SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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:
March 31, 1998 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: 51,302,319 shares of
Common Stock, no par value, outstanding as of May 13, 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 March 31, 1998 and June 30, 1997 3
Statement of Operations for the Three Months and Nine Months
Ended March 31, 1998 and 1997 and from inception to
March 31, 1998 4
Statement of Stockholders' Equity from inception 6
to March 31, 1998
Statement of Cash Flows for the Nine Months ended
March 31, 1998 and 1997 and from inception to
March 31, 1998 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)
March 31, June 30,
1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,665 $ 718,893
Deferred debt issue costs 16,150 78,699
Other current assets 47,912 35,452
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Total Current Assets 79,727 833,044
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EQUIPMENT
Equipment 361,111 329,780
Leasehold Improvements 15,000 15,000
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376,111 344,780
Less accumulated depreciation (185,330) (139,267)
------------------ ------------------
Total Equipment 190,781 205,513
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OTHER ASSETS
License agreement, at cost, less amortization 2,817,465 2,096,558
Patents, at cost, less amortization 9,029 8,895
Organization expenses, at cost, less amortization - 113
------------------ ------------------
Total Other Assets 2,826,494 2,105,566
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TOTAL ASSETS $ 3,097,002 $ 3,144,123
================== ==================
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Short term debt $ 2,557,00 $ 1,070,000
Accounts Payable 179,498 100,794
Accrued Expenses:
Spectrum Diagnostics Inc. obligations 22,953 36,509
Minimum Royalty Commitment 37,500 112,500
Accrued Interest 174,031 10,685
Accrued Severance - 77,265
Accrued Bonus/Vacation 65,238 54,226
Other - 4,019
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Total Current Liabilities 3,036,220 1,465,998
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STOCKHOLDERS EQUITY (DEFICIT)
Common stock, no par value; authorized 200,000,000
shares; issued and outstanding 51,302,319 shares at
March 31, 1998; and 48,040,759 at June 30, 1997 16,308,438 480,408
Additional paid-in capital 229,082 15,606,017
Deficit accumulated during the development stage (16,476,738) (14,408,300)
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Total Stockholders Equity 60,782 1,678,125
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 3,097,002 $ 3,144,123
================== ==================
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
Period From
September 30,
Nine Months Nine Months 1991 (Date of
Ended Ended Inception), to
March 31, March 31, March 31,
1998 1997 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Interest Income $ 10,491 $ 75,887 $ 181,272
-------------------- -------------------- --------------------
Expenses:
General and Administrative 836,653 1,147,680 8,494,861
Research and Development 994,624 1,648,359 5,640,329
Sales and Marketing - 178,778 282,380
Minimum Royalty expense 75,000 56,250 1,037,500
Losses resulting from transactions
with Spectrum Diagnostics Inc. - - 556,150
Net Exchange (gain) - - (67,172)
Financing 172,652 5,913 671,367
-------------------- -------------------- --------------------
Total Expenses 2,078,929 3,036,980 16,615,415
-------------------- -------------------- --------------------
Loss before income taxes (2,068,438) (2,961,093) (16,434,143)
Income Taxes - - 42,595
-------------------- -------------------- --------------------
Net Loss $ (2,068,438) $ (2,961,093) $ (16,476,738)
==================== ==================== ====================
Basic and diluted loss per share $ (0.04) $ (0.06)
Weighted average common shares
outstanding 50,206,240 47,167,584
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS-UNAUDITED
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
-------------------- ---------------------
<S> <C> <C>
Interest Income $ 584 $ 14,655
-------------------- ---------------------
Expenses:
General & Administrative 352,402 423,016
Research and development 399,275 584,946
Sales and Marketing - 108,354
Minimum royalty expense 37,500 18,750
Losses resulting from transactions
with Spectrum Diagnostics Inc. - -
Net exchange (gain) - -
Financing 72,831 1,471
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Total Expenses 862,008 1,136,537
-------------------- ---------------------
Loss before income taxes (861,424) (1,121,882)
Income taxes - -
-------------------- ---------------------
Net loss $ (861,424) $ (1,121,882)
==================== =====================
Basic and diluted loss per share $ (0.02) $ (0.02)
Weighted average common shares
outstanding 51,098,822 47,488,759
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to March 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Paid for Due Cumulative
Paid-In Development Subscriptions Not From Translation
Shares 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)
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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
