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 December 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 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]
At February 9, 2006, a total of 134,832,516 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 December 31, 2005
Part I - Financial Information Page
Item 1. Financial Statements (Unaudited). 3
Item 2. Management's Discussion and Analysis or Plan of Operations. 19
Item 3. Controls and Procedures 21
Part II - Other Information
Item 1. Legal Proceedings. 22
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 5. Other Information 24
Item 6. Exhibits. 24
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 46,639
Restricted Cash 255,291
Accounts receivable, net of allowance for doubtful accounts of $7,929 265,756
Prepaid expenses 8,754
------------
Total current assets 576,440
Property and equipment, net 513,320
Other assets:
Deposits 109,578
Other assets 883
------------
110,461
------------
Total assets $ 1,200,221
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 923,144
Factoring payable 202,269
Payroll and payroll taxes payable 318,351
Payroll taxes assumed in merger 96,661
Advances from lenders 155,419
Current portion of long-term debt 467,367
Convertible bonds 62,495
Convertible debentures 210,535
Convertible notes 91,750
Deferred revenue 2,021
Dividend payable 24,604
------------
Total current liabilities 2,554,617
Stockholders' deficit:
Preferred stock, convertible, no par value, 50,000,000 shares authorized,
3,154,750 shares issued and outstanding 681,605
Common stock, $0.01 par value, 200,000,000 shares authorized,
128,073,256 shares issued and outstanding 1,280,732
Additional paid-in capital 29,724,919
Stock subscription receivable (776,250)
Unamortized consulting (294,242)
Unrealized gain on marketable securities (79,741)
Investments held in escrow (51,120)
Accumulated deficit (31,840,298)
------------
Total stockholders' deficit (1,354,395)
------------
Total liabilities and stockholders' deficit $ 1,200,221
============
The accompanying notes are an integral part of these financial statements.
-3-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three months ended For the six months ended
December 31, December 31,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net revenue $ 535,521 $ 322,413 $ 1,228,880 $ 436,679
Cost of revenue 346,808 271,773 826,432 356,253
------------- ------------- ------------- -------------
Gross margin 188,713 50,640 402,448 80,426
Operating expenses:
Selling, general and administrative 537,997 1,381,023 1,203,585 2,221,132
Permanent decline on value of marketable securities -- 2,346,564 -- 2,346,564
Stock-based compensation 313,686 46,549 383,975 408,549
------------- ------------- ------------- -------------
Total operating expenses 851,683 3,774,136 1,587,559 4,976,245
------------- ------------- ------------- -------------
Loss from operations (662,969) (3,723,496) (1,185,112) (4,895,819)
Non-operating income (expense):
Realized gain on investment -- -- 113,700 --
Other income 2,959 2,853 9,631 6,178
Loss on conversion of debt -- (667,570) -- (667,570)
Uncollectible from former officers (2,409) -- (5,026) --
Beneficial conversion feature (44,159) -- (96,966) --
Interest Income 1,344 -- 2,667 --
Interest expense (31,770) (35,330) (175,036) (60,773)
------------- ------------- ------------- -------------
Total non-operating income (expense) (74,034) (700,047) (151,030) (722,164)
------------- ------------- ------------- -------------
Loss before provision for income taxes (737,004) (4,423,543) (1,336,141) (5,617,984)
Provision for income taxes -- -- 800 800
------------- ------------- ------------- -------------
Net loss (737,004) (4,423,543) (1,336,941) (5,618,784)
Dividend requirement for preferred stock 4,015 5,066 8,029 7,879
------------- ------------- ------------- -------------
Net loss applicable to common shareholders (741,019) (4,428,609) (1,344,970) (5,626,663)
Other comprehensive (loss)/gain:
Reclassification adjustment -- -- (4,080) --
Unrealized gain for the period (19,590) -- 9,317 --
------------- ------------- ------------- -------------
Comprehensive loss $ (760,609) $ (4,428,609) $ (1,339,733) $ (5,626,663)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.01) $ (0.06) $ (0.01) $ (0.08)
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) $ (0.06) $ (0.01) $ (0.08)
============= ============= ============= =============
Basic and diluted weighted average
shares outstanding 122,264,778 74,506,311 111,580,803 66,423,928
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
-4-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six-month periods ended
December 31,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net loss $(1,336,941) $(5,618,784)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 85,540 72,026
Discount on factor 4,796 --
Expenses paid by a note payable 36,478 --
Issuance of shares for consulting services 238,697 550,758
Loss on conversion of debt -- 667,570
