of
the warrant was calculated using the Black-Scholes model using the following
assumptions: Discount rate of 3.4%, volatility of 100% and expected term of one
year. The amount allocated to the warrant is being amortized over the term of
the debt. The Company calculated a beneficial conversion feature of $279, 652.
The Company amortized the beneficial conversion feature in accordance with the
conversion terms of the note. At June 30, 2006, the convertible debenture of
$210,674 is presented in the accompanying financial statements with the
unamortized beneficial conversion feature and unamortized discount fully
amortized.
F-14
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
On May 19, 2006, the Company entered into a Securities Purchase Agreement with
Cornell Capital Partners, LP ("Cornell"). The Company entered into a convertible
debenture with a total commitment value of $2,000,000 of which $750,000 was
raised during the year ended June 30, 2006. The term of the convertible
debenture is for 36 months from the date of issuance. The conversion price in
effect on any Conversion Date shall be, at the sole option of the Holder, equal
to either (a) $0.0662 (the "Fixed Conversion Price") or (b) ninety five percent
(95%) of the lowest Volume Weighted Average Price of the Common Stock during the
thirty (30) trading days immediately preceding the Conversion Date as quoted by
Bloomberg, LP (the "Market Conversion Price"). The Investor shall not be able to
convert the debentures into an amount that would result in the Investor
beneficially owning in excess of 4.99% of the outstanding shares of common stock
of the Company. Pursuant to the terms of debenture, the debenture bears interest
at 10% interest per year and includes 17,857,143 warrants to purchase common
stock at an exercise price of $0.07, 15,625,000 warrants to purchase common
stock at an exercise price of $0.08, 12,500,000 warrants to purchase common
stock at an exercise price of $0.10, and 10,416,666 warrants to purchase common
stock at an exercise price of $0.12, all warrants are for a term of five years.
The exercise of the attached warrants is at the sole option of the Holder. Upon
execution of the securities purchase agreement, $750,000 of the purchase price
was due and paid to the Company on May 19, 2006. An additional $750,000 will be
disbursed to the Company immediately prior to the filing of the Securities and
Exchange Commission's Registration Statement and the final $500,000 will be
disbursed upon effectiveness of the Securities and Exchange Commission's
Registration Statement. As of June 30, 2006, convertible debenture of $28,741,
net of unamortized discount, is presented in the accompanying financial
statements.
Per EITF 00-19, paragraph 4, these convertible debentures do not meet the
definition of a "conventional convertible debt instrument" since the debt is not
convertible into a fixed number of shares. The debt can be converted into common
stock at a conversions price that is a percentage of the market price; therefore
the number of shares that could be required to be delivered upon "net-share
settlement" is essentially indeterminate. Therefore, the convertible debenture
is considered "non-conventional," which means that the conversion feature must
be bifurcated from the debt and shown as a separate derivative liability. This
beneficial conversion liability has been calculated to be NIL at June 30, 2006.
In addition, since the convertible debenture is convertible into an
indeterminate number of shares of common stock, it is assumed that the Company
could never have enough authorized and unissued shares to settle the conversion
of the warrants into common stock. Therefore, the warrants issued in connection
with this transaction have been reported as an asset at June 30, 2006 in the
accompanying balance sheet with a fair value of $221,731. The value of the
warrant was calculated using the Black-Scholes model using the following
assumptions: Discount rate of 3.93%, volatility of 100% and expected term of
five year. The fair value of the beneficial conversion feature and the warrant
liability will be adjusted to fair value each balance sheet date with the change
being shown as a component of net income.
The fair value of the beneficial conversion feature and the warrants at the
inception of these convertible debentures were $NIL and $1,935,904,
respectively. $750,000 of the discounts has been recorded as a discount to the
convertible debentures which will be amortized over the term of the debentures
and the excess of $1,185,904 has been shown as financing costs in the
accompanying statement of operations.
14. CONVERTIBLE NOTES
The Company raised capital through the issuance of a convertible note for
$500,000 issued during the year ending June 30, 2004. The note plus any accrued
interest is convertible to the Company Common Stocks at $0.06 but limited to 10%
of the outstanding shares at the time of conversion. Additionally, the holder
will receive one bonus warrant for each conversion share. Each bonus warrant
will be exercisable for a period of 5 years from the date of issuance into one
share of Common Stock at a price of $0.03 per share. During the year ended June
30, 2005, the Company became obligated to issue 6,804,164 bonus warrants to the
debt holders upon conversion of $408,250 of the note. The Company recorded
additional interest of $938,431 representing the fair value of warrants issued
at the year ending June 30, 2005. During the year ended June 30, 2006, the
Company became obligated to issue 1,529,169 bonus warrants to the debt holder
upon conversion of the balance of the note of $91,750 on June 23, 2006. The
Company recorded additional expense of $61,912 for issuance these warrants for
the twelve months ended June 30, 2006.
F-15
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
The fair value of the warrants was calculated using the Black- Scholes model
using the following assumptions:
Volatility of 100%, discount rate of 3.93% and estimated life of 5 years.
The total accrued interest recorded on this convertible note as of June 30, 2006
amounted to $61,258.
The Company raised capital through the issuance of a convertible note for
$50,500 issued on May 10, 2006. The note bears interest at the rate of 10% per
annum compounded annually. All principal and interest shall be due and payable
at the earlier of occurrence of Company's first round of financing (whether debt
or equity) after May 31, 2006 involving the receipts of at least $200,000 or
more, or on November 10, 2006. The note holder will receive such number of fully
paid and non assessable common stock as shall equal the outstanding amount of
principal and interest due under this note being converted, divided by 80% of
the price per share at which the Company next sells the shares of its common
stock.
