UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-28541
QUINTEK TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified 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
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number: 714-848-7741
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
At May 19, 2006, a total of 142,565,943 shares of registrant's Common Shares
were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
QUINTEK TECHNOLOGIES, INC.
FORM 10-QSB
For the Fiscal Quarter Ended March 31, 2006
Part I Page
------ ----
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis or Plan of Operations. 23
Item 3. Controls and Procedures 25
Part ll Page
------- ----
Item 1. Legal Proceedings. 26
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders. 27
Item 5. Other Information 27
Item 6. Exhibits. 27
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of March 31, 2006
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,858
Restricted Cash 257,705
Accounts receivable, net of allowance for doubtful accounts of $7,929 296,495
Prepaid expenses 539
------------
Total current assets
571,597
Property and equipment, net 488,306
------------
Other assets:
Deposits 108,935
Other assets 883
------------
Total other assets
109,818
------------
$ 1,169,720
============
See notes to consolidated financial statements.
-3-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of March 31, 2006
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,051,936
Factoring payable 137,722
Payroll and payroll taxes payable 393,469
Payroll taxes assumed in merger 96,661
Advances from lenders 86,736
Loans payable 473,884
Convertible bonds 62,495
Convertible debentures 215,234
Convertible notes 91,750
Deferred revenue 13,421
Dividend payable 28,618
------------
Total current liabilities
2,651,925
Stockholders' deficit:
Preferred stock, convertible, no par value, 50,000,000 shares authorized,
3,148,750 shares issued and outstanding 681,605
Common stock, $0.01 par value, 200,000,000 shares authorized,
141,332,759 shares issued and outstanding 1,413,327
Additional paid-in capital 30,841,771
Stock subscription receivable (776,250)
Unamortized consulting (327,293)
Unrealized gain on marketable securities (79,741)
Investments held in escrow (51,120)
Accumulated deficit (33,184,504)
------------
Total stockholders' deficit
(1,482,205)
------------
Total liabilities and stockholders' deficit $ 1,169,720
============
See notes to consolidated financial statements.
-4-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited) - split table
For the three month
periods ended
For the nine
month periods
ended March 31,
2006 March 31,
2006
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net revenue $ 499,879 $ 408,047 $ 1,728,759 $ 844,726
Cost of revenue 329,525 272,650 1,155,958 628,904
------------- ------------- ------------- -------------
Gross margin 215,822 170,354 135,397 572,801
Operating expenses:
Selling, general and administrative 555,735 444,444 1,759,320 1,969,457
Permanent decline on value of marketable securities -- -- -- 2,346,564
Stock-based compensation 802,759 -- 1,186,734 1,071,972
------------- ------------- ------------- -------------
Total operating expenses 1,358,494 444,444 2,946,054 5,387,993
------------- ------------- ------------- -------------
Loss from operations (1,188,139) (309,047) (2,373,253) (5,172,171)
Non-operating income (expense):
Realized gain on investment -- -- 113,700 --
Other income 3,215 4,129 12,846 10,307
Loss on conversion of debt -- (432,850) -- (1,100,420)
Uncollectible from former officers (3,299) -- (8,325) --
Beneficial conversion feature (13,959) (107,222.00) (110,924) (135,519.00)
Interest Income 2,413 -- 5,080 --
Interest expense (140,421) (40,429) (315,457) (105,575)
------------- ------------- ------------- -------------
Total non-operating income (expense) (152,050) (576,372) (303,080) (1,331,207)
------------- ------------- ------------- -------------
Loss before provision for income taxes (1,340,190) (885,419) (2,676,333) (6,503,378)
Provision for income taxes -- -- 800 800
------------- ------------- ------------- -------------
Net loss (1,340,190) (885,419) (2,677,133) (6,504,178)
Dividend requirement for preferred stock 4,015 4,632 12,043 12,511
------------- ------------- ------------- -------------
Net loss applicable to common shareholders (1,344,205) (890,051) (2,689,176) (6,516,689)
(continued)
See notes to consolidated financial statements.
-5-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(continued)
For the three month periods ended For the nine month periods ended
March 31, 2006 March 31, 2006
2006 2005 2006 2005
------------- ------------- ------------- -------------
Other comprehensive (loss)/gain:
Reclassification adjustment -- -- (4,080) --
Unrealized gain for the period -- -- 9,317 --
------------- ------------- ------------- -------------
Comprehensive loss $ (1,344,205) $ (890,051) $ (2,683,939) $ (6,516,689)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.09)
Basic and diluted net loss per share for dividend
for preferred stock $ 0.00 $ 0.00 $ 0.00 $ 0.00
Basic and diluted net loss per share applicable to
------------- ------------- ------------- -------------
common shareholders $ (0.01) $ (0.01) $ (0.02) $ (0.09)
============= ============= ============= =============
Basic and diluted weighted average
shares outstanding 106,389,263 75,264,602 118,289,124 72,214,704
============= ============= ============= =============
Weighted average of dilutine securities has not been taken since the
effect of dilutive securities is anti dilutive
See notes to consolidated financial statements.