Shares issued for compensation -- 170,000
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 96,966 --
Amortization of the Unamortized discount 77,489 --
Stock options granted -- 1,500
Warrants granted to consultant 206,798 589,602
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 49,522 (174,170)
(Increase) in other current assets -- (37,849)
(Increase) in prepaid expenses (3,192) --
Increase in accounts payable 121,788 120,395
Increase in payroll taxes payables 116,696 --
(Decrease) in deferred revenue (23,056) --
Increase in dividends payable -- 7,879
Increase in other liablilities -- 51,823
----------- -----------
Net cash used in operating activities (442,120) (825,185)
----------- -----------
INVESTING ACTIVITIES
Acquisition of equipment (13,429) (178,181)
Proceeds from sale of marketable securities 238,018 --
(Increase) in restricted cash (2,666) --
----------- -----------
Net cash provided by investing activies 221,923 (178,181)
----------- -----------
FINANCING ACTIVITIES
Payments on factoring payable (95,279) (93,492)
Proceeds from factor 155,816 --
Proceeds from line of credit -- 250,000
Payments on leases (60,620) --
Proceeds from issuance of debentures -- 425,000
Proceeds from convertible notes -- 170,000
Cash received for shares to be issued -- 25,000
Proceeds from sale of stocks 80,000 --
Prepayments for exercise of warrants 125,000 --
Proceeds from issuance of common stock upon exercise of warrants 59,400 229,967
Payments of notes payable (10,150) (14,657)
----------- -----------
Net cash provided by financing activities 254,167 991,818
----------- -----------
Net increase (decrease) in cash and cash equivalents 33,970 (11,548)
Cash and cash equivalents, beginning balance 12,669 15,600
----------- -----------
Cash and cash equivalents, ending balance $ 46,639 $ 4,052
=========== ===========
The accompanying notes are an integral part of these financial statements.
-5-
QUINTEK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Quintek Technologies, Inc. and Subsidiaries (referred to herein as the
"Company", "Quintek", "Our", or "We") is a California corporation.
Quintek Electronics, Inc., the 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, the Company 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.
2. BASIS OF PRESENTATION
The accompanying unaudited 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 December 31,
2005, the results of operations for the three months and six months ended
December 31, 2005 and 2004, and cash flows for the six months ended December 31,
2005 and 2004. The operating results for the three month and six month period
ended December 31, 2005 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.
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.
-6-
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 six months ended December 31, 2005 was $0 as compared to $73 and $327
for the same periods in 2004, 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. At December 31, 2005, the Company recorded unrealized
loss of $80,681 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 December
31, 2005, the investments have been recorded as shown below based upon the fair
value of the marketable securities.
Marketable securities consisted of the following as of December 31, 2005:
Market Accum. Number of
Investee Name Cost Value at Unrealized Shares Held at
(Symbol) December 31, 2005 Gain December 31, 2005
---------------------------------------------------------------------------------------------------------
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
=========================================================================
For the six months ended December 31, 2005, 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.
-7-
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 $2,021 as of December
31, 2005.
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.
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,
-8-
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
---------------------
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.
In compliance with FAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
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 six month period ended December 31, 2005 and 2004, as follows ($
in thousands, except per share amounts):
Period ended December 31,
2005 2004
------------- -----------
Net loss - as reported $ (1,337) $ ( 5,619)
Stock-Based employee compensation
expense included in reported net
income, net of tax -- --
Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (13) (362)
------------- -----------
Pro forma net loss $ (1,350) $ ( 5,981)
============= ===========
(Loss) per share:
Basic, as reported $ (0.01) $ (0.08)
Diluted, as reported $ (0.01) $ (0.08)
Basic, pro forma $ (0.01) $ (0.09)
Diluted, pro forma $ (0.01) $ (0.09)
-9-
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 second quarter of fiscal 2006.
The Company believes that the adoption of this standard will have no material
impact on its financial statements.