15. STOCKHOLDERS' DEFICIT
a. Common Stock and Warrants
The Company has authorized 200 million shares of common stock with a par value
of $0.01 per share. Each share entitles the holder to one vote. There are no
dividend or liquidation preferences, participation rights, call prices or rates,
sinking fund requirements, or unusual voting rights associated with these
shares.
During the year ended June 30, 2006, the Company issued 477,778 common shares
upon exercise of warrants and received cash amounting to $34,400; 11,597,498
common shares to consultants for services to be rendered valued at $945,852
recorded as unamortized consulting of which $832,397 of the unamortized
consulting had been amortized and recognized as an expense; 50,000 common shares
to a consultant for services rendered valued at $8,000 previously recorded as
shares to be issued in June 30, 2005; 8,666,666 common shares to accredited
investors for a stock sales and collected $265,000 in cash; 16,500,000 common
shares issued to an accredited investor for sale of stock valued at $776,250
pending receipt of cash recorded as stock subscription receivable; 9,529,866
common shares pursuant to conversion of debentures and exercise of warrants to
the escrow agent; $45,826 of debentures were converted into 9,529,866 common
shares and exercises of warrants to purchase 458,264 common shares at an
exercise price of $1 per share; 250,000 common shares for conversion of Series A
Preferred stock valued at $40,000; 160,000 common shares for conversion of
Series B Preferred stock valued at $30,400; 2,000,000 common shares valued at
$140,000 pursuant to an exchange agreement for investor to remit free trading
shares to a corporate consultant, and the issuance of 20,000 warrants to third
parties for services rendered valued at $870. The Company granted 2,000,000
warrants valued at $88,604, to a note holder in lieu of penalty for non payment
of the note payable balance amounting to $200,000
During the year ended June 30, 2006, the Company issued 1,292,180 warrants in
connection with an investment banking agreement and recorded $106,672 as expense
for the cost of the issuance of such warrants, 850,000 warrants to an accredited
investor in lieu of invoice factoring valued at $25,775, 1,500,000 warrants
pursuant to terms of a financing agreement valued at $66,634, and 3,000,000
warrants pursuant to a warrant exercise agreement valued at $132,819. An
additional expense of $58,790 was recorded during the above period for 630,733
warrants to be issued pursuant to the terms of the investment banking agreement
referenced above and an additional expense of $7,453 was recorded for the above
period for 200,000 warrants to be issued pursuant to invoice factoring
agreements. The fair value of the warrants is estimated on the grant date using
the Black-Scholes Model. The following assumptions were made in estimating fair
value
Annual rate of quarterly dividends 0.00%
Discount rate - Bond Equivalent Yield 3.93%
Expected life 3 years
Expected volatility 100%
F-16
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
b. Common Stock Reserved
At June 30, 2006, common stock was reserved for the following reasons:
Outstanding convertible bonds 151,918 shares
Outstanding Warrants:
Number
of
Warrants
---------
Outstanding June 30, 2005 15,206,857
Issued during the period 70,394,322
Expired (2,555,000)
Exercised (2,936,042)
----------
Outstanding June 30, 2006 80,110,137
Warrants to be issued 4,639,842
----------
Total 84,749,979
==========
During the year ended June 30, 2006, the Company issued 2,870,000 three-year
warrants to two investors at an exercise price of $0.07 with the fair value of
the warrants of $115,249 calculated using the Black Scholes option pricing model
using the following assumptions: risk free interest rate of 3.4%, volatility of
100%, and dividend yield of 0%, the fair value was accounted for as interest
expense and additional paid in capital.
1,500,000 three-year warrants to one investor at an exercise price of $0.033
with the fair value of the warrants of $64,409 calculated using the Black
Scholes option pricing model using the following assumptions: risk free interest
rate of 3.93%, volatility of 100%, and dividend yield of 0%, with the fair value
accounted for as interest expense and additional paid in capital.
8,333,333 five-year warrants to one investor at an exercise price of $0.03 with
the fair value of the warrants of $1,014,495 calculated using the Black Scholes
option pricing model using the following assumptions: risk free interest rate of
3.4% & 3.93%, volatility of 100%, and dividend yield of 0%, with the fair value
accounted for as interest expense and additional paid in capital.
1,292,180 five-year warrants to one investment banking company at exercise
prices of $0.105 and $0.18 with the fair value of the warrants of $128,179
calculated using the Black Scholes option pricing model using the following
assumptions: risk free interest rate of 3.4%, volatility of 100%, and dividend
yield of 0% with the fair value accounted for as stock-based compensation and
additional paid in capital.
56,398,809 five-year warrants to one investment banking company at exercise
prices of $0.07, $0.08, $0.10 and $0.12 with the fair value of the warrants of
$1,935,905 calculated using the Black Scholes option pricing model using the
following assumptions: risk free interest rate of 3.93%, volatility of 100%, and
dividend yield of 0% with the fair value accounted for as finance expense,
unamortized discount and warrant liability.
c. Stock Option Agreements
The Company granted 16,303,943 stock options to officers and employees
exercisable as of June 30, 2006 valued at $485,456.
