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:
March 31, 1999 0 - 19957
Quantech Ltd.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1709417
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
1419 Energy Park Drive
St. Paul, MN 55108
(Address of principal executive offices) (Zip code)
(651)-647-6370
(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 ____
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 2,721,534 shares of Common
Stock, no par value, as of May 13, 1999.
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, 1999 and June 30, 1998 3
Statements of Operations for the Three Months and Nine Months
Ended March 31, 1999 and 1998 and from inception to
March 31, 1999 4
Statement of Stockholders' Equity from inception
to March 31, 1999 6
Statements of Cash Flows for the Nine Months ended
March 31, 1999 and 1998 and from inception to
March 31, 1999 8
Notes to Financial Statements 9
Item 2: Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION 15
2
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 403,015 $ 46,135
Prepaid expenses:
Product development expenses 86,250 115,000
Other 45,735 42,044
Engineering development expenses 194,250 0
--------------- ---------------
Total current assets 729,250 203,179
--------------- ---------------
EQUIPMENT
Equipment 410,058 366,493
Leasehold improvements 15,000 15,000
--------------- ---------------
425,058 381,493
Less accumulated depreciation (257,094) (202,201)
--------------- ---------------
Total equipment 167,964 179,292
--------------- ---------------
OTHER ASSETS
License agreement, at cost, less amortization 2,490,837 2,735,807
Prepaid product development expense, less current portion 0 57,500
Patents, at cost 13,045 9,029
--------------- ---------------
Total other assets 2,503,882 2,802,336
--------------- ---------------
TOTAL ASSETS $ 3,401,096 $ 3,184,807
=============== ===============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Short term debt $ 750,000 $ 3,112,818
Accounts payable 160,799 97,333
Accrued expenses:
Interest 2,200 48,594
Spectrum Diagnostics Inc. obligations 19,846 19,846
Minimum royalty commitment 37,500 75,000
Accrued payroll/vacation 120,299 103,157
--------------- ---------------
Total current liabilities 1,090,644 3,456,748
--------------- ---------------
REDEEMABLE PREFERRED STOCK 4,993,334 0
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding 2,721,534 shares at
March 31, 1999; and 2,565,040 at June 30, 1998 16,483,837 16,308,438
Additional paid-in capital 2,320,745 1,476,669
Deficit accumulated during the development stage (21,487,464) (18,057,048)
--------------- ---------------
Total stockholders' equity (deficit) (2,682,882) (271,941)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,401,096 $ 3,184,807
=============== ===============
</TABLE>
3
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period From
September 30,
Nine Months Nine Months 1991 (Date of
Ended Ended Inception), to
March 31, March 31, March 31,
1999 1998 1999
------------------- ------------------- ------------------
<S> <C> <C> <C>
Interest Income $ 1,475 $ 10,491 $ 184,691
------------------- ------------------- ------------------
Expenses:
General and Administrative 1,208,240 836,653 10,370,024
Research and Development 1,147,396 994,624 7,401,462
Minimum Royalty expense 112,500 75,000 1,187,500
Loses resulting from transactions
with Spectrum Diagnostics Inc. - - 556,150
Net Exchange (gain) - - (67,172)
Interest 721,145 172,652 1,938,986
------------------- ------------------- ------------------
Total Expenses 3,189,281 2,078,929 21,386,950
------------------- ------------------- ------------------
Loss before income taxes (3,187,806) (2,068,438) (21,202,259)
Income Taxes - - 42,595
------------------- ------------------- ------------------
Net Loss $ (3,187,806) $ (2,068,438) $ (21,244,854)
=================== =================== ==================
Net loss attributable to common shareholders:
Net loss $ (3,187,806) $ (2,068,438)
Preferred stock accretion (242,610) -
------------------- -------------------
Net loss attributable to common shareholders $ (3,430,416) $ (2,068,438)
=================== ===================
Loss per basic and diluted common share $ (1.29) $ (0.82)
Weighted average common shares
outstanding 2,652,854 2,510,312
</TABLE>
4
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Ended Ended
March 31, March 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Interest Income $ 407 $ 584
-------------------- ---------------------
Expenses:
General & Administrative 276,599 352,402
Research and development 172,751 399,275
Minimum royalty expense 37,500 37,500
Loses resulting from transactions
with Spectrum Diagnostics Inc. - -
Net exchange (gain) - -
Interest 6,163 72,831
-------------------- ---------------------
Total Expenses 493,013 862,008
-------------------- ---------------------
Loss before income taxes (492,606) (861,424)
Income taxes - -
-------------------- ---------------------
Net loss $ (492,606) $ (861,424)