-6-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (split table)
Nine month periods ended
March 31, 2006
2006 2005
------------- -------------
OPERATING ACTIVITIES
Net loss $ (2,677,133) $ (6,516,689)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 129,365 102,656
Discount on factor 4,796 --
Expenses paid by a note payable 36,478 --
Issuance of shares for consulting services 647,404 387,041
Loss on conversion of debt -- 1,100,420
Shares issued for compensation -- 277,431
Issuance of shares for officer compensation -- 427,500
Permanent decline on value of marketable
securities -- 2,346,564
Gain on the sale of the investment (113,700) --
Beneficial conversion feature expense 110,924 135,519
Amortization of the Unamortized discount 87,635 --
Stock options granted 539,330 1,500
Warrants granted to consultant 250,343 594,850
Changes in current assets and liabilities:
(Increase) decrease in accounts
receivable 18,783 (171,805)
(Increase) in other current assets 643 (8,189)
(Increase) in prepaid expenses 5,023 (7,329)
(Increase) in investments -- (156,718)
Increase in accounts payable 159,937 204,638
Increase in payroll payables -- (76,452)
Increase in payroll taxes payables 191,814 --
(Decrease) in deferred revenue (11,656) (3,518)
Increase in dividends payable -- 12,511
Increase in other liablilities -- 222,657
------------- -------------
Net cash used in operating activities (620,015) (1,127,413)
(continued)
See notes to consolidated financial statements.
-7-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(continued)
Nine month periods ended
March 31, 2006
2006 2005
------------- -------------
INVESTING ACTIVITIES
Acquisition of equipment (32,240) (375,287)
Proceeds from sale of marketable securities 238,018 --
(Increase) in restricted cash (5,080) --
------------- -------------
Net cash provided by investing activies 200,699 (375,287)
------------- -------------
FINANCING ACTIVITIES
Payments on factoring payable (266,694) (93,492)
Proceeds from factor 262,684 --
Proceeds from line of credit -- 200,000
Payments on leases (61,735) --
Proceeds from issuance of debentures -- 484,500
Proceeds from convertible notes -- 170,000
Proceeds from sale of stocks 265,000 --
Prepayments for warrants to be issued for note
conversion 175,000 600,000
Proceeds from issuance of common stock upon exercise
of warrants 59,400 254,968
Payments of notes payable (10,150) (14,657)
------------- -------------
Net cash provided by financing activities 423,505 1,601,319
------------- -------------
Net increase (decrease) in cash and cash equivalents 4,189 98,619
Cash and cash equivalents, beginning balance 12,669 4,052
------------- -------------
Cash and cash equivalents, ending balance $ 16,858 $ 102,671
============= =============
-8-
See notes to consolidated financial statements
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Quintek Technologies, Inc. and Subsidiary (referred to herein as the "Company",
"Quintek", "Our", or "We") is a California corporation.
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 has been 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
outsourcing services range from the 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. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Quintek have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information, but
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited financial statements of the Company
include all adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly its financial position as of March 31,
2006, the results of operations for the three months and nine months ended March
31, 2006 and 2005, and cash flows for the nine months ended March 31, 2006 and
2005. The operating results for the three month and nine month period ended
March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2006. The audited financial statements for
the year ended June 30, 2005 were filed on October 13, 2005 with the Securities
and Exchange Commission and is hereby referenced. The information included in
this Form 10-QSB should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in the Company's
2005 Form 10-KSB.
-9-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Use of Estimates
The preparation of consolidated 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.
Research and development
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amount charged to operations for the three
months and nine months ended March 31, 2006 was $0 as compared to $73 and
$52,694 for the same periods in 2005, respectively.
Marketable securities and realized loss due to decline in market value
On July 29, 2004, the Company entered into an Agreement with Langley Park
Investments Plc, a London Investment Company to issue 14,000,000 shares of the
Company's common stock to Langley in return for 1,145,595 shares of Langley.
Fifty percent of Langley shares issued to the Company under this agreement is to
be held in escrow for two years. At the end of two years if the market price for
the Company's common stock is at or greater than the Initial Closing Price, the
escrow agent will release the full amount. In the event that the market price
for the Company's common stock is less than the Initial Closing Price the amount
released will be adjusted. For the nine months ended March 31, 2006, the Company
recorded an unrealized loss of $79,741 for the potential adjustment relating to
the decline in the value of the Company's common stocks.
Langley attained listing with the United Kingdom Listing Authority. The
Company's shares are to be held by Langley for a period of at least two years.
Langley shares issued to the Company are to be free trading.
The Company's marketable securities (Langley's shares) are classified as
available-for-sale and, as such, are carried at fair value. Securities
classified as available-for-sale may be sold in response to changes in interest
rates, liquidity needs, and for other purposes. The investment in marketable
securities represents less than twenty percent (20%) of the outstanding common
stock and stock equivalents of the investee. As such, the investment is
accounted for in accordance with the provisions of SFAS No. 115.
