SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997
Commission file number 0-19957
QUANTECH LTD.
(Name of Small Business Issuer in its Charter)
Minnesota 41-1709417
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1419 Energy Park Drive
St. Paul, Minnesota 55108
(Address of Principal Executive Offices; Zip Code)
Issuer's Telephone Number Including Area Code: (612) 647-6370
Securities Registered Under Section 12(b) of the Act: None
Securities Registered Under Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The Issuer's revenues for the fiscal year ended June 30, 1997 were $0.
The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of September 24, 1997, was approximately $ 5,761,833
(based on the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, $.01 par value, outstanding on September 24, 1997:
51,040,759 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
INDEX
PART I Page
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Item 1. Description of Business.................................. 4
Item 2. Description of Property.................................. 20
Item 3. Legal Proceedings........................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...... 21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.. 22
Item 6. Management's Discussion and Analysis or Plan of Operation. 23
Item 7. Financial Statements...................................... 26
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 44
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........ 45
Item 10. Executive Compensation.................................... 46
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 46
Item 12. Certain Relationships and Related Transactions............ 46
Item 13. Exhibits and Reports on Form 8-K.......................... 46
Signatures............................................................... 47
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Summary
Quantech Ltd. ("Quantech" or the "Company") is seeking to commercialize its
proprietary Surface Plasmon Resonance ("SPR") technology for use in the critical
care medical diagnostic market and sublicense its SPR technology to strategic
partners for use in areas outside Quantech's core market. The use of SPR in
Quantech's medical diagnostic system allows for the integration of the existing
diagnostic methodologies of immunoassays, DNA probes and chemical binding into a
single, simple, economical system in order to provide rapid, quantitative,
diagnostic results near the patient. The Quantech system configuration consists
of a bench top instrument and a series of disposables, each offering a
particular test or series of tests. This system is expected to have the ability
to analyze body fluids (e.g., whole blood, urine) without preparation or
addition of reagents by lab technicians, providing hospital physicians faster
test results than obtained from labs.
Excluding home diagnostics, the overall world wide in-vitro diagnostic
market is growing, estimated at $13.2 billion in 1994, and expected to grow to
$17.5 billion by the year 2000. Central labs currently account for the majority
of this market while near patient ("NP") products represent only a small
portion. Introduction of additional NP products, such as Quantech's system, are
expected to cause the NP testing market to gain a larger percentage of the
overall in-vitro diagnostic market. The extent of such market shift will be
affected by the availability of fast, cost effective and quantitative NP testing
products.
Quantech's business strategy is to capitalize on the flexibility,
sensitivity and relatively low cost of its diagnostic system to penetrate the
diagnostic market. Quantech's intended entry into this market will be Critical
Care Units of hospitals, the first unit being the Emergency Department ("ED")
where the most pressing and unmet customer needs are found. The Critical Care
Units represent a significant market as they require a number of rapid
turn-around tests. Although there are some NP tests available for the Critical
Care Units, the Company is not aware of any FDA approved NP testing product that
provides a single instrument that will perform most of the tests required in the
ED. Additionally, minimal competition exists for NP products in the ED from
multinational companies that are focused on the central lab market.
There are approximately 30 commonly ordered tests in the ED, all of which
are ordered STAT (very urgent). Some of the most important diagnostic tests in
the ED are cardiac markers. These tests help to identify whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack). The
Company believes there is no FDA approved product that has the capability of
economically performing NP STAT, whole blood testing with quantitative results.
Quantech's first tests are expected to quantify these markers in less than 10
minutes. Similar results are presently available from the central lab in 45 to
90 minutes.
Quantech believes the benefits of its system over other NP testing systems
will be that the same instrument can be used for a full range of tests and
provide quantitative results. After the initial introduction of tests for
myocardial infarction, the Company intends to introduce additional tests.
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Selection of these tests will be based upon clinical value, ease of development,
regulatory hurdles and profit margins. The Company intends future expansion into
other critical care diagnostic markets which have needs similar to the ED.
To date Quantech has experienced extensive delays in development of its
system and in response to these delays is completing a restructuring of its
organization. Upon completion of this restructuring in early October, the
Company will announce its timetable for market introduction. Although Quantech
believes it has made significant development progress and will be able to
continue this progress, submission of its system to the FDA and introduction to
the market will be influenced by the Company's ability to raise addition
funding, timely completion of the development of its system and necessary
testing for submission to the FDA and delays it may encounter with the FDA in
its review of the system. Although Quantech has met with past delays, the
Company continues to believe that it can complete a rapid and economical
diagnostic testing platform which meets the needs of the critical care
diagnostic market, and will enable Quantech to be competitive in the global
medical diagnostics market.
Strategy
Quantech's objective is to establish its SPR biosensor diagnostic
technology as the standard for Critical Care diagnostic testing, and steadily
expand the number of tests available for its system through the introduction of
additional disposables. To reach that objective, Quantech intends to do the
following:
. Finalize FDA 510(K) work on the instrument and first test
initially configured for the cardiac marker CK-MB.
. Pursue strategic relationships in manufacturing, distribution
and testing applications of Quantech's SPR Technology outside
Quantech's core market.
. Submit 510(K) for CK-MB marker to the FDA for regulatory review.
. Develop test for additional cardiac marker Troponin.
. Submit 510(K) for cardiac marker Troponin to the FDA for
regulatory review.
. Market initial system for detection of cardiac markets CK-MB
and Troponin through strategic partner with established
distribution channels.
. Develop additional markers for other clinically relevant
critical care tests (specifically, pregnancy, therapeutic
drugs such as Digoxin, additional cardiac markers, drugs of
abuse and infectious diseases).
. Market system internationally.
. Develop second generation system for expansion into
additional markets.
Product Description
The Instrument. The Company's first instrument will combine accuracy with
simplicity of use and process one test disposable at a time with one or more
tests per disposable. Subsequently developed instruments may offer more
automation which would provide greater throughput required by larger facilities.
The ability of biosensors to convert biological data into digital signals should
also permit designs that capitalize on future advances in microcomputer
technology.
<PAGE>
The Quantech instrument is designed to fill the anticipated needs of
hospital Critical Care Units, in particular the ED. Most importantly, the
instrument is designed to be compatible with new test disposables when Quantech
introduces them to the market. As a result, when Quantech adds tests through the
introduction of new disposables, its original instrument will accommodate these
various tests without system obsolescence or significant training of ED
personnel.
The instrument is of a size capable of sitting on a bench top or cart so it
can be moved from room to room if necessary. It contains a white light source, a
microprocessor, a number of optical components, a computer screen, keyboard and
an internal and external bar-code reader. When the test disposable is inserted
into the instrument, the internal bar-code reader will identify the type of test
to be performed and contain certain calibration information necessary to
effectively maintain quality control. The instrument computer screen will
display results of a given test and buttons near the screen, a built in keyboard
and/or external bar-code reader will enable the user to enter both a user number
and the patient or specimen ID number. The data or results produced by the
instrument will also be stored on an internal hard drive, thereby allowing the
user to download data to a central computer upon demand, and may be provided on
a hard copy through use of a printer.
The small size and configuration of the instrument will enable it to be
located in the ED or associated satellite lab. It is anticipated that Critical
Care Units such as the ED will have several of these instruments at various
locations. For customers who wish to purchase the instrument, the retail price
is anticipated to be $22,000. There will also be several industry standard
reagent rental programs whereby the instrument will be provided to the hospital
and it may retain the instrument without cost as long as a specified number of
test disposables are purchased.
The Disposable. Quantech's disposable test will consist of an injection
molded plastic carrier containing a metal coated sensor surface. The metallic
surface is overlaid with reagents that react specifically with the analyte to be
identified and measured. One unique planned aspect of the Quantech disposable is
the ability to attach a standard vacutainer tube, complete with its top intact,
to the disposable so that it is easy to use and the user has minimal exposure to
the patient sample. The disposables will be configured identically for all of
the tests manufactured by the Company. The only difference between the
disposables will be the reagents coated on each grating to define the particular
test. One or more tests may be performed on a single disposable providing
Quantech the capability to develop panel related tests by simply adding the
appropriate analytes. Future disposables for certain tests can easily be
configured to handle samples of urine and other body fluids.
A further advantage of Quantech's disposable will be that an operator will
not be required to add reagents. This simplicity translates into easier use and
immediacy of results. Disposables will be configured to provide single tests or
panels of multiple diagnostically-related tests. Because the same disposable
configuration may be used for all tests, manufacturing and quality control costs
should be minimized. The tests are expected to initially have retail prices
ranging from $4.00 to $22.00 per disposable slide. Additional development of the
disposable is currently being conducted and future development will continue to
expand the number of tests that may be performed in general and on each
disposable.
<PAGE>
Comparison of Product Technologies. A number of basic methods, whether
performed manually or by automated instruments, are utilized in diagnostic
testing including immunoassays, DNA probes and chemical reactions. Each of these
testing methods requires the performance of a series of operations by a skilled
technologist. These operations consist of sample preparation, addition of
reagents, further method-specific manipulations, and reading and interpretation
of raw data. Central laboratory automated systems have mechanized, rather than
eliminated many of these steps. Current diagnostic methods are also indirect
measures of the analyte and require the addition of a variety of chemicals. The
Company's technology, in contrast, directly measures the analyte in the sample
with no additional reagents.
Although the requirements of NP testing instruments are clearly defined,
not all NP tests have been able to move away from certain disadvantages of the
central lab, or provide results that are comparable to the central lab.
Quantech's system incorporates NP testing needs and, as a result of its single
test throughput near the patient, is expected to significantly shorten
turnaround time for test results. As such, Quantech's system has been designed
to employ the same basic technologies as those of the central labs, but
simplifies the process to provide the following expected advantages:
o Faster time to test result
o Quantitative result
o Ease of use (independent of operator skill or interpretation of results)
o Competitively priced instrument and disposables
o Rapid operator training
o Compact, reliable instrument
o State of the art sensitivity and specificity
o Whole Blood/closed tube capability
To date, NP testing has been limited to a few tests, most notably blood
gases and electrolytes, glucose and blood coagulation. Technology and quality
control have kept NP tests from being introduced that provide whole blood
quantitative results for the immunoassay market segment (e.g. cardiac makers,
pregnancy, therapeutic drug monitoring, drugs of abuse and infectious diseases),
the market segment representing the greatest growth potential within the NP
testing market.
The Market
General. The medical diagnostics market can be divided into three broad
segments: home diagnostics, the traditional central lab and near patient ("NP")
testing. Excluding home diagnostics, the overall world wide in-vitro diagnostic
market is growing, estimated at $13.2 billion in 1994 and expected to grow to
$17.5 billion by the year 2000. Central labs currently account for the majority
of this market while NP testing represents only a small portion. Introduction of
additional NP testing products, such as Quantech's system, are expected to cause
the NP testing market to gain a larger percentage of the overall in-vitro
diagnostic market. The extent of such market shift will be affected by the
availability of fast, cost effective and efficient NP testing products.
