SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A (No. 1)
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
December 31, 1998 0 - 19957
Quantech Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1709417
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
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1419 Energy Park Drive
St. Paul, MN 55108
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(Address of principal executive offices) (Zip code)
(651)-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: 2,721,534 shares of
Common Stock, no par value, as of March 19, 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 December 31, 1998 and June 30, 1998 3
Statements of Operations for the Three Months and Six Months Ended
December 31, 1998 and 1997 and from inception to
December 31, 1998 4
Statement of Stockholders' Equity from inception 6
to December 31, 1998
Statements of Cash Flows for the Six Months ended December 31, 1998
and 1997 and from inception to December 31, 1998 8
Notes to Financial Statements 9
Item 2: Management's Discussion and Analysis or Plan of Operation 10
Item 3: Quantitative and Qualitative Disclosure About Market Risk 13
PART II. OTHER INFORMATION 14
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1998 1998
-------------------- ---------------
<S> <C> <C> <
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,198 $ 46,135
Prepaid expenses:
Product development expenses 115,000 115,000
Other 44,020 42,044
-------------------- ---------------
Total current assets 166,218 203,179
-------------------- ---------------
EQUIPMENT
Equipment 402,539 366,493
Leasehold improvements 15,000 15,000
-------------------- ---------------
417,539 381,493
Less accumulated depreciation (238,318) (202,201)
-------------------- ---------------
Total equipment 179,221 179,292
-------------------- ---------------
OTHER ASSETS
License agreement, at cost, less amortization 2,572,494 2,735,807
Prepaid product development expense, less current portion 0 57,500
Patents, at cost 13,045 9,029
-------------------- ---------------
Total other assets 2,585,539 2,802,336
-------------------- ---------------
TOTAL ASSETS $ 2,930,978 $ 3,184,807
==================== ===============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Short term debt $ 300,000 $ 3,112,818
Accounts payable 77,266 97,333
Accrued expenses:
Interest 1,000 48,594
Spectrum Diagnostics Inc. obligations 19,846 19,846
Minimum royalty commitment 0 75,000
Accrued payroll/vacation 120,299 103,157
-------------------- ---------------
Total current liabilities 518,411 3,456,748
-------------------- ---------------
REDEEMABLE SERIES A PREFERRED STOCK 4,851,857 0
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding 2,705,082 shares at
December 31, 1998; and 2,565,040 at June 30, 1998 16,471,498 16,308,438
Additional paid-in capital 2,320,745 1,476,669
Unearned Engineering Development (388,500) 0
Deficit accumulated during the development stage (20,843,033) (18,057,048)
-------------------- ---------------
Total stockholders' equity (deficit) (2,439,290) (271,941)
-------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,930,978 $ 3,184,807
==================== ===============
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period From
September 30,
Six Months Six Months 1991 (Date of
Ended Ended Inception), to
December 31, December 31, December 31,
1998 1997 1998
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Interest Income $ 1,068 $ 9,907 $ 184,284
-------------------- -------------------- -------------------
Expenses:
General and Administrative 931,641 484,251 10,093,425
Research and Development 974,645 595,349 7,228,711
Minimum Royalty expense 75,000 37,500 1,150,000
Losses resulting from transactions
with Spectrum Diagnostics Inc. - - 556,150
Net Exchange (gain) - - (67,172)
Interest 714,982 99,821 1,932,823
-------------------- -------------------- -------------------
Total Expenses 2,696,268 1,216,921 20,893,937
-------------------- -------------------- -------------------
Loss before income taxes (2,695,200) (1,207,014) (20,709,653)
Income Taxes - - 42,595
-------------------- -------------------- -------------------
Net Loss $ (2,695,200) $ (1,207,014) $ (20,752,248)
==================== ==================== ===================
Net loss attributable to common shareholder:
Net loss $ (2,695,200) $ (1,207,014)
Preferred stock accretion (90,785) -
-------------------- --------------------
Net loss attributable to common shareholder $ (2,785,985) $ (1,207,014)
==================== ====================
Loss per basic and diluted common share $ (1.06) $ (0.49)
Weighted average common shares
outstanding 2,620,475 2,488,451
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
-------------------- ---------------------
<S> <C> <C>
Interest Income $ 415 $ 3,083
-------------------- ---------------------
Expenses:
General & Administrative 624,813 261,394
Research and development 446,534 281,088
Minimum royalty expense 37,500 18,750
Losses resulting from transactions
with Spectrum Diagnostics Inc. - -
Net exchange (gain) - -
Interest 43,450 60,445
-------------------- ---------------------
1,152,297 621,677
-------------------- ---------------------
Loss before income taxes (1,151,882) (618,594)
Income taxes - -
==================== =====================
Net loss $ (1,151,882) $ (618,594)
==================== =====================
Net loss attributable to common shareholder:
Net loss $ (1,151,882) $ (618,594)
Preferred stock accretion (90,785) -
-------------------- ---------------------
Net loss attributable to common shareholder $ (1,242,667) $ (618,594)
==================== =====================
Loss per basic and diluted common share $ (0.47) $ (0.24)
Weighted average common shares
outstanding 2,663,199 2,552,038