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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
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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
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Balance, June 30, 1997 48,040,759 $480,408 $15,606,017 ($14,408,300) $0 $0 $0 $0
Net Loss ($2,068,438)
Conversion of common stock from par
value to no par value $15,392,446($15,392,446)
Common stock issued, September 1997 3,000,000 $390,000
Common stock issued, March 1998 261,560 $45,584
Warrants issued, March 1998 $15,215
Warrants issued with notes payable $296
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Balance, March 31, 1998 51,302,319 $16,308,438 $229,082 ($16,476,738) $0 $0 $0 $0
===========================================================================================
</TABLE>
<PAGE>
6 QUANTECH LTD
(A Development Stage Company)
STATEMENT OF CASH FLOWS-UNAUDITED
<TABLE>
<CAPTION>
Period From
September 30,
Nine Months Nine Months 1991 (Date of
Ended Ended Inception), to
March 31, March 31, March 31,
1998 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (2,068,438) $ (2,961,093) $ (16,476,738)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 46,063 45,023 231,684
Amortization 292,323 172,357 1,648,940
Noncash compensation, expense and interest 47,466 24,000 584,716
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 (12,460) (12,364) 28,526
Increase (decrease)in accounts payable 78,704 149,707 177,943
Increase (decrease) in accrued expenses 4,518 50,883 573,846
----------------- ----------------- -----------------
Net cash used in operating activities (1,611,824) (2,531,487) (12,786,088)
----------------- ----------------- -----------------
Cash Flows From Investing Activities
Purchase of property and equipment (net of non-cash) (17,998) (91,949) (439,536)
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 (28,535) (91,949) (4,430,042)
----------------- ----------------- -----------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock & warrants 131 112,500 12,880,928
Proceeds on debt obligations 937,000 - 4,665,435
Payments received on stock subscription receivables - 62,500 5,000
Stock offering costs - (12,310) -
Payments on debt obligations - (24,455) (522,810)
----------------- ----------------- -----------------
Net cash provided by financing activities 937,131 138,235 17,028,553
----------------- ----------------- -----------------
Effect of Exchange Rate Changes on Cash - - 203,242
----------------- ----------------- -----------------
Net increase (decrease) in cash (703,228) (2,485,201) 15,665
Cash
Beginning 718,893 2,942,871 -
----------------- ----------------- -----------------
Ending $ 15,665 $ 457,670 $ 15,665
================= ================= =================
Non-Cash Investing and Financing Activities
Issuance of debt, common stock and warrants for
sublicensing rights 940,165 940,165
Issuance of common stock and warrants for goods
and services 60,799 60,799
----------------- ----------------- -----------------
Total non-cash investing and financing activities $ 1,000,964 $ - $ 1,000,964
================= ================= =================
</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 March 31, 1998 and the results of operations for the three and
nine month periods and its cash flows for the nine month periods ended March 31,
1998 and 1997. 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. 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 filed 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 and the pregnancy marker hCG, 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 $16,476,738 from September 30,
1991 (date of inception) through March 31, 1998 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 nine months ended March 31, 1998 the Company had
interest income of $584 and $10,491 respectively, compared to $14,655 and
$75,887 for the same periods in 1997. 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 $352,402 and $836,653
for the three months and nine months ended March 31, 1998 respectively, from
$423,016 and $1,147,680 for the same periods in 1997. There were no sales and
marketing expenses during the three months and nine months ended March 31, 1998
compared to $108,354 and $178,778 for the three months and nine months ended
March 31, 1997. The decreases in general and administrative and sales and
marketing spending resulted from the restructuring that the Company implemented
in the second half of 1997. The restructuring was aimed at reducing expenses and
<PAGE>
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 $399,275 and $994,624 in
the three and nine months ended March 31, 1998 from $584,946 and $1,648,359 in
the same periods of 1997. 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. Approximately
25% of the R&D spending during the quarter ended March 31, 1998 was related to
the preparation of a 510(k) submission to the FDA for the cardiac marker
Myoglobin. Research and development spending is expected to increase
significantly during the rest of calendar 1998 as Quantech completes development
of its instrument and additional disposable tests, conducts additional FDA work,
and begins to establish higher volume manufacturing capabilities.