<PAGE>
Near Patient Testing. NP testing represents one of the most rapidly growing
segments of the in-vitro diagnostics market. Part of this growth is a result of
the rising costs of health care that have produced changes in hospital
reimbursement. Pressure has increased to reduce the length of patient stay and
provide a greater portion of services in ambulatory and outpatient settings.
Because the cost of providing care in Critical Care Units far exceeds those of
general medical or surgical units, the primary goal of critical care medicine is
to determine the appropriate care path for a patient so they may be treated,
sent home or moved to a different area of the hospital. Quick determination of
this care path is made possible by rapid, accurate and quantitative clinically
relevant tests.
The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology by identifying the diagnostic
market segment where such technological advantages provide both economic savings
and significant patient benefits. The Company's primary strategy will be to
focus on the critical care diagnostics area. Quantech has identified this area
as one that fulfills both the above criteria. At this time, the large medical
diagnostic testing companies have little presence in this segment as they focus
their resources on the central laboratory. This absence should enable Quantech
to competitively enter the market. However, there is no assurance that the
Quantech system will be accepted by its intended market or that competition from
diagnostic companies will not be forthcoming.
In the Critical Care departments and surgical suites, a wide variety of
testing is now conducted that was formerly restricted to the main laboratory.
For example, tests that were done in the central labs, like blood gases and
electrolytes, are now available as NP tests. Conducting testing in proximity to
the patient provides rapid results and avoids the delays, communication problems
and increased costs often associated with a centralized testing process.
Continued NP testing market growth will be driven by the economic and patient
care advantages NP testing has over central laboratories.
Critical Care. Critical Care is defined as the area where immediate
diagnostic information is needed to effect either the treatment or processing of
a patient. When test results are needed in these areas they must be processed in
a STAT manner, thereby significantly increasing the cost. The solution to this
difficulty is to bring a system of diagnostic methodologies to the patient site
in a manner that will provide test results promptly and accurately.
A part of the Critical Care Unit is the emergency department ("ED"). The
Company believes that there are approximately 30 different diagnostic tests that
require rapid results in the ED. During its first several years of operation,
Quantech intends to develop products primarily focused on the high value
clinically relevant tests required by the ED. Since the needs of the other areas
of critical care are similar to the ED, the Company anticipates that growth into
these other areas will be evolutionary.
Cardiac Markers. Of the tests needed by the critical care segment of the NP
testing market, the Company has selected those tests that the Company believes
will minimize development time and regulatory processes and, most importantly,
satisfy unmet demands of the users. Tests for cardiac markers meet all of these
criteria. These markers are needed to triage and treat individuals that arrive
<PAGE>
at the ED with chest pain. An estimated 5.5 million patients are evaluated for
chest pain annually in the United States with approximately 3 million admitted
to an intensive-care unit for further evaluation. Of those admitted, only 30%
subsequently "rule-in" for acute myocardial infarction ("AMI"). Assuming an
average cost of $3,000 per admission, this represents a total expenditure of $6
billion annually on patients who do not have AMI. This also does not take into
account that 2% to 8% of patients with acute chest pain that are released from
the ED without treatment subsequently fulfill criteria for AMI resulting in
deaths and complications that represent greater than 20% of the malpractice
dollars awarded in the field of emergency medicine.
Not only are costs of admission and malpractice claims an important issue,
but in the past, making a rapid definitive diagnosis of chest pain was not as
important as it is today. When a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within six hours of the onset of a heart attack, it can dissolve the
blood clot, clear arteries and save heart muscle tissue. Because these therapies
are expensive and present undesirable side effects if the patient has not
suffered an AMI, rapid, accurate testing for an AMI is very important.
During an AMI, certain proteins are released from the damaged heart muscle
into the blood stream as a result of damage to the muscle. These proteins are in
varying concentrations and consist of CK-MB, troponin, myosin light chain,
myoglobin and CA-III. To identify patients who have suffered an AMI, tests to
identify these proteins/cardiac markers have become important. Such tests,
however, are most effective if they can be performed in under fifteen minutes in
the ED or mobile care unit so that medical personnel may take immediate action.
Presently, there is no FDA approved method available to provide such results
quantitatively. Most of the existing test modalities require a central
laboratory system that may delay the results beyond their effective need or are
approximate thereby requiring operator interpretation of the results. Quantech's
system is expected to provide emergency personnel with the ability to receive
accurate quantitative results in less than ten minutes.
The high cost of therapy, the urgency of the associated conditions and the
difficulty of a definitive diagnosis create an urgent demand for these cardiac
marker tests in the critical care setting. Quantech has begun to develop the
disposable necessary for its first cardiac marker tests for the ED. This
disposable, and Quantech's related reading instrument, are intended to provide
results in a timely, accurate and economic manner.
The Technology
Biosensors. The Quantech system is a biosensor using the Company's
proprietary Surface Plasmon Resonance ("SPR") technology as its core. A
biosensor is defined as "an analytical device incorporating a biological sensing
element coupled to a suitable transducer that converts biochemical activity into
a measurable form of energy." Almost all analytical systems combine sensing
(i.e., detection) and transducing components. The distinct feature of biosensors
is that the two functions are coupled in a single physical entity. A biosensor's
input is a specific biological event (e.g., binding of an antigen to an
antibody). Its output is a measurable signal that corresponds to the input. A
biosensor's biological component provides specificity, the ability to
selectively recognize one type of chemical or event. Its transducer confers
sensitivity, the ability to transform the very low energy of the biological
event into a measurable signal. In other words, a biosensor converts a
biological event into an electrical signal.
<PAGE>
Surface Plasmon Resonance (SPR) Technology. Surface Plasmon Resonance is an
optical-electrical phenomenon involving the interaction of light with the
electrons of a metal. The optical-electronic basis of SPR is the transfer of the
energy carried by photons of light to a group of electrons (a plasmon) at the
surface of a metal. Quantech's SPR sensor is a disposable slide composed of a
clear plastic base with a fine grating molded into its surface. The grating is
coated with a very thin layer of gold. Gold is used since it does not oxidize
like other metals as oxidation affects the ability of the system to perform the
test. The gold is subsequently coated with binding molecules. The binding
molecules may be antibodies, DNA probes, enzymes or other reagents chosen
because they react exclusively with a specific analyte. The analyte is the
substance being measured and defines the test to be done such as a cardiac
marker.
The coated metal surface interacts with light at a characteristic resonant
wavelength that depends upon the molecular composition at the metal's surface.
When the coated metal is exposed to a sample that contains analyte, the analyte
binds to the metal through its specific interaction with the binding molecules.
As an analyte is bound, the composition at the surface changes and consequently
the resonant wavelength shifts. The magnitude of the change in the resonant
wavelength is proportional to the amount of binding that takes place, which is
proportional to the concentration of the analyte in the sample.
In the Quantech system, an antibody is coated onto the surface of the
grating in the Quantech disposable against a specific antigen such as the
cardiac marker CK-MB. As the antigen is captured by the antibody on the surface
of the grating, the wavelength of light that causes the SPR signal alters in
proportion to the amount of antigen present in the sample. Thus, the shift or
wavelength difference between the initial and final reading by the Quantech
instrument provides the quantitative results.
Quantech's SPR biosensor combines the strengths of biology and physics into
a single entity. Applications of SPR that have been reported in the scientific
literature or explored by the Company include immunoassays for cardiac markers,
hormones, drugs, viruses and bacteria, quantitation of anesthetic gases, and DNA
binding assays. The Company's SPR biosensor technology presents a simple,
unified platform that is capable of performing a wide range of diagnostic tests
and is protected by a number of patents.
Competition
The majority of in-vitro medical diagnostic testing is conducted in
hospital and commercial reference laboratories. These facilities are
particularly suited for efficiently processing a large number of clinical
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single samples, most of the samples handled by
central laboratories are processed in batches. The competitors for this market
have addressed these laboratories' needs for high sample throughput, low reagent
cost and low labor cost by developing automated systems. These systems are
generally complex and expensive, incorporating designs appropriate to the labs
they serve which employ skilled operators who are expected to perform sample
preparation, system calibration and basic instrument maintenance.
<PAGE>
Both the health care providers and their suppliers are heavily committed to
the current central laboratory model. The laboratories are constrained by their
organization structure, their substantial capital investment in instrumentation
and the task of processing a large number of routine (i.e., non-STAT) samples.
The suppliers' corporate infrastructures, marketing and sales organizations,
research and development activities and production capabilities are committed to
this market. Even though the economic savings and medical utility afforded by NP
testing is becoming widely recognized, it is not necessarily immediately
attractive to the most successful laboratories and the strongest suppliers.
There are more than 150 companies serving this central clinical laboratory
market. Most of them compete in only one or two segments of the overall market.
Abbott Laboratories, Boehringer Mannheim, and Johnson & Johnson are notable
exceptions. These companies have achieved their broad market penetration by
developing several technologies, each targeted for the specific needs of a
market segment and focusing their marketing, distribution and sales activities
on the central lab. The NP testing market in general must compete with the
central laboratory to gain market share and, as a result, Quantech will meet
with competition from these companies in both sales of its system and the
individual tests for such system.
There is significant activity in the Critical Care segment of the NP
testing market. The majority of current systems address the areas of
coagulation, blood gas and basic chemistry (including electrolytes). Two such
systems, i-STAT Corp. and Diametrics Medical, which market biosensor instruments
capable of determining blood gas and electrolyte levels have become recognized
NP testing instruments. The Company does not believe current products of i-STAT
or Diametrics are capable, however, of diagnosing analytes that indicate cardiac
markers, pregnancy, infectious diseases or other immunoassay based tests. There
can be no assurance that current or future NP testing companies or current
companies providing instruments to the central laboratory market will not invent
systems that will have broad immunoassay testing capabilities like those
expected by the Company's system.
With respect to testing for cardiac markers to diagnose AMI, most testing
is done in the Central Labs with turnaround time from 45 to 90 minutes. The
Company is aware of only a limited number of companies that provide NP testing
for AMI. Of such companies, Spectral Diagnostics Limited, a Canadian company,
markets a manual method available for certain cardiac markers and Boehringer
Mannheim markets a manual test for troponin T. As configured, neither
Spectral's, Boehringer's nor the other NP AMI tests can provide quantitative
results. In addition, Biosite Diagnostics has announced development of a product
called CareLink, a NP instrument it claims will provide quantitative results.
The first products to be introduced on the CareLink are for cardiac markers, but
a specific market launch date has not been announced. Biosite has stated they
will also provide additional tests for their CareLink system.