In May 2005, the FASB issued SFAS No. 154, entitled Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. Opinion 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement defines retrospective application as the application of a
different accounting principle to prior accounting periods as if that principle
had always been used or as the adjustment of previously issued financial
statements to reflect a change in the reporting entity. This Statement also
redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error. The adoption of SFAS 154 did not impact
the consolidated financial statements.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 consists of the following:
Scanning Equipment $ 461,836
Computer and office equipment 138,083
Other depreciable assets 102,881
Software 194,523
Furniture and fixture 40,653
---------
937,976
Accumulated depreciation (424,656)
---------
$ 513,320
=========
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.
-10-
The Company opened a certificate of deposit for $250,000 in October 2004. The
Company has accrued interest income of $2,667 for the six months ended December
31, 2005. The Company has recorded $255,291 as restricted cash in the
accompanying balance sheet as of December 31, 2005.
5. EMPLOYEE RECEIVABLES
Employee receivables as of December 31, 2005, consist of the following:
Notes receivable from employees, unsecured,
due on June 30, 2019, interest at 4% $ 261,454
Interest receivable in connection with
above notes receivable 32,729
---------
294,183
Valuation allowance (294,183)
---------
$ -
=========
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
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. 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 will also 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.
There were no purchases of purchase orders during the six months ended December
31, 2005. At December 31, 2005, the Company had a factoring payable balance of
$136,721 associated with this factor. The Company accrued $72,328 for interest
for late payments of factoring payables as of December 31, 2005.
During the six months ended December 31, 2005, the Company entered into an
agreement to factor $160,612 of qualified invoices for a cash remittance
$155,816. As of December 31, 2005, the Company had a factoring payable balance
of $65,548 associated with this factor. The Company recorded $4,796 as interest
expense in the accompanying financial statements as of December 31, 2005.
-11-
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 December 31,
2005. The Company is delinquent on payments of these payroll tax liabilities.
8. LONG TERM DEBT
Loans payable, interest at 7.9% to 20%, due various dates
in 2005 to 2008 (the company is in default for these
loans) $ 321,437
Loan payable, interest at 17.8%, due 2007 24,172
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, monthly installments $404, due July 2005
(the company is in default on this note 1,618
and classified it as current liability)
----------
$ 467,367
==========
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
$855,000 for prepayment of warrants to be exercised as of December 31, 2005. The
agreement expires on August 2, 2006. The accredited investor has exercised
699,581 warrants into common shares valued at $699,581 as of December 31, 2005.
The remaining balance of $155,419 is recorded as advances from lender in the
accompanying financial statements as of December 31, 2005. 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 December 31,
2005.
-12-
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 December 31, 2005, the Holder of the debenture converted
$72,522 of the debenture amount into 10,491,463 common shares of the Company and
exercised 724,581 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 December 31, 2005, the convertible
debenture of $227,479 is presented in the accompanying financial statements net
of the unamortized beneficial conversion feature of $13,959 and unamortized
discount arising from the warrant of $2,985.
Pursuant to addendums to the securities purchase agreement dated February 3,
2005, March 30, 2005, and August 30, 2005, the Company delivered 12,500,000
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 December 31,
2005, 3,000,000 common shares remain in the escrow account.
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 December 31, 2005 is $91,750. The total accrued
interest on the convertible note amounted to $56,884 as of December 31, 2005.
-13-
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 six month period ended December 31, 2005, the Company issued 477,778
common shares upon exercise of warrants and received cash amounting to $34,400;
4,400,000 common shares to consultants for services to be rendered valued at
$529,818 recorded as unamortized consulting; $238,697 of the unamortized
consulting had been amortized and recognized as an expense; 50,000 common shares
to consultant for services rendered valued at $8,000 recorded as shares to be
issued in June 30, 2005, these warrants were recorded in previous year as shares
to be issued.; 2,000,000 common shares to an accredited investor for a stock
sale and collected $80,000 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 a stock subscription receivable; 495,495 common shares pursuant to
conversion of debentures and exercise of warrants to the escrow agent; 5,000,000
common shares pursuant to an addendum to a convertible debenture to a joint
escrow agent upon which shares can only be released pursuant to valid debenture
conversion and warrant exercise. During the six months ending December 31, 2005
$29,021 of the debenture were converted for 5,465,365 common shares and
exercises of warrants to purchase 289,581 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; and 160,000 common shares for conversion of Series B
Preferred stock valued at $30,400.
