SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
December 31, 1997 0 - 19957
Quantech Ltd.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1709417
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
1419 Energy Park Drive
St. Paul, MN 55108
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(Address of principal executive offices) (Zip code)
(612)-647-6370
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 51,040,759 shares of
Common Stock, par value $.01 per share, outstanding as of February 12, 1998.
Transitional Small Business Disclosure Format: YES ___ NO X
<PAGE>
Index
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements:
Balance Sheets as of December 31, 1997 and June 30, 1997 3
Statement of Operations for the Three Months and
Six Months Ended December 31, 1997 and 1996 and
inception to December 31, 1997 4
Statement of Stockholders' Equity from inception 6
to December 31, 1997
Statement of Cash Flows for the Six Months ended
December 31, 1997 and 1996 and from inception to
December 31, 1997 7
Notes to Financial Statements 8
Item 2: Management's Discussion and Analysis or Plan of
Operation 9
Item 3: Quantitative and Qualitative Disclosure About
Market Risk 12
PART II. OTHER INFORMATION 13
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 50,216 $ 718,893
Deferred debt issue costs 40,450 78,699
Other current assets 35,558 35,452
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Total Current Assets 126,224 833,044
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EQUIPMENT
Equipment 335,195 329,780
Leasehold Improvements 15,000 15,000
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350,195 344,780
Less accumulated depreciation (169,897) (139,267)
------------------ ------------------
Total Equipment 180,298 205,513
------------------ ------------------
OTHER ASSETS
License agreement, at cost, less amortization 2,899,122 2,096,558
Patents, at cost, less amortization 9,029 8,895
Organization expenses, at cost, less amortization - 113
------------------ ------------------
Total Other Assets 2,908,151 2,105,566
------------------ ------------------
TOTAL ASSETS $ 3,214,673 $ 3,144,123
================== ==================
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Short term debt $ 2,107,00 $ 1,070,000
Accounts Payable 86,305 100,794
Accrued Expenses:
Spectrum Diagnostics Inc. obligations 27,546 36,509
Minimum Royalty Commitment - 112,500
Accrued Interest 109,341 10,685
Accrued Severance - 77,265
Accrued Payroll/Vacation 23,143 54,226
Other - 4,019
------------------ ------------------
Total Current Liabilities 2,353,335 1,465,998
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STOCKHOLDERS EQUITY (DEFICIT)
Common stock, $.01 par value; authorized 200,000,000
shares; issued and outstanding 51,040,759 shares at
December 31, 1997; and 48,040,759 at June 30, 1997 510,408 480,408
Additional paid-in capital 15,966,244 15,606,017
Deficit accumulated during the development stage (15,615,314) (14,408,300)
------------------ ------------------
Total Stockholders Equity 861,338 1,678,125
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 3,214,673 $ 3,144,123
================== ==================
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
Period From
September 30,
Six Months Six Months 1991 (Date of
Ended Ended Inception), to
December 31, December 31, December 31,
1997 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest Income $ 9,907 $ 61,232 $ 180,688
-------------------- -------------------- --------------------
Expenses:
General and Administrative 484,251 724,664 8,142,459
Research and Development 595,349 1,063,413 5,241,054
Sales and Marketing - 70,424 282,380
Minimum Royalty expense 37,500 37,500 1,000,000
Losses resulting from transactions
with Spectrum Diagnostics Inc. - - 556,150
Net Exchange (gain) - - (67,172)
Financing 99,821 4,442 598,536
-------------------- -------------------- --------------------
Total Expenses 1,216,921 1,900,443 15,753,407
-------------------- -------------------- --------------------
Loss before income taxes (1,207,014) (1,839,211) (15,572,719)
Income Taxes - - 42,595
-------------------- -------------------- --------------------
Net Loss $ (1,207,014) $ (1,839,211) $ (15,615,314)
==================== ==================== ====================
Basic and diluted loss per share $ (0.02) $ (0.04)
Weighted average common shares
outstanding 49,769,020 47,010,487
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1997 1996
-------------------- ---------------------
<S> <C> <C>
Interest Income $ 3,083 $ 26,540
-------------------- ---------------------
Expenses:
General & Administrative 261,394 367,170
Research and development 281,088 700,581
Sales and Marketing - 70,424
Minimum royalty expense 18,750 18,750
Loses resulting from transactions
with Spectrum Diagnostics Inc. - -
Net exchange (gain) - -
Financing 60,445 2,029
-------------------- ---------------------
Total Expenses 621,677 1,158,954
-------------------- ---------------------