The Company believes that there is a need for rapid, accurate and
quantitative measurement of cardiac markers, pregnancy, drugs and other critical
care tests and that such need continues to be unfulfilled. Quantech plans to
<PAGE>
enter the market by serving the unmet needs for quantitative cardiac markers and
to extend its penetration by delivering a full range of high value, clinically
relevant ED tests on a single platform. In doing so, the Company will compete
directly with providers of currently available testing methods. All of the
industry leaders, and many of the other companies participating in the
diagnostic testing market, have substantially greater resources than those
available to the Company, including, but not limited to, financial resources and
skilled personnel. However, the Company believes the SPR technology will enable
it to provide products to the Critical Care STAT testing market, a market
segment believed by the Company to be less competitive.
The Ares-Serono License
The Company has acquired from Ares-Serono at a total cost of $3.4 million a
worldwide exclusive license (the "License"), to certain patents, proprietary
information and associated hardware (e.g. molds, test rigs, prototypes) related
to the SPR technology. The Ares-Serono affiliated companies (the "Ares-Serono
Group"), based in Switzerland, comprise a multinational organization engaged in
the development and marketing of ethical pharmaceuticals and diagnostic
products, primarily in the field of human fertility, human growth, immunology
and virology. The SPR diagnostic technology was developed by a research and
development partnership (the "R&D Partnership"), the General Partner of which
was a company belonging to the Ares-Serono Group.
The License calls for an ongoing royalty of 6 percent on all products
utilizing the SPR technology which are sold by the Company. If the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the payments of the 6
percent royalty and the sublicense royalty fail to reach at least $1,000,000 by
December 31, 1997, an additional payment of $150,000 by December 31, 1997 will
be required. The Company has paid to date $850,000 of $1,000,000 required under
the license. If such payment is not made, Ares-Serono has the right to cause a
reversion to Ares-Serono of a royalty-free license, thereby depriving the
Company of its exclusive rights under the License. The obligations of Quantech
to pay royalties terminate when the total royalty payments reach a gross amount
of $18 million. After such date, Quantech's rights in the licensed SPR
technology continue in perpetuity with no further obligations to Ares-Serono.
Ares-Serono specifically reserved, and did not license to Quantech, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the License is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
technology for applications outside the field of the commercial interests of the
Company. Finally, Ares-Serono has retained the right to further develop the SPR
technology, provided, however, that any products commercialized from such
development may only be sold through Ares-Serono under its name. Quantech is
unaware of any attempts by Ares-Serono to further develop the SPR technology.
<PAGE>
Patents and Proprietary Rights
The Ares-Serono license covers a total of eight patents. The two principal
patents covering the SPR technology gratings, one patent covering cellulose
nitrate films and one covering calibration notches have been granted in the
United States, Canada, Australia and Europe and all but one of the grating
patents have been issued in Japan. These patents are awaiting examination in
Great Britain. Three of the remaining four patents are either issued or pending
in the United States, Canada, Australia, Europe, Japan and Great Britain. The
remaining patent which is not critical to the Quantech system has been granted
in Great Britain. All developments by the Company pursuant to the License,
either proprietary or patentable in nature, will be the property of the Company.
The Company has made a number of advances that it intends to patent. Because the
Company's licensed patents do not expire in less than ten years and Quantech
intends to file additional patents, the Company believes that it has the
opportunity to complete development of its product, establish a market position
and seek additional patents on improvements and related technologies. No
assurance can be given, however, that other companies will not develop
technologies substantially equivalent to those owned, or to be developed, by the
Company or that granted or pending and to filed patents, if granted, will
protect the Company's technology.
Government Regulation
The Company believes that the products it initially proposes to manufacture
and market will be classified as medical devices and will therefore be subject
to regulation by the United States Food and Drug Administration (the "FDA") and,
in some instances, by foreign government authorities. Under the 1976 amendments
to the Federal Food, Drug and Cosmetics Act (the "FFDCA") and regulations
promulgated thereunder, manufacturers of medical devices must comply with
certain regulations governing the testing, manufacturing and packaging of
medical devices. Under the FFDCA, medical devices are subject to different
levels of testing and review. The most comprehensive level of review requires
that a clinical evaluation program be conducted before a device receives
premarket approval by the FDA for commercial distribution. As a manufacturer of
medical devices, the Company will also be subject to certain other FDA
regulations, and its manufacturing processes and facilities will be subject to
periodic inspection, without warning, to ensure compliance. Comparable agencies
in certain states and foreign countries will also regulate the Company's
activities. The Company's products could be subject to recall by the FDA or the
Company itself, if it appears that the products and their use do not conform to
regulations.
Generally, medical devices intended for human use that are to be marketed
in the United States are placed in one of three regulatory classifications
depending upon the degree of testing and review to which the device will be
subject. The Company expects that its products will not be subjected to the
highest level of scrutiny because they are in-vitro (outside of the body)
diagnostic devices which do not come into contact directly with a living human
being. Specifically, the systems would be classified as either Class I or Class
II devices as distinct from implantable devices, which are classified as Class
III devices.
<PAGE>
The Company believes that premarket clearance can be obtained for its
initial system and tests through submission of a 510(K) premarket notification
("510(K) Notification") demonstrating the product's substantial equivalence to
another device legally marketed pursuant to 510(K) Notification clearance. The
FDA may also require, in connection with the 510(K) Notification, that it be
provided with the test results supporting this claim. The FDA may further
require, in connection with the 510(K) Notification, that it be provided with
test results demonstrating the safety and efficacy of the device. Under certain
circumstances, such clinical data can be obtained only after submitting to the
FDA an application for an Investigational Device Exemption ("IDE").
For new products that are not considered to be "substantially equivalent"
to an existing device, two levels of FDA approval will probably be required
before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve the Company's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to the
Company a Premarket Approval ("PMA"). The FDA should grant a PMA if it finds
that the product complies with all regulations and manufacturing standards. In
addition, the FDA may require further clinical evaluation of the product, or it
may grant a PMA but restrict the number of devices distributed or require
additional patient follow-up for an indefinite period of time. Completion of
this process could take up to 12 months and involve significant costs. The
Company believes it is unlikely that it will be required to obtain a PMA with
respect to any of its currently proposed products, except where mandated by the
FDA such as HIV, cancer and hepatitis detection tests. Any claims of panel
diagnostics are subject to a PMA procedure. The Company anticipates that it will
make claims in reference to its cardiac markers. These claims will be made after
the products are marketed with only single claim implications. Accordingly, the
products should not be delayed in their initial introduction. If a PMA is
required for the Company's initial system and CK-MB test, introduction of the
initial system likely would be significantly delayed, which could have a
material adverse effect on the Company.
Research and Development
For the year ended June 30, 1997, the year ended June 30, 1996, and the
period from September 30, 1991 (date of inception) to June 30, 1997, the Company
spent $2,114,586, $991,701 and $4,645,705, respectively, on research and
development of its medical diagnostic system. The Company will continue to spend
funds on final development of its system, development of additional tests and
research and development related to future products.
Manufacturing
The Company does not presently have any manufacturing capabilities. The
Company intends to manufacture its test disposable and will outsource the
manufacture of its instrument. Such third party manufacturer has not yet been
engaged by the Company.
Employees
The Company employs 11 people on a full-time basis and engages consultants
and independent contractors to provide services related to the development of
the SPR technology. The Company expects to hire other personnel as necessary for
FDA work, sales and marketing, manufacturing and administration, including a
CEO.
<PAGE>
Legal Proceedings
The Company is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operations.
CAUTIONARY STATEMENTS
The Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual operations and cause such operations to differ
materially from those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company:
Immediate and Future Capital Needs
The Company does not have sufficient funds to complete development of its
system, submit its system to the FDA or commence commercial production and sales
of its system. The Company's ability to continue as a going concern, complete
its system, submit its system to the FDA and commence sales will depend upon the
continued availability of investment capital, funding made by strategic
partner(s) or licensing revenues, until the revenues from sale of the
instruments and associated test disposables are sufficient to maintain
operations. Additional funds will have to be immediately raised through equity
or debt financing. There can be no assurance that any additional financing can
be obtained on favorable terms, if at all. Such additional financing may result
in dilution to Company shareholders and/or additional debt to the Company. If
funding is not available immediately and in the future when needed, the Company
may be forced to cease operations and abandon its business. In such event,
Company shareholders could lose their entire investment.
No History of Operations; Development Stage Company; Going Concern Uncertainty
To date, the Company does not have a product ready to be brought to market
and has experienced significant delays in completing development, but is
continuing research and development on its prototype and associated test
disposables. Accordingly, the Company has no operating history and its proposed
operations are subject to all of the risks inherent in a new business
enterprise, including commercial development of its products, lack of marketing
experience and lack of production history.
The likelihood of the success of the Company must be considered in light of
the expenses, difficulties and delays frequently encountered in connection with
the start-up of new businesses, those historically encountered by the Company,
and the competitive environment in which the Company will operate. The Company
has not had any significant revenues to date. As of June 30, 1997, the Company
<PAGE>
had an accumulated deficit of $14,408,300. The report of the independent
auditors on the Company's financial statements for the period ended June 30,
1997, includes an explanatory paragraph relating to the uncertainty of the
Company's ability to continue as a going concern. The Company is a development
stage company which has suffered losses from operations, requires additional
financing, and ultimately needs to successfully attain profitable operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. There can be no assurance that the Company will be able to
develop a commercially viable product or marketing system or attain profitable
operations.
New Product Development
The Company's reading instrumentation and associated disposables are under
development. Such development is being conducted by the Company using both
internal resources and outside contractors. To date, the Company and certain of
its outside contractors have not met their development timetables and budgets.
No assurance can be given that the Company's current development timetable can
be met, that the budget for development will be maintained, or that development
efforts will be successful.
Uncertainty of Market Acceptance
The commercial success of the Company's products will depend upon their
acceptance by the medical community and third-party payers as useful, accurate
and economical. Market acceptance will depend upon several factors, including
the establishment of the utility and cost-effectiveness of the Company's tests,
the receipt of regulatory clearances in the United States and elsewhere and the
availability of third-party reimbursement. The availability of NP test systems
for a wide variety of tests has been limited to date. The Company is thus
targeting an emerging market. Diagnostic tests similar to those developed by the
Company are generally performed by a central laboratory at a hospital or clinic.
The approval of the purchase of diagnostic equipment by a hospital is generally
controlled by its central laboratory. The Company expects there will be
resistance by central laboratories to yield control of tests they have
previously performed. The company will also have to demonstrate to physicians
that its diagnostic products perform as intended, meaning that the level of
accuracy and precision attained by the Company's products must be comparable to
test results achieved by the central laboratory systems. Failure of the
Company's products to achieve market acceptance or third-party payer approval
would have a material adverse effect on the Company.