The minimum royalty expense recorded for the three months and nine
months ended March 31, 1998 increased to $37,500 and $75,000 from $18,750 and
$56,250 in the same periods of 1997. The increase was due to higher accruals for
minimum payments scheduled for December 1998 and 1999 (see Notes to Financial
Statements, Note 2 License Agreement).
Financing expenses increased to $72,831 and $172,652 for the three
months and nine months ended March 31, 1998 compared to $1,471 and $5,913 for
the same periods in 1997 primarily due to increased debt from the sale of
convertible promissory notes to fund operations. Financing expenses are expected
to increase during the quarter ending June 30, 1998 as a result of the sale of
additional convertible promissory notes, interest on such notes, and further
funding. The extent of such financing expenses will depend upon the future
capital structure of the Company and the timing of any repayment or conversion
of the notes into shares of Common Stock.
For the three months and nine months ended March 31, 1998 Quantech had
a loss of $861,424 and $2,068,438, respectively, as compared to $1,121,882 and
$2,961,093 for the same periods in 1997. 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.
The collaboration between Quantech and Perkin-Elmer has resulted in the
achievement of several milestones including submission in April 1998 of a 510(k)
to the FDA for a test for the cardiac marker Myoglobin. Quantech is continuing
development of further tests and receiving assistance from Perkin-Elmer in
completing additional phases under the License Agreement. Product launch of
Quantech's system is anticipated in the first quarter of 1999, which
introduction is expected to include at least 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 strategic relationships, complete commercial prototype development of its
system and 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.
<PAGE>
Liquidity and Capital Resources
From inception to March 31, 1998, Quantech has raised approximately
$17,000,000 through a combination of public stock sales, private stock sales and
debt obligations, including a $500,000 bank loan guaranteed by Company
directors. In April 1998, the Company completed an offering of notes (the
"Notes") and warrants (the "Warrants"). The Notes are 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 is the prime rate
plus five percent, and the Notes are secured by all of the assets of the
Company. The Notes are convertible into shares of Common Stock at a 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 Notes or June 1,
1998.
Net proceeds of $590,000 were raised after March 31, 1998 through the
Company's offering of Notes and Warrants. The Company anticipates that this will
fund current operations through June 1998. Additional funds will be needed after
that date to continue operations. Notes Payable, which include the Notes, in the
amount of $2,695,150 plus interest are due on June 1, 1998. The Company is
currently working to complete a capital restructuring which it expects to
include negotiating an extension of its June 1, 1998 Notes to September 30,
1998, raising additional funds through the issuance of up to $500,000 in
principal amount of additional September 30, 1998 Notes and a reverse stock
split which would position the Company for future equity capital, elevate its
trading above that of penny-stock classification and attract interest from
investment analysts. The September 30, 1998 Notes will have a conversion price
equal to the lower of $0.17625, 80% of the price of the Additional Funding or,
if the Additional Funding has not occurred prior to September 30, 1998, 80% of
the average market price of the Company's Common Stock for the 20 consecutive
trading days prior to September 30, 1998. Warrants for the purchase of Company
Common Stock will be granted for the extension of the June 1, 1998 Notes and the
purchase of new Notes with exercise prices similar to the conversion price of
the new notes.
Funds of at least $7.5 million will be needed to repay the new Notes,
develop and submit to the FDA additional tests, complete clinical evaluation of
the Quantech system, establish manufacturing capabilities, and introduce the
system to market. Funding needs would be reduced by the amount of any Notes
converted into shares of Common Stock. The Company expects that a substantial
portion of the new Notes would be converted if additional funding is obtained.
Quantech is currently reviewing multiple avenues of future funding including a
private sale of equity 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 the funds to
be raised through the new Notes or additional capital will not have a dilutive
effect on current shareholders. If the Company is unable to extend the due date
of the Notes Payable or pay the Notes Payable when due, the Company will be in
default and may have to liquidate its assets. See "Cautionary Statements
Immediate and Future Capital Needs." 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 $31,331 in the nine month
period ended March 31, 1998. 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 51,302,319 shares of Common
Stock. It also has options and warrants outstanding to purchase an additional
58,067,107 shares at exercise prices from $0.12 to $0.72 per share, and notes
convertible into 15,291,631 shares.