Loss before income taxes (618,594) (1,132,414)
Income taxes - -
-------------------- ---------------------
Net loss $ (618,594) $ (1,132,414)
==================== =====================
Basic and diluted loss per share $ (0.01) $ (0.02)
Weighted average common shares
outstanding 51,040,759 47,119,129
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to December 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Par Additional the Paid for Due Cumulative
Shares Value Paid-In Development Subscriptions Not From Translation
Issued Amount Capital Stage Receivable Issued Officers Adjustment
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception
Net Loss for 15 months ($3,475,608)
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
Common stock issued, September 1992 700,000 $699,033 $875,967 ($53,689)
Common stock issuance costs ($312,755)
Common stock to be issued $120,000
Cumulative translation adjustment ($209,099)
Elimination of cumulative
translation adjustment ($178,655)
Officers advances, net ($27,433)
--------------------------------------------------------------------------------------------
Balance, December 31, 1992 4,500,000 $4,465,353 $1,461,617 ($3,475,608) ($53,689) $120,000 ($27,433) $0
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 ($4,471,697) ($53,689) $0 ($22,296) $0
Net loss ($1,543,888)
240,000 shares of common
stock to be issued $30,000
Repayments $53,689 $22,296
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Balance, June 30, 1994 4,690,000 $46,900 $6,012,070 ($6,015,585) $0 $30,000 $0 $0
Net loss ($2,070,292)
Common stock issued, June 1995 2,150,000 $21,500 $276,068 ($20,000) ($30,000)
Warrants issued for services $40,200
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Balance June 30, 1995 6,840,000 $68,400 $6,328,338 ($8,085,877) ($20,000) $0 $0 $0
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
Payments 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) $0 $0 $0 $0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) $0 $0 $0 $0
Net Loss ($1,207,014)
Common stock issued, September 1997 3,000,000 $30,000 $360,000
Warrants issued with notes payable $227
============================================================================================
Balance, December 31, 1997 51,040,759 $510,408 $15,966,244 ($15,615,314) $0 $0 $0 $0
============================================================================================
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Period From
September 30,
Six Months Six Months 1991 (Date of
Ended Ended Inception), to
December 31, December 31, December 31,
1997 1996 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (1,207,014) $ (1,839,211) $ (15,615,314)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 30,630 13,841 216,251
Amortization 186,366 59,732 1,542,983
Noncash compensation and interest - - 537,250
Losses resulting from transactions with
Spectrum Diagnostics Inc. - - 556,150
Write down of investment - - 67,500
Change in assets and liabilities, net of effects from
purchase of Spectrum Diagnostics Inc.:
(Increase) decrease in other current assets (106) (27,705) 40,880
Increase (decrease)in accounts payable (14,489) 40,932 84,750
Increase (decrease) in accrued expenses (135,174) 23,367 434,154
------------------ ------------------ -----------------
Net cash used in operating activities (1,139,787) (1,729,044) (12,314,051)
------------------ ------------------ -----------------
Cash Flows From Investing Activities
Purchase of property and equipment (5,415) (64,654) (426,953)
Proceeds on disposition of property - - 37,375
Organization expenses - - (97,547)
Patent spending (134) - (9,029)
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 (10,403) - (112,046)
Purchase of Spectrum Diagnostics, Inc., net of cash
and cash equivalents acquired - - (1,204,500)
------------------ ------------------ -----------------
Net cash used in investing activities (15,952) (64,654) (4,417,459)
------------------ ------------------ -----------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock & warrants 62 2,500 12,880,859
Proceeds on debt obligations 487,000 4,215,435
Payments received on stock subscription receivables - - 5,000
Stock offering costs - (12,310) -
Payments on debt obligations - (4,605) (522,810)
------------------ ------------------ -----------------
Net cash provided by financing activities 487,062 (14,415) 16,578,484
------------------ ------------------ -----------------
Effect of Exchange Rate Changes on Cash - - 203,242
------------------ ------------------ -----------------
Net increase (decrease) in cash (668,677) (1,808,113) 50,216
Cash
Beginning 718,893 2,942,871 -
------------------ ------------------ -----------------
Ending $ 50,216 $ 1,134,758 $ 50,216
================== ================== =================
Non-Cash Investing and Financing Activities
Issuance of debt, common stock and warrants for
sublicensing rights $ 940,165 $ - $ 940,165
================== ================== =================
</TABLE>
<PAGE>
QUANTECH LTD.