F-17
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
The number and weighted average exercise prices of options granted by the
Company are as follows:
Options Weighted Aggregate
Outstanding Average Intrinsic
Exercise Value
Price
------------------------------------
Outstanding June 30, 2005 9,470,317 $ 0.93 $ 26,611
Granted during the year 7,233,626
Exercised --
Expired/forfeited (400,000)
------------------------------------
Outstanding June 30, 2006 16,303,943 $0.045 $ --
====================================
Following is a summary of the status of options outstanding at June 30, 2006:
Weighted Total
Average Weighted Weighted
Remaining Average Average
Range of Total Options Life Exercise Options Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
$0.01 - $0.09 13,000,881 3.35 0.024 13,000,881 0.024
$0.10 - $0.20 3,303,062 0.48 0.021 3,303,062 0.021
-----------------------------------------------------------
16,303,943 3.83 0.045 16,303,943 0.045
===========================================================
2,380,000 three year options calculated using the Black Scholes option pricing
model using the following assumptions
Risk-free interest rate 3.40%
Dividend yield 0%
Volatility 100%
13,611,943 five year options calculated using the Black Scholes option pricing
model using the following assumptions
Risk-free interest rate 3.40%
Dividend yield 0%
Volatility 100%
312,000 three year options calculated using the Black Scholes option pricing
model using the following assumptions
Risk-free interest rate 3.93%
Dividend yield 0%
Volatility 100%
For periods presented prior to the adoption of SFAS No. 123R, pro forma
information regarding net income and earnings per share as required by SFAS No.
123R has been determined as if we had accounted for our employee stock options
under the original provisions of SFAS No. 123. The fair value of these options
was estimated using the Black-Scholes option pricing model. The pro forma
expense to recognize during the six months ended December 31, 2005 (prior to the
adoption of SFAS 123R) and for the year ended June 30, 2005 is as follows: ($ in
thousands, except per share amounts)
F-18
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
2006 2005
--------- -------
Net loss attributed to common stockholders:
As reported $ (2,946) $(7,418)
Compensation recognized under APB 25 -- 40
Compensation recognized under SFAS 123 -- (1,718)
--------- -------
Pro forma $ (2,946) $(9,096)
========= =======
Basic and diluted loss per common share:
As reported $ (0.02) $ (0.10)
Pro forma $ (0.02) $ (0.12)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for options issued during the year ended June 30, 2006: risk-free
interest rate of 3.7%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common shares of 100%; and a weighted average
expected life of the option of 3 years.
d. Stock transactions approved by the shareholders
At the annual meeting of the shareholders held June 30, 2004, the shareholders
approved by a majority vote to increase to 200,000,000 shares, $0.01 par value
common stock, and 50,000,000 shares no par value preferred stock. The board of
directors are authorized to divide the preferred stock into any number of
classes or series, fix the designation and number of shares of each such series
or class and alter or determine the rights, preferences, privileges and
restrictions of each or series of preferred stock
Series A Preferred Stock
The general terms of the Series A Preferred Stock is as follows: No par value;
Liquidation Preference - $0.25 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.005 per share when and as declared by
the Board of Directors; Conversion Rights - convertible to common stock at a 1:1
ratio ; Redemption Rights - the Company has the right to redeem part or all of
the stock upon 30 days written notice at a rate of $0.25 per share plus all
accumulated and unpaid dividends thereon at the dividend rate of $0.005 annually
per share; Voting Rights - one vote per share on all matters requiring
shareholder vote. At June 30, 2006, the Company had 3,047,531 shares of Series A
Preferred stock outstanding valued at $526,506. The Company has recorded a
cumulative dividend of $32,440 for the Series A Preferred stockholders as of
June 30, 2006 in the accompanying financial statements.
Series B Preferred Stock
The general terms of the Series B Preferred Stock is as follows: No par Value;
Liquidation Preference - $0.25 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.0005 per share when and as declared by
the Board of Directors; Conversion Rights - convertible to common stock at a 1:5
ratio (i.e. 1 share of Series B Preferred stock is convertible into 5 shares of
common stock); Redemption Rights - the Company has the right to redeem part or
all of the stock upon 30 days written notice at a rate of $0.25 per share plus
all accumulated and unpaid dividends thereon at the dividend rate of $0.0005
annually per share; Voting Rights - one vote per share on all matters requiring
shareholder vote. At June 30, 2006, the Company had 89,271 shares of Series B
Preferred Stock outstanding valued at $86,888. The Company has recorded a
cumulative dividend of $176 for the Series B Preferred Stockholders as of June
30, 2006 in the accompanying financial statements.
F-19
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Series C Preferred Stock
The general terms of the Series C Preferred Stock is as follows: No par value;
Liquidation Preference - $1.00 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.0005 per share when as declared by the
Board of Directors; Conversion Rights - 1:20 ratio (i.e. 1 share of Preferred
Series C stock is convertible into 20 shares of common stock); Redemption Rights
- the Company has the right to redeem part or all of the stock upon 30 days
written notice at the rate of $1.00 per share plus all accumulated and unpaid
dividends thereon at the dividend rate of $0.0005 annually per share.; Voting
Rights - one vote per share on all matters requiring shareholder vote. At June
30, 2006, the Company had 17,948 shares of Series C Preferred Stock outstanding
valued at $68,211. The Company has recorded a cumulative dividend of $16 for the
Series C Preferred Stockholders as of June 30, 2006 in the accompanying
financial statements.
The Company has recorded a dividend for preferred shareholders amounting to
$16,057 for the twelve month period ended June 30, 2006, and a cumulative
dividend of $32,633 for the preferred stockholders as of June 30,, 2006 in the
accompanying financial statements. The Company has entered into agreements with
various vendors and employees to convert their liabilities into the preferred
series of stock.
16. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 2006 and 2005 is
summarized as follows:
2006 2005
----------- -----------
Current:
Federal $(1,007,001) $(2,527,649)
State (177,706) (446,056)
Deferred taxes 1,185,507 2,974,505
----------- -----------
Income tax expense (benefit) $ 800 $ 800
=========== ===========
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Consolidated
Statements of Operations at June 30, 2006 and 2005:
2006 2005
----- -----
Tax expense (credit) at statutory rate-federal (34%) (34%)
State tax expense net of federal tax (6%) (6%)
Permanent differences -- --
Valuation allowance 40% 40%
----- -----
-- --
Tax expense at actual rate -- --
===== =====
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at June 30, 2006 are as follows:
Deferred tax assets:
Net operating loss carry forward $ 11,498,914
Less valuation allowance (11,498,914)
------------
Net deferred tax assets $ --
============
F-20
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
At June 30, 2006, the Company had net operating loss carry forwards of
approximately $28,747,285 for U.S. federal income tax purposes available
to offset future taxable income expiring on various dates through 2020.
The net change in the valuation allowance during the year ended June 30,
2006 and 2005 was an increase of $1,184,707 and $2,973,705, respectively.
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95.
The Company paid $0 and $4,800 for income tax during the years ended June 30,
2006 and 2005. The Company paid $53,414 and $58,970 interest during the years
ended June 30, 2006 and 2005, respectively.
The cash flow statement for the year ended June 30, 2006 does not include the
following non-cash investing and financing transactions;
o 1,529,169 shares were issued for conversion of note payable of
$91,750.
o 9,529,866 shares were issued for conversion of debenture of $45,891.
18. MAJOR CUSTOMERS AND SUPPLIERS
The Company had two customers that accounted for 16-37 % of revenue for the year
ended June 30, 2006. Accounts receivable from these major customers were $15,023
and $4,496.03 respectively at June 30, 2006. For the year ended June 30, 2005,
the Company had two customers that accounted for 20-45 % of revenue. Accounts
receivable from these major customers were $245,615 and $604,208 respectively-
at June 30, 2005.
19. COMMITMENTS AND CONTINGENCIES
a) Operating Leases
Effective July 1, 2004 the Company relocated their executive offices to
Huntington Beach, California and entered into a four year lease agreement. The
agreement contains a base rent escalation clause. The Company leases its Idaho
office facility under a month-to-month rental agreement at $675 per month. For
the years ended June 30, 2006 and 2005, rent expense for these operating leases
totaled $105,411 and $89,829, respectively.
The future minimum lease payments under non-cancelable leases are as follows:
2007 $93,218
2008 94,913
---------
$188,131
=========
b) Litigation
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against Quintek for $22,662. for goods provided. Since 2000, Decision One
(formerly Imation) has been both a vendor to Quintek and a reseller of Quintek's
Q4300 Printers. Quintek filed a counterclaim on August 1, 2004. Quintek asserts
that Decision One used its authority as a dealer of our product to disparage us,
in violation of its dealer agreement with us, and we seek relief for the
hundreds of thousands of dollars in business lost because of it. On January 11,
2005, the Court granted Judgment for the sum of $21,000 in favor of the Decision
One Corporation. The Court has ruled that Quintek would be allowed to file the
counterclaim under this action, rather than a separate lawsuit. The Company can
appeal the Court's decision and would have until February 18, 2005 to file the
Notice of Appeal. In March 2005, a stipulation settlement was accepted by the
F-21
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Creditor where they agreed to accept $15,000 in full satisfaction of their debt.
The Company agreed to pay $2,000 upon execution of the stipulation plus $1,000
for 13 months thereafter. Upon receipt of the final payment, a Satisfaction of
Judgment will be entered in the matter. If the Company fails to meet the payment
schedule, the Creditor, after giving credit for payments received, shall be
allowed to proceed with the full judgment of $21,000 plus accumulated interest
and costs. The Company has recorded the full amount of judgment of $21,000 and
accrued interest in the accompanying financial statements as of June 30, 2006.
In April 2006, the Company made a payment of $16,827 to satisfy its obligations
pursuant to the terms of the judgment.
An action which was pending in the Superior Court of the State of California for
Orange County against one of the Company's competitors, a former employee and a
former officer of the Company, has been resolved by mutual agreement. The
settlement includes an injunction which prevents the defendants from soliciting
or initiating contact with 23 accounts until February 28, 2007. There was no
admission or acknowledgment of any wrongdoing by the defendants in stipulating
to the injunction. The plaintiff, Quintek Technologies, Inc., and defendants
Robert Brownell, Chris De Lapp and Document Imaging Technologies, Inc. entered
into a stipulated injunction in the matter which provides, among other things,
that Defendants and all of their respective officers, agents, representatives,
directors, affiliates, employees, successors in interest, and all persons acting
in concert or participating with them, are restrained and enjoined from
soliciting or initiating contact with 23 clients listed in the injunction.
Additionally, the Defendants shall not use, disclose, disseminate or publish in
any manner Quintek's confidential business information and/or trade secrets
including lists of clients, candidates, information regarding contracts or
prospective Quintek contracts with clients and candidates, computer programs,
business plans and strategies, prices, job descriptions, contracts, budgets, and
similar confidential or proprietary materials or information respecting
Quintek's or its clients' or candidates' business affairs, as well as
confidential information of a personal nature of Quintek's and its employees,
managers and officers, without the prior written consent of Quintek.
20. BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share." Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Weighted average number of shares used to compute basic and diluted loss per
share for the years ended June 30, 2006 and 2005 are the same since the effect
of dilutive securities is anti-dilutive.
21. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. This basis of accounting contemplates the recovery
of the Company's assets and the satisfaction of its liabilities in the normal
course of business. Through June 30, 2006, the Company had incurred cumulative
losses of $33,457,095 including net losses of $2,945,710 and $7,417,687 for the
fiscal years 2006 and 2005, respectively. In view of the matters described in
the preceding paragraph, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's ability
to raise additional capital, obtain financing and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-22
Quintek Technologies, Inc. and Subsidiares
Notes to Consolidated Financial Statements
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the period ended June 30, 2006, towards (i) obtaining additional equity
and debt financing and (ii) evaluation of its distribution and marketing
methods.