Lack of Marketing Experience
The Company has had no experience in marketing its system. Quantech intends
to market its product in both the United States and in foreign markets through a
strategic partner with an established distribution system, but no assurance can
be given that such an arrangement can be made. If the Company markets directly,
it believes that the ED market is focused enough so that a small sales and
marketing force can produce significant results. There is no guaranty, however,
that Quantech's sales and marketing plan will succeed.
<PAGE>
Lack of FDA Product Approval
The Company's products will be regulated as medical devices by the Food and
Drug Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and as such require premarket regulatory clearance before
commercialization in the United States. The Company believes that premarket
clearance can be obtained for its systems, except for a few tests the Company
may introduce at a later time, through submission of a 510(K) premarket
notification ("510(K) Notification") demonstrating the product's substantial
equivalence to another device legally marketed pursuant to 510(K) Notification
clearance. The Company will have to perform in-house clinical trials designed to
produce the data necessary to demonstrate the substantial equivalence of its
instrument and tests. Although 510(K) submissions are supposed to be completed
by the FDA within 90 days of submission, there can be no assurance the FDA will
approve the Company's initial system pursuant to a 510(K) Notification, or do so
in a timely manner, and therefore there can be no assurance that the Company
will be able to introduce its initial system in the United States within its
anticipated time frame. If the Company cannot establish to the satisfaction of
the FDA that its products are substantially equivalent, the Company will have to
seek premarket approval ("PMA") of its system, requiring submission of a PMA
application supported by extensive data to prove safety and efficacy. If a PMA
is required, introduction of the initial system likely would be significantly
delayed, which could have a material adverse effect on the Company. By
regulation, FDA review of PMA applications is required within 180 days of its
acceptance for filing; however, reviews more often occur over a significantly
protracted period, usually 12 to 18 months, and a number of products have never
been cleared.
Limited Manufacturing and Production Experience
To be successful the Company must manufacture its products in compliance
with regulatory requirements, in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing costs. The
Company will have to establish a manufacturing facility, or contract with a
third party for manufacturing, which is registered with the FDA. Production of
the Company's disposables requires the placement of antibodies or other binding
reagents on metalized sensor surfaces. The chemical and physical conditions for
coating are substantially equivalent to those used to produce other solid state
binding assays. Although the Company believes that its production methods will
be effective for manufacturing its disposables, there can be no assurance that
the methods will be applicable to all the tests it expects to develop or that
the Company will be able to manufacture accurate and reliable products in large
commercial quantities on a timely basis and at an acceptable cost. Inability to
manufacture a full range of diagnostic tests would limit the Company's access to
its intended market.
Competition
The diagnostic testing market is highly competitive. As NP testing markets
expand, the Company expects that manufacturers of central and STAT laboratory
testing equipment will compete to maintain their revenue and market share and
that new NP testing products will be developed. All of the industry leaders and
many of the other companies participating in this market have substantially
greater resources than the resources available to the Company, including, but
not limited to, financial resources and skilled personnel.
<PAGE>
Technological Obsolescence
The Company operates in a market characterized by rapid and significant
technological change. While the Company is not aware of any developments in the
medical industry which would render the Company's current or planned products
less competitive or obsolete, there can be no assurance that future
technological changes or the development of new or competitive products by
others will not do so. To remain competitive, the Company must continually make
substantial expenditures for development of both equipment and disposables.
Obtaining Antibodies and Chemistries
Many of the chemistries that will be necessary for the Company's diagnostic
system must be obtained through commercial suppliers or agreements for the
licensing of such chemistries. Although the Company believes it can obtain the
necessary chemistries, there can be no assurance that the Company will be able
to make satisfactory arrangements to provide its customers with as wide a
variety of products as they might desire. The lack of a sufficient number of
chemistries would greatly limit the Company's ability to market its diagnostic
system.
Patent Protection
No assurance can be given that other companies will not develop
technologies substantially equivalent to those owned or to be acquired or
developed by the Company or that the Company will be able to protect its
proprietary technology. The Company is not aware of any issued patents that
would prohibit the use of any technology the Company currently has under
development. However, patents may exist or issue in the future to other
companies covering elements of the Company's systems. The existence or issuance
of such patents may require the Company to make significant changes in the
design of its systems or operational plans. Although the Company believes that
its proposed products will not infringe patent rights of others, there can be no
assurance that such infringement does not, or will not, exist with respect to
the completed product. The Company has not conducted an independent patent
search or evaluation with respect to the SPR technology. Ares-Serono, the
licenser to the Company of its basic SPR technology, has made no warranties as
to the enforceability of any of its patents or the commercial potential of the
technology. Although Ares-Serono has the obligation to defend the patents they
have licensed to the Company, Quantech will be responsible for the defense of
any patents issued to it. Cost of defending patents can be substantial.
Dependence on the Ares-Serono License
The Company is dependent upon the worldwide license (the "License") it
acquired from Ares-Serono to certain patents, proprietary information and
associated hardware (e.g. molds, test rigs, prototypes) related to the SPR
technology. The Ares-Serono affiliated companies (the "Ares-Serono Group"),
based in Switzerland, comprise a multinational organization engaged in the
<PAGE>
development and marketing of ethical pharmaceuticals, primarily in the field of
human fertility, human growth, immunology and virology. The License calls for an
ongoing royalty of 6 percent on all products utilizing the SPR technology which
are sold by the Company. If the Company sublicenses the technology, the Company
will pay a royalty of 15 percent of all revenues received by the Company under
any sublicense. To date, the Company has paid $850,000. If the payments of the 6
percent royalty and the sublicense royalty fail to reach at least $1,000,000 by
December 31, 1997, an additional payment of $150,000 by December 31, 1997 will
be required. If such payment is not made, Ares-Serono has the right to cause a
reversion to Ares-Serono of a royalty-free license, thereby depriving the
Company of its exclusive rights under the License. The obligations of Quantech
to pay royalties terminate when the total royalty payments reach a gross amount
of $18 million. After such date, Quantech's rights in the licensed SPR
technology continue in perpetuity with no further obligations to Ares-Serono.
Ares-Serono specifically reserved, and did not license to Quantech, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the License is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
technology for applications outside the field of the commercial interests of the
Company. Finally, Ares-Serono has retained the right to further develop the SPR
technology, provided, however, that any products commercialized from such
development may only be sold through Ares-Serono under its name. Quantech is
unaware of any attempts by Ares-Serono to further develop the SPR technology.
Government Regulation
If the Company becomes a provider of health care diagnostic devices as
intended, the Company will be subject to laws and regulations administered by
federal, state and foreign governments. The degree of regulation and areas of
concern differ in each country or region. The Company will be required to comply
with regulations regarding product approval and performance and, in addition,
regulations concerning electronic devices. The industry in which the Company
expects to operate is subject to frequent regulatory changes and there can be no
assurance that the Company will be able to comply with applicable regulations.
In the event of noncompliance, the Company may be unable to market any products.
Changes in Management
In June 1997, R.H. Joseph Shaw resigned as the Company's chairman,
president and chief executive officer and subsequently resigned as a director.
Mr. Shaw remains a consultant to the Company. The Company is seeking a new chief
executive officer with a strong background in operating a commercial diagnostics
company. In the interim, Robert Case, a director of the Company, has been
elected to serve as the chief executive officer of Quantech. James Lyons was
elected chairman of the Company's board. In July 1997, Gregory G. Freitag, the
Company's CFO, assumed the additional position of Chief Operating Officer. Mr.
Freitag had also previously held the position of Executive Vice President of
Corporate Development. The Company also accepted the resignations of Michael P.
Nagel, formerly Director of Sales and Marketing, and Todd L. Jensen, formerly
Director of Chemistry Development. In addition, the Company completed a
workforce reduction during the summer of 1997. As of September 24, 1997 the
total number of full-time employees was 11. Although the Company believes it
maintains a core group of employees sufficient for it to effectively continue
its operations, there can be no assurance that these changes will not have an
adverse effect on operations and future development.
<PAGE>
Possibility of Exposure to Product Liability Claims
The Company could be exposed to risk of product liability claims or other
lawsuits in the event of incorrect diagnosis utilizing the SPR equipment and
disposables developed by the Company. Although the Company will evaluate
obtaining liability insurance when the products come to market, there can be no
assurance that the Company will be able to obtain or maintain such insurance or
that the Company will not be subject to claims in excess of its insurance
coverage.
Absence of Dividends
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and the Board of Directors presently intends to retain all
earnings for use by the Company for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors and will depend upon a number of factors,
including among others, earnings of the Company, the operating and financial
condition of the Company, the Company's capital requirements, and general
business conditions.
Shares Eligible for Future Sale
All but 3,365,000 shares of the Company's outstanding Common Stock may be
sold in the public market. In addition 20,604,080 of a total of 23,035,403
shares that may be obtained upon exercise of outstanding options and warrants
may be sold in the public market if and when exercised. The sale of a
substantial number of the shares available for sale or shares underlying options
and warrants could adversely affect the market price and liquidity of the
Company's securities.
Limited Market for Securities
There is a limited trading market for the Company's Common Stock, which is
not listed on any stock exchange or NASDAQ. Although trading in the Company's
Common Stock does occur on a consistent basis, the volume of shares traded has
been sporadic. There can be no assurance that an established trading market will
develop, the current market will be maintained or a liquid market for the
Company's Common Stock will be available in the future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space (comprised of approximately 6,800 sq. ft.)
at 1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent of
approximately $5,000 pursuant to a lease arrangement which expires February,
2000 and will thereafter proceed on a month-to-month basis. The Company will
require at least 15,000 sq. ft. of space prior to commercial manufacturing of
its system. The Company will review its space needs prior to product
commercialization.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the local over-the-counter and the
National Association of Securities Dealers Bulletin Board markets under the
symbol QQQQ. At September 24, 1997, the Company had approximately 525
shareholders of record and the bid, asked and closing sale prices of its Common
Stock were $0.115, $0.125 and $0.125, respectively. The following table
summarizes the quarterly high and low sale prices for the Company's Common Stock
for the prior two fiscal years.
High Low
--------------- -------------
Fiscal 1996
First Quarter $0.34 $0.187
Second Quarter $0.81 $0.50
Third Quarter $1.06 $0.50
Fourth Quarter $1.625 $0.68
Fiscal 1997
First Quarter $1.09 $0.59
Second Quarter $0.96 $0.46
Third Quarter $0.66 $0.38
Fourth Quarter $0.41 $0.20
The Company has never paid a cash dividend on its Common Stock. Payment of
dividends is at the discretion of the Board of Directors. The Board of Directors
plan to retain earnings, if any, for operations and does not intend to pay
dividends in the near future.
In June 1997 the Company sold 365,000 shares of its Common Stock at $.30
per share to an accredited investor. The shares were sold pursuant to Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"). The purchaser
of such Common Stock acquired these securities for its own account and not with
a view to any distribution thereof to the public.