( A Development Stage Company )
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. BASIS OF PRESENTATION
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal,
recurring adjustments) necessary to present fairly the financial position of the
Company as of December 31, 1997 and the results of operations for the three and
six month periods and its cash flows for the six month periods ended December
31, 1997 and 1996. The results of operations for any interim period are not
necessarily indicative of the results for the year. These interim financial
statements should be read in conjunction with the Company's annual financial
statements and related notes in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1997.
Note 2. LICENSE AGREEMENT
The Company has a license agreement as amended with Ares-Serono for certain
patents, proprietary information and associated hardware related to 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. As of December 31, 1997, the Company had paid $1,000,000 of
cumulative royalty payments, which includes a $150,000 payment made on December
31, 1997. In order to maintain its exclusive rights under the license agreement,
the Company must make a $150,000 payment by December 31, 1998 and 1999. The
Company intends to accrue $150,000 by December 31, 1998, and continue accruing
for future payments until royalty accruals based on revenues exceed the minimum
payment amounts.
Note 3. NET LOSS PER SHARE
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. Basic per share amounts
are computed, generally, by dividing net income or loss by the weighted average
number of common shares outstanding. 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 anti-dilutive thereby reducing the loss or increasing the
income per common share.
The Company initially applied Statement No. 128 for the periods ended December
31, 1997 and, as required by the Statement, has restated all per share
information for the prior years to conform to the Statement. Because the Company
has incurred a loss in all periods presented, the inclusion of potential common
shares in the calculation of diluted loss per share would have an antidilutive
effect. Therefore, Basic and Diluted loss per share amounts are the same in each
period presented.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
History
Quantech Ltd. ("Quantech" or the "Company") is a Minnesota corporation
originally founded in 1991. Quantech is completing development of a near patient
("NP") medical diagnostic testing system which is based upon its patented
Surface Plasmon Resonance ("SPR") technology. Quantech's critical care system
will have the ability to perform a complete range of clinically related,
quantitative whole blood tests on a single instrument near the patient in 10 to
20 minutes. The system will be marketed to hospital Critical Care Units, with
the initial focus being Emergency Departments. Hospital Critical Care Units,
such as the Emergency Department, are best able to recognize the immediate
positive impact Quantech's system will have on patient treatment and
satisfaction, determination of appropriate clinical care path and cost
containment.
Quantech's system will consist of an easy to use bench top instrument
and test disposables. Each disposable will contain one test, or a panel of
clinically related tests, which will define the particular tests to be conducted
by the instrument. The Company has begun data collection and other preparation
necessary to file a pre-market notification, known as a 510(k), with the FDA on
its first test for the detection and quantification of the cardiac marker
Myoglobin. This cardiac marker is an aid to physicians in the diagnosis of an
early stage heart attack. Further tests, including the cardiac markers CK-MB and
Troponin, are being developed to provide the Quantech system with a full range
of testing capabilities along with multiple tests per disposable.
Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading
supplier of life science systems and analytical instruments, are parties to a
technology and development agreement. Such agreement provides Perkin-Elmer with
exclusive licenses to certain Quantech technology for use outside of Quantech's
core area of non-nucleic medical diagnostics. Perkin-Elmer, pursuant to the
agreement, provides technical assistance related to Quantech's medical
diagnostic system and possible future royalty payments if Perkin-Elmer sells
products using Quantech's technology.
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 diagnostic system. Additional tests and
system development must be completed, FDA approval obtained on these multiple
tests and the system, Quantech's diagnostic system 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 $15,615,314 from September 30,
1991 (date of inception) through December 31, 1997 due to expenses related to
formation and operation of its predecessor, continuing costs of raising capital,
normal expenses of operating over an extended period of time, funds applied to
research and development, minimum royalty payments on the SPR technology, and
interest on borrowed funds. In addition, an investment of $3,356,629 was made
when Quantech purchased the exclusive rights to the SPR technology.