==================== =====================
Net loss attributable to common shareholders:
Net loss $ (492,606) $ (861,424)
Preferred stock accretion (151,825) -
-------------------- ---------------------
Net loss attributable to common shareholders $ (644,431) $ (861,424)
==================== =====================
Loss per basic and diluted common share $ (0.24) $ (0.34)
Weighted average common shares
outstanding 2,676,864 2,554,941
</TABLE>
5
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to March 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Sub- Paid for Due Cumulative
Paid-In Development scriptions Not From Translation
Shares Amount Capital Stage Receivable Issued Officers Adjustment
--------------------------------------------------------------------------------------------
<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 160,000 $3,154,574
Common stock issued, November 1991 30,000 $611,746 $1,788,254
Common stock issuance costs ($889,849)
Cumulative translation adjustment $387,754
Common stock issued, September 1992 35,000 $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 225,000 $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 8,000 $1,600 $118,400 ($120,000)
Common stock issued, April 1993 1,500 $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 234,500 $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
--------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 234,500 $46,900 $6,012,070 ($6,015,585) $0 $30,000 $0 $0
Net loss ($2,070,292)
Common stock issued, June 1995 107,500 $21,500 $276,068 ($20,000) ($30,000)
Warrants issued for services $40,200
--------------------------------------------------------------------------------------------
Balance June 30, 1995 342,000 $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 308,000 $61,600 $1,304,450
August, 1995 35,880 $7,176 $161,460
September, 1995 690,364 $138,073 $2,370,389
November, 1995 94,892 $18,978 $425,482
December, 1995 560,857 $112,172 $1,292,473
May, 1996 313,750 $62,750 $3,300,422
June, 1996 252 $51 $3,650
Payments received on
subscription receivable (960) (192) ($14,808) $20,000
Compensation expense recorded
on stock options $125,000
--------------------------------------------------------------------------------------------
Balance, June 30, 1996 2,345,035 $469,008 $15,296,856 ($10,482,840) $0 $0 $0 $0
Net loss ($3,925,460)
Stock offering costs ($12,310)
Common stock issued upon exercise
of options and warrants
September 1996 500 $100 $2,400
October 1996 8,500 $1,700 $40,800
November 1996 750 $150 $3,600
December 1996 13,500 $2,700 $64,800 ($57,500)
January 1997 1,000 $200 $4,800
February 1997 7,500 $1,500 $17,250
March 1997 7,000 $1,400 $33,600
Payments received on
subscription receivable $57,500
Compensation expense recorded
on stock options $48,000
Common stock issued, June 1997 18,250 $3,650 $105,850
Warrants issued with notes payable $371
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to March 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Additional the Sub- Paid for Due Cumulative
Paid-In Development scriptions Not From Translation
Shares Amount Capital Stage Receivable Issued Officers Adjustment
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,402,035 $480,408 $15,606,017 ($14,408,300) $0 $0 $0 $0
Net Loss ($3,648,748)
Conversion of common stock from par value
to no par value $15,392,446 ($15,392,446)
Common stock issued for license agreement:
September 1997 150,000 $390,000
Common stock issued for equipment and
services received: March 1998 13,078 $45,584
Warrants issued for services received:
March 1998 $15,215
April 1998 $500
Warrants issued with notes payable $939
Amount attributable to value of debt
conversion feature $988,444
Warrants issued for license agreement
December 1997 $230,000
Compensation expense recorded
on stock options $28,000
Adjustment of fractional shares due to 1-for 20
reverse stock split (73)
-------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,565,040 $16,308,438 $1,476,669 ($18,057,048) $0 $0 $0 $0
Net Loss ($3,187,806)
Warrants issued with notes payable $76
Common stock issued upon conversion
of notes payable:
July 1998 2,000 $7,060
September 1998 3,400 $12,002
October 1998 25,000 $18,750
Common stock issued upon exercise of
warrant: August 1998 2,045 $5,114
Common stock issued for equipment and
services received:
July 1998 5,714 $20,000
August 1998 9,196 $27,589
September 1998 12,557 $11,318
December 1998 6,078 $5,688
Stock options issued for services:
October 1998 $42,000
Compensation expense recorded
on stock options $21,000
Common stock issued upon conversion
of preferred stock:
November 1998 74,052 $55,539
January 1999 15,952 $11,964
March 1999 500 $375
Warrants issued for services:
November 1998 $781,000
Accrete to redemption value on
Series A Preferred Stock ($242,610)
-------------------------------------------------------------------------------------------
Balance, March 31, 1999 2,721,534 $16,483,837 $2,320,745 ($21,487,464) $0 $0 $0 $0