<PAGE>
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
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. The
Company is negotiating the extension of $2,695,150, including interest, of Notes
Payable which are June 1, 1998. If the Company does not pay these Notes Payable
when due, it may be forced to liquidate its assets to pay such Notes Payable.
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 March 1998 the Company sold 261,560 shares of its Common Stock and
warrants to purchase 21,560 shares of Common Stock to persons in
exchange for services. The shares were sold pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"). The purchasers
of such Common Stock acquired these securities for their own accounts
and not with a view to any distribution thereof to the public.
Also in March 1998 the Company issued warrants to purchase 1,200,000 and
300,000 shares of its Common Stock to James F. Lyons and Edward E.
Strickland respectively, directors of the Company, as compensation for
the guarantee of a bank loan to the Company. 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 warrants were acquired
for these parties' own accounts and not with a view to any distribution
thereof to the public.
In January, February, March and April 1998 the Company sold Convertible
Secured Promissory Notes in the principal amount of $868,150 to
accredited investors and issued warrants in connection with the sales of
such notes to the investors for the purchase of 2,604,450 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 $58,652 to a registered investment bank for
acting as selling agent and issued the investment bank a warrant to
purchase up to 175,956 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 the securities
for their own accounts and not with a view to any distribution thereof
to the public.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
a. Exhibits -
10.1 Employment Agreement with Gregory Freitag
10.2 Employment Agreement with Robert Case
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: May 13, 1998 Chief Financial Officer
<PAGE>
EXHIBIT INDEX
QUANTECH LTD.
FORM 10-QSB for Quarter Ended
March 31, 1998
Exhibit Number Description
10.1 Employment agreement with Gregory Freitag
10.2 Employment agreement with Robert Case
27 Financial Data Schedule (filed in electronic format only)
EMPLOYMENT AGREEMENT
PARTIES:
Quantech Ltd. (the "Company")
1419 Energy Park Drive
St. Paul, Minnesota 55108
Gregory G. Freitag (the "Employee")
1227 Hennepin Avenue
Minneapolis, Minnesota 55403
DATE: December 1, 1997
RECITALS:
A. The Company is engaged in the business of developing and
commercializing certain patents, technology, associated proprietary data and
existing operating prototypes related to medical diagnostics based upon Surface
Plasmon Resonance.
B. The Employee seeks to be employed, and the Company seeks
to employ, Employee under the terms of this Agreement.
C. The Employee agrees that as a condition to employment with
the Company the Employee will abide by the terms of this Agreement.
D. The Employee desires to be employed by the Company in a
capacity in which he may contribute to, or receive confidential information, and
acknowledges that the Company will suffer irreparable harm if Employee uses
confidential information outside his employment or makes any unauthorized
disclosure of such confidential information to any third party or uses such
confidential information wrongfully or in competition with the Company.
E. Employee further recognizes that execution of this
Agreement is an express condition of employment.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other benefits now or hereafter paid or made available to
Employee by the Company, the parties hereby agree as follows:
1. Employment at Will. The Company hereby employs Employee as Chief Operating
Officer and Chief Financial Officer of the Company until such time as the
<PAGE>
Company or Employee decides to terminate Employee's employment. Nothing in this
Agreement shall be construed to create an employment relationship other than one
that is at will or constituting a commitment, guaranty, agreement, or
understanding of any kind or nature that Quantech shall continue to employ
Employee, nor shall this letter affect in any way the right of Quantech to
terminate Employee's employment at any time and for any reason.
2. Duties and Supervision. During the term of this Agreement, Employee agrees to
devote best efforts to the business and affairs of the Company and agrees to
perform such reasonable services and duties as may, from time to time, be
assigned to him by the Chief Executive Officer. While employee is employed by
the Company, Employee will not perform services for any other person, firm or
corporation, either as an employee or as an agent or other independent
contractor without the express consent of the Chief Executive Officer of the
Company. Employee agrees to comply in ever respect with the general standards
and policies of the Company as in effect from time to time during Employee's
employment, all of which the Company reserves the right to change in its sole
discretion.