22. RELATED PARTY TRANSACTIONS
On January 6, 2006, the Company issued a warrant to purchase 20,000 common
shares bearing an exercise price of $0.07 and a three year term to a relative of
the CFO pursuant to a short term loan agreement of $20,000.
On May 16, 2006, the Company paid to a relative of the CFO $4,500 in regard to a
finder's fee for financial funding received by the Company.
23. SUBSEQUENT EVENTS
On July 25, 2006, the Company created and established 1,000,000 shares of Series
D Convertible Preferred Stock with a par value of $0.001 per share. This
designation was endorsed and filed in the office of the Secretary of State of
the state of California on July 27, 2006. On July 27, 2006, the Company issued
500,000 shares of Series D Preferred Stock of the Corporation to each of Robert
Steele and Andrew Haag for securing the recent financing with Cornell Capital
Partners and their time and dedication to the Corporation.
On August 3, 2006, the Company issued 3,529,169 common shares pursuant to a
warrant conversion and convertible note valued at $151,750 reported as shares to
be issued from the year ending June 30, 2006.
On September 15, 2006 the company executed an amendment to its agreement with
Cornell Capital Partners. The Company would receive One Hundred Fifty Thousand
Dollars ($150,000) funding upon the Company increasing its authorized shares of
Common Stock to at least five hundred million (500,000,000) shares of Common
Stock. In consideration the company issued a note paying 10% annual interest for
ths principal sum of One Hundred Fifty Thousand Dollars ($150,000) together with
accrued but unpaid interest due on or before September 15, 2009 (the "Maturity
Date"). The company also agreed to amend warrants to purchase Fifty Six Million
Three Hundred Ninety Seven Thousand (56,397,000) shares of the Company's Common
Stock for a period of five (5) years as follows: 1) a warrant to purchase
17,857,000 shares of the Company's Common Stock which shall have an exercise
price of $0.05 per share, 2) a warrant to purchase 15,625,000 shares of the
Company's Common Stock shall have an exercise price of $0.055 per share, 3) a
warrant to purchase 12,500,000 shares of the Company's Common Stock which shall
have an exercise price of $0.065 per share, and 4) a warrant to purchase
10,415,000 shares of the Company's Common Stock which shall have an exercise
price of $0.08 per share (collectively referred to as the "Warrants").
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements between us and our accountants as to
matters which require disclosure.
ITEM 8A - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
as of June 30, 2006. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were designed at a
reasonable assurance level and were effective as of June 30, 2006 to provide
reasonable assurance that information required to be disclosed in reports filed
or submitted under the Exchange Act was recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that such information was accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial
reporting and make changes to our processes and systems to improve controls and
increase efficiency, while ensuring that we maintain an effective internal
control environment. Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating processes.
There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 8B - OTHER INFORMATION
None.
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------------------------------------------------------
Names: Ages Titles: Board of Directors
--------------------------------------------------------------------------------
Robert Steele 39 Chief Executive Officer Director
--------------------------------------------------------------------------------
Andrew Haag 38 Chief Financial Officer Director
--------------------------------------------------------------------------------
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services, although
their expenses in attending meetings are reimbursed. Officers are elected by the
Board of Directors and serve until their successors are appointed by the Board
of Directors. Biographical resumes of each officer and director are set forth
below.
Robert Steele, Chief Executive Officer and Director
Robert Steele has been our Chief Executive Officer, President, and
Chairman of the Board of Directors since January 30, 2003. In 1999, Mr. Steele
founded iBrite, a wireless information software company in Reston, Virginia, and
from May 1999 through June 2001 served as its Chief Executive Office. The
company established contractual partnerships with AOL and Global Knowledge. From
1988 through 1998, Mr. Steele served as Corporate Vice President & Chief
Technology Officer for CADD Microsystems, Inc. (CMI), currently the leading
provider of Autodesk Computer Aided Design software, consulting, training and
integration services in the Washington, DC Metropolitan Area. During his time at
CMI, the company grew from $50,000 in annual sales to more than $3,000,000. Mr.
Steele sold and supervised significant systems integration contracts with
clients such as Lucent Technologies, Long Airdox Mining (Division of the Fortune
500 Marmon Group), ABB, GSA (General Services Administration), FAA (Federal
Aviation Administration) and NRO (National Reconnaissance Office). Mr. Steele
received a Bachelor of Science in Electronic and Computer Engineering from
George Mason University in 1988.
Andrew Haag, Chief Financial Officer and Director
Andrew Haag has been our Chief Financial Officer and a Director since
January 31, 2003. From December 2002, he was employed by the Camelot Group,
Inc., an investment banking firm, to assist its corporate clients on capital
structure, the structure of PIPE transactions and the preparation of offering
documents. From May 2001, Mr. Haag was employed by Aquasearch, Inc., a publicly
held company, where he raised significant funds from private sources, advised
its CEO on strategic business development issues and successfully negotiated
several contracts to benefit the company. Mr. Haag assisted in drafting
corporate business plan, terms of investment, press releases and other corporate
documents. From November 1998 through April 2001 he was employed by Nutmeg S
ecurities, Ltd., where he advised institutional and individual clientele on
corporate offerings and equity trading, and performed corporate advisory work
for both public and private companies. From June 1998 through October 1998 Mr.
Haag was a Managing Director of Waldron & Co. Inc., an investment bank located
in Irvine, CA.