</TABLE>
<PAGE>
QUANTECH LTD
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY-UNAUDITED
Period From September 30, 1991 (date of Inception), to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Unearned During
Common Stock Additional Engineering the Sub- Paid for Due Cumulative
Paid-In Develop- Development scriptions Not From Translation
Shares Amount Capital ment Stage Receivable Issued Officers Adjustment
------------------------------------------------------------------------------------------------
<S> <C> <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 $0 ($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 $0 ($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
------------------------------------------------------------------------------------------------
Balance, June 30, 1994 234,500 $46,900 $6,012,070 $0 ($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
------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 342,000 $68,400 $6,328,338 $0 ($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 $0 ($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>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Unearned During
Common Stock Additional Engineering the Sub- Paid for Due Cumulative
Paid-In Develop- Development scriptions Not From Translation
Shares Amount Capital ment Stage Receivable Issued Officers Adjustment
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,402,035 $480,408 $15,606,017 $0 ($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 $0 ($18,057,048) $0 $0 $0 $0
Net Loss ($2,695,200)
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
Warrants issued in conjunction with
Series A Preferred Stock $227,000
Warrants issued for services:
November 1998 $554,000 ($518,000)
Amortization of engineering development $129,500
Accrete to redemption value on
Series A Preferred Stock ($90,785)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,705,082 $16,471,498 $2,320,745 ($388,500)($20,843,033) $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,
1998 1997 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (2,695,200) $ (1,207,014) $ (20,752,248)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 36,117 30,630 284,672
Amortization 220,811 186,366 1,957,155
Noncash compensation, services and interest 808,798 - 2,133,477
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 6,824 (106) 48,872
Increase (decrease) in accounts payable (20,067) (14,489) 69,044
Increase (decrease) in accrued expenses (105,452) (135,174) 415,269
------------------- ------------------- ------------------
Net cash used in operating activities (1,748,169) (1,139,787) (15,398,764)
------------------- ------------------- ------------------
Cash Flows From Investing Activities
Purchase of property and equipment (8,457) (5,415) (446,708)
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 (12,473) (15,952) (4,430,827)
------------------- ------------------- ------------------
Cash Flows From Financing Activities
Net proceeds from the sale of Series A Preferred Stock 1,669,475 - 1,669,475
Net proceeds from the sale of Common Stock and warrants - 62 12,880,797
Proceeds on debt obligations 252,230 487,000 5,801,085
Payments received on stock subscription receivables - - 5,000
Stock offering costs - - 0
Payments on debt obligations (200,000) - (722,810)
------------------- ------------------- ------------------
Net cash provided by financing activities 1,721,705 487,062 19,633,547
------------------- ------------------- ------------------
Effect of Exchange Rate Changes on Cash - - 203,242
------------------- ------------------- ------------------
Net increase (decrease) in cash (38,937) (668,677) 7,198
Cash
Beginning 46,135 718,893 -
------------------- ------------------- ------------------
Ending $ 7,198 $ 50,216 $ 7,198
=================== =================== ==================
</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 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 December 31, 1998 and the results of operations for the three and
six month periods and its cash flows for the six month periods ended December
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 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 any time after November 5, 2003 Quantech receives
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 March 17, 1999 there
were 1,702,706 shares of Series A Convertible Preferred Stock issued and
outstanding.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
History
Quantech Ltd. is a Minnesota company originally founded in 1991.
Quantech Ltd. 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").
We are designing the DBx primarily for the emergency department. The
DBx is expected to have the range of available tests and quality performance of
hospitals' central and STAT labs, but with test time turnaround of 10 to 20
minutes. The system will analyze both whole blood and urine without preparation
or addition of other substances or removal of the sample from the collection
device. We believe this ease of use and the ability to locate the DBx in the
emergency department will economically provide physicians with faster test
results than hospital central or STAT laboratories.
We have received approval from the FDA for our first heart attack test,
which will test for the cardiac market myoglobin. We have submitted to the FDA
applications for a second heart attack test, which will test for the cardiac
marker CK-MB, and for a pregnancy test, which will test for hCG. Initial launch
of the DBx system is expected in late 1999. Quantech believes the capabilities
of its DBx system as a diverse diagnostic testing platform will meet the needs
of the critical care STAT testing market enabling Quantech to be competitive in
the global medical diagnostics market.