3. Compensation.
A. Base Salary. The Company shall pay Employee an initial
annual salary of $125,000 (the "Base Salary"), payable in accordance with the
Company's normal payroll practices in effect from time to time beginning as of
the date this Agreement. The Employee's compensation shall be subject to
discretionary upward adjustments by the Company's Chief Executive Officer.
B. Bonus. The Company shall establish a bonus plan consistent
with the Company policy whereby Employee shall be entitle to receive bonuses in
cash and/or securities of the Company as determined by the Company's Board of
Directors or its compensation committee.
4. Other Employee Benefits.
A. Benefits. For so long as Employee remains employed by the
Company, the Company agrees to obtain and maintain for the benefit of Employee,
health insurance benefits of the same nature as the Company maintains from time
to time in favor of its employees in general and to provide such other benefits
as the Company announces from time to time to apply to its employees in general.
B. Disability Insurance. Quantech agrees to reimburse
Employee for disability insurance, which reimbursement shall not exceed $150 per
month.
C. Reimbursement of Expenses. The Company will reimburse
Employee for all of Employees out-of-pocket expenses related to the Company
business, provided, however, that any such single expense in excess of $500 will
be approved by the Company's Chief Executive Officer.
5. Payments Upon Termination Employment. Employee shall be entitled to six (6)
month's base salary if he is terminated by the Company, other than for cause as
<PAGE>
provided in Section 6, except that Employee shall be entitled to a lump-sum
payment of one (1) year's base salary and bonus if termination of Employment is
a result of a sale of substantially all of the assets of the Company or a change
in the control of more than 50% of the Company's Common Stock pursuant to a
single transaction or a series of transactions by the same acquiring party.
6. Termination for Cause. Termination for cause shall be defined as: (i)
Employee's conviction of or entry of a plea of guilty or nolo contendere to any
felony against him in connection with any allegation against him of fraud,
misrepresentation or misappropriation of property; (ii) Employee's theft or
misappropriation of the Company's property; (iii) Employee knowingly making
material false statements to the Company's Board of Directors regarding the
affairs of the Company; or (iv) upon written notice by the Company if Employee
willfully and materially fails to perform his duties in a reasonable and timely
manner and does not correct such failure within a period of ten (10) days after
written notice thereof from the Company specifying the nature of such failure of
performance and demanding that it be cured, provided, however, that upon
occurrence of the third such failure of a similar nature or the third failure of
any kind, the Company may terminate employment on written notice without
opportunity to cure.
7. General Provisions.
A. Injunctive Relief. In addition to any other relief afforded
by law, the Company shall have the right to enforce the covenants contained in
this Agreement by seeking injunctive relief against Employee and any other
person concerned thereby, it being understood that both damages and injunctive
relief shall be proper modes of relief and are not to be considered as
alternative remedies.
B. Severability and Interpretation. In the event that a
provision of this Agreement is held invalid by a court of competent
jurisdiction, the remaining provisions shall nonetheless be enforceable
according to their terms. Further, in the event that any provision is held to be
overbroad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and shall be enforced as amended.
C. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes any and all prior oral or written
understandings between the parties relating to the subject matter hereof, except
for the Confidentiality and Invention Agreement entered into between the Company
and Employee of even date with this Agreement.
D. Modification and Waiver. No purported amendment,
modification or waiver of any provision hereof shall be binding unless set forth
in a written document signed by all parties (in the case of amendments or
modifications) or by the party to be charged thereby (in the case of waivers).
Any waiver shall be limited to the provisions hereof and the circumstances or
event specifically made subject thereto, and shall not be deemed a waiver of any
other term hereof or of the same circumstance or event upon any reoccurrence
thereof.
<PAGE>
E. Assignment. This Agreement shall be binding on Employee's
heirs, assigns and legal representatives and may be transferred by the Company
to its successors and assigns.
F. Governing Law. This Agreement is governed by and shall be
construed in accordance with the laws of the State of Minnesota.
G. Arbitration. All disputes arising under this Agreement
shall be submitted for arbitration in the state of Minnesota, the United States
of America.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
"Company"
QUANTECH LTD.