===========================================================================================
</TABLE>
8
<PAGE>
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,
1999 1998 1999
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (3,187,806) $ (2,068,438) $ (21,244,854)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 54,893 46,063 303,448
Amortization 331,220 292,323 2,067,564
Noncash compensation, services and interest 1,011,296 47,466 2,335,975
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 prepaid expenses (3,139) (12,460) 38,909
Increase (decrease) in accounts payable 63,466 78,704 152,577
Increase (decrease) in accrued expenses (66,752) 4,518 453,969
------------------- ------------------- ------------------
Net cash used in operating activities (1,796,822) (1,611,824) (15,447,417)
------------------- ------------------- ------------------
Cash Flows From Investing Activities
Purchase of property and equipment (15,976) (17,998) (454,227)
Proceeds on disposition of property - - 37,375
Patent expenses (4,016) (134) (13,045)
Organization expenses - - (97,547)
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) (101,643)
Purchase of Spectrum Diagnostics, Inc., net of cash
and cash equivalents acquired - - (1,204,500)
------------------- ------------------- ------------------
Net cash used in investing activities (19,992) (28,535) (4,438,346)
------------------- ------------------- ------------------
Cash Flows From Financing Activities
Net proceeds from the sale of Series A Preferred Stock 1,671,464 - 1,671,464
Net proceeds from the sale of Common Stock and warrants - 131 12,880,797
Proceeds on debt obligations 502,230 937,000 6,051,085
Payments received on stock subscription receivables - - 5,000
Stock offering costs - - 0
Payments on debt obligations - - (522,810)
------------------- ------------------- ------------------
Net cash provided by financing activities 2,173,694 937,131 20,085,536
------------------- ------------------- ------------------
Effect of Exchange Rate Changes on Cash - - 203,242
------------------- ------------------- ------------------
Net increase (decrease) in cash 356,880 (703,228) 403,015
Cash
Beginning 46,135 718,893 -
------------------- ------------------- ------------------
Ending $ 403,015 $ 15,665 $ 403,015
=================== =================== ==================
</TABLE>
9
<PAGE>
QUANTECH LTD.
( A Development Stage Company )
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. BASIS OF PRESENTATION
In the opinion of the management of Quantech, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal,
recurring adjustments) necessary to present fairly the financial position of
Quantech as of March 31, 1999 and the results of operations for the three and
nine month periods and its cash flows for the nine month periods ended March 31,
1999 and 1998. 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 Quantech's annual financial
statements and related notes in Quantech's Annual Report on Form 10-KSB for the
year ended June 30, 1998.
Note 2. LICENSE AGREEMENT
Quantech has a license agreement 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 Quantech. In addition, if Quantech sublicenses
the technology, Quantech will pay a royalty of 15 percent of all revenues
received by Quantech under any sublicense. As of December 31, 1998, Quantech had
paid $1,150,000 of cumulative royalty payments. In order to maintain its
exclusive rights under the license agreement, Quantech must make a final
$150,000 payment by December 31, 1999. Quantech accrues quarterly a pro-rata
portion of the $150,000 annual payment, and will continue to do so until royalty
accruals based on revenues exceed such minimum annual payment amount.
Note 3. SERIES A CONVERTIBLE PREFERRED STOCK
In November 1998, Quantech established an additional class of shares as Series A
Convertible Preferred Stock, and designated 2,500,000 of its authorized shares
as Series A Convertible Preferred Stock. Such shares have no par value and a
liquidation preference of $3.00 per share. Each share of Series A Convertible
Preferred Stock is convertible into, and has voting rights equal to, four shares
of Common Stock. The Series A Convertible Preferred Stock is not redeemable
until November 5, 2003. If at any time after November 5, 2003 Quantech receives
the written request of the holders of at least 50% of the outstanding shares of
Series A Convertible Preferred Stock, Quantech will redeem all of the
outstanding shares by paying in cash an amount equal to the sum of the original
purchase price plus a 10% return per annum. Series A Convertible Preferred Stock
is automatically converted into shares of Common Stock in the event (i) Quantech
closes on an equity financing of at least $5,000,000 or (ii) at least 50% of the
number of shares of series A preferred stock that were outstanding as of
November 30, 1998 have been converted or redeemed. As of May 13, 1999 there were
1,702,706 shares of Series A Convertible Preferred Stock issued and outstanding.