Also in June and July 1997, the Company completed an offering of
Convertible Secured Promissory Notes in the principal amount of $1,095,000 to
accredited investors and issued warrants in connection with the sale of such
notes to the investors for the purchase of 3,285,000 shares of Common Stock. The
sales were made in reliance upon exemptions from registration provided under
Section 4(2) of the 1933 Act and Rule 506 of Regulation D. The Company paid
commissions and accountable expenses in the aggregate amount of $84,949 to a
registered investment bank for acting as selling agent and issued the investment
bank a warrant to purchase up to 232,800 shares of Common Stock as additional
compensation. Such warrant was sold pursuant to Section 4(2) of the 1933 Act.
The purchasers of these notes and warrants acquired these securities for their
own account and not with a view to any distribution thereof to the public.
<PAGE>
Finally, in September 1997, Quantech was finalizing an agreement that
issues 3,000,000 shares and warrants to purchase 1,650,000 shares of Common
Stock to an accredited investor. The sales were made in reliance upon exemptions
from registration provided under Section 4(2) of the 1933 Act. The securities
were obtained by the accredited investors for their own account and not with a
view to any distribution thereof to the public.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
History
Quantech Ltd. ("Quantech" or the "Company") was formed under the laws of
Minnesota for the purpose of effecting the change of domicile of Spectrum
Diagnostics S.p.A ("SDS") from Italy to the state of Minnesota through the
merger with SDS on April 14, 1993. Quantech had no operations prior to the
merger and is continuing the business of SDS to commercialize Surface Plasmon
Resonance ("SPR") technology licensed from Ares-Serono. SPR, the core technology
of Quantech's proposed medical diagnostic system, enables the Company to
integrate the existing diagnostic methodologies of immunoassays, DNA probes and
chemical binding into a single, simple economical system in order to provide
rapid, quantitative, diagnostic results. The Quantech system configuration will
consist of a bench top instrument and a series of disposable slides with
multiple tests per disposable. It is anticipated that the Quantech system will
have the ability to analyze body fluids (e.g. whole blood, urine) without
preparation or addition of reagents. The Company plans to first market its
system and related disposables to hospital Critical Care Units, initially the
Emergency Department. Its first test will aid physicians in assessing whether a
patient has suffered a heart attack.
Quantech is a development stage company which has suffered losses from
operations and will require additional financing to complete development, obtain
FDA approval and commercialize its product. The Company's product development
must be completed, FDA approval obtained, the product introduced to the market
and ultimately Quantech will need to successfully attain profitable operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
Results of Operations
The Company has incurred a net loss of $14,408,300 from September 30, 1991
(date of inception) through June 30, 1997 due to expenses related to formation
and operation of SDS in Italy, continuing costs of raising capital, normal
expenses of operating over an extended period of time, funds applied to research
and development, royalty payments related to the SPR technology, losses due to
expenses of Quantech's predecessor, Spectrum Diagnostics Inc. and interest on
borrowed funds. In addition, an investment of $3,356,629 was made when Quantech
purchased the rights to the SPR technology.
For the year ended June 30, 1997 the Company had interest income of $80,854
compared to $42,038 for the 1996 fiscal year as a result of higher cash on hand
<PAGE>
obtained from Quantech's private placements. General and administration expenses
increased from $1,218,674 for the year ended June 30, 1996 to $1,516,737 for the
year ended June 30, 1997. The increase in Quantech's general and administration
expenses in fiscal 1997 was a result of additional personnel, and costs
associated with such personnel, severance expenses, and increased public
relations costs including those associated with pursuing additional short and
long term funding.
Research and development costs increased from $991,701 in 1996 to
$2,114,586 in 1997. This increase is a result of accelerated research and
development activity including hiring of employees and consultants, purchasing
of chemistry supplies, and engaging firms to perform contract development work,
including producing sensor gratings and design engineering on Quantech's
disposable and instrument.
The Company incurred sales and marketing expenses of $282,380 for the year.
There are no comparative periods for such expenditures as the Company began its
sales and marketing activity during 1997. Sales and marketing activity consisted
of market research, including attending the winter symposium of Emergency
Physicians, integrating user requirements into the system designs and preparing
the Quantech marketing plan. As a result of the completion of the Company's
market research and marketing plan, the Company has suspended significant sales
and marketing activity at least until it submits its system to the FDA.
Minimum royalty expense decreased in 1997 as compared to 1996 as a result
of the declining minimum royalties owed under Quantech's license with
Ares-Serono. Financing expenses decreased in 1997 as compared to 1996 as a
result of lower average debt during the year. Financing expenses are expected to
increase in 1998 due to an increase in debt as a result of the Company's sale of
convertible promissory notes in June 1997 and the need for additional capital.
For the year ended June 30, 1997 Quantech had a loss of $3,925,460 as
compared to $2,396,963 for the same period ended June 30, 1996. This increase
was a result of the rise in research and development and general and
administrative expenses in 1997 exceeding decreases in such period in minimum
royalty and financing expenses and the increase in interest income.
In June 1997 the Company began to restructure its operations to reduce
expenses and focus its resources on completing development of its diagnostic
system. Current general and administrative and research and development spending
is below the 1997 rate, and sales and marketing expenses are at a minimal level.
The Company anticipates that operating expenses will increase significantly when
it completes development of its system and begins its FDA work, product
manufacturing and distribution, and development of additional disposable tests
for its system.
The Company has made significant progress in the development of its system,
but this progress has been much slower than anticipated. Although Quantech has
been able to complete prototype systems that demonstrate that its SPR technology
does work to detect certain conditions, it has not been able to achieve
reproducible results at sensitivity levels necessary for quantitative analysis
<PAGE>
throughout the entire required clinical range for its initial test. Quantech's
development is focused upon the system reproducibility and sensitivity necessary
for FDA approval and market acceptance. After such development is complete, the
next major step will be to submit its system to the FDA for approval. In
addition to development activity, the Company is in discussions with potential
strategic partners regarding the sublicensing of Quantech's technology outside
of its core medical area, research and development collaborations for medical
and industrial applications of Quantech's technology, distribution of its system
once developed and device manufacturing. The timetable for submitting the
Company's system to the FDA and introduction to the market will be influenced by
the Company's ability to obtain further funding, enter into strategic
relationships, complete prototype development of its system, necessary testing
for submission of its FDA filing and delays it may encounter with the FDA in its
review of the system. There can be no assurance that the Company will be able to
obtain the required funding, enter into any strategic agreements or ultimately
complete its sytem.
Liquidity and Capital Resources
From inception to June 30, 1997, Quantech has raised approximately
$16,600,000 through a combination of public stock sales and private sales of
stock and debt obligations. The Company estimates that it has funds to continue
current operations through October 1997. Additional funds will be needed after
that date to continue operations, including obtaining FDA approval, establishing
sales and marketing and production capabilities, and beginning any significant
sales of the Company's product once development is completed. There can be no
assurance that the Company will obtain additional capital when needed or that
additional capital will not have a dilutive effect on current shareholders.
Although the Company has a limited lending arrangement with its bank, it does
not anticipate receiving significant funding from lenders. See "Cautionary
Statements - Immediate and Future Capital Needs."
During June and July 1997, Quantech received $1,006,000 of net proceeds as
a result of a private placement of convertible notes (the "Notes") and warrants
(the "Warrants"). The Notes will be due and payable on June 1, 1998 or earlier
upon Quantech completing a transaction that provides it with a minimum of
$5,000,000. Interest on the Notes is 13.5%, and the Notes are secured by all of
the assets of the Company. For each dollar invested in the Note the investor
received a Warrant to purchase three shares of Quantech Common Stock at an
exercise price equal to the lower of $0.35 or 80% of the market price of the
Company's Common Stock for: (i) the 20 consecutive trading days prior to the
issuance of the Warrant or June 1, 1998, or (ii) the price at which the
transaction which triggers repayment of the Notes is completed. The principal
amount of the Notes are convertible into shares of the Company's Common Stock at
a price equal to, and calculated in the same manner as, the Warrant Exercise
Price with the exception that there is no $.35 maximum.
Quantech incurred capital expenditures of approximately $99,000 in fiscal
1997. Current capital spending is running below this rate, however, the Company
anticipates significantly higher capital expenditures for laboratory and
production equipment and office expansion as the Company nears product
introduction. The timing and amount of such expenditures will be governed by the
Company's development and market introduction schedules which are subject to
change due to a number of factors including development delays, FDA approval and
availability of future financing. In addition to capital expenditures, the
Company has a final minimum royalty payment of $150,000 due to Ares-Serono on
December 31, 1997.
<PAGE>
The Company currently has outstanding 51,040,759 shares of Common Stock. It
also has options and warrants outstanding to purchase an additional 23,035,403
shares.