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
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 $20,752,248 from September 30, 1991
(date of inception) through December 31, 1998 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, expenditures on research and
development, royalty payments related to 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.
<PAGE>
For the three and six months ended December 31, 1998 Quantech had
interest income of $415 and $1,068 compared to $3,083 and $9,907 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, research and development, and to reduce borrowing from its $750,000
bank credit facility.
General and administration expenses increased to $624,813 and $931,641
for the three months and six months ended December 31, 1998 from $261,394 and
$484,251 for the same periods in 1997. The increases in general and
administrative spending for the quarter were primarily due to costs associated
with financing activities, including commission expense of $190,000, charges of
$78,000 for warrants and options issued in connection with financing activities
and professional fees of $32,000. Such expense increases for the six months were
$198,000, $78,000 and $39,000, respectively. Additional expenses for the three
and six month periods related to Quantech expansion also contributed to the
increase in general and administration expense. Quantech anticipates that these
expenses will be lower during the quarter ending March 31, 1999 due to reduced
financing activity, but then will increase as Quantech raises additional
funding, completes development of its system and begins to manufacture and
distribute its products.
Research and development costs increased to $446,534 and $974,645 in
the three months and six months ended December 31, 1998 from $281,088 and
$595,349 in the same periods of 1997. These increases were primarily due to
expenses related to the preparation of 510(k) submissions to the FDA, and
engineering design work on the DBx commercial instrument and related
disposables, including year-to-date charges of $200,500 for warrants and options
issued in connection with research and development agreements. Quantech expects
R&D spending to remain flat during the quarter ending March 31, 1999 and then
increase as Quantech completes the commercial development of its system,
conducts additional FDA work, and begins to establish higher volume
manufacturing capabilities.
Minimum royalty expense increased to $37,500 and $75,000 during the
three and six months ended December 31, 1998 compared to $18,750 and $37,500 for
the same periods in 1997. These increases were due to the accrual for the
minimum payment made in December 1998. 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 $43,450 from $60,445 for the quarter
ended December 31, 1998 as a result of the conversion of promissory notes into
preferred stock on November 5, 1998. Interest expense for the six months ended
December 31, 1998 increased to $714,982 compared to $99,821 during the same
period in 1997 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 decrease during the quarter
ending March 31, 1999 due to the effect of the conversion of the promissory
notes for all three months of the quarter, and then to remain flat.
For the three and six months ended December 31, 1998 Quantech had
losses of $1,151,882 and $2,695,200 as compared to $618,594 and $1,207,014 for
the same periods in 1997. The higher loss for the quarter was primarily due to
increased operating expenses partially offset by lower interest expense. A
substantial portion of the increased loss for the six month period was interest
cost, with the remaining increase a result of higher operating expenses and
lower interest income.
Liquidity and Capital Resources
From inception to December 31, 1998, Quantech has raised approximately
$20,350,000 through a combination of public stock sales, private stock sales and
debt obligations. In November and December 1998, Quantech raised net proceeds of
<PAGE>
$1,669,475 from the sale of 600,617 shares of its Series A Convertible Preferred
Stock to accredited investors. The shares were priced at $3.00 per share and
each share of Series 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 Series A Preferred Stock in November 1998. Additionally, in
November 1998 Quantech issued a warrant to Millennium Medical Systems 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 and bank credit facility,
which had $450,000 available as of December 31, 1998, along with the lower cash
requirements resulting from the Millennium development agreement will allow it
to maintain operations through May 1999. Additional financing of approximately
$10 million through March 2000 will be needed to develop and submit to the FDA
additional tests, complete clinical evaluation of the DBx, establish
manufacturing capabilities and prepare for sales of the DBx. Quantech is
currently 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 - Immediate and Future Capital Needs." Although Quantech
has a limited lending arrangement with its bank to a maximum of $750,000, all of
which credit line will be used by the end of May 1999, it does not anticipate
receiving any additional significant funding from commercial lenders.
Quantech incurred capital expenditures of $36,046 in the six month
period ended December 31, 1998. 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 Series A Preferred Stock convertible into 6,810,824
shares of Common Stock. It also has options and warrants outstanding to purchase
an additional 6,256,581 shares of Common Stock at exercise prices from $0.75 to
$14.40. Because these options and warrants expire from May 2000 through December
2003, Quantech is not relying on any significant proceeds from the exercise of
options and warrants in the next 12 months. However, the exercise of any
significant number of options and warrants could provide necessary funding and
such exercises could occur if Quantech continues to timely meet its milestone
schedule.
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.
Immediate and Future Capital Needs
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 March 2000. This financing will be used to
develop and submit to the FDA 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.