----------------------------
Robert Case, CEO
"Employee"
----------------------------
Gregory Freitag
EMPLOYMENT AGREEMENT
PARTIES:
Quantech Ltd. (the "Company")
1419 Energy Park Drive
St. Paul, Minnesota 55108
Robert Case (the "Employee")
640 N LaSalle St.
Chicago, 60610
DATE: December 1, 1997
RECITALS:
A. The Company is engaged in the business of developing and
commercializing certain patents, technology, associated proprietary data and
existing operating prototypes related to medical diagnostics based upon Surface
Plasmon Resonance.
B. The Employee seeks to be employed, and the Company seeks to
employ, Employee under the terms of this Agreement.
C. The Employee agrees that as a condition to employment with
the Company the Employee will abide by the terms of this Agreement.
D. The Employee desires to be employed by the Company in a
capacity in which he may contribute to, or receive confidential information, and
acknowledges that the Company will suffer irreparable harm if Employee uses
confidential information outside his employment or makes any unauthorized
disclosure of such confidential information to any third party or uses such
confidential information wrongfully or in competition with the Company.
E. Employee further recognizes that execution of this
Agreement is an express condition of employment.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other benefits now or hereafter paid or made available to
Employee by the Company, the parties hereby agree as follows:
1. Employment at Will. The Company hereby employs Employee as Chief Executive
Officer of the Company until such time as the Company or Employee decides to
<PAGE>
terminate Employee's employment. Nothing in this Agreement shall be construed to
create an employment relationship other than one that is at will or constituting
a commitment, guaranty, agreement, or understanding of any kind or nature that
Quantech shall continue to employ Employee, nor shall this letter affect in any
way the right of Quantech to terminate Employee's employment at any time and for
any reason.
2. Duties and Supervision. During the term of this Agreement, Employee agrees to
devote best efforts to the business and affairs of the Company and agrees to
perform such reasonable services and duties as may, from time to time, be
assigned to him by the Board of Directors. The Company acknowledges that
Employee shall not devote full time to the affairs of the Company and will
perform services for other persons, firms and corporations.
3. Employee Benefits. The Company will reimburse Employee for all of Employees
out-of-pocket expenses related to the Company business.
4. Payments Upon Termination Employment. Employee shall not be entitled to any
payments upon termination of employment, except any bonuses that have accrued to
Employee through the date of such termination shall be paid by the Company, and
further provided that Employee shall also be entitled to a lump-sum payment of
$150,000 if termination of Employment is a result of a sale of substantially all
of the assets of the Company or a change in the control of more than 50% of the
Company's Capital Stock pursuant to a single transaction or a series of
transactions by the same acquiring party.
5. General Provisions.
A. Injunctive Relief. In addition to any other relief afforded
by law, the Company shall have the right to enforce the covenants contained in
this Agreement by seeking injunctive relief against Employee and any other
person concerned thereby, it being understood that both damages and injunctive
relief shall be proper modes of relief and are not to be considered as
alternative remedies.
B. Severability and Interpretation. In the event that a
provision of this Agreement is held invalid by a court of competent
jurisdiction, the remaining provisions shall nonetheless be enforceable
according to their terms. Further, in the event that any provision is held to be
overbroad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and shall be enforced as amended.
C. Entire Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes any and all prior oral or written
understandings between the parties relating to the subject matter hereof, except
for the Confidentiality and Invention Agreement entered into between the Company
and Employee of even date with this Agreement.
D. Modification and Waiver. No purported amendment,
modification or waiver of any provision hereof shall be binding unless set forth
in a written document signed by all parties (in the case of amendments or
<PAGE>
modifications) or by the party to be charged thereby (in the case of waivers).
Any waiver shall be limited to the provisions hereof and the circumstances or
event specifically made subject thereto, and shall not be deemed a waiver of any
other term hereof or of the same circumstance or event upon any reoccurrence
thereof.
E. Assignment. This Agreement shall be binding on Employee's
heirs, assigns and legal representatives and may be transferred by the Company
to its successors and assigns.
F. Governing Law. This Agreement is governed by and shall be
construed in accordance with the laws of the State of Minnesota.
G. Arbitration. All disputes arising under this Agreement
shall be submitted for arbitration in the state of Minnesota, the United States
of America.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
"Company"
QUANTECH LTD.
----------------------------
Gregory Freitag, COO & CFO
"Employee"
----------------------------
Robert Case, CEO
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
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0
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<COMMON> 16,308,438
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<TOTAL-LIABILITY-AND-EQUITY> 3,097,002
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