Unrealized holding gains and losses for marketable securities are excluded from
earnings and reported as a separate component of stockholder's equity. Realized
gains and losses for securities classified as available-for-sale are reported in
earnings based upon the adjusted cost of the specific security sold. On March
31, 2006, the investments have been recorded as shown below based upon the fair
value of the marketable securities.
Marketable securities consisted of the following:
Market Accum. Number of
Investee Name Cost Value at Unrealized Shares Held at
(Symbol) March 31, 2006 Gain March 31, 2006
---------------------------------------------------------------------------------------------------------
Marketable securities:
Langley Park Investments,
PLC Investments held in escrow:
Langley Park Investments, PLC $ 1,330,000 $ 131,801 $ 940 572,798
Reserve for potential loss (80,681) (80,681)
-------------------------------------------------------------------------
Totals $ 1,330,000 $ 51,120 $ (79,741) 572,798
=========================================================================
-10-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended March 31, 2006, the Company sold 544,158 marketable
securities in Langley Park investment for $147,017, realizing a gain of $24,300.
The Company sold 1,750,000 shares held in PanaMed for $89,400, which had been
impaired in a previous period for a realized gain of $89,400.
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 award and long-term
incentive plan which includes stock appreciation rights and certain stock
incentive awards. The plan was approved by the shareholders as of June 30, 2004.
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.
Deferred revenue
Deferred revenue represents amounts received from the customers against future
sales of goods or services. Deferred revenue amounted to $13,421 as of March 31,
2006.
Issuance of shares for service
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.
-11-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 financial statements as substantially
all of the Company's operations are conducted in one industry segment.
Reclassifications
Certain comparative amounts have been reclassified to conform to the current
period presentation.
Recent Pronouncements
Recently Issued Accounting Pronouncements
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. The Company has not evaluated the impact of this
pronouncement its financial statements. In March 2006 FASB issued SFAS 156
`Accounting for Servicing of Financial Assets' this Statement amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. This
Statement:
1. Requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract.
2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose `Amortization method' or Fair value
measurement method' for each class of separately recognized servicing
assets and servicing liabilities.
4. At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the
treatment of other available-for-sale securities under Statement 115,
provided that the available-for-sale securities are identified in some
manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value.
-12-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities.
This Statement is effective as of the beginning of the Company's first fiscal
year that begins after September 15, 2006. Management believes that this
statement will not have a significant impact on the consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
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 nine month period ended March 31, 2006 and 2005, as follows ($
in thousands, except per share amounts):
Nine months ended March 31,
2006 2005
------------- -----------
Net loss - as reported $ (2,677) $(6,504)
Stock-Based employee compensation
expense included in reported net
income, net of tax 539 --
Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (485) (362)
------------- -----------
Pro forma net loss $ (2,623) $ (6,866)
============= ===========
(Loss) per share:
Basic, as reported $ (0.01) $ (0.09)
Diluted, as reported $ (0.01) $ (0.09)
Basic, pro forma $ (0.01) $ (0.10)
Diluted, pro forma $ (0.01) $ (0.10)
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 is still under the process of evaluating the impact of this standard
on its financial statements.
-13-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2006 consists of the following:
Scanning Equipment $ 478,576
Computer and office equipment 136,254
Other depreciable assets 102,881
Software 198,423
Furniture and fixture 40,653
---------
956,787
Accumulated depreciation (468,481)
---------
$ 488,306
=========
4. RESTRICTED CASH
The Company entered into a service agreement with GMAC under which they are
required to provide at their own cost a performance bond. Such bond shall be
solely for the protection of the client. The initial bond was drafted in the
amount of $250,000 and will cover 12 months starting October 1, 2004 and renew
annually.
The Company opened a certificate of deposit for $250,000 in October 2004. The
Company has recorded interest income of $5,080 for the nine months ended March
31, 2006. The Company has recorded $257,705 as restricted cash in the
accompanying balance sheet as of March 31, 2006.
5. EMPLOYEE RECEIVABLES
Employee receivables as of March 31, 2006, consist of the following:
Notes receivable from employees, unsecured,
due on June 30, 2019, interest at 4% $ 296,782
Interest receivable in connection with
above notes receivable 35,628
---------
261,154
Valuation allowance (261,254)
---------
$ -
=========
6. FACTORING PAYABLE
The Company has 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 has 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 agreement term is from June 2, 2003 to June 2, 2005. The Company will
-14-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
pay a late fee of 3% for payments not made within 30 days and 5% for those not
made in 60 days. At the option of the Factor, the late fees may be paid with
Company stock. If paid by Company stock, the stock bid price will be discounted
50% in computing the shares to be issued in payment of the late fee.
Pursuant to the terms of the factor agreement, the Factor entitled to receive
two (2) bonus warrants for each dollar of purchase orders purchased. The bonus
warrants will be exercisable at the average closing price of the Company's
common stock for the 90 days prior to the purchase order transactions they
represent or a 50% discount to the closing price of the Company's stock at the
time exercised at the option of the Factor. The warrants are exercisable over a
five year period. The Company has recorded $46,992 as interest expense for the
nine months period ended March 31, 2006. The Company has not issued any warrants
during the nine month period ending March 31, 2006.