From 1992 through 1998 he was employed by Auerbach, Pollak & Richardson,
investment bankers, located in Stamford, CT and Beverly Hills, CA, rising to
Managing Director, where he: assisted in the development of the firm, attracting
and referring new hires and clients to all offices; developed a national and
international client base for the firm that participated in a majority of the
firm's corporate offerings; set up and managed road shows for firm's corporate
clientele; attracted a wide variety of corporate clientele; assisted in the
structuring and funding of offerings for corporate clientele; and increased
visibility of the firm through networking of research and offerings. Mr. Haag
attended the University of Maine and CUNY Hunter College.
21
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our directors and executive officers, and persons who own more than ten
percent of a registered class of our equity securities, to file with the
Commission initial reports of ownership and reports of changes in ownership of
our Common Stock and other equity securities of ours. Officers, directors and
greater than ten percent shareholders are required by the Commission's
regulations to furnish us with copies of all Section 16(a) forms they filed.
We have been provided with copies of all forms (3, 4 and 5) filed by
officers, directors, or ten percent shareholders within three days of such
filings. Based on our review of such forms that we received, or written
representations from reporting persons that no Forms 5s were required for such
persons, we believe that, during fiscal 2006, except for two Form 3's that were
delinquent, all Section 16(a) filing requirements have been satisfied on a
timely basis for members of the Board of Directors and Executive Officers.
Board Committees
We have not established any compensation or executive committees.
Currently, the board of directors serves as our audit committee. Because of our
small size and the risk attendant to a small public company, we are currently
unable to attract an independent audit committee financial expert to our Board
of Directors.
Code of Ethics
On June 10, 2003, our board of directors adopted a code of ethics that
applies to our officers, directors and employees. A copy of the Code of Ethics
is incorporated by reference as an exhibit.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal years ending June 30, 2006, 2005 and 2004 exceeded
$100,000:
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
---------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Name and Annual Annual Annual Stock Underlying LTIP All Other
Principal Fiscal Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Position Year ($) ($) ($) (1) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------------------------------
Robert Steele, 2005 141,364 0 6,000 0 3,370,813 0 0
Chairman and CEO 2005 85,500 0 15,438 1,000,000 4,267,276 0 0
2004 72,000 0 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------------
Andrew Haag, CFO 2005 141,339 0 6,000 0 3,370,813 0 0
2005 85,500 0 15,433 1,000,000 4,267,276 0 0
2004 72,000 0 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------------
Robert 2005 0 0 0 0 0 0 0
Brownell, 2004 119,000 0 0 250,000 611,062 0 0
President 2003 37,500 0 0 0 0 0 0
1) These amounts represent our payments to provide an automobile and health
insurance for Mr. Steele and Mr. Haag.
2) Mr. Brownell resigned on March 31, 2005.
3) Represents compensation received by Brownell while serving as our President
from March 12, 2004 to June 30, 2004.
22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial
ownership of each class of our stock as of September 25, 2006
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
NUMBER OF PERCENTAGE OF
SHARES OWNED CLASS OWNED
NAME AND ADDRESS OF OWNER TITLE OF CLASS (1) (2)
-------------------------------------------------------------------------------------------------------
Robert Steele Common Stock 9,038,089 (3) 5.64%
17951 Lyons Circle
Huntington Beach, CA 92647
Andrew Haag Common Stock 8,554,616 (4) 5.41%
17951 Lyons Circle
Huntington Beach, CA 92647
All Officers and Directors Common Stock 17,592,705 (5) 10.55%
As a Group (2 persons)
Zubair Kazi Common Stock 9,720,536 (6) 6.35%
Langley Park Investments PLC Common Stock 14,000,000 (7) 8.45%
Robert Steele Series A Preferred Stock 1,000,000 32.81%
Andrew Haag Series A Preferred Stock 1,000,000 32.81%
Robert Steele Series D Preferred Stock 1,000,000 50.00%
Andrew Haag Series D Preferred Stock 1,000,000 50.00%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of September 25, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 151,699,773 shares issued and outstanding on September 25, 2006.
(3) Includes 1,000,000 shares issuable upon conversion of Series A convertible
preferred stock and 7,638,089 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days.
(4) Includes 1,000,000 shares issuable upon conversion of Series A convertible
preferred stock and 5,362,792 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days.
(5) Includes 2,000,000 shares issuable upon conversion of Series A convertible
preferred stock and 13,000,881 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days.
23
(6) Includes 1,500,000 shares of common stock underlying warrants that are
currently exercisable or exercisable within 60 days.
(7) Shares are issued but not outstanding and are held in escrow until
fulfillment of conditions by Langley Park Investment pursuant to a July 29, 2004
agreement with us.
Remuneration of Directors
None.
Employment Agreements
Contract with Robert Steele
On January 30, 2003, we entered into a five-year employment contract with
Robert Steele, our Chief Executive Officer. The base salary under the agreement
is $6,000 per month. Upon achieving gross revenue in a quarter of $300,000, the
base salary under the agreement is $9,000 per month. Upon achieving gross
revenue in a quarter of $600,000, the base salary under the agreement is $12,000
per month. Upon achieving gross revenue in a quarter of $900,000, the base
salary under the agreement is $15,000 per month. If our quarterly gross revenues
decrease, Mr. Steele's base salary will decrease accordingly, subject to the
minimum base salary of $6,000 per month. In addition, Mr. Steele is entitled to
participate in any and all benefit plans, from time to time, in effect for our
employees, along with vacation, sick and holiday pay in accordance with our
policies established and in effect from time to time.