For the three and six months ended December 31, 1997 the Company had
interest income of $3,083 and $9,907 compared to $26,540 and $61,232 for the
same periods in 1996. These decreases were a result of less cash on hand as
proceeds obtained from Quantech's private placements of securities have been
used for operations and research and development.
General and administration expenses decreased to $261,394 and $484,251
for the three months and six months ended December 31, 1997 from $367,170 and
$724,664 for the same periods in 1996. There were no sales and marketing
expenses during the three months and six months ended December 31, 1997 compared
to $70,424 for the three months and six months ended December 31, 1996. The
<PAGE>
decreases in general and administrative and sales and marketing spending
resulted from the restructuring that the Company implemented in 1997. The
restructuring was aimed at reducing expenses and focusing the Company's
resources on completing development of its diagnostic system. Changes that were
made included reducing the number of employees, consultants and outside services
employed in the administrative and marketing functions. The Company anticipates
that these expenses will increase significantly in the future as the Company
completes development of its system and begins to manufacture and distribute its
products.
Research and development costs decreased to $281,088 and $595,349 in
the three and six months ended December 31, 1997 from $700,581 and $1,063,413 in
the same periods of 1996. The decreases were due to the above mentioned
restructuring, with cost reductions resulting primarily from reduced outside
contract development work as the Company focused its resources on completing the
system development with a reconfigured internal development team. Research and
development spending, however, is expected to increase significantly during
calendar 1998 as Quantech completes development of its system, conducts FDA
work, and begins development of additional disposable tests for its system.
There was no change in the minimum royalty expense recorded for the
three months and six months ended December 31, 1997 compared to the same periods
for the previous year. A royalty expense of $37,500 per quarter will begin to
accrue starting in January 1998 for minimum payments scheduled for December 1998
and 1999 (see Notes to Financial Statements, Note 2 - License Agreement).
Financing expenses increased to $60,445 and $99,821 for the three
months and six months ended December 31, 1997 compared to $2,029 and $4,442 for
the same periods in 1996 primarily due to increased debt from the sale of
convertible promissory notes in 1997 to fund operations. Financing expenses are
expected to increase as a result of the sale of additional convertible
promissory notes and interest on such notes.
For the three months and six months ended December 31, 1997 Quantech
had a loss of $618,594 and $1,207,014, respectively, as compared to $1,132,414
and $1,839,211 for the same periods in 1996. The decreased losses were the
result of lower operating expenses partially offset by lower interest income.
During December 1997 the Company entered into a License Agreement with
The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading supplier of life
science systems and analytical instruments. The Agreement provides technical
assistance to Quantech for the completion of its medical diagnostic system in
exchange for Perkin-Elmer receiving exclusive licenses to certain Quantech
technology for use outside of Quantech's core medical markets. Quantech will be
entitled to royalty payments on products sold by Perkin-Elmer which include
Quantech's technology. The royalty rate on these sales will be reduced as
Perkin-Elmer assists Quantech in achieving certain product development
milestones or phases. In addition, the Company has granted Perkin-Elmer a
warrant to purchase Quantech common stock under certain conditions.
In January 1998, the Company announced that it had completed with
Perkin-Elmer the first phase of instrument development, a breadboard-level
instrument that detects bulk changes of chemical concentrations. From this
milestone, Quantech was able to make further progress that allowed it to begin
activities for the preparation necessary to file a pre-market notification
510(k) with the FDA for the cardiac marker Myoglobin. It is expected that the
FDA 510(k) for Myoglobin will be submitted to the FDA early in the second
calendar quarter. Quantech is continuing development of further tests and
receiving assistance from Perkin-Elmer in completing additional phases under the
License Agreement. Introduction of Quantech's system is anticipated in the later
part of 1998, which introduction is expected to include three tests for the
system.
The Company is also in discussions with other potential strategic
partners regarding research and development collaborations for medical and
industrial applications of Quantech's technology, and distribution of its system
once developed and in manufacturing. The timetable for submitting additional
tests to the FDA and introduction of Quantech's system to the market will be
influenced by the Company's ability to obtain further funding, enter into
<PAGE>
strategic relationships, complete commercial prototype development of its
system, develop further tests and delays it may encounter with the FDA in its
review of Quantech's tests and 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 commercial system.