There were no purchases of purchase orders during the nine months ended March
31, 2006. At March 31, 2006, the Company had a factoring payable balance of
$116,722 associated with this factor. The Company has accrued $59,147 for
interest for late payments of factoring payables as of March 31, 2006.
During the nine months ended March 31, 2006, the Company entered into an
agreement to factor $289,312 of qualified invoices for a cash remittance of
$284,516. As of March 31, 2006, the Company had a factoring payable balance of
$1,000 associated with this factor. The Company recorded $8,204 as interest
expense in the accompanying financial statements as of March 31, 2006.
The Company has entered into bridge loan agreements with two individuals. At
March 31, 2006 the Company had a factoring balance associated with these factors
of $20,000. The Company has accrued $11,204 for interest of these factoring
payables as of March 31, 2006.
7. 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 March 31, 2006.
The Company is delinquent on payments of these payroll tax liabilities.
8. LOANS PAYABLE
Loans payable, interest at 7.9% to 20%, due various dates $313,039
in 2005 to 2008 (the company is in default for these loans)
Loan payable, interest at 17.8%, due 2007 20,705
Notes payable, non-interest bearing 55,000
(the company is in default on this note)
Note payable, interest at 5.75%, due July 30, 2006
(the company is in default and the default interest is 12%) 33,438
Note payable, interest at 15.99%, due June & July 2006 622
Notes payable, interest at 8%, due 2006
(the company is in default on this note) 31,080
Note payable, interest at 8%, due May 31, 2006 20,000
----------
$473,884
===========
9. ADVANCES FROM LENDER
On August 2, 2004, the Company signed a convertible debenture agreement with an
accredited investor whereby the Company has received an advance totaling
$905,000 for prepayment of warrants to be exercised as of March 31, 2006. The
-15-
<
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
agreement expires on August 2, 2006. The accredited investor has exercised
818,264 warrants into common shares valued at $818,264 as of March 31, 2006. The
remaining balance of $86,736 is recorded as advances from lender in the
accompanying financial statements as of March 31, 2006. In addition, the holders
exercised warrants to purchase 25,000 shares for cash at an exercise price of
$1.00 per share.
10. CONVERTIBLE BONDS
Bonds payable with interest at 9%, due on various dates in 2001
and 2002, convertible to shares of common stock in
increments of $1,000 or more. $ 21,354
Bonds payable with interest at 12%, due July 2002, 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. The Company has recorded the $62,495 as convertible bonds as a
current liability in the accompanying financial statements as of March 31, 2006.
11. CONVERTIBLE DEBENTURES
The Company raised $300,000 through the issuance of convertible debentures
during the year ended June 30, 2005. The term of the convertible debentures are
as follows: pursuant to the terms of conversion, debenture in the amount of
$300,000 pays interest at 5 3/4% 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 March 31, 2006, the Holder of the debenture converted $84,326
of the debenture amount into 13,372,780 common shares of the Company and
exercised 843,264 warrants.
The Company allocated the proceeds from the debenture between the warrant and
the debt based on relative fair value of the warrant and the debt. The value of
the warrant was calculated using the Black-Scholes model using the following
assumptions: Discount rate of 3.4%, volatility of 100% and expected term of one
year. The amount allocated to the warrant of $20,348 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 March 31, 2006, the convertible
debenture of $215,234 is presented in the accompanying financial statements net
of the unamortized beneficial conversion feature of $-0- and unamortized
discount arising from the warrant of $440.
-16-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. CONVERTIBLE NOTE
The Company raised capital through the issuance of a convertible note for
$500,000 issued during the year ending June 30, 2004. The note plus any accrued
interest is convertible to the Company common shares 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 shares at a price of $0.10. The Company has issued 6,804,164
common shares on the conversion of $408,250 of the convertible note. The
convertible note balance as of March 31, 2006 is $91,750. The total accrued
interest on the convertible note amounted to $59,147 as of March 31, 2006.
13. STOCKHOLDERS' DEFICIT
a. Common Stock and Warrants
The Company has authorized 200 million shares of common stock with a par value
of $0.01 per share. Each share entitles the holder to one vote. There are no
dividend or liquidation preferences, participation rights, call prices or rates,
sinking fund requirements, or unusual voting rights associated with these
shares.