During the six months ended December 31, 2005, the Company issued 1,292,180
warrants in connection with an investment banking agreement. The Company
recorded $106,672 as expense for the cost of the issuance of such warrants
during the six month period ended December 31, 2005. An additional expense of
$38,607 as of December 31, 2005 was recorded for 305,573 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%
During the six months ended December 31, 2005, the Company recorded $61,519 for
the warrants to be issued for the factor for the purchase of the purchase
orders.
-14-
b. Common Stock Reserved
At December 31, 2005, 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 1,292,180
Expired (1,055,000)
Exercised (767,359)
---------
Outstanding December 31, 2005 14,676,678
Warrants to be issued 8,218,501
----------
Total outstanding 22,895,179
==========
c. Stock Option Agreements
The number and weighted average exercise prices of options granted by the
Company are as follows:
Weighted
Number average
of exercise
Options price
--------- ---------
Options
Outstanding June 30, 2005 9,470,317 $0.93
Granted 312,000 0.10
Exercised - 0.00
Expired/forfeited (400,000) 0.15
--------- ---------
Outstanding December 31, 2005 9,382,317 $ 0.93
========= ---------
The total outstanding options of 9,382,317 are exercisable as of December 31,
2005.
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
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
-15-
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 December 31, 2005, 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 $24,447 for the Series A Preferred
stockholders as of December 31, 2005 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 December 31, 2005, the Company had 89,271 shares of Series
B Preferred Stock outstanding valued at $86,888. The Company has recorded a
cumulative dividend of $146 for the Series B Preferred Stockholders as of
December 31, 2005 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
December 31, 2005, the Company had 17,948 shares of Series C Preferred Stock
outstanding valued at $68,211. The Company has recorded a cumulative dividend of
$11 for the Series C Preferred Stockholders as of December 31, 2005 in the
accompanying financial statements.
The Company has recorded a dividend for preferred shareholders amounting to
$8,029 for the six month period ended December 31, 2005, and a cumulative
dividend of $24,604 for the preferred stockholders as of December 31, 2005 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.
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 six month period ended December 31, 2005. The Company paid
$28,731 interest during the six month period ended December 31, 2005.
-16-
The cash flow statements do not include the following non-cash investing and
financing activities:
o The Company issued 5,465,365 common shares for a conversion of $29,021
of convertible debentures.
o The Company issued 4,400,000 common shares for consulting services to
be provided over agreement period, the value of the shares was $529,818
and the unamortized portion of it is $294,242.
o The Company issued 264,581 common shares due to the exercise of
warrants valued at $264,581 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 $54,819 for the six month period ended December
31, 2005.
The future minimum lease payments under non-cancelable leases are as follows for
the twelve months ended December 31:
2006 $ 92,371
2007 94,066
2008 47,457
---------
$ 233,893
=========
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 amount of Judgment of $21,000
is included in accounts payable and accrued expenses in the accompanying
financial statements as of December 31, 2005. The balance included in the
Accounts payable and accrued expense as of December 31, 2005 is $19,827, the
Company is in default on the payment and is liable for the balance after giving
credit for the payments made.
-17-
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 six month period ended December 31, 2005 and 2004
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 December 31, 2005, the Company had incurred
cumulative losses of $31,840,298 including a net loss of $1,336,941 for the six
month period ended December 31, 2005. 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 December 31, 2005, towards (i) obtaining additional
equity financing and (ii) evaluation of its distribution and marketing methods.
18. SUBSEQUENT EVENTS
On January 5, 2006, the Company received a short term loan of $20,000 from a
shareholder bearing a simple interest rate of 8%. On January 13, 2006, an
accredited investor exercised 3,500,000 warrants for common stock valued at
$105,000, the Company received the funds but the shares remain unissued as of
February 10, 2006. On January 23, 2006, the Company issued 1,259,260 shares of
common stock valued at $113,333 to a media consultant for services. During
January 2006, the Company sold 3,166,666 shares of common stock to accredited
investors and received $80,000 for sale of such shares. 666,666 shares of common
stock remain unissued as of February 10, 2006.