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as follows:
Page
---------
Financial Statements for Fiscal Years 1997 and 1996
Independent Auditors Report........................................ 27
Balance Sheets as of June 30, 1997 and 1996........................ 28
Statements of Operations For the Period from Inception
(September 30, 1991) through June 30, 1997 and for the Years Ended
June 30, 1997 and 1996............................................. 30
Statements of Stockholders' Equity (Deficit) For the Period
from Inception (September 30, 1991) through June 30, 1997.......... 31
Statement of Cash Flows For the Period from Inception
(September 30, 1991) through June 30, 1997 and for the Years
Ended June 30, 1997 and 1996...................................... 33
Notes to Financial Statements...................................... 36
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and the
Board of Directors
Quantech Ltd.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Quantech Ltd. (A Development
State Company) as of June 30, 1997 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1997 and 1996, and the period from September 30, 1991 (date of
inception), to June 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quantech Ltd. (A Development
Stage Company) as of June 30, 1997 and 1996, and the results of its operations
and its cash flows for the years ended June 30, 1997 and 1996, and the period
from September 30, 1991 (date of inception), to June 30, 1997, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company which has
suffered losses from operations, requires additional financing, and ultimately
needs to successfully attain profitable operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Minneapolis, Minnestoa
July 17, 1997
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, 1997 and 1996
ASSETS (Note 3) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 718,893 $ 2,942,871
Debt issue costs 78,699 -
Prepaid expenses 35,452 41,269
-------------------------------------
Total current assets 833,044 2,984,140
-------------------------------------
Property and Equipment
Equipment 329,780 268,058
Leasehold improvements 15,000 15,000
-------------------------------------
344,780 283,058
Less accumulated depreciation 139,267 78,657
-------------------------------------
205,513 204,401
-------------------------------------
Other Assets
License agreement, at cost, less amortization (Note 4) 2,096,558 2,320,334
Patents 8,895 -
Organization expenses, at cost, less amortization 113 4,675
-------------------------------------
2,105,566 2,325,009
-------------------------------------
$ 3,144,123 $ 5,513,550
=====================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 1,070,000 $ 24,455
Accounts payable 100,794 114,934
Accrued expenses:
Minimum royalty commitment (Note 4) 112,500 -
Spectrum Diagnostics, Inc. obligations (Note 8) 36,509 53,637
Payroll and vacation 54,226 -
Accrued severance 77,265 -
Other 14,704 -
-------------------------------------
Total current liabilities 1,465,998 193,026
-------------------------------------
Long-Term Obligations
Minimum royalty commitment (Note 4) - 37,500
-------------------------------------
Commitments and Contingencies (Notes 4, 5, and 8)
Stockholders' Equity (Deficit) (Notes 2, 3, and 6)
Common stock, $0.01 par value; authorized 90,000,000 shares;
shares outstanding, 48,040,759 and 46,900,759 in 1997
and 1996, respectively 480,408 469,008
Additional paid-in capital 15,606,017 15,296,856
Deficit accumulated during the development stage (14,408,300) (10,482,840)
-------------------------------------
1,678,125 5,283,024
-------------------------------------
$ 3,144,123 $ 5,513,550
=====================================
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996, and Period From September 30, 1991 (Date of
Inception) to June 30, 1997
September 30,
1991 (Date of
Inception) to
Years Ended June 30 June 30,
-------------------------------------
1997 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 80,854 $ 42,038 $ 170,781
---------------------------------------------------------
Expenses:
General and administrative 1,516,737 1,218,674 7,658,208
Research and development 2,114,586 991,701 4,645,705
Sales and marketing 282,380 - 282,380
Minimum royalty expense (Note 4) 75,000 125,000 962,500
Losses resulting from transactions with Spectrum
Diagnostics, Inc. (Note 8) - - 556,150
Net exchange gain - - (67,172)
Financing 17,611 103,626 498,715
---------------------------------------------------------
4,006,314 2,439,001 14,536,486
---------------------------------------------------------
Loss before income taxes (3,925,460) (2,396,963) (14,365,705)
Income taxes (Note 7) - - 42,595
---------------------------------------------------------
Net loss $ (3,925,460) $ (2,396,963) $ (14,408,300)
=========================================================
Loss per common share $ (0.08) $ (0.07)
Weighted average common shares outstanding 47,318,280 31,991,150
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From September 30, 1991 (Date of Inception) to June 30, 1997
Deficit
Common Stock Accumulated
-------------------- Additional Paid For, During the Cumulative
Shares Par Value Paid-In But Not Subscriptions Due From Development Translation
Issued Amount Capital Issued Receivable Officers Stage Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at inception - $ - $ - $ - $ - $ - $ - $ -
Net loss - - - - - - (594,620) -
Common stock transactions:
Common stock issued, October 1991 3,200,000 3,154,574 - - - - - -
Common stock issued, November 1991 600,000 611,746 1,788,254 - - - - -
Common stock issuance costs - - (889,849) - - - - -
Cumulative translation adjustment - - - - - - - 387,754
----------------------------------------------------------------------------------------------
Balance, December 31, 1991 3,800,000 3,766,320 898,405 - - - (594,620) 387,754
Net loss - - - - - - (2,880,988) -
Common stock transactions:
Common stock issued, September 1992 700,000 699,033 875,967 - (53,689) - - -
Common stock issuance costs - - (312,755) - - - - -
160,000 shares of common stock to
be issued - - - 120,000 - - - -
Officer advances, net - - - - - (27,433) - -
Cumulative translation adjustment - - - - - - - (209,099)
Elimination of cumulative translation
adjustment - - - - - - - (178,655)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1992 4,500,000 4,465,353 1,461,617 120,000 (53,689) (27,433) (3,475,608) -
Net loss - - - - - - (996,089) -
Common stock transactions:
Common stock issued, January 1993 160,000 1,600 118,400 (120,000) - - - -
Common stock issued, April 1993 30,000 300 11,700 - - - - -
Change in common stock par value
resulting from merger - (4,420,353) 4,420,353 - - - - -
Repayments - - - - - 5,137 - -
-----------------------------------------------------------------------------------------------
Balance, June 30, 1993 4,690,000 46,900 6,012,070 - (53,689) (22,296) (4,471,697) -
Net loss - - - - - - (1,543,888) -
240,000 shares of common stock to
be issued - - - 30,000 - - - -
Repayments - - - - 53,689 22,296 - -
-----------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Period From September 30, 1991 (Date of Inception) to June 30, 1997
Deficit
Common Stock Accumulated
-------------------- Additional Paid For, During the Cumulative
Shares Par Value Paid-In But Not Subscriptions Due From Development Translation
Issued Amount Capital Issued Receivable Officers Stage Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 4,690,000 46,900 6,012,070 30,000 - - (6,015,585) -
Net loss - - - - - - (2,070,292) -
Common stock issued, June 1995 2,150,000 21,500 276,068 (30,000) (20,000) - - -
Warrants issued for services - - 40,200 - - - - -
-----------------------------------------------------------------------------------------------
Balance, June 30, 1995 6,840,000 68,400 6,328,338 - (20,000) - (8,085,877) -
Net loss - - - - - - (2,396,963) -
Common stock issued, net of issuance
costs of $848,877:
July 1995 6,160,000 61,600 1,304,450 - - - - -
August 1995 717,600 7,176 161,460 - - - - -
September 1995 13,807,296 138,073 2,370,389 - - - - -
November 1995 1,897,840 18,978 425,482 - - - - -
December 1995 11,217,157 112,172 1,292,473 - - - - -
May 1996 6,275,000 62,750 3,300,422 - - - - -
June 1996 5,058 51 3,650 - - - - -
Payment received on subscription
receivable (19,192) (192) (14,808) - 20,000 - - -
Compensation expense recorded on
stock options - - 125,000 - - - - -
-----------------------------------------------------------------------------------------------
Balance, June 30, 1996 46,900,759 469,008 15,296,856 - - - (10,482,840) -
Net loss - - - - - - (3,925,460) -
Stock offering costs - - (12,310) - - - - -
Common stock issued upon exercise of
options and warrants:
September 1996 10,000 100 2,400 - - - - -
October 1996 170,000 1,700 40,800 - - - - -
November 1996 15,000 150 3,600 - - - - -
December 1996 270,000 2,700 64,800 - (57,500) - - -
January 1997 20,000 200 4,800 - - - - -
February 1997 150,000 1,500 17,250 - - - - -
March 1997 140,000 1,400 33,600 - - - - -
Payments received on subscription
receivable - - - - 57,500 - - -
Compensation expense recorded on
stock options - - 48,000 - - - - -
Common stock issued, June 1997 365,000 3,650 105,850 - - - - -
Warrants issued with notes payable - - 371 - - - - -
-----------------------------------------------------------------------------------------------
Balance, June 30, 1997 48,040,759 $480,408 $15,606,017 $ - $ - $ - $(14,408,300) $ -
===============================================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996, and Period From September 30, 1991 (Date of
Inception) to June 30, 1997
September 30,
1991 (Date of
Inception) to
Years Ended June 30 June 30,
-------------------------------------
1997 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (3,925,460) $ (2,396,963) $ (14,408,300)
Adjustments to reconcile net loss to net cash used
in operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 60,610 37,400 185,621
Amortization 228,338 238,926 1,356,617
Noncash compensation and interest 48,000 187,050 537,250
Losses resulting from transactions with
Spectrum Diagnostics, Inc. (Note 8) - - 556,150
Write-down of investment - - 67,500
Changes in assets and liabilities, net of
effects from purchase of
Spectrum Diagnostics, Inc.:
Decrease in prepaid expenses 5,817 72,390 40,986
Increase (decrease) in accounts payable (14,140) (670,187) 99,239
Increase (decrease) in accrued expenses 204,067 (647,270) 569,328
---------------------------------------------------------
Net cash used in operating activities (3,392,768) (3,178,654) (11,174,264)
---------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (99,097) (187,711) (421,538)
Proceeds on disposition of property 37,375 - 37,375
Organization expenses - - (97,547)
Patent expenses (8,895) - (8,895)
Officer advances, net - - (109,462)
Purchase of investment - - (225,000)
Purchase of license agreement - - (1,950,000)
Advances to Spectrum Diagnostics, Inc. - - (320,297)
Prepaid securities issuance costs (78,699) - (101,643)
Purchase of Spectrum Diagnostics, Inc., net of
cash and cash equivalents acquired - - (1,204,500)
---------------------------------------------------------
Net cash used in investing activities (149,316) (187,711) (4,401,507)
---------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997 and 1996, and Period From September 30, 1991 (Date of
Inception) to June 30, 1997
September 30,
1991 (Date of
Inception) to
Years Ended June 30 June 30,
-------------------------------------
1997 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net proceeds from the sale of common stock
and warrants 215,061 6,676,125 12,880,797
Proceeds on debt obligations 1,070,000 30,555 3,728,435
Payments received on stock subscription receivables 57,500 5,000 5,000
Payments on debt obligations (24,455) (406,720) (522,810)
---------------------------------------------------------
Net cash provided by financing
activities 1,318,106 6,304,960 16,091,422
---------------------------------------------------------
Effect of Exchange Rate Changes on Cash - - 203,242
---------------------------------------------------------
Net increase (decrease) in cash (2,223,978) 2,938,595 718,893
Cash
Beginning 2,942,871 4,276 -
---------------------------------------------------------
Ending $ 718,893 $ 2,942,871 $ 718,893
=========================================================
Cash Payments for Interest $ 6,925 $ 49,736 $ 140,096
=========================================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Acquisition of Spectrum Diagnostics, Inc.
(Note 8):
Cash purchase price, less $5,199 cash
acquired $ - $ - $ 1,204,500
=========================================================
Fair value of other assets acquired,
principally the license agreement $ - $ - $ 1,489,500
Liabilities assumed - - (285,000)
---------------------------------------------------------
$ - $ - $ 1,204,500
=========================================================
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997 and 1996, and Period From September 30, 1991 (Date of
Inception) to June 30, 1997
September 30,
1991 (Date of
Inception) to
Years Ended June 30 June 30,
-------------------------------------
1997 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities (Continued)
Advances to Spectrum Diagnostics, Inc. (Note 8) $ - $ - $ 20,000
Prepaid security issuance costs (acquired from
Spectrum Diagnostics, Inc.) ultimately used
to reduce proceeds from the sale of
common stock - - 58,830
Due from Ital-American Securities, Inc. - - (674,374)
Stock issuance costs to be paid - - 237,201
Subscriptions receivable offset by accrued
compensation - - 53,689
Officer advances offset by accrued compensation - - 109,462
Issuance of debt obligation for services and
accounts payable - - 40,200
Issuance of warrants for services - - 90,000
=========================================================
Common stock issued/to be issued for:
Services and interest $ - $ 62,050 $ 274,050
Subscriptions receivable - (15,000) 5,000
Debt obligations - 2,227,500 2,318,125
Accounts payable - - 40,000
Accrued expenses - 293,451 360,394
---------------------------------------------------------
$ - $ 2,568,001 $ 2,997,569
=========================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of Minnesota, for the purpose of effecting the change in domicile of
Spectrum Diagnostics, S.p.A. (SDS) from Italy to the state of Minnesota through
a merger with SDS on April 14, 1993. The merger has been accounted for as if it
were a pooling of interests and, accordingly, all prior financial statements
include SDS. The Company's fiscal year end is June 30 and SDS' fiscal year end
was December 31.