During the nine month period ended March 31, 2006, the Company issued 477,778
common shares upon exercise of warrants and received cash amounting to $34,400;
5,992,837common shares to consultants for services to be rendered valued at
$669,837 recorded as unamortized consulting of which $341,944 of the unamortized
consulting had been amortized and recognized as an expense; 50,000 common shares
to a consultant for services rendered valued at $8,000 previously recorded as
shares to be issued in June 30, 2005; 8,666,666 common shares to accredited
investors for a stock sales and collected $265,000 in cash; 16,500,000 common
shares issued to an accredited investor for sale of stock valued at $776,250
pending receipt of cash recorded as stock subscription receivable; 8,346,682
common shares pursuant to conversion of debentures and exercise of warrants to
the escrow agent; . $40,889 of debentures were converted into8,346,682 common
shares and exercises of warrants to purchase 408,264 common shares at an
exercise price of $1 per share; 250,000 common shares for conversion of Series A
Preferred stock valued at $40,000; 160,000 common shares for conversion of
Series B Preferred stock valued at $30,400; 2,000,000 common shares valued at
$140,000 pursuant to an exchange agreement for investor to remit free trading
shares to a corporate consultant, and the issuance of 20,00 warrants to third
parties for services rendered valued at $870. The Company granted 2,000,000
warrants valued at $88,604, to a note holder in lieu of penalty for non payment
of the note payable balance amounting to $200,000
During the nine months ended March 31, 2006, the Company issued 1,292,180
warrants in connection with an investment banking agreement and recorded
$106,672 as expense for the cost of the issuance of such warrants. An additional
expense of $54,197 was recorded during the above period for 536,078 warrants to
be issued pursuant to the terms of the investment banking agreement referenced
above. The fair value of the warrants is estimated on the grant date using the
Black-Scholes Model. The following assumptions were made in estimating fair
value.
Annual rate of quarterly dividends 0.00%
Discount rate - Bond Equivalent Yield 3.40%
Expected life 5 years
Expected volatility 90% to 100%
-17-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended March 31, 2006, the Company recorded an expense of
$61,519 for the warrants to be issued for a factor pursuant to the factoring of
purchase orders.
b. Common Stock Reserved
At March 31, 2006, the Company reserved Common Shares for the following reasons:
Outstanding convertible bonds 151,918 shares
Outstanding of warrants
Number
of
Warrants
Warrants ---------
Outstanding June 30, 2005 15,206,857
Issued during the period 4,162,180
Expired (2,555,000)
Exercised (886,042)
---------
Outstanding March 31, 2006 15,927,995
Warrants to be issued 8,149,351
----------
Total outstanding 24,077,346
==========
c. Stock Option Agreements
The number and weighted average exercise prices of options granted by the
Company are as follows:
Number Weighted
of Average exercise
Options price
---------- ----------------
Options
Outstanding June 30, 2005 9,470,317 $ 0.93
0.10
Granted 7,233,626 0.00
Exercised --- --
Expired/forfeited (400,000) 0.15
------------ --------
Outstanding March 31, 2006 16,303,943 $ 0.93
============ --------
The total option granted to officers and employees are valued at $539,330, the
total outstanding options of 16,303,943 are exercisable as of March 31, 2006.
d. Stock transactions approved by the shareholders
At the Annual Meeting of the shareholders held on 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 which the corporation shall have authority to issue. The board of
-18-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
directors is authorized to divide the preferred stock into any number of classes
or series, fix the designation and number of shares of each such series or class
and alter or determine the rights, preferences, privileges and restrictions of
each or series of preferred stock
Series A Preferred Stock
The general terms of the Series A Preferred Stock is as follows: No par value;
Liquidation Preference - $0.25 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.005 per share when and as declared by
the Board of Directors; Conversion Rights - convertible to common stock at a 1:1
ratio ; Redemption Rights - the Company has the right to redeem part or all of
the stock upon 30 days written notice at a rate of $0.25 per share plus all
accumulated and unpaid dividends thereon at the dividend rate of $0.005 annually
per share; Voting Rights - one vote per share on all matters requiring
shareholder vote. At March 31, 2006, the Company had 3,047,531 shares of Series
A Preferred stock outstanding valued at $526,506. The Company has recorded a
cumulative dividend of $28,443 for the Series A Preferred stockholders as of
March 31, 2006 in the accompanying financial statements.
Series B Preferred Stock
The general terms of the Series B Preferred Stock is as follows: No par Value;
Liquidation Preference - $0.25 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.0005 per share when and as declared by
the Board of Directors; Conversion Rights - convertible to common stock at a 1:5
ratio (i.e. 1 share of Series B Preferred stock is convertible into 5 shares of
common stock); Redemption Rights - the Company has the right to redeem part or
all of the stock upon 30 days written notice at a rate of $0.25 per share plus
all accumulated and unpaid dividends thereon at the dividend rate of $0.0005
annually per share; Voting Rights - one vote per share on all matters requiring
shareholder vote. At March 31, 2006, the Company had 89,271 shares of Series B
Preferred Stock outstanding valued at $86,888. The Company has recorded a
cumulative dividend of $161 for the Series B Preferred Stockholders as of March
31, 2006 in the accompanying financial statements.