Liquidity and Capital Resources
From inception to December 31, 1997, Quantech has raised approximately
$17,100,000 through a combination of public stock sales, private stock sales and
debt obligations, including a $300,000 bank loan guaranteed by Company
directors. Additional funds are needed immediately to continue current
operations. To provide these additional funds, the Company is seeking to sell up
to a maximum of $1,173,000 which is the balance of its $2.5 million offering of
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 (the "Additional Funding"). Interest
will be the prime rate plus five percent and the Notes will be secured by all of
the assets of the Company. For each dollar invested in the Note, the investor
will receive a Warrant to purchase three shares of Quantech Common Stock at an
exercise price equal to the lower of (a) $0.17625 per share; or (b) 80% of the
price of the Additional Funding or, if the Additional Funding has not occurred
prior to June 1, 1998, the lower of 80% of the market price of the Company's
Common Stock for the 20 consecutive trading days prior to the issuance of the
Warrant or June 1, 1998. The principal amount of the Notes is 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. Terms are subject to negotiation and
may change. The Company believes it will complete the sale of most or all of the
$1,173,000 of the Notes by March 15, 1998, and the Directors and Director
affiliates of the Company have already purchased $200,000 of the Notes. There
can be no assurance, however, that the Company will be able to raise this or any
other funding and continue its operations. See "Cautionary Statements -
Immediate and Future Capital Needs."
The Company anticipates that the $1,173,000 will be sufficient to allow
it to complete its FDA work for the cardiac marker Myoglobin and begin
development of further tests. Funds of at least $7.5 million will be needed to
develop and submit to the FDA additional tests, establish manufacturing
capabilities, introduce the Quantech system and repay the Notes. Quantech is
currently reviewing multiple avenues of future funding including a secondary
offering of securities, private sale of equity or debt with equity features or
arrangements with strategic partners. The Company does not have any commitments
for any such financing and 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 commercial lenders.
Quantech incurred capital expenditures of $5,415 in the six month
period ended December 31, 1997. The Company anticipates significant capital
expenditures in the near future 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.
The Company currently has outstanding 51,040,759 shares of Common
Stock. It also has options and warrants outstanding to purchase an additional
51,416,561 shares and notes convertible into 10,933,333 shares.
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 results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document and elsewhere by or on behalf of the Company.
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 its proposed operations are subject to all of the risks inherent in a
<PAGE>
new business enterprise, including completion of commercial development and FDA
approval of its tests and instrument within reasonable time frames and financial
constraints, 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, and specifically those historically encountered by
Quantech, the development of a new product and the competitive environment in
which the Company will operate. 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.
Immediate and Future Capital Needs
The Company does not have sufficient funds to complete development of
its commercial system or additional tests for such system, submit its system to
the FDA or commence commercial production and sales. 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
revenues from the sale of instruments and associated test disposables are
sufficient to maintain operations. Additional funds may have to be 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.
Other Factors
As described in the Company's Form 10-KSB for the year ended June 30,
1997 under Cautionary Statements, there are additional factors concerning the
Company that should be considered including: uncertainty of market acceptance of
Quantech's product once introduced, inability or delay in obtaining FDA product
approval, , effects of government regulation on Quantech's product and its sale,
ability to manufacture its product, exposure to the risk of product liability
and the limited market for the Company's shares.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
In December 1997 the Company issued to The Perkin-Elmer Corporation a
warrant to purchase up to 28,000,000 shares of Common Stock. The
exercise price for each share will be equal to 95% of the average of the
last sale price of the Common Stock for each of the 25 consecutive
trading days immediately preceding the date of the first notice of
exercise of the Warrant provided to Quantech by Perkin-Elmer. Exemption
from registration under the Securities Act of 1933 ("the Act") for the
issuance of the Warrant is claimed under Section 4(2) of the Act.
Perkin-Elmer represented its intention to acquire the Warrant for
investment purposes only and a restrictive securities legend has been
placed on the Warrant.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on December 2, 1997 in Minneapolis,
Minnesota. The Company solicited proxies and filed a definitive proxy
statement with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Act of 1934, as amended. The matters
voted upon at the meeting and the votes cast were as follows:
No. 1 Election of Mr. Richard W. Perkins as class 2 director: Votes for -
23,769,597 Votes Withheld - 5,033,730
Election of Mr. Edward E. Strickland as class 2 director: Votes for -
23,788,597 Votes Withheld - 5,014,730
The terms of the following directors continued after the meeting:
Robert Case, James F. Lyons.