The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize the Surface Plasmon Resonance (SPR) technology.
Commercialization will consist of developing and introducing an instrument which
will run various tests capable of diagnosing various human health conditions,
and which the Company intends to market to the world medical diagnostic
industry. The Company anticipates that it will grant trade credit to future
customers on credit terms it establishes with individual customers.
A summary of the Company's significant accounting policies follows:
Cash equivalents: The Company maintains its cash in bank deposit and money
market accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. As of June 30, 1997,
cash equivalents include approximately $652,000 invested in money market funds.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating the fair value of each class of financial
instruments:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short maturity of those instruments.
Short-term debt: The fair value of the Company's short-term debt is estimated
based on interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities with similar collateral
requirements. At June 30, 1997, cost approximated fair value.
Debt issue costs: Costs to issue debt are amortized over the life of the debt.
Other assets: The license agreement is being amortized by the straignt-line
method over the remaining life of the related patents of 15 years (Note 4).
Organization expenses are being amortized by the straignt-line method over 5
years. Costs of obtaining patents are capitalized and will be amortized over
their useful life.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company reviews its intangible assets quarterly to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows provided by operating activities of the business. Should
the sum of the expected future net cash flows be less than the carrying value,
the Company would determine whether an impairment loss should be recognized. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the intangible. Fair value will be determined
based on estimated expected future discounted cash flows. To date, management
has determined that no impairment of intangible assets exists.
Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over five years, or the life of the
lease, whichever is less.
Income taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Research and development: The Company contracts with certain outside parties for
the design and development of its product in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Loss per common share: Loss per common share is computed based upon the weighted
average number of common shares outstanding during the period. Primary and fully
diluted loss per common share are the same amounts for all periods presented.
The FASB has issued Statement No. 128, Earnings Per Share, which supersedes APB
Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants, and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per-share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The adoption of Statement No. 128 would have had no effect on reported earnings
(loss) per share.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
Translation of foreign currency statements: Prior to September of 1992, the
functional and reporting currency for SDS was the Italian lire. Concurrent with
the receipt of net proceeds from its initial public offering of common stock in
the United States in September 1992, and in connection with the phase out of its
Italian operations, the functional and reporting currency of SDS changed from
the Italian lire to the United States dollar. As a result, the cumulative
translation adjustment component of equity was eliminated in 1992.
Note 2. Basis of Presentation
The Company was incorporated for the purpose of acquiring, developing, and
commercializing SPR technology for use in medical diagnostics. The Company has
had no sales, and the only revenue generated by the Company since its inception
has been interest income.
The Company is a development stage company which has suffered losses from
operations, requires additional financing, and ultimately needs to successfully
attain profitable operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not reflect any adjustment which might be necessary should the Company not
remain a going concern.
The Company does not have sufficient funds to remain a going concern, or to
complete development of and bring its instrument and disposables to commercial
production, without immediate funding from equity or debt financing. Management
is working to obtain this needed funding. In addition, management is exploring
strategic partner relationships to provide intellectual resources and/or
licensing revenues. There is no assurance that additional financing or
relationships can be obtained.
Note 3. Short-term Debt Obligations
Short-term debt obligations as of June 30, 1997 and 1996, are as follows:
1997 1996
13.5% convertible secured promissory notes,
payable June 1998, secured by substantially
all of the Company's assets $1,070,000 $ -
Others, paid in 1997 - 24,455
-------------------------
$1,070,000 $ 24,455
=========================
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 3. Short-term Debt Obligations (Continued)
In June 1997, the Company completed an offering of secured promissory notes of
$1,070,000 to accredited investors and issued three warrants for every $1 of
principal in connection with the sale of such notes to the investors for the
purchase of 3,210,000 shares of common stock. In addition, the selling agent
also received warrants to purchase 232,800 shares of common stock. All warrants
issued were valued at $371. The notes are convertible into shares of common
stock at a price equal to 80 percent of the market price of the common stock for
(i) the 20 consecutive trading days prior to the issuance of the notes or June
1, 1998, or (ii) the price at which the transaction which triggers repayment of
the notes is completed. The warrants exercise price is calculated in the same
manner as the notes conversion price, except the exercise price is limited to a
maximum of $0.35.
Note 4. Agreements
License agreement: The Company has a license agreement for certain patents,
proprietary information, and associated hardware related to the SPR technology.
The license calls for an ongoing royalty of 6 percent on all products utilizing
the SPR technology which are sold by the Company. In addition, if the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the cumulative
payments of these two royalties fail to reach at least $500,000 by December 31,
1993, $850,000 by December 31, 1995, and $1,000,000 by December 31, 1997, then
each time one of such benchmarks is not met the licensor has the right to
deprive the Company of its exclusive rights under the license agreement. As of
June 30, 1997, the Company has paid $850,000 of the cumulative payment. The
Company has also ratably accrued additional minimum royalty payments of $112,500
as of June 30, 1997, because sales or sublicense revenues through December 31,
1997, may not be adequate to meet the cumulative minimum royalty payments. The
Company intends to accrue the entire $150,000 by December 31, 1997.
The obligations of the Company to pay royalties terminates when the total
royalty payments reach a gross amount of $18,000,000, which amount would be
increased by $2,000,000 each time a benchmark is not met. After such date, the
Company's rights in the licensed SPR technology continue in perpetuity with no
further royalty obligations.
Employment agreements: The Company has the following employment agreements with
various officers:
<TABLE>
<CAPTION>
Annual
Officer Term Expires Compensation
<S> <C> <C> <C>
Executive Vice President of Research and Development 3 years 04/30/98 $125,000
Chief Financial Officer 2 years 12/01/97 125,000
Executive Vice President of Manufacturing 1 year 10/28/97 105,000
Senior Director of Engineering 1 year 02/01/98 100,000
</TABLE>
All employment agreements are subject to adjustments and bonuses as may be
determined by the Board of Directors. In the event the employment agreements are
terminated for any reason by the Company, other than for cause as defined in the
agreements, the officers would receive compensation for the greater of (i) the
salary due under the remaining terms of the agreement or (ii) one year's salary.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 5. Leases
The Company leases its office space under an agreement which expires February
28, 2000. Approximate minimum aggregate rental commitments under this lease are
as follows:
Years ending June 30:
1998 $ 43,500
1999 38,000
2000 26,000
Rental expense for the years ended June 30, 1997 and 1996, and the period from
September 30, 1991 (date of inception) to June 30, 1997, was approximately
$68,000, $82,000, and $443,000, respectively.
Note 6. Stockholders' Equity
Capital stock: The Company has authorized 120,000,000 of capital shares
consisting of 90,000,000 common shares and 30,000,000 undesignated shares.
Common stock placements: During the year ended June 30, 1996, the Company
completed three private offerings of its common stock. From July to September
1995, the Company received net proceeds of approximately $2,883,000 from a
private placement of units at $1.00 per unit. In November 1995, the Company
received net proceeds of approximately $430,000 also from the private placement
of $1.00 units. Each unit consisted of four (4) shares of Company common stock
and a warrant to purchase one share of common stock at $0.25 per share. In May
1996, the Company completed its third private offering of 6,275,000 shares of
common stock at $0.60 per share, resulting in net proceeds of approximately
$3,363,000.
Debt conversions: In September and December 1995, the Company converted
approximately $2,565,000 of convertible debentures and related accrued interest
to shares of common stock. The debentures conversion prices were $0.125 to $0.25
per share.
Options and warrants: The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Had compensation cost for the Company's stock option and warrant
grants been determined based on the fair value at the grant date for awards in
1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
1997 1996
Net loss, as reported $(3,925,460) $(2,396,963)
Net loss, pro forma (4,197,373) (2,462,865)
Net loss per share, as reported (0.08) (0.07)
Net loss per share, pro forma (0.09) (0.08)
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net loss for future years because
options vest over several years and additional awards generally are made each
year.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6. Stockholders' Equity (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996:
1997 1996
Expected dividend yield $ - $ -
Expected stock price volatility 71.63% 76.14%
Risk-free interest rate 6.0% 6.0%
Expected life of options (years) 3 3
Transactions involving stock options and warrants during the two years ended
June 30, 1997, are summarized as follows:
Weighted
Stock Average Exercise
Warrants Options Price Per Share
Balance, June 30, 1995 6,072,603 - $ 0.20
Granted 5,977,500 3,725,000 0.31
Exercised - - -
Expired - - -
--------------------------------------------------
Balance, June 30, 1996 12,050,103 3,725,000 0.27
Granted 3,442,800 1,123,500 0.43
Exercised (455,000) (320,000) 0.23
Expired (250,000) (218,315) 0.48
--------------------------------------------------
Balance, June 30, 1997 14,787,903 4,310,185 $ 0.31
==================================================
The weighted average fair value of options and warrants granted during 1997 and
1996 was $0.36 and $0.16, respectively. The following tables summarize
information about stock options and warrants outstanding as of June 30, 1997:
OPTIONS AND WARRANTS OUTSTANDING
Weighted
Average
Number of Remaining Weighted
Range of Units Contractual Average
Exercise Price Outstanding Life Exercise Price
$0.12-$0.125 2,278,000 2.5 $ 0.12
$0.25-$0.35 14,494,903 3.5 0.27
$0.55-$0.90 2,307,685 3.3 0.68
$5.40 17,500 0.2 5.40
---------- -----------
19,098,088 $ 0.31
========== ===========
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6. Stockholders' Equity (Continued)
OPTIONS AND WARRANTS EXERCISABLE
Number of Weighted
Range of Units Average
Exercise Price Exercisable Exercise Price
$0.12-$0.125 2,278,000 $ 0.12
$0.25-$0.35 14,018,803 0.27
$0.55-$0.90 1,626,462 0.69
$5.40 17,500 5.40
---------------------------------------
17,940,765 $ 0.30
=======================================
Compensation expense related to stock option grants was $48,000 in 1997 and
$125,000 in 1996.
In July 1997, additional stock options to purchase 2,500,000 shares of common
stock were granted to employess. These options vest over a two-year period and
have an exercise price of $0.25. In addition, the Company reduced the exercise
price on all options granted to employees (approximately 943,500 shares) to
$0.25.