Series C Preferred Stock
The general terms of the Series C Preferred Stock is as follows: No par value;
Liquidation Preference - $1.00 per share plus any unpaid accumulated dividends;
Dividends - cumulative annual rate of $0.0005 per share when as declared by the
Board of Directors; Conversion Rights - 1:20 ratio (i.e. 1 share of Preferred
Series C stock is convertible into 20 shares of common stock); Redemption Rights
- the Company has the right to redeem part or all of the stock upon 30 days
written notice at the rate of $1.00 per share plus all accumulated and unpaid
dividends thereon at the dividend rate of $0.0005 annually per share.; Voting
Rights - one vote per share on all matters requiring shareholder vote. At March
31, 2006, the Company had 17,948 shares of Series C Preferred Stock outstanding
valued at $68,211. The Company has recorded a cumulative dividend of $14 for the
Series C Preferred Stockholders as of March 31, 2006 in the accompanying
financial statements.
The Company has recorded a dividend for preferred shareholders amounting to
$12,043 for the nine month period ended March 31, 2006, and a cumulative
dividend of $28,618 for the preferred stockholders as of March 31, 2006 in the
accompanying financial statements. The Company has entered into agreements with
various vendors and employees to convert their liabilities into the preferred
series of stock.
-19-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. 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 nine month period ended March 31, 2006. The Company paid
$35,104 interest during the nine month period ended March 31, 2006.
The cash flow statements do not include the following non-cash investing and
financing activities:
o The Company issued 8,346,682 common shares for a conversion of $40,826
of convertible debentures.
o The Company issued 5,992,837 common shares for consulting services to
be provided over agreement period, the value of the shares was $669,837
and the unamortized portion of it is $327,293.
o The Company issued 408,264 common shares due to the exercise of
warrants valued at $408,264 to be offset against the lender advance.
o The Company issued 410,000 common shares for the conversion of $70,400
of preferred stocks.
15. COMMITMENTS AND CONTINGENCIES
a) Operating Leases
The Company leases its executive offices to Huntington Beach, California and
entered into a four year lease agreement on July 1, 2004. The agreement contains
a base rent escalation clause. The Company leases its Idaho office facility
under a month-to-month rental agreement at $675 per month. Rent expense for
these operating leases totaled $80,255 for the nine month period ended March 31,
2006.
The future minimum lease payments under non-cancelable leases are as follows as
of March 31, 2006:
2006 $ 92,794
2007 94,490
2008 23,728
---------
$ 211,013
=========
b) Litigation
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against Quintek for $22,661.56 for goods provided. Since 2000, Decision
One (formerly Imation) has been both a vendor to Quintek and a reseller of
Quintek's Q4300 Printers. Quintek filed a counterclaim on August 1, 2004.
Quintek asserts that Decision One used its authority as a dealer of our product
to disparage us, in violation of its dealer agreement with us, and we seek
relief for the hundreds of thousands of dollars in business lost because of it.
On January 11, 2005, the Court granted Judgment for the sum of $21,000 in favor
of the Decision One Corporation. The Court has ruled that Quintek would be
allowed to file the counterclaim under this action, rather than a separate
lawsuit. The Company can appeal the Court's decision and would have until
February 18, 2005 to file the Notice of Appeal. In March 2005, a stipulation
settlement was accepted by the Creditor where they agreed to accept $15,000 in
full satisfaction of their debt. The Company agreed to pay $2,000 upon execution
of the stipulation plus $1,000 for 13 months thereafter. Upon receipt of the
final payment, a Satisfaction of Judgment will be entered in the matter. If the
Company fails to meet the payment schedule, the Creditor, after giving credit
for payments received, shall be allowed to proceed with the full judgment of
$21,000 plus accumulated interest and costs. The Company has recorded the full
amount of judgment of $21,000 and accrued interest in the accompanying financial
statements as of March 31, 2006. In April 2006, the Company made a payment of
$16,827 to satisfy its obligations pursuant to the terms of the judgment.
-20-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
An action which was pending in the Superior Court of the State of California for
Orange County against one of its competitors, a former employee and a former
officer of the Company, has been resolved by mutual agreement. The settlement
includes an injunction which prevents the defendants from soliciting or
initiating contact with 23 accounts until February 28, 2007. There was no
admission or acknowledgment of any wrongdoing by the defendants in stipulating
to the injunction. The plaintiff, Quintek Technologies, Inc., and defendants
Robert Brownell, Chris De Lapp and Document Imaging Technologies, Inc. entered
into a stipulated injunction in the matter which provides, among other things,
that Defendants and all of their respective officers, agents, representatives,
directors, affiliates, employees, successors in interest, and all persons acting
in concert or participating with them, are restrained and enjoined from
soliciting or initiating contact with 23 clients listed in the injunction.
Additionally, the Defendants shall not use, disclose, disseminate or publish in
any manner Quintek's confidential business information and/or trade secrets
including lists of clients, candidates, information regarding contracts or
prospective Quintek contracts with clients and candidates, computer programs,
business plans and strategies, prices, job descriptions, contracts, budgets, and
similar confidential or proprietary materials or information respecting
Quintek's or its clients' or candidates' business affairs, as well as
confidential information of a personal nature of Quintek's and its employees,
managers and officers, without the prior written consent of Quintek.
All other related claims and causes of action were dismissed with prejudice.
16. 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 three month and nine month period ended March 31, 2006 and 2005
are the same since the effect of dilutive securities is anti-dilutive.