No. 2 Amendment to Articles of Incorporation to increase the number of
authorized shares to 250,000,000 shares consisting of 200,000,000 Common
Shares and 50,000,000 undesignated shares Votes: for - 16,735,984 Votes
Against - 1,590,456 Abstain - 291,400 Broker Non-Votes - 10,185,487
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
a. Exhibits -
10.1 Amended royalty agreement with Ares-Serono dated
October 31, 1997
10.2 License agreement with Perkin-Elmer (incorporated by
reference to Exhibit 1 of Schedule 13D filed by
The Perkin-Elmer Corporation on December 23, 1997,
File No. 0-19957)
27 Financial Data Schedule (filed in electronic format only)
b. Reports on 8-K - None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUANTECH LTD
/s/ Robert Case
Robert Case
Chief Executive Officer
/s/ Gregory G. Freitag
Gregory G. Freitag
Chief Operating Officer and
Date: February 12, 1998 Chief Financial Officer
<PAGE>
EXHIBIT INDEX
QUANTECH LTD.
FORM 10-QSB for Quarter Ended
December 31, 1997
Exhibit Number Description
10.1 Amended royalty agreeement with Ares-Serono dated
October 31, 1997
10.2 License agreement with Perkin-Elmer (incorporated by reference
to Exhibit 1 of Schedule 13D filed by The Perkin-Elmer
Corporation on December 23, 1997, File No. 0-19957)
27 Financial Data Scehdule (filed in electronic format only)
AMENDMENT TO LICENSE AGREEMENT
This Amendment to License Agreement, dated as of 31st October 1997, is by
and among Applied Research Systems ARS Holding N.V. ("ARS"); Laboratoires Serono
S.A. ("LSA"), the successor in interest to Serono Diagnostic S.A. ("Diagnostic")
(ARS, LSA and any successor thereof being collectively referred to as the
"Serono Companies") and Quantech Ltd. ("Quantech"), the successor in interest to
Spectrum Diagnostics, S.p.A. ("Spectrum").
RECITALS:
A. The Serono Companies and Quantech are parties to the License,
Sublicense and Purchase Agreement dated November 7th, 1991, attached
as Exhibit A (the "License Agreement").
B. Section 2 (a) (i) of the License Agreement reserves from the scope of
the license granted to Spectrum thereunder, among other reservations, a
right to develop and commercialize the SPR technology for the
development of products to be marketed in the name of the Serono
Companies and/or Serono Affiliates (the "SPR License Reservation").
C. Section 2 (d) of the License Agreement sets forth a series of
benchmarks of aggregate payments (the "Minimum Royalties") and Section
4(b) of the License Agreement sets forth sublicense, assignment and
transfer royalties (the "Transfer Royalties").
D. Section 2 (e) of the License Agreement grants the Serono Companies and
Serono Affiliates the right to demand a royalty-free right to use any
technology Spectrum has developed with respect to SPR (the "Grant Back
License"), subject to certain reservations.
E. Upon an Event of Default, Section 10 of the License Agreement (the
"Default Provision") provides that the license rights granted to
Spectrum shall terminate and revert back to the Serono Companies.
F. The Serono Companies and Quantech wish to amend and restate the License
Agreement as it concerns the SPR License Reservation, the Minimum
Royalties, the Transfer Royalties, the Grant Back License, and the
Default Provision.
In consideration of the agreements contained herein and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
agree as follows:
1. Definitions. All of the defined terms in the License Agreement shall
have the same meanings in this Amendment to License Agreement.
2. SPR License Reservation. Upon Payment to the Serono Companies pursuant
to Section 2(d) of the License Agreement of Minimum Royalties of at
least $1,000,000 in the aggregate by December 31, 1997, the Serono
Companies, on behalf of themselves and the Serono Affiliates, shall
waive all of their rights under the SPR License Reservation.