-18-
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
---------------------
The Company's revenues totaled $535,521 and $1,228,880 for the three months and
six months ended December 31, 2005 compared to $322,413 and $436,679 for the
same periods in 2004, respectively. Increase in revenues resulted primarily due
to changing the Company's sales focus to the services business.
Cost of sales for the three months and six months ended December 31, 2005
totaled $346,808 and $826,432 compared to $271,773 and $356,253 for the same
periods in 2004, respectively. The increase of $470,179 for the six month
comparative consisted primarily of labor, facility and equipment lease costs
relating to the business outsourcing services, whereas cost of sales during
fiscal 2004 consisted primarily of labor and production costs. The increase of
$75,035 for the three month comparative consisted primarily of labor, equipment
lease costs relating to the business outsourcing services, whereas cost of sales
during fiscal 2004 consisted primarily of labor and production costs.
Operating expenses totaled $851,683 and $1,587,559 for the three months and six
months ended December 31, 2005 compared to $3,774,136 and $4,976,245 for the
same periods in 2004, respectively. The decrease of $3,388,686 for the six month
comparative resulted from a decrease in sales related expenses, stock-based
compensation for officers, directors, employees and consultants and expenses
relating to marketable securities. The decrease of $2,922,453 for the three
month comparative resulted from a decrease in sales related expenses, expenses
relating to marketable securities.
Non-operating income totaled $2,959 and $9,631 for the three months and six
months ended December 31, 2005 as compared to $2,853 and $6,178 for the same
periods in 2004. The Company recorded a loss on conversion of debt amounting to
$667,570 during the six month period ended December 31, 2004 as compared to $0
loss for the same period in 2005. Non-operating expense totaled $2,409 and
$5,026 for the three months and six months ended December 31, 2005, compared to
$0 for the same periods in 2004. The Company realized a gain of $113,700 on sale
of investments and recorded a beneficial conversion feature expense of $44,159
and $96,966 during the three months and six months period ended December 31,
2005, respectively. Interest expense totaled $31,770 and $175,036 for the three
months and six months ended December 31, 2005 compared to $35,330 and $60,773
for the same periods in 2004, respectively.
During the six months ended December 31, 2005, the Company billed on 10
contracts for document services, 13 maintenance contacts, and one network
software renewal. The Company billed on three contracts for document services,
19 maintenance contracts, and one network upgrade during the six months ended
December 31, 2004.
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 December
31, 2005, the Company had cash on hand of $46,639 and a working capital deficit
of $1,978,177.
Net cash used in operating activities totaled $442,120 for six months ended
December 31, 2005. The net cash used in 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 $221,923 for the six months
ended December 31, 2005 primarily due to net proceeds from the sale of
marketable securities.
-19-
Net cash provided by financing activities totaled $254,167 for the six months
ended December 31, 2005, 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, although we currently do not have any plans, contracts or
commitments for financing and no assurances can be given that financing will be
available on terms the Company deems favorable, or at all. If the Company is
unable to raise sufficient capital, it may need to sell certain assets, enter
into new strategic partnerships, reorganize or merge with another company to
effectively maintain operations.
-20-
Item 3. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. As of December 31,
2005, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and the Chief
Financial Officer of the effectiveness of the design and operation of
the Company's system of disclosure controls and procedures pursuant to
the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and
timely reporting material information required to be disclosed in
reports filed by the Company under the Securities Exchange Act of 1934.
b) Changes in internal controls. There were no changes in internal
controls over financial reporting, known to the Chief Executive Officer
or Chief Financial Officer that occurred during the period covered by
this report that has materially affected, or is likely to materially
effect, the Company's internal control over financial reporting.
-21-
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings that 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 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.
The Company is a party to an arbitration pending before the Judicial Arbitration
and Mediation Services ("JAMS") at 707 Wilshire Blvd., 46th Floor, Los Angeles,
CA 90017 entitled Brownell, Robert vs. Quintek Technologies, Inc., case no.