17. 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 March 31, 2006, the Company had incurred cumulative
losses of $33,184,504 including a net loss of $2,677,133 for the nine month
period ended March 31, 2006. 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.
-21-
QUINTEK TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 2006, towards (i) obtaining additional equity
financing and (ii) evaluation of its distribution and marketing methods.
18. SUBSEQUENT EVENTS
On April 11, 2006, pursuant to an investment bank agreement, the investor
converted $5,000 of a convertible debenture and was issued 1,183,184 common
shares. In conjunction with this transaction, the investor also exercised 50,000
warrants and had remitted a prepayment of $50,000 on February 23, 2006 for this
exercise of warrants. On April 17, 2006, the Company received a cash remittance
of $60,000 from an accredited investor as an advance against future warrant
exercises. On May 10, 2006, the Company executed a promissory note to an
accredited investor for $50,000 bearing 10% interest per annum, The note is due
six months from the date of issuance, in addition, the Company granted to the
investor 1,500,000 warrants to purchase common stock at $0.0333, expiring May
10, 2009.
-22-
Item 2. Management's Discussion and Analysis
Results of Operations
---------------------
Our revenues totaled $499,879 and $1,728,759 for the three months and nine
months ended March 31, 2006 compared to $408,047 and $844,726 for the same
periods in 2005, respectively. Increases in revenues resulted primarily due to
changing the Company's sales focus to the services business.
Cost of sales for the three months and nine months ended March 31, 2006 were
$329,525 and $1,155,958 compared to $272,650 and $628,904 for the same periods
in 2005, respectively. The increases of $56,875 and $527,054 for the three and
nine months ended March 31, 2006, respectively, in cost of sales consisted
primarily of labor, facility and equipment lease costs relating to the business
outsourcing services, whereas cost of sales during fiscal 2005 consisted
primarily of labor and production costs.
Operating expenses totaled $1,358,494 and $2,946,054 for the three months and
nine months ended March 31, 2006 compared to $444,444 and $5,387,993 for the
same periods in 2005, respectively. The increase of $914,050 for the three
months ended March 31, 2006 compared to the same period in 2005 resulted
primarily due to increased stock based compensation. The decrease of $2,441,939
for the nine month period ended March 31, 2006 compared to the same period in
2005 resulted from controlling officer compensations and consulting costs. The
Company recorded a permanent decline on value of marketable securities of
$2,346,564 during the nine month period ended March 31, 2005, whereas no such
costs were incurred during the same periods in 2006.
Non-operating income and expenses: Other income totaled $3,215 and $12,846 for
the three months and nine months ended March 31, 2006 as compared to $4,129 and
$10,307 for the same periods in 2005, respectively. The Company recorded a loss
on conversion of debt amounting to $0 during the three months and nine months
period ended March 31, 2006 as compared to $ 432,850 and $1,100,420 loss for the
same periods in 2005, respectively. The Company realized a gain of $0 and
$113,700 on sale of investments during the three months and nine months period
ended March 31, 2006 as compared to $0 for the same periods in 2005. The Company
recorded a beneficial conversion feature expense of $13,959 and $110,924 during
the three months and nine months period ended March 31, 2006 as compared to
$107,222 and $135,519 for the same periods in 2005, respectively. Interest
expense totaled $140,421 and $315,457 for the three months and nine months
period ended March 31, 2006 compared to $40,429 and $105,575 for the same
periods in 2005, respectively. Interest expense increased due to the increase in
additional leases financed by the Company and additional interest recorded on
warrant issuances.
During the nine months ended March 31, 2006, the Company billed on 15 contracts
for document services, 13 maintenance contracts, and one network software
renewal compared to the nine months ended March 31, 2005, the Company billed on
nine contracts for document services, 19 maintenance contracts, and one network
software renewal. During the three months ended March 31, 2006 the Company
billed on 9 contracts for document services, no maintenance contracts, and no
network software renewal for document services compared to the three months
ended March 31, 2005, the Company billed on seven contracts for document
services, 15 maintenance contracts, and one network software renewal.
Liquidity and capital resources
-------------------------------
The Company has historically financed operations from the issuance of debt, the
sale of common stock and the conversion of common stock warrants. On March 31,
2006, the Company had cash on hand of $16,858 and working capital deficit of
$2,080,328.
-23-
Net cash used in operating activities totaled $620,015 for nine months ended
March 31, 2006. The net cash used is attributed primarily due to decrease in
accounts receivable, increase in accounts payable and payroll taxes, and
decreases in deferred revenue.
Net cash provided by investing activities totaled $200,699 for the nine months
ended March 31, 2006 primarily due to net proceeds from the sale of marketable
securities.
Net cash provided by financing activities totaled $423,505 for the nine months
ended March 31, 2006, primarily due to net proceeds from sale of shares,
prepayments for exercise of warrants, offset by payments of leases, factoring
payables and notes payable.
