UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File No. 0-28541
QUINTEK TECHNOLOGIES, INC.
(Name of Small Business Issuer in its charter)
California 77-0505346
---------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
17951 Lyons Circle
Huntington Beach, CA 92647
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(Address of principal executive offices)
Issuer's telephone number: 714-848-7741
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form l0-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,547,923.
At September 19, 2005, the aggregate market value of registrant's Common Stock
held by non-affiliates was $8,550,063 based on the closing OTC Bulletin Board
bid price of $0.08 per share on that date.
At September 19, 2005, a total of 109,267,761 shares of registrant's Common
Stock were outstanding.
TABLE OF CONTENTS
ITEM 1 BUSINESS DESCRIPTION
ITEM 2 DESCRIPTION OF PROPERTY
ITEM 3 LEGAL PROCEEDINGS
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 Market for Common Stock
5.2 Dividends
5.3 Securities Authorized for Issuance Under Equity
Compensation Plans
5.4 Recent Sales of Unregistered Securities
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7 FINANCIAL STATEMENTS
ITEM 8 CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 8A CONTROLS AND PROCEDURES
ITEM 8B OTHER INFORMATION
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
9.1 Board of Directors and Executive Officers
9.2 Compensation of Directors
9.3 Management Committees
9.4 Section 16(a) Beneficial Ownership Reporting
Compliance
9.5 Code of Ethics
ITEM 10 EXECUTIVE COMPENSATION
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 EXHIBITS
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
SIGNATURES
FINANCIAL STATEMENTS
EXHIBITS
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Forward-Looking Statements
This annual report contains certain forward-looking statements within the
meaning of section 21 of the Securities Act of 1934, as amended, including
statements that indicate what the Company "believes," "expects," and
"anticipates" or similar expressions. These statements involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to differ materially from those
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this annual report. There can be no assurance that the
forward looking information contained herein will in fact transpire. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or otherwise.
Item 1. Description of Business
Business Development
Quintek Technologies, Inc. and Subsidiary (referred to herein as the "Company",
"Quintek", "Our", or "We") is a California corporation. Quintek's corporate
headquarters are located at 17951 Lyons Circle, California, 92647. Our contact
information at that location is: phone number (714) 848-7741, fax number is
(714) 848-7701 and our website is www.quintek.com. Our corporate filings with
the Securities and Exchange Commission ("SEC") and amendments to these filings,
as well as other information is available free of charge at our website soon
after such reports are filed electronically with the SEC, or directly on the
SEC's website at www.sec.gov.
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
("Juniper"). Upon effectiveness of that acquisition, Quintek elected to become
the successor issuer to Juniper for reporting purposes under the Securities
Exchange Act of 1934.
Quintek 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, through its wholly owned subsidiaries Quintek Services, Inc. (QSI), and
Sapphire Consulting Services, Inc. provides services to enable Fortune 500 and
Global 2000 corporations to reduce costs and maximize revenues.
Quintek Services, Inc.
The Company's Quintek Services, Inc. (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 the best
customer service, the fastest turnaround and the best price.
Market Overview
On August 31, the Institute for Policy Studies released a report that top
executives at the firms that use outsourcing the most got a 46 percent pay
increase. Leading the way in outsourcing are General Electric, United
Technologies, Citigroup, Oracle and Bank of America.
The outsourcing of jobs that can be performed via the Internet has come to be
called BPO or business process outsourcing. Forester estimates that the market
for BPO services will grow at a CAGR of 66% from $19 billion in 2004 to $146
billion in 2008. The Aberdeen Group, a provider of IT market intelligence,
forecasts 13% annual growth for the BPO industry through 2005, when the market
is projected to reach $248 billion.
Quintek solves three major problems for the outsourcing market. First, the
outsourced worker has to have the current data to do his job in his web browser.
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The reality is that now more than ever, much of that data is in paper and has to
be quickly and efficiently digitized to be made available offshore. In the 2001
book, The Myth of the Paperless Office, from MIT Press, the authors found that
the use of e-mail in an organization causes an average 40 percent increase in
paper consumption.
In his book, "Business @ The Speed of Thought," Bill Gates writes, "... paper
consumption has continued to double every four years, and 95% of all information
in the US remains on paper, compared with just 1% stored electronically."
The American Forest and Paper Association, reports that paper use increased by
over 30 percent between 1986 and 1997. From 1992 to 2002, world consumption of
paper and board products grew from 250m metric tones to 325m metric tones.
Second, closing a multi-year, multi-million dollar outsourcing deal requires
specialized sales skill.
Lastly, there are system integration requirements that must be supported with a
US presence. Quintek brings high-quality, high-volume imaging, scanning and data
capture services, specialized sales and systems integration experience to this
growing market.
According to a March 2004 report by research firm IDC, the global document
management and imaging outsourcing market reached $13 billion in 2003 and is
expected to expand at a compound annual growth rate of 19.7% over the next three
years. The rapid growth of the document management market has been largely
unnoticed by industry watchers because it is manifested very differently from
industry to industry, IDC noted. For example growth in the health care industry
has been driven in part by government regulation. The Health Insurance
Portability and Accountability Act (HIPAA) requirements has legislated companies
to implement cross-company document management standards and technologies.
"Growth in this market is being fueled by the rapid adoption of imaging,
document, and content technologies overall, user demand for easy access to
documents, as well as the evolving need for imaging and document management
within particular vertical segments," said Ron Glaz, director of IDC's
digital-imaging solutions and services. "In fact, survey participants indicated
that the most important factors in choosing an imaging and document management
outsourcing vendor is their track record and specific vertical industry
expertise."
Our Addressable Market
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 go to market with these core competencies in three market
segments.
We see the market for our mortgage document processing services as follows.
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 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
$260m. If we capture 10% of that market, we are on a $26m run rate in the
mortgage space.
We see the market for our healthcare document processing services as follows.
According to Healthcare Informatics.com, there were 15B 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 $1.5B for our healthcare claims
processing service.
We see the market for our accounts payable processing services as follows. In
2005, total revenues from the Fortune 500 were $8.2 Trillion. Our experience is
that a company will spend 0.025% of its revenue on A/P Outsourcing. This yields
an addressable market of $1.7B for our A/P processing services.
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.
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Quintek is targeting document imaging and scanning, accounts payable processing
and inbound mailroom processing business across all vertical markets. Quintek is
targeting Outsourced Mortgage Processing in the mortgage sector and Outsourced
Healthcare Claims Processing in the healthcare sector.
Core Competencies
Mailroom Outsourcing
The most efficient solution for a customer is for the customer to outsource the
mail handling function to Quintek. Quintek physically retrieves the mail
directly from the post office through a P.O. box, sorts, scans and captures key
data fields from each document. The scanned images and corresponding data are
uploaded directly to the customer's ECM or one of Quintek's ASP (Application
Service Provider) partners systems for online viewing by the customer's end
user. This service is sold per piece of mail processed.
High-Speed Scanning at Client Site or Quintek Production Center.
Fortune 500 companies and other large organizations manage documents using
Enterprise Content Management (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 and seven days a week.
The scope of work for a High Speed Scanning contract will usually include
Quintek receiving paper documents and delivering these documents directly into
the customer's Enterprise Content Management (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.
Quintek provides the ground transportation and secure facility for processing
the documents, the trained staff for processing the documents, the expertise to
index, scan and categorize the documents, the 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, Quintek's Huntington Beach facility can convert
60,000 images in an eight hour shift and 2,400,000 per month running two shifts
at a rate of $0.05 an image. This would result in approximately $120,000 a month
in billings and a gross profit of $48,000. Upon subsequent financing, with
additional equipment and reconfiguration, this facility has the capability of
processing 600,000 images in an eight hour shift. Running two shifts at full
capacity, the facility could process 13,200,000 documents a month. At a rate of
$0.05 an image this would result in approximately $660,000 a month in billings
and a gross profit of $264,000.
Domestic/Offshore Data Capture, OCR, and Indexing
Quintek can use manual and OCR (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. Quintek
ensures 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.
Quintek 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 (Application Service Provider) Hosting of Scanned Images
Once images have been scanned, end-users need an ECM (Enterprise Content
Management) system. Quintek will continue to provide clients with support for
best of breed choice preferred by the customer such as OnBase from Hyland
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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, Quintek resells web-based document hosting
ASP services from Quintek's partners such as Hyland Software's OnBase. This
provides Quintek's clients the efficient and immediate capability of viewing
business critical documents online.
Workflow Automation
Quintek designs and installs software systems for automating the routing and
approval processes related to electronic documents via the internet.
Delivery of products or services
Quintek's High Speed Scanning, Data Capture, OCR & Indexing and In-house Imaging
Solutions services are performed either in Quintek's Huntington Beach facility
or on client site in Thousand Oaks, CA, Los Angeles, CA, and Costa Mesa, CA.
The Company's ASP Hosting of Scanned Images service is delivered to the customer
by Quintek's partner Hyland Software, Inc.
Quintek's Mailroom Outsourcing service is delivered from our Huntington Beach,
CA facility.
Sales of products or services
Quintek is establishing customer relationships directly as well as with sales
partners, large prime contractors and vertical-specific solution brokers.
Quintek will continue expanding its sales staff and developing its sales
partnerships.
Direct Sales
Quintek currently has one full-time direct sales person. The Company plans 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. Quintek provides 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.
Quintek's 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.
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In April 2004, Quintek announced that the Company was entering the BPO services
market. All of these services are new within the last year. The Company executed
and is delivering on long-term customer contracts for all of these five
services. The Company also sold, delivered and been paid for numerous short-term
contracts for these five new services.
On June 1, 2004, Quintek signed a sales partner agreement with FedEx Kinko's.
With the relationship that has been put in place between FedEx Kinko's and
Quintek, FedEx Kinko's can resell Quintek's BPO services. Quintek's sales team
has been training FedEx Kinko's sales representatives on selling Quintek
services. Quintek has sold and delivered on several customer contracts under
this agreement. Under this agreement, Quintek executed and delivered on one
long-term contract. This contract is with a leading life sciences and
biotechnology Company is providing services in Thousand Oaks, CA
On June 4, 2004, Quintek signed a sales partner agreement with a leading
technology integrator. Under the relationship that has been put in place between
the integrator and Quintek, the integrator can resell Quintek's BPO services.