Contract with Andrew Haag
On January 31, 2003, we entered into a five-year employment contract with
Andrew Haag, our Chief Financial Officer. The base salary under the agreement is
$6,000 per month. Upon achieving gross revenue in a quarter of $300,000, the
base salary under the agreement is $9,000 per month. Upon achieving gross
revenue in a quarter of $600,000, the base salary under the agreement is $12,000
per month. Upon achieving gross revenue in a quarter of $900,000, the base
salary under the agreement is $15,000 per month. If our quarterly gross revenues
decrease, Mr. Haag's base salary will decrease accordingly, subject to the
minimum base salary of $6,000 per month. In addition, Mr. Haag is entitled to
participate in any and all benefit plans, from time to time, in effect for our
employees, along with vacation, sick and holiday pay in accordance with our
policies established and in effect from time to time.
Stock Option Plans
On June 30, 2004, our stockholders approved our 2004 Stock Option Plan and
authorized 11,822,500 shares of common stock for issuance there under. As of
September 25, 2006, no options have been granted pursuant to the plan.
On September 7, 2006, our stockholders approved our 2006 Stock Option Plan
and authorized 25,000,000 shares of common stock for issuance there under. As of
September 25, 2006, no options have been granted pursuant to the plan.
Option/SAR Grants in Last Fiscal Year
None.
24
Equity Compensation Plan Information
The following table sets forth certain information about the common stock
that may be issued upon the exercise of options, warrants and rights under all
of the existing equity compensation plans as of September 25, 2006.
Number of Shares
Remaining
Available for
Number of Shares Weighted-Average Future Issuance
to be Issued Exercise Under Equity
Upon Exercise of Price of Compensation
Outstanding Outstanding Plans (Excluding
Options, Options, Shares Reflected
Warrants and Warrants and in the First
Plan Category Rights Rights Column)
---------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by shareholders -- -- 36,822,500
Equity compensation plans not approved by shareholders -- -- --
----------- ----------- -----------
Total -- -- 36,822,500
=========== =========== ===========
25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, there have been no transactions, or
proposed transactions, which have materially affected or will materially affect
us in which any director, executive officer or beneficial holder of more than
10% of the outstanding common stock, or any of their respective relatives,
spouses, associates or affiliates, has had or will have any direct or material
indirect interest. We have no policy regarding entering into transactions with
affiliated parties.
On December 22, 2004, we issued 1,967,824 shares of common stock to Andrew
Haag, an officer and director, pursuant to an exercise of a warrant on a
cashless basis.
On January 6, 2006, we issued a warrant to purchase 20,000 common shares
bearing an exercise price of $0.07 and a three year term to an investor related
to Andrew Haag, an officer and director, pursuant to a short term loan agreement
of $20,000.
On May 16, 2006, we paid to a party related to Andrew Haag, an officer and
director, $4,500 in regard to a finder's fee for financial funding we received.
26
ITEM 13. EXHIBITS.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization between Quintek
Technologies, Inc., and Juniper Acquisition Corporation, filed
as an exhibit to the current report on Form 8-K filed with the
Securities and Exchange Commission on February 25, 2000 and
incorporated herein by reference.
3.1 Articles of Incorporation, filed as an exhibit to the annual
report on Form 10-KSB filed with the Securities and Exchange
Commission on October 16, 2000 and incorporated herein by
reference.
3.2 Bylaws of the Company, filed as an exhibit to the annual
report on Form 10-KSB filed with the Securities and Exchange
Commission on October 16, 2000 and incorporated herein by
reference.
4.1 Form of Irrevocable Proxy Granted to Chief Executive Officer
dated January 30 or 31, 2003, filed as an exhibit to the
quarterly report on Form 10-QSB filed with the Securities and
Exchange Commission on February 14, 2003 and incorporated
herein by reference.
4.2 Securities Purchase Agreement, dated May 17, 2006, by and
between Quintek Technologies, Inc. and Cornell Capital
Partners L.P., filed as an exhibit to the Current Report on
Form 8-K, filed with the Commission on May 24, 2006 and
incorporated herein by reference.
4.3 Secured Convertible Debenture issued to Cornell Capital
Partners LP, dated May 17, 2006, filed as an exhibit to the
Current Report on Form 8-K, filed with the Commission on May
24, 2006 and incorporated herein by reference.
4.4 Warrant to purchase 10,415,000 shares of Common Stock, dated
May 17, 2006, issued to Cornell Capital Partners L.P., filed
as an exhibit to the Current Report on Form 8-K, filed with
the Commission on May 24, 2006 and incorporated herein by
reference.
4.5 Warrant to purchase 12,500,000 shares of Common Stock, dated
May 17, 2006, issued to Cornell Capital Partners L.P., filed
as an exhibit to the Current Report on Form 8-K, filed with
the Commission on May 24, 2006 and incorporated herein by
reference.
4.6 Warrant to purchase 17,857,000 shares of Common Stock, dated
May 17, 2006, issued to Cornell Capital Partners L.P., filed
as an exhibit to the Current Report on Form 8-K, filed with
the Commission on May 24, 2006 and incorporated herein by
reference.
4.7 Warrant to purchase 15,625,000 shares of Common Stock, dated
May 17, 2006, issued to Cornell Capital Partners L.P., filed
as an exhibit to the Current Report on Form 8-K, filed with
the Commission on May 24, 2006 and incorporated herein by
reference.
4.8 Registration Rights Agreement, dated May 17, 2006, by and
between Quintek Technologies Inc. and Cornell Capital Partners
L.P., filed as an exhibit to the Current Report on Form 8-K,
filed with the Commission on May 24, 2006 and incorporated
herein by reference.
4.9 Security Agreement, dated May 17, 2006, by and between Quintek
Technologies Inc. and Cornell Capital Partners L.P., filed as
an exhibit to the Current Report on Form 8-K, filed with the
Commission on May 24, 2006 and incorporated herein by
reference.