Note 7. Income Taxes
The Company's income tax expense consists solely of a franchise tax in Italy
during the year ended December 31, 1992, as the Company has incurred no United
States income taxes. For United States income tax purposes, under provisions of
the Internal Revenue Code, the Company has approximately $8,963,000 in operating
loss carryforwards and $208,000 in research and development credits at June 30,
1997, which may be used to offset otherwise future taxable income. These
carryforwards are subject to certain limitations under the provisions of the
Internal Revenue Code, Section 382, which relates to a 50 percent change in
control over a three-year period. The annual net operating loss carryforward
limitation due to Section 382 is approximately $200,000 per year, which reduced
the carryforward by $2,800,000. The Company has "post change" carryforwards of
approximately $5,934,000 that are not limited. Further changes of control may
result in the additional expiration of a portion of the remaining carryforward
before it can be used and are also dependent upon the Company attaining
profitable operations in the future.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Taxes (Continued)
Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 1997, have the following
expiration dates:
Net Research and
Expiration Operating Development
Date Loss Credits
2006 $ 241,000 $ -
2007 1,115,000 -
2008 827,000 20,000
2009 849,000 26,000
2010 - 45,000
2011 2,193,000 -
2012 3,738,000 117,000
----------------------------------------
$ 8,963,000 $ 208,000
========================================
The tax effects of principle temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
June 30
1997 1996
Loss carryforwards $ 3,047,000 $ 1,800,000
Royalties 38,000 -
Research and development credits
and deductions 414,000 296,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 59,000 43,000
Other accruals (10,000) -
----------------------------------------
Gross deferred tax assets 3,663,000 2,254,000
Valuation allowance for deferred tax assets (3,663,000) (2,254,000)
----------------------------------------
$ - $ -
========================================
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
June 30, 1997 and 1996, due to the valuation allowance recorded against deferred
tax assets.
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 8. Spectrum Diagnostics, Inc.
During 1991, SDS acquired substantially all of the assets of Spectrum
Diagnostics, Inc. (SDI) for 1,200,000 shares of SDS common stock plus the
assumption of certain SDI liabilities and guarantees.
As a result of its merger with SDS (see Note 1), Quantech now guarantees payment
of certain SDI liabilities previously guaranteed by SDS. SDI expects to sell an
investment it has in Quantech's common stock, the proceeds of which are expected
to be used to pay certain of SDI's obligations, but are not expected to be
sufficient to pay the entire amount guaranteed by Quantech.
Quantech has accrued its estimated loss which may result should SDI be unable to
pay the obligations discussed above. The Company has recorded a liability of
approximately $37,000 as of June 30, 1997.
Note 9. Subsequent Event
Subsequent to year end, the Company was in process of finalizing an agreement to
issue 3,000,000 shares of the Company's common stock, convertible secured
promissory notes totaling $550,000, and warrants to purchase 1,650,000 shares of
common stock in return for the cancellation of certain license agreements.
The convertible secured promissory notes carry an interest rate of 13.5 percent,
are payable June 1998, and are convertible into shares of common stock at a
price of the lesser of $0.35 per share or a price equal to 80 percent of the
market price of the common stock for (i) the 20 consecutive trading days prior
to the issuance of the notes or June 1, 1998, or (ii) the price at which the
transaction which triggers repayment of the notes is completed.
The warrants exercise price is calculated in the same manner as the notes
conversion price, except the maximum price is limited to $0.25.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The names, ages and positions of the Company's executive officers are as
follows:
Name Age Position
Robert Case 52 Chief Executive Officer (interim) and Director
Gregory G. Freitag 35 Chief Financial Officer, Chief Operating Officer
and Director
Robert R. McKiel, Ph.D. 54 Executive Vice President-Research and Development
Robert Case has been interim Chief Executive Officer since June 1997 and a
director since October 1996. He founded Case + Associates, Inc. in 1978 and has
been its President since such time. Case + Associates is a leading consultant in
the research, design, development and engineering of medical products. Its
consulting activities include work for major multinational, as well as
development stage, medical companies in the design of products from diagnostic
instrumentation and implantable devices to surgical instruments. He has served
as a Chairman of the Industrial Designers Society of America, and was a member
of its national Board of Directors. Mr. Case has also been a longtime member of
the Biomedical Marketing Association. In addition, Mr. Case conducts both US and
European seminars in product definition and development for Frost & Sullivan,
the Society of Plastics Engineers, the Society for the Advancement of Medical
Packaging Institute and Northwestern University. His educational background
includes product design, engineering and marketing at Syracuse University, the
Illinois Institute of Technology and DePaul University.
Gregory G. Freitag has been Chief Financial Officer and Secretary of the
Company since December 1995 and Chief Operating Officer since July 1997, having
previously held the position of Executive Vice President of Corporate
Development. From 1987 until joining the Company Mr. Freitag was a lawyer with
the Minneapolis, Minnesota law firm of Fredrikson & Byron, P.A. As a shareholder
with Fredrikson & Byron, he practiced in the corporate, securities and merger
and acquisition areas of law. Mr. Freitag has his J.D. and CPA, has served on
securities advisory committees to the Minnesota Commissioner of Commerce, is
included in the Minnesota Business Guide to Law & Leading Attorneys, and
received from City Business its "40 Under 40" award recognizing Mr. Freitag as
one of the Twin Cities' next generation of business and community leaders.
Robert R. McKiel, Ph.D., has been Executive Vice President-Research and
Development since 1992. From 1984 to 1987, Dr. McKiel served as Vice President
<PAGE>
of Amersham International, a large medical company, based in the United Kingdom.
From 1987 until joining the Company he served as a consultant to various
companies in the medical diagnostics industry, including Ares-Serono and
Boehringer Mannheim Corporation. In that capacity, he has been involved in a
variety of projects including the design of a clinical immunochemistry analyzer,
implementation of a GMP (Good Manufacturing Practices) program for a clinical
device manufacturer and a redesign of a pharmaceutical quality control program.
He earned his baccalaureate degree in organic chemistry at the University of
Notre Dame and a doctorate in biological chemistry at the University of
Illinois. After completion of his post-doctoral residency in clinical chemistry
at the University of Illinois Medical Center, he joined the Illinois Medical
Center staff. From 1973 to 1979, he served as an assistant Director of the
University of Illinois Hospital Laboratories and as head of Radioimmunoassay
Laboratory, held various faculty appointments, and taught in the departments of
Biological Chemistry and Pathology. In 1979, Dr. McKiel joined Amersham
Corporation to establish a U.S. based technical support system for the company's
products, and to enhance Amersham's effectiveness in the design and marketing of
new products in the U.S. In 1984, he took on the additional responsibility of
managing the marketing of clinical products.
The information required by Item 9 relating to directors is incorporated
herein by reference to the section entitled "Election of Directors" which
appears in the Company's definitive proxy statement for its 1997 Annual Meeting
of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to
the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the section entitled "Shareholdings of Principal Shareholders and Management"
which appears in the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference to
the section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the fourth quarter ended June 30, 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANTECH LTD.
("Registrant")
Dated: September 25, 1997 By: /s/ Robert Case
----------------
Robert Case,
CEO
In accordance with the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints ROBERT
CASE and GREGORY G. FREITAG as his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
/s/ Robert Case Chief Executive Officer,
Robert Case and Director September 25, 1997
/s/ Gregory G. Freitag Chief Financial Officer,
Gregory G. Freitag COO, Secretary and
Treasurer (Chief Financial
and Accounting Officer) September 25, 1997
/s/ James F. Lyons Chairman September 25, 1997
James F. Lyons
/s/ Richard W. Perkins Director September 25, 1997
Richard W. Perkins
/s/ Edward E. Strickland Director September 25, 1997
Edward E. Strickland
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
QUANTECH LTD.
For The Fiscal Year Ended June 30, 1997
Commission File Number: 0-19957
Exhibit Description
Number
2.1 Plan of Reorganization, dated November 24, 1992, by and among
Quantech Ltd. and Spectrum Diagnostics S.p.A. (incorporated by
reference to Exhibit 2.1 of the Registrant's Registration Statement
on Form S-4; Reg. No. 33-55356).
2.2 Amendment and Restatement Agreement and Plan of Merger dated
January 20, 1993 by and among Quantech Ltd., Spectrum Diagnostics
S.p.A. and Spectrum Diagnostics Corp. (incorporated by reference to
Exhibit 2.2 of the Registrant's Registration Statement on Form S-4;
Reg. No. 33-55356).
3.1 Articles of Incorporation of Quantech Ltd., as amended
(incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-4; Reg. No. 33-55356).
3.2 Bylaws of Quantech Ltd. (incorporated by reference to Exhibit 3.2
of the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.1 Form of Stock Certificate (incorporated by reference to Exhibit 4.1
of the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.2 Form of Private Placement Warrant (incorporated by reference to
Exhibit 4.2 of the Registrant's Registration Statement on Form SB-2;
Reg. No. 333-6809).
10.1 Lease for office space at 1419 Energy Park Drive, St. Paul, MN 55108
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-KSB for the Year Ended June 30, 1995).
10.2 Option Agreement with Ares-Serono, as amended (including license)
assigned to Quantech Ltd. pursuant to the Merger (incorporated by
reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form S-4; Reg. No. 33-55356).
<PAGE>
10.3* Employment Agreement with Robert M. McKiel (incorporated by
reference to Exhibit 10.4 of the Registrant's Form 10-KSB for the
Year Ended June 30, 1995).
10.4 Letter of Amendment to Ares-Serono License (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-KSB for the
Year Ended June 30, 1995).
10.5* Warrant to purchase 830,841 shares by Robert M. McKiel
(incorporated by reference to Exhibit 10.13 of the
Registrant's Form 10-KSB for the Year Ended June 30, 1995).
10.6* Employment Agreement with Gregory G. Freitag (incorporated by
reference to Exhibit 10.8 of the Registrant's Registration
Statement on Form SB-2; Reg. No. 333-6809).
10.7 Severance and Settlement Agreement and Mutual Release of All Claims
with R.H. Joseph Shaw dated June 13, 1997 (incorporated by reference
to Exhibit 10.9 of the Registrant's Registration Statement on
Form SB-2; Reg. No. 333-6809).
21 Quantech has no subsidiaries.
23 Accountants Consent
24 Power of Attorney (included on signature page)
27 Financial Data Schedule
*Management contract or compensatory plan or arrangement.
We hereby consent to the incorporation by reference in the Form S-8
Registration Statement (file no. 333-11475) and in the Form S-3 Registration
Statement (file no. 333-6809) of our report, dated July 17, 1997, on the
financial statements of Quantech Ltd. (the "Registrant"), which report and
statements appear in the Registrant's Annual Report on Form 10-KSB for the year
ended June 30, 1997.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
September 29, 1997
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