For more than a year, Quintek has been providing ongoing services under our
subcontracting relationship to a major medical center in Los Angeles, CA.
On March 22, 2004, Quintek signed a sales partner agreement with a medical
services company. With the relationship that has been put in place between the
medical services company and Quintek, the medical services company can resell
Quintek's BPO services. Quintek's sales team has been training the medical
services company on selling Quintek services. Quintek has sold and delivered on
several customer contracts under this agreement.
On April 26, 2004, Quintek signed an agreement with Single Source Partners
(SSP). Single Source Partners is a provider of mortgage solutions located in
Newport Beach, CA that brokers services in the mortgage industry. Quintek
executed and delivered on one long-term contract with under this agreement. This
contract is with a Fortune 10 company with annual revenues in excess of $20
billion. In July, 2005 Quintek and SSP executed an Exclusive Sales and Marketing
Agreement.
COMPETITION
The Company's 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
truly national providers of BPO and Document Imaging. Most often Quintek will
compete with Affiliated Computer Services (NYSE:ACS) of Dallas, TX, SourceCorp
(NASDAQ:SRCP) of Dallas, TX and EDS (NYSE:EDS).
EDS is a Fortune 500 company with reported annual revenues of over $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.
SourceCorp is a business process outsourcing solutions to clients throughout the
U.S. SourceCorp reported annual revenues of $385 million. The company focuses on
business processes in information-intensive industries including healthcare,
legal, financial services, government, transportation and logistics. The company
has offices in 24 states and operates in approximately 40 states, Washington
D.C., Mexico and both domestically and offshore through alliances.
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The Company's competitive advantage is better, faster and cheaper. Quintek sees
a void created by these large multi national providers. There is a lack of a
middle tier service provider with a national scope and a commitment to quality.
The Company is focused on providing its customers a high quality service with a
rapid turn around time for less than its competitors. Quintek can do this by
having low operational employee turnover and effective job costing.
An Employee Incentive Program (EIP) provides incentive to its employees to be as
productive as possible and to stay at Quintek. An (EIP) will enable us to
deliver quality service at less cost than our competitors.
The Company's publicly traded company status will allow Quintek to continue to
attract high quality experienced professionals that desire the upside of equity
options in a high quality early stage BPO services provider with a focus on
growth.
The Company relies on non-union skilled labor for mailroom and scanning
production services. The Company relies on widely available technologies from
Kodak, Dell, EMC, Hyland, and Kofax to deliver services.
Quintek has three customers that individually represented more than 10% of its
revenues for the fiscal year; GMAC represented 46% of its revenue, Precyse
Solutions, Inc. represented 19% of its revenue, and Peter Pepper Products
represented 12% of its revenue. The Company has a five year Master Services
Agreement with GMAC and a month-to-month contract with Precyse. The Company is
not aware of any reason why revenue from GMAC or Precyse would cease in the next
fiscal year. The revenue from GMAC is based on their volume of mortgages. The
Company's revenues could be impacted positively or negatively based on its
customers projected mortgage volume. Quintek's business with Peter Pepper
Products in the fiscal year ended June 30, 2005 was a one-time systems
implementation project. The Company's ongoing business with Peter Pepper is not
expected to be of the same volume. This is part of the Company's business model.
Quintek expects to have other systems implementation projects in the current
fiscal year of similar or greater revenue. Revenues from GMAC and Precyse have
trended up over the last fiscal year. The Company expects that the portion of
revenue that it derives from GMAC and Precyse as a percentage of overall revenue
will decrease in the current fiscal year reducing its dependence on these
customers.
Increased regulatory environment such as HIPAA (Health Insurance Portability and
Accountability Act) and Sarbanes-Oxley drives demand for the Company's services
and also increases its costs.
Quintek does not account for research and development as a separate account.
Quintek has been investing in bringing new services to market as part of the
Company's normal course of business. The costs and effects of compliance with
environmental laws are negligible.
Quintek has thirty-four (34) employees, twenty-four (24) hourly employees and
ten (10) salaried employees.
Item 2. Description of Property.
The Company leases 7,062 square feet for its 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 rent on this facility is $7,627.
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The Company rents, on a month-to-month basis, 1,800 square feet of office and
warehouse space at 720 N. 4th Street, Montpelier, Idaho, for its accounting and
purchasing function. The current monthly rent is $1,384.
Item 3. Legal Proceedings.
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against the Company for $22,662 for goods provided. Since 2000, Decision
One (formerly Imation) has been both a vendor and a reseller of the Company's
products. The Company filed a counterclaim on August 1, 2004 asserting that
Decision One used its authority as a dealer to disparage the Company in
violation of its dealer agreement. The Company sought relief for the hundreds of
thousands of dollars in business lost. On January 11, 2005, the Court granted
Judgment for the sum of $21,000 in favor of the Decision One Corporation. The
Court ruled that the Company would be allowed to file the counterclaim under
this action, rather than a separate lawsuit. In March 2005, a stipulation
settlement was accepted by the 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 amount of Judgment of $21,000
is included in accounts payable and accrued expenses in the accompanying
financial statements as of June 30, 2005.
We are a party to an arbitration hearing on December 19, 2005 of Brownell,
Robert vs. Quintek Technologies, Inc. at JAMS, 707 Wilshire Blvd., 46th Floor,
Los Angeles, CA 90017. Robert Brownell and Quintek Technologies, Inc. are the
principal parties. Robert Brownell was employed as President of Quintek
Technologies, Inc. from March 31, 2004 to until he resigned on March 31, 2005.
On July 6, 2005, Robert Brownell filed an arbitration claim against Quintek
Technologies, Inc. for Promissory Fraud; Breach of Written Contract; Wrongful
Constructive Termination Based on Public Policy and Invasion of Privacy.
Brownell seeks relief as follows: one year's severance, or $150,000, prejudgment
interest at 10% per annum general damages, punitive damages, costs of suit
incurred and for such relief as the arbitrator deems proper.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 Market for Common Stock
Since January 14, 1999, Common Stock has traded on the OTC Bulletin Board
(symbol "QTEK"). On September 19, 2005, there were 495 listed shareholders of
record. The high and low bid prices per share for the Company's stock for each
quarter commencing July 1, 2002 and ending June 30, 2005 are listed below. The
high and low bid prices per share for Quintek's stock for the quarter ending
June 30, 2005 were $0.11 and $0.10, respectively. This information was obtained
from Media General Financial Services, Reuters and Yahoo Finance.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
FY2003 $0.14 $0.03 $0.13 $0.02 $0.07 $0.03 $0.19 $0.03
FY2004 $0.17 $0.09 $0.19 $0.10 $0.26 $0.13 $0.20 $0.12
FY2005 $0.21 $0.20 $0.24 $0.20 $0.16 $0.15 $0.11 $0.10
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
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5.2 Dividends
Quintek presently intend to retain future earnings, if any, to provide funds for
use in the operation and expansion of its business. Accordingly, the Company has
not declared or paid any dividends to its common shareholders and do not
presently intend to do so. Any future decision whether to pay dividends will
depend on our financial condition and any other factors that the Company's Board
of Directors deems relevant.
5.3 Securities Authorized for Issuance Under Equity Compensation Plans
Quintek's Chief Executive Officer and Chief Financial Officer entered into
employment agreements on January 31, 2003 with the Company which grants each of
them the right to earn substantial equity compensation from the Company.
Pursuant to the employment agreements, the Company has agreed to sell to each of
them stock (or grant to each rights to purchase additional shares of common
stock) at $0.03 per share such that, including all options or shares previously
issued to or purchased by each of them, each would own, in the aggregate, shares
of common stock or rights to purchase shares of common stock representing ten
percent (10%) of the current outstanding common stock of Quintek, on a
fully-diluted basis after taking into account the issuance of such additional
shares to each officer and assuming the issuance of all other shares subject to
currently outstanding options or warrants. The employment agreements state that
the agreement(s) specifically granting the shares to be purchased by the
officers will have, at minimum, new termination and repurchase provisions, with
the termination provisions to be consistent with new termination and repurchase
provisions set forth in this Agreement. The agreement(s) also will contain
provisions providing the officers with pre-emptive rights to purchase additional
shares of common stock under certain circumstances. Options to the two officers
shall vest according to the following schedule: Right of each to purchase two
and a half percent (2.5%) of outstanding common stock, upon the authorization of
additional shares by the shareholders of Quintek; assuming that authorization of
more shares is approved by the shareholders of the Company, options giving each
of the officers the right to purchase an additional two and a half percent
(2.5%) of outstanding common stock at the time of grant, will be granted upon
the one (1) year anniversary of each officer's employment agreement for the
following three (3) years. In the event of a sale of Quintek, termination of the
officers' employment agreements by the Company, or any other event that may
impede Quintek's ability to fulfill its obligations under the officers'
employment agreements, all options will be immediately vest.
5.4 Recent Sales of Unregistered Securities
On July 11, 2004, the Company sold a one year $20,000 convertible promissory
note bearing ten percent annual interest to an accredited investor. On August
30, 2004, the note converted into 200,000 shares of common stock at $0.10.
Additionally, the investor was granted, for each share converted pursuant to the
note, one warrant to purchase a share of common stock at $0.15 expiring July 11,
2007.
On July 15, 2004, the Company granted 300,000 of common stock to a consultant in
consideration of services performed pursuant to a consulting agreement.
On July 27, 2004 the Company sold a one year $50,000 convertible promissory note
bearing ten percent annual interest to an accredited investor. On August 30,
2004 the note was converted into 500,000 shares of common stock at $0.10.
Additionally, the investor was granted, for each share converted pursuant to the
note, one warrant to purchase a share of common stock at $0.15 expiring May, 27
2007.
On August 5, 2004, the Company sold 500,000 shares of common stock to an
accredited investor in consideration of $35,000 and sold 1,000,000 shares of
common stock to an accredited investor in consideration of $70,000.
