10QSB 1 0001.txt FORM 10-QSB FOR FIRST QUARTER 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: September 30, 2000 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.) 815 Northwest Parkway, Suite 100 Eagan, MN 55121 (Address of principal executive offices) (Zip code) (651)-647-6370 (Issuer's telephone number, including area code) (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: 18,418,987 shares of Common Stock, no par value, as of November 7, 2000. Transitional Small Business Disclosure Format: YES ___ NO X Index PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements: Balance Sheets as of September 30, 2000 and June 30, 2000 3 Statements of Operations for the Three Months Ended September 30, 2000 and 1999 and from inception to September 30, 2000 4 Statement of Stockholders' Equity from inception to September 30, 2000 5 Statements of Cash Flows for the Three Months ended September 30, 2000 and 1999 and from inception to September 30, 2000 7 Notes to Financial Statements 8 Item 2: Management's Discussion and Analysis or Plan of Operation 10 PART II. OTHER INFORMATION 14 QUANTECH LTD. (A Development Stage Company) BALANCE SHEET
(Unaudited) September 30, June 30, 2000 2000 -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,936,925 $ 1,328,797 8% demand note receivable from officer 145,597 141,000 Prepaid expenses 49,694 44,261 -------------- -------------- Total current assets 3,132,216 1,514,058 -------------- -------------- PROPERTY AND EQUIPMENT Equipment 1,565,282 1,193,898 Leasehold improvements 39,960 28,634 -------------- -------------- 1,605,242 1,222,532 Less accumulated depreciation (311,659) (278,088) -------------- -------------- Total equipment 1,293,583 944,444 -------------- -------------- OTHER ASSETS License agreement, at cost, less amortization 2,000,895 2,082,553 Patents 60,480 25,816 Deposits 99,994 79,457 -------------- -------------- Total other assets 2,161,369 2,187,826 -------------- -------------- TOTAL ASSETS $ 6,587,168 $ 4,646,328 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Short term debt $ - $ 750,000 Current portion of long-term debt 60,955 57,770 Accounts payable 626,993 614,592 Accrued expenses: Interest - 3,750 Payroll and vacation 138,763 138,763 -------------- -------------- Total current liabilities 826,711 1,564,875 -------------- -------------- LONG TERM LIABILITIES Long term debt, net of current portion 29,522 46,009 MINORITY INTEREST IN SUBSIDIARY 290,442 339,685 REDEEMABLE PREFERRED STOCK 4,602,913 4,495,245 STOCKHOLDERS' EQUITY (DEFICIT) Series B Preferred Stock, no par value; authorized 2,719,667 shares; outstanding 2,719,667 shares and 2,744,667 shares at September 30, 2000 and June 30, 2000 respectively 1,851,573 1,874,073 Series C Preferred Stock, no par value; authorized 1,000,000 shares; outstanding 1,000,000 shares and 1,000,000 shares at September 30, 2000 and June 30, 2000 respectively 973,100 973,100 Series D Preferred Stock, no par value; authorized 2,500,000 shares; outstanding 1,996,000 shares and 0 shares at September 30, 2000 and June 30, 2000 respectively 3,941,299 Common stock, no par value; authorized 51,567,267 shares; outstanding 6,243,524 shares and 6,204,416 shares September 30, 2000 and June 30, 2000 respectively 19,992,846 19,959,765 Subscriptions receivable (20,000) (20,000) Additional paid-in capital 9,958,982 7,313,828 Deficit accumulated during the development stage (35,860,220) (31,900,252) -------------- -------------- Total stockholders' equity (deficit) 837,580 (1,799,486) -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,587,168 $ 4,646,328 ============== ==============
QUANTECH LTD. (A Development Stage Company) STATEMENT OF OPERATIONS - UNAUDITED
Period From September 30, Three Months Three Months 1991 (Date of Ended Ended Inception), to September 30, September 30, September 30, 2000 1999 2000 ------------ ------------ ------------ Net Sales $ 40,000 $ -- $ 190,000 Expenses: General and administrative 634,735 332,153 12,840,818 Marketing 197,153 269,182 1,682,298 Research and development 1,370,643 591,454 12,710,026 Minimum royalty expense -- 37,500 1,300,000 Minority interest (82,993) -- (205,670) Other -- -- 488,978 ------------ ------------ ------------ Total expenses 2,119,538 1,230,289 28,816,450 ------------ ------------ ------------ Loss from operations (2,079,538) (1,230,289) (28,626,450) Other: Interest income 28,949 1,383 241,613 Interest expense (19,226) (9,608) (2,012,100) ------------ ------------ ------------ Loss before income taxes (2,069,815) (1,238,514) (30,396,937) Income taxes -- -- 42,595 ------------ ------------ ------------ Net loss $ (2,069,815) $ (1,238,514) $(30,439,532) ============ ============ ============ Net loss attributable to common shareholders: Net loss $ (2,069,815) $ (1,238,514) Preferred stock accretion (118,249) (127,471) Beneficial conversion feature of preferred stock (1,771,904) -- ------------ ------------ Net loss attributable to common shareholders $ (3,959,968) $ (1,365,985) ============ ============ Loss per basic and diluted common share $ (0.64) $ (0.47) Weighted average common shares outstanding 6,219,867 2,922,126