10
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
History
Quantech Ltd. is a Minnesota company originally founded in 1991.
Quantech is completing development of a system that is expected to run tests for
a number of different medical conditions. We call our system the DBx. The DBx
consists of an instrument that sits on the top of a counter or cart and reads
disposable test cartridges developed by Quantech. Each Quantech test cartridge
will contain from one to four different medical tests such as those for a heart
attack or pregnancy. The DBx produces test results in a manner different than
other testing systems because it uses Quantech's proprietary technology based on
the scientific phenomenon known as surface plasmon resonance ("SPR"). Quantech's
technology creates SPR in a controlled environment which enables the DBx to
detect and transmit information concerning the presence and quantity of certain
native and foreign molecules in blood, urine or other fluids which may be
associated with specific diseases or medical conditions.
Excluding tests that can be conducted in the home, the overall world
wide diagnostic market is more than $18 billion. Routine and "STAT" (from the
Latin statim meaning urgent) laboratory tests currently account for the majority
of this market. Routine tests required in the hospital are conducted on testing
systems located in either the hospital's central laboratory or sent to a
laboratory that is not within the hospital. STAT tests are conducted by a
hospital's central laboratories or a smaller, more conveniently located version
of the central laboratories called STAT labs. Obtaining test results from
central laboratories can take a minimum of 45 minutes and up to three hours.
This delay negatively affects patient treatment and increases costs. Although
STAT labs have been established to reduce the time delay, test costs are higher
in STAT labs than central laboratories and turnaround time for tests is not
always reduced. We are designing the DBx to address what we believe is a
pressing need for a test system that can quickly, within 10 to 20 minutes, and
cost effectively provide test results, especially for patients with critical
problems in emergency departments.
We expect the DBx to be launched with at least a panel of three heart
attack tests and a single test for pregnancy. Additional tests are expected to
be added to the DBx system to provide the number of different quantitative tests
the emergency department requires on an urgent basis. We received approval from
the FDA for our first heart attack test to detect myoglobin, and have provided
to the FDA submissions for a second heart attack test to detect CK-MB and a
pregnancy test. Submissions to the FDA for additional tests and the instrument
itself are expected to be made throughout 1999.
In November 1998, we entered into a development agreement with
Millennium Medical Systems, LLC. Under the terms of the agreement, Millennium
will provide us with the proof of concept version of our DBx commercial system
in exchange for a warrant to purchase shares of Quantech Common Stock. This
agreement reduces our cash needs for the development of our product, and allows
us to concentrate our resources on expanding the system test menu, commercial
system completion, marketing and manufacturing.
Quantech and The Perkin-Elmer Corporation, a leading supplier of life
science systems and analytical instruments, are parties to a technology and
development agreement. This agreement provides Perkin-Elmer with exclusive
licenses to some of our technology for use outside of our core area of
non-nucleic medical diagnostics. We have licensed back from Perkin-Elmer
technology that provides a large density, high throughput diagnostic testing
capacity for our SPR technology. We believe this capability will allow us to
expand our digital SPR technology into central lab, ICU/CCU, surgical suite,
doctor office and home testing markets.
Quantech is a development stage company which has suffered significant
losses from operations, requires additional financing, and ultimately needs to
11
<PAGE>
complete development of its product, generate revenues, and successfully attain
profitable operations to realize the value of its license agreement. These
factors raise substantial doubt about Quantech's ability to continue as a going
concern.
Results of Operations
Quantech has incurred a net loss of $21,244,854 from September 30, 1991
(date of inception) through March 31, 1999 due to expenses related to formation
and operation of Quantech's predecessor, Spectrum Diagnostics Inc. ("SDS") in
Italy, continuing costs of raising capital, normal expenses of operating over an
extended period of time, funds applied to research and development, royalty
payments related to the SPR technology, losses due to expenses of SDS 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, 1999 Quantech had
interest income of $407 and $1,475 compared to $584 and $10,491 for the same
periods in 1998. 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, research and development.
General and administration expenses decreased to $276,599 for the three
months ended March 31, 1999 from $352,402 for the same period in 1998 primarily
due to the timing of costs associated with financing activities. For the nine
months ended March 31, 1999 general and administrative expenses increased to
$1,208,240 compared to $836,653 for the same period in 1998. The increase was
primarily due to costs associated with financing activities, including
commission expense of $198,000, charges of $78,000 for warrants and options
issued in connection with financing activities and professional fees of $39,000.