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On August 31, 2004, the Company issued consultant 50,000 shares of common stock
under a consulting agreement.
On August 26, 2004, the Company granted 150,000 shares of common stock to a
consultant in consideration of services performed pursuant to a consulting
agreement.
On September 14, 2004, the Company issued an employee 300,000 shares of common
Stock per their employee agreement.
On September 15, 2004, Company sold 1,000,000 shares of common stock to an
investor in consideration of $100,000; additionally, the investor was granted a
three year warrant to purchase 1,000,000 of common stock at an exercise price of
$0.14 per share.
On September 20, 2004, the Company issued investor 660,000 shares of common
stock for repayment of loans.
On September 30, 2004, the Company sold 14,000,000 shares of common stock to an
institutional investor at $0.139 per share.
On October 4, 2004, the Company sold 250,000 shares of common stock to an
investor in consideration of $25,000. The investor was also granted a three-year
warrant to purchase 250,000 shares of common stock at an exercise price of $0.15
per share.
On October 16, 2004, the Company sold a $250,000 promissory note, 5.75% interest
per annum, to an accredited investor. The note is due six months from the date
of issuance. Additionally, the investor was granted 5,000,000 warrants to
purchase common stock at $0.10, expiring October 16, 2007.
On October 19, 2004 the Company issued to Robert Steele, its Chief Executive
Officer, and Andrew Haag, its Chief Financial Officer, 1,000,000 shares each, of
Series A Preferred Stock as per their employment agreement with Quintek. The
Company also issued Bob Brownell, its then President, 250,000 shares of Series A
Preferred Stock and per his employment agreement with the company.
On October 19, 2004, the Company issued 1,006,854 Series A Preferred Stock to
various employees as part of an agreement dated January 31, 2003 in lieu of
their back compensation of $201,211.
On October 19, 2004, the Company issued 724,077 shares of Series A Preferred
Stock to Bill Rice as part of an agreement to convert monies due of $36,204.
On October 19, 2004 the company issued 648,255 shares of Series B Preferred
Stock to three investors for conversion of $162,062 in debt.
On October 19, 2004 the company issued 32,000 shares of Series B Preferred Stock
to a vendor for investor relation services valued at $2,080 in debt.
On October 19, 2004 the company issued 20,148 shares of Series C Preferred Stock
to 13 vendors for conversion of $20,148 in debt.
On October 25, 2004, the Company issued the Bosphorus Group 700,000 shares of
common ctock as finder' fee valued at $133,000.
On November 10, 2004 the Company issued 44,000 shares of common stock as
conversion of Series C convertible Preferred Stock valued at $2,200.
-11-
On November 24, 2004, the Company issued 54,545 shares of common stock to a
consultant for services provided valued at $7,091 pursuant to a consulting
agreement.
On November 24, 2004, the Company issued 2,794,920 shares of common Sctock to an
investor pursuant to the investor's conversion of Series B convertible Preferred
Stock valued at $111,797.
On December 3, 2004, the Company issued 500,000 shares of common ctock to Gerald
Hannahs pursuant to an exercise of warrants valued at $23,000.
On December 13, 2004, the Company issued 7,500 shares of common ctock to a
consultant for services rendered valued at $1,650 pursuant to a consulting
agreement.
On December 13, 2004, the Company issued 2,000 shares of Series A Preferred
Stock to various employees as part of an agreement dated January 31, 2003 in
lieu of their remaining back compensation of $400.
On December 22, 2004, the Company issued 1,967,824 shares of common ctock to
Andrew Haag, an officer and director of Quintek, pursuant to an exercise of a
warrant on a cashless basis.
On January 10, 2005, the Company issued 328,000 shares of common stock to an
investor pursuant to the investor's conversion of Series A Preferred Stock
valued at $65,600.
On January 12, 2005, the Company issued 250,000 shares of common shares to an
accredited investor for sale of stock valued at $25,000 on October 12, 2004.
On January 14, 2005, the Company entered into an agreement with a consultant to
provide consulting services for a twelve month period. In consideration of
consulting services, the consultant shall receive 1,800,000 shares of common
shares to be issued under rule 144 (restricted stock) and shall have a one year
restriction before the sale of any shares, and after two years shall be
unrestricted under rule 144k. As of June 30, 2005, the Company did not issue any
shares to the consultant.
On February 2, 2005, in consideration of investor relations services, the
Company agreed to issue 6,250,000 Warrants to purchase Common Shares at $0.18
per share. The Warrants shall become exercisable as follows: (a) 3,125,000
Warrants are vested and fully exercisable; and (b) 3,125,000 Warrants shall vest
and become exercisable on July 1, 2005. The Warrants shall expire on February 1,
2008. The Company did not issue these warrants as of June 30, 2005.
On February 3, 2005, the Company entered into an addendum to Convertible
Debenture and Warrant to Purchase shares of common stock by and between the
Company and an accredited investor. Under this agreement, the Company received
$100,000 on March 30, 2005, as a prepayment towards the exercise of Warrant
Shares under them Convertible Debenture and Warrant to Purchase Common Shares
agreement.
On February 8, 2005, the Company issued 186,375 shares of common shares valued
at $2,500 to an accredited investor. On February 16, 2005, the Company issued
5,000,000 Common Shares valued at $750,000 to be held in escrow for an
accredited investor, for future debenture conversions and warrant exercises. On
March 30, 2005, the Company issued an additional 2,500,000 Common Shares valued
at $300,000 to be held in escrow for the same accredited investor.
On March 7, 2005, the Company issued 6,804,164 shares of common shares to an
accredited investor upon conversion of convertible promissory note of $408,250.
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On March 10, 2005, the Company issued 400,000 shares of common stock valued at
$56,000 in settlement of debt of a shareholder.
On April 8, 2005, the Company issued 457,000 shares of common stock to an
investor pursuant to the investor's conversion of Series A Preferred Stock
valued at $91,320.
On May 25, 2005, the Company issued a consultant 390,193 shares of common stock
for advisory and consulting services valued at $26,000.
On June 14, 2005, the Company issued Vucan Ruzic/Profit Concepts International,
288,500 shares of common shares for compensation under a release of claims
valued at $33,466.
The proceeds from the sales of unregistered securities have been allocated
towards general working capital and to promote the growth of the business.
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 the Company of shares of its common stock to
financially sophisticated individuals who are fully aware of the Company's
activities, as well as its business and financial condition, and who acquired
said securities for investment purposes and understood the ramifications of
same.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's revenues totaled $1,547,923 and $298,653 and for the twelve months
ended June 30, 2005 and 2004, respectively, an increase of $1,249,270 (418%) in
2005 due to changing the Company's sales focus to the services business.
For the twelve months ended June 30, 2005 and 2004, cost of revenue was
$1,070,001 and $184,964 respectively, an increase of $885,037 (478%). Cost of
revenue for both periods consisted mostly of labor and production costs. Cost of
revenue increased in 2005 due to increased revenues from changing the Company's
sales focus to the services business.
Net cash used in operating activities was $1,418,456, for the twelve-month
period ended June 30, 2005 as compared to $595,947 for the prior twelve-month
period. The (138%) increase is attributable to the efforts focused in the
services business.
Total operating expenses were $5,982,314 for the twelve-month period ended June
30, 2005 as compared to $1,083,246 for the prior twelve-month period. The
$4,899,068 (452%) increase in operating expenses is mostly a non-cash increase
primarily due to the conversion of debt to equity, stock-based compensation , a
permanent decline in the market value of marketable securities held as
investment, and an increase in expenses as the Company focused its efforts in
the services business.
During the 12 month period ending June 30, 2005, the Company sold eight (8)
contracts for services. The Company has not renewed any additional service
contracts since January 1, 2005.
For the twelve months ended June 30, 2005, total assets equaled $1,402,264, an
increase of $1,254,989 (852%) primarily due to an increase in accounts
receivable, property and equipment and restricted cash; total current
liabilities equaled $2,168,067, a decrease of $9,513 (.004%), accounts payable
and accrued expenses equaled $863,320, an increase of $424,494 (97%) primarily
due to increased spending due to growth, factoring payable equaled $136,936, an
increase of $93,706 (216%) due to increased funding for capitalization.
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The Company is 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 the Company does not have the funds to repay the indebtedness. It is
not known whether the Company will be able to repay or renegotiate this debt. If
the Company is unable to cure the default or renegotiate its debt, the Company
may not be able to continue as a going concern.
The Company owes $96,661 in payroll withholding taxes that were assumed in a
merger and are past due.
Liquidity and Capital Resources
The Company's principal capital requirements during the fiscal year 2006 are to
fund the internal operations and the acquisitions of growth-oriented businesses.
The Company plans to raise necessary funds by selling its own common shares to
selected investors and bringing in business partners whose contributions include
the necessary cash. In view of low borrowing interest rates, the Company is
actively pursuing additional credit facilities with financial institutions as a
means to obtain new funding. The Company's management estimates that it
currently has the funding facilities in place to operate for at least twelve
months.
As shown in the accompanying financial statements, the Company incurred a net
loss of $7,417,687 for the year ended June 30, 2005 as compared to a net loss of
$998,531 for the same period in 2004. Additionally, the Company's current
liabilities exceeded its current assets by $1,461,696 at June 30, 2005.
The Company has historically financed operations from the sale of its Common
Stock and the conversion of Common Stock warrants. At June 30, 2005, the Company
had cash on hand of $12,669 as compared cash on hand of $15,600 at June 30,
2004.
Net cash used in operating activities for the year ended June 30, 2005 was
$1,418,456, primarily attributable to the increases in accounts payable and
accrued expenses of $424,494, increase in payroll taxes payable of $14,517,
increase in accounts receivable of $286,542, increase in deposits of $101,162,
and an increase in deferred revenue of $61,963.
Net cash used in investing activities for the year ended June 30, 2005 was
$428,389, primarily due to the acquisition of equipment of $175,764 and cash
used for security bond of $250,000.