QUANTECH LTD (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY Period From September 30, 1991 (date of Inception), to September 30, 2000
Series B Series C Series D Preferred Stock Preferred Stock Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------------------------------------------- Balance at Inception Net Loss for 15 months Common stock transactions: Common stock issued, October 1991 160,000 $3,154,574 Common stock issued, November 1991 30,000 $611,746 Common stock issuance costs Cumulative translation adjustment Common stock issued, September 1992 35,000 $699,033 Common stock issuance costs Common stock to be issued Cumulative translation adjustment Elimination of cumulative translation adjustment Officers advances, net ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 0 $0 0 $0 0 $0 225,000 $4,465,353 Net loss Common stock transactions: Common stock issued, January 1993 8,000 $1,600 Common stock issued, April 1993 1,500 $300 Change in common stock par value resulting from merger ($4,420,353) Repayments ------------------------------------------------------------------------------------------------------------- Balance,June 30, 1993 0 $0 0 $0 0 $0 234,500 $46,900 Net loss 240,000 shares of common stock to be issued Repayments ------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994 0 $0 0 $0 0 $0 234,500 $46,900 Net loss Common stock issued, June 1995 107,500 $21,500 Warrants issued for services ------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 0 $0 0 $0 0 $0 342,000 $68,400 Net loss Common stock issued, net of issuance costs of $848,877: July, 1995 308,000 $61,600 August, 1995 35,880 $7,176 September, 1995 690,364 $138,073 November, 1995 94,892 $18,978 December, 1995 560,857 $112,172 May, 1996 313,750 $62,750 June, 1996 252 $51 Payments received on subscription receivable (960) (192) Compensation expense recorded on stock options ------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 0 $0 0 $0 0 $0 2,345,035 $469,008 Net loss Stock offering costs Common stock issued upon exercise of options and warrants September 1996 500 $100 October 1996 8,500 $1,700 November 1996 750 $150 December 1996 13,500 $2,700 January 1997 1,000 $200 February 1997 7,500 $1,500 March 1997 7,000 $1,400 Payments received on subscription receivable Compensation expense recorded on stock options Common stock issued, June 1997 18,250 $3,650 Warrants issued with notes payable ------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 0 $0 0 $0 0 $0 2,402,035 $480,408 Net Loss Conversion of common stock from par value to no par value $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 April 1998 Warrants issued with notes payable Amount attributable to value of debt conversion feature Warrants issued for license agreement December 1997 Compensation expense recorded on stock options Adjustment of fractional shares due to 1-for 20 reverse stock split (73) ------------------------------------------------------------------------------------------------------------- (Table continued)
(Table continued)
Deficit Accumulated Additional During the Sub- Paid for Due Cumulative Paid-In Development scriptions Not From Translation Capital Stage Receivable Issued Officers Adjustment ---------------------------------------------------------------------------------------------------------------------------- Balance at Inception Net Loss for 15 months ($3,475,608) Common stock transactions: Common stock issued, October 1991 Common stock issued, November 1991 $1,788,254 Common stock issuance costs ($889,849) Cumulative translation adjustment $387,754 Common stock issued, September 1992 $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 $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 $118,400 ($120,000) Common stock issued, April 1993 $11,700 Change in common stock par value resulting from merger $4,420,353 Repayments $5,137 --------------------------------------------------------------------------------------------------------------------------- Balance,June 30, 1993 $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 --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994 $6,012,070 ($6,015,585) $0 $30,000 $0 $0 Net loss ($2,070,292) Common stock issued, June 1995 $276,068 ($20,000) ($30,000) Warrants issued for services $40,200 --------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1995 $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 $1,304,450 August, 1995 $161,460 