<PAGE>
3. Minimum Royalties. Section 2 (d) of the License Agreement shall be
amended to read as follows:
(d) Minimum Royalty: Notwithstanding anything stated in this
Agreement to the contrary, in the event that the royalty payments
actually paid to the Serono Companies by Spectrum and/or any Third
Party Transferee pursuant to Section 4 of this Agreement do not equal
the following amounts: (a) at least $500,000 in the aggregate by
December 31, 1993; (b) at least $850,000 in the aggregate by December
31,1995; (c) at least $1,000,000 in the aggregate by December 31, 1997;
(d) at least $1,150,000 in the aggregate by December 31, 1998; and (e)
at least $1,300,000 in the aggregate by December 31, 1999, then each
time one of the first three of such benchmarks is not met, the
cumulative royalties to be paid to the Serono Companies pursuant to
Section 4(d) hereof shall be increased by two million ($2,000,000)
dollars so that if all three initial benchmarks are not met, the
cumulative royalties payable to the Serono Companies pursuant to
Section 4(d) hereof shall be increased from eighteen million
($18,000,000) dollars to twenty-four million ($24,000,000) dollars.
Also if any one of the first three of such benchmarks is not met the
restrictions on the Serono Companies pursuant to Section 2(a)(i) hereof
that provide only the Serono Companies and/or Serono Affiliates shall
be allowed to market products developed pursuant to the retention of
the right to develop and commercialize SPR shall lapse. If Spectrum
shall receive any lump sum payment from any Third Party Transferee
under a Transfer Agreement prior to December 31, 1999, then Spectrum
shall accelerate payment of the minimum royalties set forth in this
Section 2(d) by paying up to twenty percent (20%) of such lump sum
payment to the Serono Companies. It is expressly understood that such
lump sum payments do not give rise to any additional royalty
obligations than would otherwise be payable to the Serono Companies
under Section 4(b) and shall not increase any aggregate minimum
royalties payable under this Section 2(d).
4. Section 4(b)(B) of the License Agreement shall be restated to read as
follows:
(B) Commencing on July 2, 1996, each Third Party Transferee
shall pay Third Party Royalties to Diagnostic equal to the 15%
<PAGE>
Royalties. The obligation of Spectrum and any subsequent Third Party
Transferees to pay Third Party Royalties to the Serono Companies shall
terminate only in accordance with subparagraph 4(d) below.
5. Grant Back License. Section 2 (e) of the License Agreement shall be
amended to read as follows:
(e) Spectrum Obligation to provide technology: Upon
termination of this Agreement under Section 10 below, the Serono
Companies shall be entitled to a royalty-free license to make, use and
sell whatever technology Spectrum has developed with respect to SPR,
provided that such license shall be subject to the terms and conditions
of any Preferred Transfer Agreement (as that term is defined in Section
6 of the Amendment to License Agreement) which is in force and effect
at the time of such termination of this Agreement. This royalty-free
license shall not extend to any technology and/or data and/or patents
which Spectrum developed with a third party and with respect to which
the third party retained a proprietary right.
6. Default Provision. Upon an Event of Default under the Default
Provision, any sublicense granted by Quantech to a Preferred Third
Party Transferee under a Preferred Transfer Agreement prior to the
Event of Default shall survive termination of the license and
sublicense rights in the Licensed SPR Technology granted to Spectrum
and reversion of such license and sublicense rights to the Serono
Companies under the Default Provision, and such Preferred Transfer
Agreement shall continue in full force and effect under its own
terms and conditions. For purposes of this Section 6, a "Preferred
Third Party Transferee" shall be any third party which had assets
of $100 million or more at the end of the third party's fiscal year
immediately preceding the execution of such Transfer Agreement.
For purposes of this Section 6, a "Preferred Transfer Agreement"
shall be any Transfer Agreement with a Preferred Third Party Transferee
which is approved by LSA, which approval will not be unreasonably
withheld.
7. Execution in Counterparts. This Amendment to License Agreement may be
executed in one or more counterparts, all of which shall be considered
one and the same agreement, and shall become a binding agreement when
one or more counterparts have been signed by each party and delivered
to the other party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Amendment to License Agreement as of the date first above written.
APPLIED RESEARCH SYSTEMS LABORATOIRES SERONO S.A.
ARS HOLDING N.V.
/s/ Reginald Schotborgh
/s/ S. Antonius-Soedhoe
/s/ T.P. Verhassee
By Reginald Schotborgh/ By T.P. Verhassee
S. Antonius-Soedhoe
Its Managing Directors Its Senior Vice President of Operations
QUANTECH LTD.
/s/ Jacques Theurillat
By Jacques Theurillat
Its Director
/s/ Gregory G. Freitag
By Gregory G. Freitag
Its COO and CFO
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