Net cash provided by financing activities for the year ended June 30, 2005 was
$1,843,914. The increase was primarily attributable to proceeds from issuance of
debentures of $300,000, issuance of convertible notes of $200,000, issuance of
convertible bonds of $250,000, issuance of common stock from warrant exercise of
$1,003,468, prepayments of warrants to be issued for note conversion of
$295,000, payments for the leases of $48,260, proceeds from factor net of
payments of $93,706 and payments of note payable of $250,000.
As a result of the above activities, the Company experienced a net decrease in
cash and cash equivalents of $2,931 for the year ended June 30, 2005 as compared
to a net decrease in cash and cash equivalents of $5,562 as of June 30, 2004.
The ability of the Company to continue as a going concern is still dependent on
its success in obtaining additional financing from institutional investors or by
selling its common shares and fulfilling its plan.
-14-
Subsequent Events
On July 14, 2005, the Company sold 1,750,000 common shares of Endexx Corporation
(formerly known as PanaMed Corporation) to an accredited investor in a private
placement for a cash consideration of $89,400. On June 30, 2004, the Company had
impaired its investment in PanaMed and recognized an impairment loss of $28,778.
On July 15, 2005, the Company entered into an exclusive sales and marketing
agreement with a third party whereby the third party for an engagement fee,
agreed to market the Company's products and services to the third party's
contacts in the mortgage lending industry. As part of the consideration of the
agreement, the Company signed a promissory note for $36,478 to settle its
disputed fees.
On August 30, 2005, the Company sold 2,000,000 restricted common shares to an
accredited investor in a private placement, and raised $80,000 in cash.
In September 2005, the Company sold 544,158 common shares of its investment in
Langley Park Investments, PLC for a cash consideration of $147,017.
ITEM 7 FINANCIAL STATEMENTS
See pages F-l, et seq., included herein.
ITEM 8 CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 15, 2004, the Company received a letter dated March 8, 2004 from Heard,
McElroy &Vestal ("Heard McElroy") resigning as the Company's its independent
public accountants. The decision to resign by Heard McElroy did not involve a
dispute with the Company over accounting policies or practices. On March 24,
2004, the Company appointed Kabani & Company, Inc., Certified Public Accountants
("Kabani") as its new independent public accountants. The decision to retain
Kabani was made by the Company's Board of Directors.
The report of Heard McElroy on the Company's financial statements for the year
ended June 30, 2003 did not contain an adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles, except for the fact that Heard McElroy, in its report for that
fiscal year, had included an opinion that, due to the Company's lack of revenue
producing assets and history of losses, there was doubt about the Company's
ability to continue as a going concern.
During the Company's fiscal year ended June 30, 2003, there were no
disagreements with Heard McElroy on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to Heard McElroy satisfaction, would have caused
Heard McElroy to make reference to the subject matter of the disagreement in
connection with its reports on the financial statements for the year, except for
the fact that Heard McElroy, in its report for that fiscal year, has included an
opinion that, due to the Company's lack of revenue producing assets and history
of losses, there is doubt about the Company's ability to continue as a going
concern.
During the Company's most recent fiscal year, there were no disagreements with
Kabani & Co. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to Kabani's satisfaction, would have caused Kabani to make reference to
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the subject matter of the disagreement in connection with its reports on the
financial statements for the year, except for the fact that Kabani, in its
report for the past fiscal year, has included an opinion that, due to the
Company's lack of revenue producing assets and history of losses, there is doubt
about the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years and through June 30, 2005,
there have been no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).
The Company has provided Heard McElroy with a copy of this Item 4 disclosure and
has requested that Heard McElroy review such disclosures and provide a letter
addressed to the Securities and Exchange Commission as specified by Item
304(a)(3) of Regulation S-K. Such letter is filed as Exhibit 16.1 to the
Company's Current Report on Form 8K filed April 7, 2004.
During the fiscal year ended June 30, 2003, and the subsequent interim period up
to March 8, 2004, the Company did not consult with Kabani regarding (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the registrant's financial statements, and either a written report was provided
to the registrant or oral advice was provided that the new accountant concluded
was an important factor considered by the registrant in reaching a decision as
to the accounting, auditing or financial reporting; or (ii) any matter that was
either the subject of a disagreement or a reportable event, as described in Item
304(a)(1)(iv) and (a)(1)(v) of Regulation S-K.
ITEM 8A CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
(based on their evaluation of these controls and procedures as of a date within
90 days of the filing of this report) that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in this report is accumulated and communicated to the Company's
management, including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosure. The Certifying Officers also
have indicated that there were no significant changes in the Company's internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
ITEM 8B OTHER INFORMATION
Not applicable.
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
9.1 Board of Directors and Executive Officers
The Company's board of directors consists of two members. Directors are elected
at the Annual Meeting of Shareholders and serve until their successors have been
elected and qualified. Officers are appointed by and serve at the discretion of
the Board of Directors.
The following is a summary description of the current directors, executive
officers and significant employees:
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Robert Steele, Age 39, Chief Executive Officer and Director
-----------------------------------------------------------
Robert Steele has been the Company's 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, VA, and from
May 1999 through June 2001 served as its Chief Executive Office. The company
established contractual partnerships with AOL and Global Knowledge. For nine
years, 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, Age 38, Chief Financial Officer and Director
---------------------------------------------------------
Andrew Haag has been the Company's Chief Financial Officer and a Director since
January 31, 2003. Prior to that, 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 Securities, 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.
9.2 Compensation of Directors
All of the Company's directors are full time employees of Quintek. Because we
have no independent directors, we pay no compensation to any directors for their
service on the board over and above their employment compensation. There are no
family relationships among the directors or executive officers.
9.3 Management Committees
The Company has not established compensation or executive committees. Currently,
our entire board of directors serves as our audit committee. Because of the
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small size of the Company and the risk attendant to a small public company, the
Company is currently unable to attract an audit committee financial expert to
our Board of Directors.
9.4 Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the directors, executive
officers and persons who own more than 10% of our Common Stock to file reports
of ownership and changes in ownership of our common stock with the Securities
and Exchange Commission. Directors, executive officers and persons who own more
than 10% of the Company's common stock are required by Securities and Exchange
Commission regulations to furnish to the Company copies of all Section 16(a)
forms they file.
To the Company's knowledge, based solely upon review of the copies of such
reports received or written representations from the reporting persons, the
Company believes that during our 2005 fiscal year our directors, executive
officers and persons who own more than 10% of our common stock complied with all
Section 16(a) filing requirements.
9.5 Code of Ethics
On June 10, 2003, the Company's board of directors adopted a code of ethics, a
copy of which was filed as an exhibit to our report on Form 10-KSB for fiscal
year 2003, that applies to our principal executive and financial officers. The
Company intends to file amendments, changes or waivers to the code of ethics as
required by SEC rules.
ITEM 10 EXECUTIVE COMPENSATION
The following table summarizes the annual compensation of the Company's past and
current President for the three years ended June 30, 2005.
----------------- Annual Compensation --------------- ---- Long Term Compensation ---
Securities
Other Annual Restricted Underlying All Other
Name Year Salary Compensation (3) Stock Awards Options Compensation
---- ---- ------------------------ ------------ ----------- -------------
Robert Steele
Chairman & CEO FY2005 $ 85,500 $ 15,438 1,000,000 4,267,276 options --
Chairman & CEO FY2004 $ 72,000 -- -- -- --
President FY2003 $30,000 (1) $ 2,500 -- -- --
Andrew Haag
CFO FY2005 $ 85,500 $ 15,433 1,000,000 4,267,276 options --
FY2004 $ 72,000 -- -- -- --
FY2003 $ 30,000(5) -- -- -- --
Robert Brownell
President FY2005 $ 119,000(4) -- 250,000 611,062 options --
FY2004 $ 37,500(2) -- -- -- --
Notes:
1) Represents compensation received by Steele while serving as our President and
CEO from 2/1/03 to 6/30/03 2) Represents compensation received by Brownell while
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serving as our President from 3/12/04 to 6/30/04
3) These amounts represent the Company's payments to provide an automobile and
health insurance for Mr. Steele and Mr. Haag.
4) Mr. Brownell resigned on March 31, 2005.
5) Represents compensation received by Mr. Haag while serving as our CFO from
2/1/03 to 6/30/03.
Quintek did not grant any stock options or stock appreciation rights or
Long-Term Incentive Plan Awards to its officers or employees, in the fiscal
years ended June 30, 2004 or June 30, 2003.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of our common stock, as of June 30,
2005 by our directors and significant shareholders. On June 30, 2005,
200,000,000 shares of our stock were authorized and 101,739,983 shares of our
common stock were outstanding. This information was given to us by the transfer
agent and the numbers are based on definitions found in Rules 13d-3 and 13d-5
under the Securities Exchange Act of 1934.
Shareholder Title Shares %
----------- ----- ------ ----
Officers, Directors and Key Employees
Robert Steele, CEO and Chairman (1) (2) CEO & Chairman 5,667,276 5.6%
Andrew Haag (2) (5) CFO, Director 5,183,803 5.1%
Kurt Kunz (7) Founder/VP Engineering 3,806,111 3.7%
Key Investors
Zubair Kazi(9) Investor 9,720,536 9.6%
Institutional Ownership
Langley Park Investments PLC(10) Investor 14,000,000 13.7%
Golden Gate Investors (8) Investor 2,856,049 2.8%
All directors and officers as a group (3 persons)
(1) Includes 2,275,297 options to purchase stock at $0.03 until September 8,
2009 and 1,991,979 options to purchase Common Stock at $0.03 per share
until February 8, 2010.
(2) Includes 1,000,000 Series A Preferred Stock convertible into Common Stock
on a 1 for 1 basis
(5) Includes 1,991,979 options to purchase Common Stock at $0.03 per shares
until February 8, 2010.
(7) Includes options to purchase 142,857 shares of Common Stock at $0.13 and
1,100,000 shares of Common Stock at $0.175.
(8) Includes 2,670,000 options to purchase Common Stock at $1.00 per share
until August 2, 2007.
(9) Include an option to purchase 1,500,000 shares of Common Stock at $0.423.
Mr. Kazi does not have the right to convert any portion of the Warrants
that would cause him to be deemed the beneficial owner of more than ten
percent (9.9%) of the outstanding shares of Common Stock of the Company.