1200003614 Robert Brownell ("Brownell") and Quintek Technologies, Inc.
("Quintek") are the principal parties. Brownell was employed as President of
Quintek from March 31, 2004 to until he resigned on March 31, 2005. On July 6,
2005, Brownell filed an Arbitration Complaint against Quintek for promissory
fraud, breach of written contract, wrongful constructive termination based on
public policy and invasion of privacy. On or about September 20, 2005, Quintek
filed a Cross-Complaint against Brownell alleging causes of action for breach of
contract, breach of the implied covenant of good faith and fair dealing, breach
of fiduciary duty, breach of duty of loyalty, misappropriation of trade secrets,
common law misappropriation of trade secrets, unfair competition, civil
conspiracy to commit fraud, intentional interference with business
relationships, and constructive trust. Both parties seek damages, punitive
damages, costs of suit incurred and such other relief as the arbitrator deems
proper. The Brownell Arbitration Complaint, the Quintek Arbitration
Cross-Complaint and all pleadings, motions and documents filed with JAMS in
connection therewith are collectively referred to herein as the "Brownell
Arbitration".
The Company is also a party to a JAMS arbitration with Chris de Lapp ("De
Lapp"). On March 15, 2004, De Lapp became employed by Quintek in the capacity of
Senior Account Executive, and on April 4, 2005 was promoted to the position of
Quintek's National Sales Manager, which position he served until he resigned
from Quintek on June 4, 2005. On or about November 28, 2005, Quintek filed an
Arbitration Complaint against De Lapp, JAMS case no. 1220034091, alleging causes
of action for breach of contract, breach of the implied covenant of good faith
and fair dealing, breach of fiduciary duty, breach of duty of loyalty,
misappropriation of trade secrets, common law misappropriation of trade secrets,
-22-
unfair competition, civil conspiracy to commit fraud, intentional interference
with business relationships, and constructive trust. On or about December 8,
2005, De Lapp filed a Cross-Complaint against Quintek in response to the Quintek
Arbitration Complaint, alleging causes of action for breach of contract, account
stated, services rendered, open book account, fraudulent inducement, negligent
misrepresentation and violations of Labor Codes. The Quintek Arbitration
Complaint, the De Lapp Arbitration Cross-Complaint and all pleadings, motions
and documents filed with JAMS in connection therewith are collectively referred
to herein as the "De Lapp Arbitration".
On or about November 29, 2005, Quintek filed a Complaint against Brownell, De
Lapp and Data Imaging Technologies, Inc. ("DIT") in Orange County Superior
Court, case no. 05CC12586, alleging causes of action for breach of contract,
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty, breach of duty of loyalty, misappropriation of trade secrets,
common law misappropriation of trade secrets, unfair competition, civil
conspiracy to commit fraud, intentional interference with business
relationships, and constructive trust (the "Superior Court Action").
After some discovery was conducted in the Brownell Arbitration, Quintek,
Brownell, De Lapp and DIT entered into settlement discussions. After weeks of
settlement negotiations, on Wednesday, February 1, 2006, the parties reached an
agreement to resolve the Brownell Arbitration, De Lapp Arbitration and the
Superior Court Action by way of a settlement agreement and stipulated
injunction. The parties are presently in negotiations as to the final terms of
the written settlement agreement and stipulated injunction, and it is expected
that said agreement shall be signed by or before February 27, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 10, 2005, the Company issued 16,500,000 common shares to an
institutional investor for sale of common stock in consideration of $776,250.
This cash consideration has not been received by the Company as of December 31,
2005.
On November 17, 2005, the Company issued 500,000 common shares to a consultant
in consideration of services valued at $40,000 pursuant to a consulting
agreement.
On November 17, 2005, the Company issued 1,500,000 common shares to an investor
relations firm in consideration of services valued at $120,000 pursuant to a
marketing agreement.
On November 17, 2005, the Company issued 1.800,000 common shares to a consultant
in consideration of services valued at $333,818 pursuant to a consulting
agreement.
On December 1, 2005, the Company issued 250,000 common shares upon conversion of
250,000 shares of Series A Preferred stock.
On December 12, 2005, the Company issued 160,000 common shares upon conversion
32,000 shares of Series B Preferred stock.
On December 22, 2005, the Company issued 600,000 common shares to a consulting
firm in consideration of services valued at $36,000 pursuant to a consulting and
financial advising agreement.
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
-23-
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
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule
15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
-24-
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: February 14, 2006 /s/ ROBERT STEELE
------------------------------------
Robert Steele, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2006 /s/ ANDREW HAAG
------------------------------------
Andrew Haag, Chief Financial Officer
(Principal Financial and Accounting Officer)
-25-