<PAGE>
Going Concern Uncertainty
Quantech has not had any significant revenues to date. As of June 30,
1998 and December 31, 1998, we had an accumulated deficits of $18,057,048 and
$20,843,033, 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.
No Assurance of Final Development of DBx
Components of the DBx are under various stages of development. Until
DBx development is completed and cleared through the FDA, there can be no
assurance that the DBx 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 in Immediate and Future Capital Needs 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 are diligently ascertaining at each step of
development that our products are 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 Quantech
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 Quantech'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 Quantech'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 1998 Quantech sold 3,792 shares of Common Stock at $1.50 per
share to an accredited investor. Also in December 1998 Quantech sold
2,286 shares of Common Stock at $1.83 per share to an accredited
investor. The sale of such shares was deemed to be exempt from
registration under 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.
During November 1998 through March 1999, 90,504 shares of Common Stock
were issued pursuant to conversion Series A Convertible Preferred Stock.
The sale of such shares was deemed to be exempt from registration under
Section 3(a)(9) of the 1933 Act. The purchasers of such Common Stock
acquired these securities for their own accounts.
In November and December 1998, Quantech sold 600,617 shares of its
Series A Convertible Preferred Stock to accredited investors at a price
of $3.00 per share, and issued 1,124,715 shares of Series A Convertible
Preferred stock pursuant to conversion of promissory notes at a
conversion price of $3.00 per share. Quantech paid commissions and
accountable expenses in the aggregate amount of $125,700 to registered
broker-dealers for acting as selling agents and issued the
broker-dealers warrants to purchase up to 176,420 shares of Common Stock
as additional compensation. Each share of Series A Convertible Preferred
stock is convertible into four shares of Quantech's Common Stock. The
sale of such shares and warrants was deemed to be exempt from
registration under Section 4(2) of the 1933 Act and Rule 506 promulgated
thereunder. The purchasers of such Preferred Stock acquired these
securities for their own accounts and not with a view to any
distribution thereof to the public.
In November 1998, Quantech issued a warrant to purchase 1,800,000 shares
of Common Stock in exchange for engineering development work, and issued
another warrant to purchase 144,000 shares of Common Stock and paid
$190,000 cash to an investment banking firm that arranged the
transaction. The exercise prices of the warrants are $1.10 per share and
$1.32 per share, respectively. Both warrants expire in November 2003.
The sale of such warrants was deemed to be exempt from registration
under Section 4(2) of the 1933 Act. The purchasers acquired these
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
Quantech held its annual meeting on December 15, 1998 in Minneapolis,
Minnesota. Quantech solicited proxies and filed a definitive proxy
statement with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended. The
matters voted upon at the meeting and the votes cast were as follows:
No. 1 Election of Mr. James F. Lyons as class 3 director Votes for -
5,240,106 Votes Against - 200 Votes Withheld - 25,158 The terms of the
following directors continued after the meeting: Edward E. Strickland,
Richard W. Perkins and Robert Case.
No. 2 Adoption of the 1998 Stock Option Plan Votes for - 4,001,534
Votes Against - 403,905 Abstain - 8,300 Broker Non-Votes - 851,795 No.
3 Amendment to Articles of Incorporation to increase the number of
authorized shares to 75,000,000 shares consisting of 50,000,000 common
shares, 2,500,000 Series A preferred shares and 22,500,000 undesignated
shares Votes for - 4,275,904 Votes Against - 124,681 Abstain - 13,154
Broker Non-Votes - 851,795
<PAGE>
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on 8-K
a. Exhibits -
3.1 Articles of Incorporation, as amended to date
10.1 Research and Development Services Agreement, dated November
13, 1998, with Millennium Medical Systems, LLC (incorporated
by reference to Exhibit A to Schedule 13D filed by Robert
Gaines and Millennium Medical Systems, LLC on November 23,
1998, File No. 0-19957).
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: March 24, 1999 Chief Financial Officer
<PAGE>
EXHIBIT INDEX
QUANTECH LTD.
FORM 10-QSB for Quarter Ended
December 31, 1998
Exhibit Number Description
- -------------- -----------------------------------------------
3.1 Articles of Incorporation, as amended to date
(incorporated by reference to Exhibit 3.1 to
Registrant's Form 10-Q for the fiscal quarter
ended December 31, 1998, File No. 0-19957).
10.1 Research and Development Services Agreement,
dated November 13, 1998, with Millennium
Medical Systems, LLC (incorporated by
reference to Exhibit A to Schedule 13D filed
by Robert Gaines and Millennium Medical
Systems, LLC on November 23, 1998, File
No. 0-19957).
27 Financial Data Schedule (filed in
electronic format only)
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