(10) As of June 30, 2005, Langley Park Investment's 14,000,000 shares of
Quintek Common Stock were issued and held in escrow until fulfillment of
conditions by Langley Park Investment pursuant to its July29, 2004
agreement with Quintek .
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 11, 2004, the Company sold a one year $20,000 convertible promissory
note bearing ten (10%) percent annual interest to an accredited investor. On
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August 30, the note converted into 200,000 shares of common stock at $0.10.
Additionally, the investor was granted, for each share converted pursuant to the
note, one warrant to purchase a share of common stock at $0.15 expiring July 11,
2007.
On December 22, 2004, the Company issued 1,967,824 shares of common stock to
Andrew Haag, an officer and director of Quintek, pursuant to an exercise of a
warrant on a cashless basis.
ITEM 13 EXHIBITS
2.1 # Agreement and Plan of Reorganization between Quintek Technologies,
Inc., and Juniper Acquisition Corporation.
3.1 * Articles of Incorporation.
4.1 ** Form of Irrevocable Proxy Granted to Chief Executive Officer dated
January 30 or 31, 2003
10.4*** Consulting Agreement between Quintek Technologies, Inc. and Robert
Steele dated December 16, 2002 (previously filed as Exhibit 10.1)
10.5*** Consulting Agreement between Quintek Technologies, Inc. and Zubair Kazi
dated January 31, 2003 (previously filed as Exhibit 10.2).
10.6*** Warrant Agreement between Quintek Technologies, Inc. and Zubair Kazi
dated January 31, 2003 (previously filed as Exhibit 10.3).
10.7**** Purchase Order Financing Agreement dated June 2, 2003 between Kazi
Management VI, LLC and Quintek Technologies, Inc. (previously filed as
Exhibit 10.1).
10.8*****Consulting Agreement between Quintek Technologies, Inc. and Gary Litt
dated February 3, 2003 (previously filed as Exhibit 10.4). Employment
Agreement between Quintek Technologies, Inc. and Robert Steele dated
January 10.9# 31, 2003
10.10# Employment Agreement between Quintek Technologies, Inc. and Andrew Haag
dated January 31, 2003
10.11## Employment Agreement between Quintek Technologies, Inc. and Robert
Brownell dated March 12, 2004
10.12## Note Purchase Agreement between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated November 26, 2003.
10.13## Convertible Note I between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated November 26, 2003.
10.14## Convertible Note II between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated February 8, 2004.
10.15## Convertible Note III between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated March 13, 2004.
10.16## Convertible Note IV between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated April 26, 2004.
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10.17## Convertible Note V between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated June 7, 2004.
10.18## Loan and Security Agreement between Quintek Technologies, Inc. and Kazi
Management V.I. LLC dated November 26, 2003.
10.19## Warrant to Purchase Common Stock of Quintek Technologies, Inc. issued
to Kazi Management V.I., Inc. dated November 26, 2003.
10.20## Registration Rights Agreement between Quintek Technologies, Inc. and
Kazi Management V.I. LLC dated November 26, 2003.
10.21## Stock Purchase Agreement between Quintek Technologies, Inc. Langley
Park Investments PLC dated July 7, 2004
10.22## Securities Purchase Agreement between Quintek Technologies, Inc. and
Golden Gate Investors, Inc. dated August 2, 2004
(10.22a) $300,000 5 3/4 % CONVERTIBLE DEBENTURE dated August 2,2004
(10.22b) Letter regarding "Registration Statement Legal and Accounting
Fees" to Golden Gate Investors, Inc. dated August 2, 2004. (10.22c)
Letter regarding "Warrant Prepayment" to Golden Gate Investors, Inc.
dated August 2, 2004. (10.22d) Registration Rights Agreement dated as
of August 2,, 2004 between Quintek Technologies, Inc., and Golden Gate
Investors, Inc. (10.22e) Warrant To Purchase 3,000,000 shares of Common
Stock of Quintek Technologies, Inc. dated August 2, 2004.
10.23### Agreement with GMAC Mortgage Corporation dated July 16, 2004. Form 8K
dated 11-03-04 incorporated by reference. (10.23a) Agreement with Nalco
dated November 17, 2004. Form 8K dated 11-17-04 incorporated by
reference. (10.23b) Agreement with FedEx Kinko's Office and Print
Services, Inc. dated January 20, 2005. Form 8K dated 1-24-05
incorporated by reference. (10.23c) Departure of principal officers on
March 31, 2005. Form 8K dated 4-1-05 incorporated by reference.
20.1# Code of Ethical Conduct adopted June 10, 2003
20.2# Audit Committee Charter adopted June 11, 2003
31.1 Certification pursuant to Rule 13a-14 of the Securities Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
of the Chief Executive Officer of Quintek Technologies, Inc.
31.2 Certification pursuant to Rule 13a-14 of the Securities Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
of the Chief Financial Officer of Quintek Technologies, Inc.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Executive Officer of Quintek Technologies, Inc.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Financial Officer of Quintek Technologies, Inc.
-21-
33.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Executive Officer of Quintek Technologies, Inc.
33.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Financial Officer of Quintek Technologies, Inc.
# Incorporated by reference to Exhibit 2.1 to the Form 8-K dated February 24,
2000.
* Incorporated by reference to Form 10-KSB for the fiscal year ended June 30,
2000.
** Incorporated by reference to Form 10-QSB for quarter ended Dec.31, 2002.
*** Incorporated by reference to Registration Statement on Form S-8 filed March
11, 2003.
**** Incorporated by reference to Form 8-K filed July 14, 2003.
***** Incorporated by reference to Registration Statement on Form S-8 filed
August 18, 2003.
# Incorporated by reference to Form 10-KSB for the fiscal year ended June 30,
2003
## Incorporated by reference to Form 10-K/A for the fiscal year ended June
30,2004
### Incorporated by reference to Form 10-KSB for the fiscal year ended June 30,
2005.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2005 and 2004 and reviews of the consolidated
financial statements included in the Company's Forms 10-QSB were $20,000 for
2004 and $41,000 for 2005.
Audit-Related Fees
For fiscal 2005 and 2004, the Company's auditors did not bill any fees for
assurance and related services that are reasonably related to the performance of
the audit or review of the Company's financial statements and are not reported
under "Audit Fees" above.
Tax Fees
No fees were billed by the Company's auditors for professional services for tax
compliance, tax advice, and tax planning for fiscal 2005 and 2004, respectively.
All Other Fees
No fees were billed by the Company's auditors for all other non-audit services
rendered to the Company, such as attending meetings and other miscellaneous
financial consulting, in fiscal 2005 and 2004.
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. Approximately 100% of all fees paid to our independent auditors for fiscal
2005 are pre-approved by the audit committee.
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 12, 2005 QUINTEK TECHNOLOGIES, INC.
By: /s/ Robert Steele
--------------------------------------
Robert Steele, Chief Executive 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 indicated.
Date: October 12, 2005 /s/ Robert Steele
---------------------------------------
Robert Steele, Chief Executive Officer
and Director
Date: October 12, 2005 /s/ Andrew Haag
---------------------------------------
Andrew Haag, Chief Financial Officer
and Director
-23-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
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, 2005
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year then ended and the related statements of operations,
stockholders' deficit and cash flow for the year ended June 30, 2004 of Quintek
Technologies, Inc. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quintek
Technologies, Inc. and subsidiary as of June 30, 2005 and the results of its
operations and its cash flows for the years ended June 30, 2005 and the results
of operations and cash flows of Quintek Technologies, Inc. for the year ended
June 30, 2004 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 the notes 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 the notes to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KABANI & COMPANY, INC.
---------------------------------
Los Angeles, California
September 30, 2005
-24-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
BALANCE SHEET
June 30, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 12,669
Restricted Cash 252,625
Accounts receivable, net of allowance
for doubtful accounts of $7,929 315,278
Investment in marketable securities 120,238
Prepaid expenses 5,562
------------
Total current assets 706,372
Property and equipment, net 585,431
Other assets:
Deposits 109,578
Other assets 883
------------
110,461
------------
Total assets $ 1,402,264
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 863,320
Factoring payable 136,936
Payroll and payroll taxes payable 201,655
Payroll taxes assumed in merger 96,661
Advances from lenders 295,000
Current portion of long-term debt 241,094
Convertible bonds 62,495
Convertible debentures 137,504
Convertible notes 91,750
Deferred revenue 25,077
Dividend payable 16,575
------------
Total current liabilities 2,168,067
Long-term debt 128,162
Commitments and contingencies --
Stockholders' deficit:
Preferred stock, convertible, no par value, 50,000,000 shares authorized,
3,436,750 shares issued and outstanding $ 752,005
Common stock, $0.01 par value, 200,000,000 shares authorized,
98,480,532 shares issued and outstanding 984,805
Additional paid-in capital 27,994,614
Shares to be issued 8,000
Unamortized consulting fees (3,120)
Unrealized loss on marketable securities (8,374)
Investments held in escrow (126,567)
Accumulated deficit (30,495,328)
------------
Total stockholders' deficit (893,965)
------------
Total liabilities and stockholders' deficit $ 1,402,264
============
The accompanying notes are an integral part of these financial statements.