Additional expenses related to Quantech expansion also contributed to the
increase in general and administration expense. We anticipate that these
expenses will increase as we raise additional funding, complete development of
our system and increase corporate infrastructure to begin to manufacture and
distribute our product.
Research and development costs decreased to $172,751 for the three
months ended March 31, 1999 from $399,275 in the same period of 1998 primarily
due to the proportion of development work performed during the quarter by
Millennium Medical Systems in exchange for a warrant to purchase shares of
Quantech common stock. For the nine months ended March 31, 1999 research and
development expenses increased to $1,147,396 compared to $994,624 for the same
period in 1998 primarily due to costs related to the preparation of 510(k)
submissions to the FDA. We expect R&D spending to increase as the contract with
Millennium Medical Systems ends, we complete the commercial development of the
DBx system and additional tests for the DBx, conduct further FDA work, and begin
to establish higher volume manufacturing capabilities.
Minimum royalty expense increased to $112,500 for the nine months ended
March 31, 1999 compared to $75,000 for the same period in 1998. This increase
was due to the accruals for the minimum payment made in December 1998, and the
payment due in December 1999. Royalty expense is expected to remain at $37,500
per quarter through December 1999 (see Notes to Financial Statements, Note 2
License Agreement).
Interest expense decreased to $6,163 from $72,831 for the quarter ended
March 31, 1999 as a result of the conversion of promissory notes into Series A
Preferred Stock on November 5, 1998. Interest expense for the nine months ended
March 31, 1999 increased to $721,145 compared to $172,652 during the same period
in 1998 primarily due to increased debt from the sale of promissory notes
including a $546,902 charge to reflect the beneficial conversion feature of the
now converted notes. Interest expense is expected to remain flat during the next
year as Quantech does not anticipate any debt other than borrowing up to
$750,000 from its bank credit facility.
12
<PAGE>
For the three months ended March 31, 1999 Quantech had a loss of
$492,606 as compared to $861,424 for the same period in 1998 due to lower
operating expenses and interest expense. For the nine months ended March 31,
1999 Quantech had a loss of $3,187,806 as compared to $2,068,438 for the same
period in 1998 primarily due to higher interest and operating expenses including
$624,902 of non-cash charges related to financing activities.
The timetable for submitting additional tests to the FDA and
introduction of Quantech's DBx system to the market will be influenced by
Quantech'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 Quantech 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 March 31, 1999, Quantech has raised approximately
$20,600,000 through a combination of public stock sales, private stock sales and
debt obligations. In November and December 1998, Quantech raised net proceeds of
$1,671,474 from the sale of 600,617 shares of its Series A Convertible Preferred
Stock (the "A Preferred Stock") to accredited investors. The shares were priced
at $3.00 per share and each share of A Preferred Stock is convertible into four
shares of Common Stock. Noteholders also converted $3,374,138 of Quantech's
promissory notes into 1,124,715 shares of the A Preferred Stock in November
1998. Additionally, in November 1998 Quantech issued a warrant to purchase
1,800,000 shares of Common Stock at $1.10 per share in exchange for engineering
development work.
Quantech anticipates that its cash on hand along with the lower cash
requirements resulting from the Millennium development agreement will allow it
to maintain operations through May 1999. Additional financing will be needed to
develop and submit to the FDA the DBx instrument and additional tests, complete
clinical evaluation of the Quantech system, establish manufacturing capabilities
and introduce the system to market.
During May 1999 Quantech began offering for sale a minimum of $500,000
and a maximum of $2,000,000 shares of its Common Stock to accredited investors.
The shares are to be sold at a price of $1.50 per share. Quantech is also
reviewing multiple avenues of future funding including private sale of equity or
debt with equity features or arrangements with strategic partners. Quantech does
not have any commitments for any such financing and there can be no assurance
that Quantech will obtain additional capital when needed or that additional
capital will not have a dilutive effect on current shareholders. See "Cautionary
Statements - We need additional cash in May 1999 and will require at least $10
million in additional financing to complete the DBx." Although Quantech has a
limited lending arrangement with its bank to a maximum of $750,000, it does not
anticipate receiving any additional significant funding from commercial lenders.