The Company believes that the receipt of net proceeds from the issuance of debt,
the sale of the common stock and the exercise of common stock warrants plus cash
generated internally from sales will be sufficient to satisfy our future
operations, working capital and other cash requirements for the remainder of the
fiscal year. However, if the Company is unable to raise sufficient capital, the
Company may need to sell certain assets, enter into new strategic partnerships,
reorganize the Company, or merge with another company to effectively maintain
operations.
-24-
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures. An evaluation as of
March 31, 2006 was performed under the supervision and with
participation of our management, including the chief executive officer
and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that
evaluation, the chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) were effective as of that date
to ensure that the information required to be disclosed by us in the
reports that we file under the Exchange Act is gathered, analyzed and
disclosed with adequate timeliness, accuracy and completeness.
b) Changes in internal controls. There was no change in the Company's
internal controls over financial reporting that occurred during the
period covered by this report that has materially affected, or is
reasonably likely to materially effect, the Company's internal control
over financial reporting.
-25-
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
On April 16, 2004, Decision One Corporation filed suit in the County of Bannock,
Idaho against Quintek for $22,661.56 for goods provided. Since 2000, Decision
One (formerly Imation) has been both a vendor to Quintek and a reseller of
Quintek's Q4300 Printers. Quintek filed a counterclaim on August 1, 2004.
Quintek asserts that Decision One used its authority as a dealer of our product
to disparage us, in violation of its dealer agreement with us, and we seek
relief for the hundreds of thousands of dollars in business lost because of it.
On January 11, 2005, the Court granted Judgment for the sum of $21,000 in favor
of the Decision One Corporation. The Court has ruled that Quintek would be
allowed to file the counterclaim under this action, rather than a separate
lawsuit. The Company can appeal the Court's decision and would have until
February 18, 2005 to file the Notice of Appeal. In March 2005, a stipulation
settlement was accepted by the Creditor where they agreed to accept $15,000 in
full satisfaction of their debt. The Company agreed to pay $2,000 upon execution
of the stipulation plus $1,000 for 13 months thereafter. Upon receipt of the
final payment, a Satisfaction of Judgment will be entered in the matter. If the
Company fails to meet the payment schedule, the Creditor, after giving credit
for payments received, shall be allowed to proceed with the full judgment of
$21,000 plus accumulated interest and costs. The Company has recorded the full
amount of judgment of $21,000 and accrued interest in the accompanying financial
statements as of March 31, 2006. In April 2006, the Company made a payment of
$16,827 to satisfy its obligations pursuant to the terms of the judgment.
An action which was pending in the Superior Court of the State of California for
Orange County against one of its competitors, a former employee and a former
officer of the Company, has been resolved by mutual agreement. The settlement
includes an injunction which prevents the defendants from soliciting or
initiating contact with 23 accounts until February 28, 2007. There was no
admission or acknowledgment of any wrongdoing by the defendants in stipulating
to the injunction. The plaintiff, Quintek Technologies, Inc., and defendants
Robert Brownell, Chris De Lapp and Document Imaging Technologies, Inc. entered
into a stipulated injunction in the matter which provides, among other things,
that Defendants and all of their respective officers, agents, representatives,
directors, affiliates, employees, successors in interest, and all persons acting
in concert or participating with them, are restrained and enjoined from
soliciting or initiating contact with 23 clients listed in the injunction.
Additionally, the Defendants shall not use, disclose, disseminate or publish in
any manner Quintek's confidential business information and/or trade secrets
including lists of clients, candidates, information regarding contracts or
prospective Quintek contracts with clients and candidates, computer programs,
business plans and strategies, prices, job descriptions, contracts, budgets, and
similar confidential or proprietary materials or information respecting
Quintek's or its clients' or candidates' business affairs, as well as
confidential information of a personal nature of Quintek's and its employees,
managers and officers, without the prior written consent of Quintek. All other
related claims and causes of action were dismissed with prejudice
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 18, 2006, February 13, 2006, February 21, 2006 and March 20, 2006,
the Company sold an aggregate of 6,666,666 common shares to five accredited
investors for consideration of $185,000.
On January 23, 2006, the Company issued 1,259,260 common shares valued at
$113,333 to a consultant in consideration for media campaign services. The
common shares were valued at the closing market price of the shares on the date
of issuance.
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On March 6, 2006, the Company issued 333,577 common shares valued at $26,686 to
a consultant in consideration of services pursuant to a consulting agreement.
The common shares were valued at the closing market price of the shares on the
date of issuance.
On March 20, 2006, the Company issued 2,000,000 common shares valued at $140,000
to an accredited investor in exchange for the investor remitting shares to a
third party for settlement of payables. The common shares were valued at the
closing market price of the shares on the date of issuance.
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 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibits
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
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
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
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
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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, thereunto duly authorized.
QUINTEK TECHNOLOGIES, INC.
Date: May 22, 2006 /s/ ROBERT STEELE
--------------------------------------------
Robert Steele, Chairman
and Chief Executive Officer
Date: May 22, 2006 /s/ ANDREW HAAG
--------------------------------------------
Andrew Haag, Chief Financial Officer
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