-25-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30,
2005 2004
------------ ------------
Net revenue $ 1,547,923 $ 298,653
Cost of revenue 1,070,001 184,964
------------ ------------
Gross margin 477,922 113,689
Operating expenses:
Selling, general and administrative 2,200,475 960,209
Inventory write off -- 35,259
Impairment - Investment -- 28,778
Permanent decline on value of marketable securities 2,338,321 --
Stock-based compensation 1,443,517 59,000
------------ ------------
Total operating expenses 5,982,314 1,083,246
------------ ------------
Loss from operations (5,504,392) (969,557)
Non-operating income (expense):
Investment Income -- 16
Other income 6,961 157
Decrease in the allowance for former officers receivables 104,051 --
Beneficial conversion feature (317,021) --
Loss on conversion of debt (594,892) --
Interest Income 11,109 11,136
Interest expense (1,122,703) (39,483)
------------ ------------
Total non-operating income (expense) (1,912,495) (28,174)
------------ ------------
Loss before provision for income taxes (7,416,887) (997,731)
Provision for income taxes 800 800
------------ ------------
Net loss (7,417,687) (998,531)
Dividend requirement for preferred stock 16,575 --
------------ ------------
Net loss applicable to common shareholders (7,434,262) (998,531)
------------ ------------
Comprehensive loss $ (7,434,262) $ (998,531)
============ ============
Basic and diluted net loss per share $ (0.10) $ (0.02)
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 $ (0.10) $ (0.02)
============ ============
Basic and diluted weighted average
shares outstanding 77,455,774 48,164,549
============ ============
The accompanying notes are an integral part of these financial statements
-26-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Twelve months periods ended
June 30,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net loss $(7,417,687) $ (998,531)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 130,666 50,730
Impairment of investment -- 28,778
Inventory write-off (6,758) 35,259
Issuance of shares for consulting services 918,129 15,000
Issuance of stock for interest payment -- 17,222
Loss on conversion of debt 594,892 --
Shares to be issued for compensation 8,000 40,000
Permanent decline on value of marketable securities 2,338,321 --
Beneficial conversion feature expense 317,021 --
Stock options granted 1,636,652 4,000
Warrants granted to consultant -- 5,774
Commission paid out of investments 66,500 --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (286,542) 44,382
(Increase) decrease in inventory 6,758 (30,888)
Decrease in other current assets 6 3,593
(Increase) decrease in prepaid expenses (300) 3,353
(Increase) in deposits (101,162) (6,021)
(Increase) in investments -- (16)
Increase in accounts payable 424,494 119,040
Increase in payroll taxes payables 14,517 51,023
(Decrease} in payroll taxes assumed in merger -- (26,611)
Increase (decrease) in deferred revenue (61,963) 46,006
Increase in liabilities in process of conversion to stock -- 1,960
----------- -----------
Net cash used in operating activities (1,418,456) (595,947)
----------- -----------
INVESTING ACTIVITIES
Acquisition of equipment (175,764) --
Increase in cash invested (252,625) --
----------- -----------
Net cash used in investing activities (428,389) --
----------- -----------
FINANCING ACTIVITIES
Payments on factoring payable (135,586) (131,885)
Proceeds from factor 229,292 28,225
Proceeds on loans from stockholders -- 211,756
Payments on leases (48,260) --
Proceeds from issuance of debentures 300,000 --
Proceeds from convertible bonds 250,000 --
Proceeds from convertible notes 200,000 500,000
Prepayments for warrants to be issued for note conversion 295,000 --
Proceeds from issuance of common stock and warrants 1,003,468 --
Payment of notes payable (250,000) (17,711)
----------- -----------
Net cash provided by financing activities 1,843,914 590,385
----------- -----------
Net decrease in cash and cash equivalents (2,931) (5,562)
Cash and cash equivalents, beginning balance 15,600 21,162
----------- -----------
Cash and cash equivalents, ending balance $ 12,669 $ 15,600
=========== ===========
The accompanying notes are an integral part of these financial statements.
-27-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(Split table - Part 1 of 3)
Preferred Stock Common Stock
---------------------------- ---------------------------
Number of Number of
Shares Amount shares Amount
------------ ------------ ------------ ------------
Balance at June 30, 2003 -- $ -- 46,762,008 $ 467,620
Issuance of shares for services -- -- 200,000 2,000
Issuance of shares for conversion of bond -- -- 1,773,695 17,737
Issuance of shares for debt settlement -- -- 14,291 143
Shares to be issued for compensation -- -- -- --
Common stock options granted -- -- -- --
Issuance of stock warrants -- -- -- --
Net loss for the year ended June 30, 2004 -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2004 -- $ -- 48,749,994 $ 487,500
============ ============ ============ ============
Issuance of shares for cash -- -- 2,750,000 27,500
Issuance of shares for debt settlement 1,027,602 280,262 12,132,736 121,327
Conversion of preferred stocks (1,345,184) (696,315) 3,624,320 36,243
Issuance of shares for services 2,342,000 367,400 3,894,560 38,946
Issuance of shares for conversion of bond 1,372,332 760,658 7,426,098 74,261
Issuance of shares for purchase of investment -- -- 14,000,000 140,000
Shares to be issued for services -- -- -- --
Shares issued for Services 40,000 40,000 -- --
Common stock options granted -- -- -- --
Issuance of shares upon exercise of warrants -- -- 5,902,824 59,028
Amortization of warrants granted -- -- -- --
Investment held in escrow -- -- -- --
Unrealized loss on investment -- -- -- --
Beneficial conversion feature -- -- -- --
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
============ ============ ============ ============
(continued)
The accompanying notes are an integral part of these financial statements
-28A-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(Split table - Part 2 of 3)
Additional Unamortized
paid in Shares to consulting Investment
capital be issued fees in escrow
------------ ------------ ------------ ------------
Balance at June 30, 2003 $ 20,326,780 $ -- $ -- $ --
Issuance of shares for services 13,000 -- -- --
Issuance of shares for conversion of bond 88,685 -- -- --
Issuance of shares for debt settlement 1,643 -- -- --
Shares to be issued for compensation -- 40,000 -- --
Common stock options granted 4,000 -- -- --
Issuance of stock warrants 41,572 -- (35,798) --
Net loss for the year ended June 30, 2004 -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2004 $ 20,475,680 $ 40,000 $ (35,798) $ --
============ ============ ============ ============
Issuance of shares for cash 196,000 -- -- --
Issuance of shares for debt settlement 578,679 -- -- --
Conversion of preferred stocks 660,072 -- -- --
Issuance of shares for services 510,730 -- -- --
Issuance of shares for conversion of bond 225,240 -- -- --
Issuance of shares for purchase of investment 2,520,000 -- -- --
Shares to be issued for services -- 8,000 -- --
Shares issued for Services -- (40,000) -- --
Common stock options granted 1,676,375 -- -- --
Issuance of stock warrants (exercise of warrants) 720,940 -- -- --
Amortization of warrants granted 2,950 -- 32,678 --
Investment held in escrow -- -- -- (126,567)
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 $ 27,994,614 $ 8,000 $ (3,120) $ (126,567)
============ ============ ============ ============
(continued)
The accompanying notes are an integral part of these financial statements
-28B-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(Split table - Part 3 of 3)
Other Total
Accumulated Comprehensive Stockholder's
Deficit Income Deficit
------------ ------------ ------------
Balance at June 30, 2003 $(22,062,534) $ -- $ (1,268,134)
Issuance of shares for services -- -- 15,000
Issuance of shares for conversion of bond -- -- 106,422
Issuance of shares for debt settlement -- -- 1,786
Shares to be issued for compensation -- -- 40,000
Common stock options granted -- -- 4,000
Issuance of stock warrants -- -- 5,774
Net loss for the year ended June 30, 2004 (998,531) -- (998,531)
------------ ------------ ------------
Balance at June 30, 2004 $(23,061,065) $ -- $ (2,093,683)
============ ============ ============
Issuance of shares for cash -- -- 223,500
Issuance of shares for debt settlement -- -- 980,268
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
Shares issued for Services -- -- --
Common stock options granted -- -- 1,676,375
Issuance of stock warrants (exercise of warrants) -- -- 779,968
Amortization of warrants granted -- -- 35,628
Investment held in escrow -- -- (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 $(30,495,328) $ (8,374) $ (893,965)
============ ============ ============
(concluded)
The accompanying notes are an integral part of these financial statements
-29-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARY
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. The Company sells hardware, software and services for printing
large-format drawings such as blueprints and computer-aided design (CAD) files
directly to the microfilm format off aperture cards. The Company is the only
manufacturer of a patented, chemical-free desktop microfilm printer for aperture
cards.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES & REALIZATION OF ASSETS
Principles of Consolidation
The consolidated financial statements include the accounts of Quintek
Technologies, Inc. and its wholly owned subsidiary, Sapphire Consulting
Services. The results of operations of Sapphire are included in the consolidated
financial statements from its formation date. All intercompany balances and
transactions are eliminated on consolidation.
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.
-30-
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 $7,929
as at June 30, 2005.
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.
-31-
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.
Accounts Payable & Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable $ 507,405
Accrued interest 190,177
Accrued legal fees 38,250
Accrued payroll 17,059
Settlement payables 24,827
Other accrued expenses 85,602
--------
$ 863,320
=======
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, 2005
and 2004 were $886 and $5,026, respectively.
-32-
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,
2005, such differences were insignificant.
Stock-based Compensation
SFAS No. 123 prescribes accounting and reporting standards for all stock-based
compensation plans, including employee stock options, restricted stock, employee
stock purchase plans and stock appreciation rights. SFAS No. 123 requires
compensation expense to be recorded (i) using the new fair value method or (ii)
using the existing accounting rules prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and related
interpretations with pro-forma disclosure of what net income and earnings per
share would have been had the Company adopted the new fair value method. The
Company has chosen to account for stock-based compensation using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
has adopted the disclosure only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee is required to pay for the stock.
The Company's board of directors authorized a stock option plan which included
certain stock incentive awards. The plan was approved by the shareholders as of
June 30, 2004. Additionally, the Company's board of directors authorized a stock
bonus plan as of December 7, 2004.
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 current assets and current 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.
-33-
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. The Company has complied with the requirements of SFAS 133, the
effect of which was not material to the Company's financial position or results
of operations as the Company does not participates in such activities.
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.
-34-
Reclassifications
Certain comparative amounts have been reclassified to conform with the current
year's presentation.
Recent Pronouncements
In November 2004, the FASB has issued FASB Statement No. 151, "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments made by
FAS No. 151 are intended to improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities.
The guidance is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
provisions of FAS No. 151 will be applied prospectively. The Company does not
expect the adoption of FAS No. 151 to have a material impact on its consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company believes that the adoption of this standard will have no material
impact on its financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We are evaluating the effect the adoption of this
interpretation will have on its financial position, cash flows and results of
operations.
-35-
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.
The Company opened a certificate of deposit for one year for $250,000. The
Company has accrued interest income of $2,625 through June 30, 2005. The Company
has recorded $252,625 as restricted cash in the accompanying balance sheet as of
June 30, 2005.