Quantech incurred capital expenditures of $43,565 in the nine month
period ended March 31, 1999. Quantech anticipates significant capital
expenditures in the future for laboratory and production equipment and office
expansion as Quantech nears product introduction. The timing and amount of such
expenditures will be governed by Quantech'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.
Quantech currently has outstanding 2,721,534 shares of Common Stock,
and 1,702,706 shares of A Preferred Stock convertible into 6,810,824 shares of
Common Stock. It also has options and warrants outstanding to purchase an
additional 6,866,595 shares of Common Stock at exercise prices from $0.75 to
$14.40.
13
<PAGE>
Cautionary Statements
Quantech wishes to caution investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, Quantech'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 Quantech.
We need additional cash in May 1999, will require at least $10 million in
additional financing to complete commercial development of the DBx and to
commence sales and have no commitment to receive any additional significant
funding.
Quantech does not have sufficient funds to complete commercial
development or commence production and sales of the DBx. Quantech anticipates
that its cash on hand and bank credit facility will allow it to maintain
operations through May 1999. Additional financing of approximately $10 million
of investment capital, funding by strategic partner(s) or licensing revenues
will be needed to operate through May 2000. This financing will be used to
develop and submit to the FDA the DBx system and additional tests, complete
clinical evaluation of the DBx, establish manufacturing capabilities and prepare
for sales of the DBx. Quantech does not have any commitments for any such
additional financing and does not anticipate receiving any additional
significant funding from commercial lenders. There can be no assurance that any
such additional financing can be obtained on favorable terms, if at all. Any
additional equity financing may result in dilution to Quantech stockholders.
Going concern uncertainty in auditor's report on June 30, 1998 financial
statements may make it difficult to raise new capital.
Quantech has not had any significant revenues to date. As of June 30,
1998 and March 31, 1999, we had accumulated deficits of $18,057,048 and
$21,487,464, respectively. The report of the independent auditors on Quantech's
financial statements for the year ended June 30, 1998, includes an explanatory
paragraph relating to the uncertainty of Quantech's ability to continue as a
going concern, which may make it more difficult for Quantech to raise additional
capital.
Development of the DBx is not complete and may not be completed on the current
time-table and budget.
Components of the DBx system are under various stages of development.
Until DBx system development is completed and cleared through the FDA, there can
be no assurance that the DBx system will be finished according to our current
development timetable and budget. Failure to timely finish on budget will
require Quantech to seek funding greater than currently anticipated, thus
intensifying the risks described above. Additionally, the final price that we
will need to charge to cover the costs of the DBx instrument and the test
cartridges cannot be determined until development is complete and FDA clearances
have been obtained. If Quantech cannot receive FDA approval and offer the DBx
system with certain required features at a cost acceptable to potential
customers, it will be impossible for Quantech to continue operations.
Year 2000 Compliance
We believe our internal information and non-information systems are
year 2000 compliant. Quantech is in a stage of development of its products at a
time when awareness of year 2000 issues allows it to build year 2000 compliance
into its products and operations. We believe that any existing suppliers to
Quantech who are lost due to year 2000 problems could be replaced at our current
stage of development without any serious interruption to our business or any
material adverse effect on our operations or financial condition. We are
diligently ascertaining at each step of development that our products are
14
<PAGE>
compliant and are in the process of contacting key suppliers to address their
exposure to year 2000 related risks. We have, therefore, not developed any
contingency plans relating to year 2000 issues and have not budgeted any funds
for year 2000 issues. Although we believe that our systems are year 2000
compliant, unanticipated year 2000 problems may arise which, depending on the
nature and magnitude of the problem, could adversely affect our business.
Furthermore, year 2000 problems involving third parties may have a negative
impact on our suppliers and potential customers, the general economy or the
ability of businesses to receive essential services such as telecommunications
and banking. Any such occurrence could adversely affect our business.
Other Factors
As described in Quantech's Form 10-KSB for the year ended June 30, 1998
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, competition, lack of marketing and manufacturing experience,
technological obsolescence, ability to maintain patent protection on the
Company's technology and not violate others' rights, effects of government
regulation on Quantech's product and its sale, ability to manufacture its
product, dependence on key personnel, exposure to the risk of product liability
and the limited market for the Company's shares.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
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 -
27 Financial Data Schedule (filed in electronic format only)
b. Reports on Form 8-K - None
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 17, 1999 Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
QUANTECH LTD.
FORM 10-QSB for Quarter Ended
March 31, 1999
Exhibit Number Description
- -------------- ---------------------------------------------------------
27 Financial Data Schedule (filed in electronic format only)
17
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