4.10 Security Agreement, dated May 17, 2006, by and between Quintek
Services, Inc. and Cornell Capital Partners L.P., filed as an
exhibit to the Current Report on Form 8-K, filed with the
Commission on May 24, 2006 and incorporated herein by
reference.
27
4.11 Security Agreement, dated May 17, 2006, by and between
Sapphire Consulting Services and Cornell Capital Partners
L.P., filed as an exhibit to the Current Report on Form 8-K,
filed with the Commission on May 24, 2006 and incorporated
herein by reference.
4.12 Amendment No. 1 to Securities Purchase Agreement, dated May
17, 2006, by and between Quintek Technologies, Inc. and
Cornell Capital Partners L.P. (filed herewith).
4.13 Amendment No. 1 to Registration Rights Agreement, dated May
17, 2006, by and between Quintek Technologies, Inc. and
Cornell Capital Partners L.P. (filed herewith).
4.14 Amendment No. 1 to Warrant to purchase 10,415,000 shares of
Common Stock, dated May 17, 2006, issued to Cornell Capital
Partners L.P. (filed herewith).
4.15 Amendment No. 1 to Warrant to purchase 12,500,000 shares of
Common Stock, dated May 17, 2006, issued to Cornell Capital
Partners L.P. (filed herewith).
4.16 Amendment No. 1 to Warrant to purchase 17,857,000 shares of
Common Stock, dated May 17, 2006, issued to Cornell Capital
Partners L.P. (filed herewith).
4.17 Amendment No. 1 to Warrant to purchase 15,625,000 shares of
Common Stock, dated May 17, 2006, issued to Cornell Capital
Partners L.P. (filed herewith).
10.1 Consulting Agreement between Quintek Technologies, Inc. and
Robert Steele dated December 16, 2002, filed as an exhibit to
the registration statement on Form S-8 filed with the
Securities and Exchange Commission on March 11, 2003 and
incorporated herein by reference.
10.2 Consulting Agreement between Quintek Technologies, Inc. and
Zubair Kazi dated January 31, 2003, filed as an exhibit to the
registration statement on Form S-8 filed with the Securities
and Exchange Commission on March 11, 2003 and incorporated
herein by reference.
10.3 Warrant Agreement between Quintek Technologies, Inc. and
Zubair Kazi dated January 31, 2003, filed as an exhibit to the
registration statement on Form S-8 filed with the Securities
and Exchange Commission on March 11, 2003 and incorporated
herein by reference.
10.4 Purchase Order Financing Agreement dated June 2, 2003 between
Kazi Management VI, LLC and Quintek Technologies, Inc., filed
as an exhibit to the registration statement on Form S-8 filed
with the Securities and Exchange Commission on August 18, 2003
and incorporated herein by reference.
10.5 Employment Agreement between Quintek Technologies, Inc. and
Robert Steele dated January 31, 2003, filed as an exhibit to
the annual report on Form 10-KSB filed with the Securities and
Exchange Commission on October 14, 2003 and incorporated
herein by reference.
10.6 Employment Agreement between Quintek Technologies, Inc. and
Andrew Haag dated January 31, 2003, filed as an exhibit to the
annual report on Form 10-KSB filed with the Securities and
Exchange Commission on October 14, 2003 and incorporated
herein by reference.
28
14.1 Code of Ethical Conduct adopted June 10, 2003, filed as an
exhibit to the current report on Form 8-K filed with the
Securities and Exchange Commission on October 13, 2004 and
incorporated herein by reference.
14.2 Audit Committee Charter adopted June 11, 2003, filed as an
exhibit to the current report on Form 8-K filed with the
Securities and Exchange Commission on October 13, 2004 and
incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14 and Rule 15d 14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
29
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our auditors for professional services
rendered in connection with the audit of our annual consolidated financial
statements for fiscal 2006 and 2005 and reviews of the consolidated financial
statements included in our Forms 10-QSB were $52,000 for 2006 and $41,000 for
2005.
Audit-Related Fees
For fiscal 2006 and 2005, our auditors did not bill any fees for assurance
and related services that are reasonably related to the performance of the audit
or review of our financial statements and are not reported under "Audit Fees"
above.
Tax Fees
No fees were billed by our auditors for professional services for tax
compliance, tax advice, and tax planning for fiscal 2006 and 2005, respectively.
All Other Fees
No fees were billed by our auditors for all other non-audit services
rendered to us, such as attending meetings and other miscellaneous financial
consulting, in fiscal 2006 and 2005.
Audit Committee
The audit committee meets prior to filing of any Form 10-QSB or 10-KSB to
approve those filings. In addition, the committee meets to discuss audit plans
and anticipated fees for audit and tax work prior to the commencement of that
work. All fees paid to our independent auditors for fiscal 2006 were
pre-approved by the audit committee.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUINTEK TECHNOLOGIES, INC.
Date: September 28, 2006 By: /s/ ROBERT STEELE
----------------------------------------
Robert Steele
Chief Executive Officer (Principal
Executive Officer)
Date: September 28, 2006 By: /s/ ANDREW HAAG
----------------------------------------
Andrew Haag
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
--------------------------------------------------------------------------------
Name Position Date
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
/s/ ROBERT STEELE Chief Executive Officer (Principal September 28, 2006
----------------- Executive Officer) and Director
Robert Steele
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
/s/ ANDREW HAAG Chief Financial Officer (Principal September 28, 2006
--------------- Financial Officer and Principal
Andrew Haag Accounting Officer) and Director
--------------------------------------------------------------------------------
31