4. INVENTORIES
Inventory consists of parts and supplies. The Company has recorded an allowance
of obsolesce amounting $323,612 as on June 30, 2005. As a result, 100% of
inventory totaling $323,612 was reserved for obsolescence.
5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2005, consists of the following:
Computer and office equipment $ 781,013
Other depreciable assets 102,881
Furniture and fixture 40,653
----------
924,547
Accumulated depreciation (339,116)
----------
$ 585,431
==========
6. INTANGIBLE ASSETS
Intangible assets at June 30, 2005 were as follows:
Patents and proprietary processes $ 136,067
Accumulated amortization (136,067)
----------
$ --
==========
7. EMPLOYEE RECEIVABLES
Notes receivable from former officers, unsecured,
due on June 30, 2019, interest at 4% per anum $ 262,254
Interest receivable in connection with the above
employee receivables 26,903
----------
289,157
Valuation allowance (289,157)
---------
$ --
=========
-36-
8. NOTE PAYABLE
On October 19, 2004, the Company executed a note payable to a third party for
$250,000. The term of the note was for a period of six months bearing an annual
interest at 5-3/4%. The Company granted 5,000,000 warrants to a third party upon
exercising their rights to advance $250,000 to the Company. The Company recorded
$589,602 as expense for the cost of the issuance of such warrants during the
period ended June 30, 2005. The Company made payments of $50,000 in cash and
allowed the third party to exercise 2,000,000 of the 5,000,000 warrants at $0.10
per share to payoff the remaining principal amount of the note payable during
the period ended June 30, 2005.
9. 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.
The Company issued the Factor 1,500,000 warrants purchasing the Company's stock
as a fee for the factoring agreement. Pursuant to the terms of agreement, the
stock issued under the warrants can be purchased at the average closing price of
the Company's stock for the 90 days prior to the factoring agreement.
The Company has also agreed to issue the Factor bonus warrants. The Factor will
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. Both warrants are for a five year
period. No bonus warrants were issued to the Factor as of June 30, 2005.
At June 30, 2005, the Company had a factoring payable balance of $136,936.
10. 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, 2005.
The Company is delinquent on payments of these payroll tax liabilities.
-37-
11. LONG TERM DEBT
Lease payable, interest at 7.9% to 20%, due various dates $ 405,704
in 2005 to 2007
Note payable, DFS, interest at 15.99%, due various dates 1,146
in 2005 and 2006
Notes payable - AP conversion, interest at 8%, due 2006 32,785
Notes payable - vendor, monthly installments $404, due July 2005 2,022
---------
441,657
Less current portion (241,094)
---------
200,563
Less Unamortized discount (72,401)
---------
128,162
=========
The company issued warrants 744,000 to the leasing company and the value of the
warrants was calculated using the Black-Schole with the following assumptions:
discount rate of 3.4%, volatility of 100% and expected term of three year. The
value of the warrants is $96,367 and it is amortized over the periods of the
leases, the company had amortized $23,966 of this value as an interest.
The future maturity of the long term debt is as follows:
2006 $ 241,094
2007 174,845
2008 25,718
----------
Total $ 441,657
==========
12. 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 $730,000 for
prepayment of warrants to be exercised. The agreement expires on August 2, 2006.
During the twelve month period ended June 30, 2005, the accredited investor
exercised $435,000 of warrants into common shares. The remaining $295,000 is
recorded as advances from lender in the accompanying financial statements as of
June 30, 2005.
13. 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
=========
Certain of the outstanding 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.
Bondholders have been asked to exchange their bonds for preferred stock. As of
June 30, 2005, holders of $198,268 of bonds including accrued interest had acted
on this. The Company issued Series A Preferred shares in the amount of $36,204
and Series B Preferred share in the amount of $162,064 as of June 30, 2005. The
company recognized loss on the conversion of $594,892.
-38-
14. CONVERTIBLE DEBENTURES
The Company raised $300,000 through the issuance of convertible debentures as of
June 30, 2005. The term of the convertible debentures area 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, 2005, the Holder of the debenture converted $43,500 of the debenture amount
into 5,026,098 common shares of the Company and exercised 435,000 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, 2005 the note is presented net of the
unamortized beneficial conversion feature of $110,924 and unamortized discount
arising from the warrant of $8,072.
Pursuant to addendums to the securities purchase agreement dated February 3,
2005 and March 30, 2005, the Company delivered 7,500,000 common shares to an
escrow agent in accordance to the terms of the agreement. Such shares may only
be released by valid debenture conversion and warrant exercise notices submitted
to the Company by the Holder. As of June 30, 2005, 3,259,451 common shares
remain in the escrow account.
A second convertible debenture in the amount of $200,000 was converted into
common stock on April 15, 2005. Conversion price was $0.10 per share. The
convertible denbenture was originally funded in two $100,000 issuances on August
18, 2004 and November 23, 2004, The Company recorded a beneficial conversion
feature of $120,000 which represents the difference between the conversion price
and the market value of the shares at the transaction dates.
15. CONVERTIBLE NOTES
During the year ended June 30, 2005, the Company raised $70,000 through the
issuance of convertible promissory notes. All notes are for a one year period
and bear simple interest at the rate of 10%. The due dates
-39-
of these notes are from July 15, 2004 through June 30, 2005. The note plus any
accrued interest through the date of conversion are convertible to the company
common stocks at $0.10, the Company recorded a beneficial conversion feature of
$28,297. The note was converted in August 31, 2004 and the company issued
700,000 shares.
Another 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 $0.10.
The conversion right of the note holder with respect to the individual notes
shall exist upon (i) the approval of a proxy statement to be filed with the
Securities and Exchange Commission and approval of an amendment by the Company's
shareholders to authorize to 200,000,000 the number of shares common stock and
(ii) the Company's registration statement registering the Shares underlying the
notes and other Securities has been declared effective by the Securities and
Exchange Commission. The company issued 6,804,164 Common stocks on the
conversion of $408,250 of the note. 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 shares. The Company recorded additional interest of $938,431
representing the fair value of warrants issued. The fair value of the warrants
was calculated using the Black-Scholes model using the following assumptions:
volatility of 100%, discount rate of 3.4% and estimated life of 3 years.
The total interest on these convertible notes for the year ended June 30, 2005
amounted to $65,867.
16. STOCKHOLDERS' EQUITY
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 2003, the Company established the Class L warrants with the
following general terms: 1) exercise price of $0.25 per share, 2) expiration
date of January 14, 2005, and 3) Series A Preferred stock designated as
underlying stock. During the fiscal year ended June 30, 2003, the Company
initiated an exchange program with the existing Class J Warrant holders in which
the Company offered to exchange one Class L Warrant for two Class J warrants,
with the exchange number rounded up to the next whole number in cases where an
odd number of Class J Warrants were submitted for exchange. The Class J Warrants
expired on January 14, 2004. The Class L Warrants expired on January 14, 2005
and no new warrants were issued to replace Class J and Class L warrants as of
June 30, 2005.
During the twelve month period ended June 30, 2005, the Company recorded the
following equity transactions:
o The Company issued 2,725,652 Common Shares to consultants for services
valued at $367,040 and 4,628,572 Common Shares were issued for
conversion of loans from shareholders valued at $221,756.
o The Company issued 2,492,824 Common Shares upon exercise of warrants
and received cash amounting to $49,968.
o The Company issued 6,804,164 Common Shares upon conversion of a
promissory note of $408,250. The Company issued 700,000 Common Shares
upon conversion of promissory notes of $70,000. In connection with this
transaction, a beneficial conversion feature expense of $28,297 was
recorded.
-40-
o The Company issued 7,026,098 Common Shares pursuant to conversion of
debentures into common stock valued at $243,500.
o The Company issued a total of 3,624,321 Common Shares upon conversion
of Preferred Shares. 785,400 Series A Preferred Shares were converted
to 785,400 common Shares valued at $156,920; 558,984 Series B Preferred
Shares were converted to 2,794,920 Common Shares valued at $531,035;
2,200 Series C Preferred Shares were converted to 44,000 Common Shares
valued at $8,360.
o The Company issued 490,215 Common Shares to employees as bonus valued
at $85,750.
o The Company issued 14,000,000 Common Shares pursuant to an Agreement
with Langley Park Investments PLC, whereby, the Company received
1,145,595 shares of Langley in exchange of its common shares issuance.
The company paid out of Langely shares 28,639 as a commission.
o The Company issued 2,750,000 Common Shares under private placement
agreements and raised $223,500 from sale of shares.
o The Company issued 400,000 Common Shares to a shareholder for
converting its loan of $56,000 to equity.
o The Company issued 457,400 Common Shares upon conversion of Series A
Preferred Shares valued at $91,320.
o The Company issued 1,000,000 Common Shares upon exercise of warrants
and received cash in the amount of $120,000.
o The Company issued 2,000,000 Common Shares upon exercise of warrants
upon which the the Company used the proceeds to pay the note.
o The Company issued 390,193 Common Shares pursuant to an
advisory/consultant agreement valued at $50,725.
o The Company issued 288,500 Common Shares to avoid assessment of future
liability valued at $46,160.
During the year ended June 30, 2004, 200,000 shares of warrants were issued for
consulting services for three years beginning February 2004, valued at $41,572.
The Company amortized $32,678 in consulting expense during the year ended June
30, 2005. On October 19, 2004, the Company granted 5,000,000 warrants to a third
party upon exercising their rights to advance $250,000 to the Company. The
amount advanced was for a period of six months bearing an annual interest at
5-3/4%. The Company recorded $589,602 as expense for the cost of the issuance of
such warrants during the period ended June 30, 2005. Pursuant to the security
purchase agreement dated August 2, 2004, the Company granted 3,000,000 warrants
to a third party, to be exercised concurrently with or subsequent to the
issuance of a conversion notice under the debenture agreement. The fair value of
the warrants is $20,348 using the Black-Schole Model and the its amortized over
the terms of the note and accordingly with the exercise of the warrants. The
Company recorded $5,727 as expense for the cost of the issuance of 150,000
warrants to consultant during the period ended June 30, 2005. 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.
-41-
Annual rate of quarterly dividends 0.00%
Discount rate - Bond Equivalent Yield 3.40%
Expected life 3 years
Expected volatility 100%
b. Common Stock Reserved
At June 30, 2005, common stock was reserved for the following reasons:
Outstanding convertible bonds 151,919 shares
Number
of
Warrants
Warrants ---------
Outstanding June 30, 2004 4,263,432
Issued during the period 13,443,425
Exercised (2,500,000)
----------
Outstanding June 30, 2005 15,206,857
Warrants to be issued 6,804,164
----------
Total 22,011,021
==========
c. Stock Option Agreements
The Company granted 11,745,614 stock options to eleven (11) employees during the
year ended June 30, 2005. The company had recorded intrinsic value of $39,500 as
compensation
The number and weighted average exercise prices of options granted by the
Company are as follows:
Options Outstanding
------- -----------
Weighted
Number Average
of Exercise
Options Price
Outstanding June 30, 2003 2,015,000 $ 1.01
Granted during the year 200,000 0.10
Exercised 0 0
Expired/forfeited 0 1.00
---------- ----------
Outstanding June 30, 2004 2,215,000 $ 0.93
========== ==========
Granted during the year 11,745,614 0.05
Exercised 2,275,297 0.001
Expired/forfeited 2,215,000 0.93
---------- ----------
Outstanding June 30, 2005 9,470,317 $ 0.93
========== ==========
-42-
Following is a summary of the status of options outstanding at June 30, 2005:
Outstanding Options Exercisable Options
-------------------------------- ------------------------------
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- --------- ------------------ ------------- ------------ ------------
$0.10 1,061,062 21 months $ 0.10 1,061,062 $ 0.93
$0.03 - $0.16 8,409,255 35 months $ 0.04 8,409,255 $ 0.04
Pro forma information regarding the effect on operations is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. Pro forma
information using the Black-Scholes method at the date of grant based on the
following assumptions for the year ended June 30, 2005 was as follows:
Expected life (years) 1 year
Risk-free interest rate 1.40% and 3.40%
Dividend yield 0% and 0%
Volatility 45% and 100%
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the year ended June 30, 2005 and 2004 as follows ($ in thousands,
except per share amounts):
Year ended June 30,
2005 2004
--------- ---------
Net loss - as reported $ (7,316) $ (999)
Stock based employee compensation
expense included in reported net
income, net of tax 40 --
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (1,718) (8)
--------- ---------
Pro forma net loss $ (8,994) $ (1,006)
========= =========
Earnings (loss) per share:
Basic, as reported $ (0.09) $ (0.02)
Diluted, as reported $ (0.09) $ (0.02)
Basic, pro forma $ (0.12) $ (0.02)
Diluted, pro forma $ (0.12) $ (0.02)
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
-43-
Series A Preferred Stock
The general terms of the Series A Preferred Stock is as follows: Par value -
$0.00; 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, 2005, the Company had issued 4,082,931
shares of Series A Preferred stock. These shares were used to pay for officer
compensation valued at $360,000, accrued payroll valued at $252,213 the company
recorded a gain on the settlement of the liabilities of $50,503 and for bond
conversion valued at $36,204 the Company recorded a loss on conversion of debt
in amount of $108,612 in the accompanying financials from Series A preferred
stock. The Company has recorded a cumulative dividend of $16,453 for the
preferred stockholders for the period ended June 30, 2005 in the accompanying
financial statements.
Series B Preferred Stock
The general terms of the Series B Preferred Stock is as follows: Par Value -
$0.00; 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, 2005, the Company had issued 680,255
shares of Series B Preferred Stock valued at $646,243. The Company recorded loss
on conversion of debt in amount of $480,460 in the accompanying financials from
Series B Preferred Stock. The Company has recorded a cumulative dividend of $115
for the preferred stockholders for the period ended June 30, 2005 in the
accompanying financial statements.
Series C Preferred Stock
The general terms of the Series C Preferred Stock is as follows: Par value -
$0.00; Liquidation Preference - $1.00 per share plus any unpaid accumulated
dividends; Dividends - cumulative annual rate of $.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 $.0005 annually per share.;
Voting Rights - one vote per share on all matters requiring shareholder vote. At
June 30, 2005, the Company had issued 20,148 shares of Series C Preferred Stock
valued at $76,562. The Company recorded loss on conversion of debt in amount of
$56,423 in the accompanying financials from Series C Preferred Stock. The
Company has recorded a cumulative dividend of $7 for the preferred stockholders
for period ended June 30, 2005, in the accompanying financial statements.
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Conversion of Preferred Stock
o The Company issued a total of 3,624,321 Common Shares upon conversion of
Preferred Shares. 785,400 Series A Preferred Shares were converted to 785,400
common Shares valued at $156,920; 558,984 Series B Preferred Shares were
converted to 2,794,920 Common Shares valued at $531,035; 2,200 Series C
Preferred Shares were converted to 44,000 Common Shares valued at $8,360.
17. INCOME TAXES
The Company accounts for income taxes using the liability approach to financial
accounting and reporting. The Company has a deferred tax asset due to net
operating loss carry-forwards and temporary taxable differences due to
stock-based compensation for income tax purposes and reserve for inventory
obsolescence. Through June 30, 2005, the Company incurred net operating losses
for federal tax purposes of $7,417,687. The net operating loss carry-forward may
be used to reduce taxable income through the year 2025. The availability of the
Company's net operating loss carry-forwards are subject to limitation if there
is a 50% or more positive change in the ownership of the Company's stock.
The deferred tax assets are $5,579,965 and $3,057,951 as of June 30, 2005 and
2004, respectively. However, due to the ongoing nature of the losses and the
potential inability of the Company to ever realize the benefit, a valuation
allowance has been established for 100% of the deferred tax asset. Net operating
loss carryforwards expire at various times through the year 2023.
The effects of temporary differences that give rise to significant portions of
the deferred tax benefit for the years ended June 30, 2005 and 2004 are
presented below:
2005 2004
----------- -----------
Net operating loss $ 764,350 $ 319,441
Inventory reserve 323,612 --
Stock-based compensation 498,290 20,060
----------- -----------
1,586,252 339,501
Less-valuation allowance (1,586,252) (339,501)
----------- -----------
Total $ -- $ --
=========== ===========
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:
June 30, June 30,
2005 2004
---------- ---------
Tax expense (credit) at statutory rate-federal (34%) (34%)
State tax expense net of federal tax (6%) (6%)
Permanent differences (1%) (1%)
Valuation allowance (39%) (39%)
---------- ----------
Tax expense at actual rate -- --
========== ==========
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18. 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- for income tax during the years ended June 30, 2005 and
2004. The Company paid $58,970 and $29,937 interest during the years ended June
30, 2005 and 2004, respectively.
The cash flow statement for the year ended June 30, 2005 does not include the
following non-cash investing and financing transaction;
19,558,834 shares of common stock and 2,399,934 shares of preferred stock
were issued for conversion of debt amounting to $2,040,427.
19. MAJOR CUSTOMERS AND SUPPLIERS
The Company had two customers that accounted for 20- 45 % of revenue for the
year ended June 30, 2005. Accounts receivable from these major customers were
$245,615 and $604,208 respectively- at June 30, 2005. For the year ended June
30, 2004, the Company had one customer that accounted for more than 21% of
revenue. Accounts receivable from this major customers were approximately $-0-
at June 30, 2004.
20. 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 $1,384 per month. For
the years ended June 30, 2005 and 2004, rent expense for these operating leases
totaled $89,829 and $56,997, respectively.
The future minimum lease payments under non-cancelable leases are as follows:
2006 $ 91,524
2007 93,218
2008 94,913
---------
$ 279,655
=========
b) Litigation
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against the Company for $22,662 for goods provided. Since 2000, Decision
One (formerly Imation) has been both a vendor and a reseller of the Company's
products. The Company filed a counterclaim on August 1, 2004 asserting that
Decision One used its authority as a dealer to disparage the Company in
violation of its dealer agreement. The Company sought relief for the hundreds of
thousands of dollars in business lost. On January 11, 2005, the Court granted
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Judgment for the sum of $21,000 in favor of the Decision One Corporation. The
Court ruled that the Company would be allowed to file the counterclaim under
this action, rather than a separate lawsuit. In March 2005, a stipulation
settlement was accepted by the 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 amount of Judgment of $21,000
is included in accounts payable and accrued expenses in the accompanying
financial statements as of June 30, 2005.
21. 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, 2005 and 2004 are the same since the effect
of dilutive securities is anti-dilutive.
22. 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, 2005, the Company had incurred cumulative
losses of $30,495,328 including net losses of $7,417,687 and $998,531 for the
fiscal years 2005 and 2004, 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.
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, 2005, towards (i) obtaining additional equity
financing and (ii) evaluation of its distribution and marketing methods.
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23. SUBSEQUENT EVENTS
On July 14, 2005, the Company sold 1,750,000 common shares of Endexx Corporation
(formerly known as PanaMed Corporation) to an accredited investor in a private
placement for a cash consideration of $89,400. The Company had impaired its
investment in PanaMed in fiscal year 2004 and had recognized an impairment loss
of $28,778.
On July 15, 2005, the Company entered into an exclusive sales and marketing
agreement with a third party whereby the third party for an engagement fee,
agreed to market the Company's products and services to the third party's
contacts in the mortgage lending industry. As part of the consideration of the
agreement, the Company signed a promissory note for $36,478 to settle its
disputed fees.
On August 30, 2005, the Company sold 2,000,000 restricted common shares to an
accredited investor in a private placement, and raised $80,000 in cash.
In September 2005, the Company sold 544,158 common shares of its investment in
Langley Park Investments, PLC for a cash consideration of $147,017.
The Company is a party to a litigation filed by its former President for
promissory fraud, breach of written contract, wrongful constructive termination
based on public policy and invasion of privacy. The plaintiff is seeking a
monetary relief of $150,000 and for costs incurred for the litigation as the
arbitrator deems proper. The parties are set for an arbitration hearing
scheduled for December19, 2005.
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