September, 1995 $2,370,389 November, 1995 $425,482 December, 1995 $1,292,473 May, 1996 $3,300,422 June, 1996 $3,650 Payments received on subscription receivable ($14,808) $20,000 Compensation expense recorded on stock options $125,000 ---------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 $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 $2,400 October 1996 $40,800 November 1996 $3,600 December 1996 $64,800 ($57,500) January 1997 $4,800 February 1997 $17,250 March 1997 $33,600 Payments received on subscription receivable $57,500 Compensation expense recorded on stock options $48,000 Common stock issued, June 1997 $105,850 Warrants issued with notes payable $371 ----------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 $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) Common stock issued for license agreement: September 1997 Common stock issued for equipment and services received: March 1998 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 ----------------------------------------------------------------------------------------------------------------------------
Series B Series C Series D Preferred Stock Preferred Stock Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount Shares Amount ---------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 0 $0 2,565,040 $16,308,438 Net Loss Warrants issued with notes payable 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 Compensation expense recorded on stock options Common stock issued upon conversion of preferred stock: November 1998 74,052 $55,539 January 1999 15,952 $11,964 March 1999 500 $375 April 1999 20,000 $15,000 Warrants issued for services: November 1998 Series B Preferred Stock issued: June 1999 623,334 $891,500 Accrete to redemption value on Series A Preferred Stock ---------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 623,334 $891,500 0 $0 0 $0 2,741,534 $16,498,837 Net Loss Series B Preferred Stock issued: July 1999 216,666 $291,829 August 1999 86,667 $116,989 September 1999 16,667 $22,500 October 1999-adjust price to $1.00 471,666 November 1999 100,000 $100,000 December 1999 480,000 $472,500 January 2000 600,000 $425,500 February 2000 1,318,000 $732,755 Beneficial conversion expense on Preferred Stock Series C Preferred Stock issued: February 2000 1,000,000 $973,100 Common stock issued: February 2000 125,000 $187,500 Common stock issued upon conversion of preferred stock: July 1999 32,000 $24,000 August 1999 (33,333) ($50,000) 179,121 $159,341 September 1999 80,852 $60,639 October 1999 50,000 $37,500 December 1999 13,252 $9,939 January 2000 (880,000) ($880,000) 890,000 $887,500 February 2000 866,664 $649,998 March 2000 (75,000) ($72,500) 89,000 $83,000 April 2000 (180,000) ($177,000) 226,880 $212,160 May 2000 68,864 $51,648 June 2000 42,824 $32,118 Common stock issued upon exercise of warrants: September 1999 454,545 $500,000 February 2000 24,256 $18,192 March 2000 60,263 $147,835 May 2000 39,708 $67,318 June 2000 7,321 $7,553 Warrants issued: September 1999 November 1999 January 2000 February 2000 March 2000 Common stock issued upon exercise of options: January 2000 2,000 $2,750 February 2000 200 $226 June 2000 7,001 $8,751 Common stock issued for equipment and services received: January 2000 2,275 $2,276 February 2000 200,856 $310,684 Compensation expense recorded on stock options Subsidiary stock issued Payment received on subscriptions receivable Accrete to redemption value on Series A Preferred Stock ---------------------------------------------------------------------------------------------------------------------------- Balance June 30, 2000 2,744,667 $1,874,073 1,000,000 $973,100 0 $0 6,204,416 $19,959,765 Net Loss Series D Preferred Stock issued: August 2000 1,462,400 $2,817,482 September 2000 533,600 $1,123,817 Common stock issued upon conversion of preferred stock: August 2000 14,108 $10,581 September 2000 (25,000) ($22,500) 25,000 $22,500 Warrants issued: August 2000 September 2000 Subsidiary stock issued Beneficial conversion expense on Preferred Stock Accrete to redemption value on Series A Preferred Stock ------------------------------------------------------------------------------------------------------------------------------- Balance September 30, 2000 2,719,667 $1,851,573 1,000,000 $973,100 1,996,000 $3,941,299 6,243,524 $19,992,846
(Table continued) (Table continued)
Deficit Accumulated Additional During the Sub- Paid for Due Cumulative Paid-In Development scriptions Not From Translation Capital Stage Receivable Issued Officers Adjustment ---------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 $1,476,669 ($18,057,048) $0 $0 $0 $0 Net Loss ($4,289,816) Warrants issued with notes payable $76 Common stock issued upon conversion of notes payable: July 1998 September 1998 October 1998 Common stock issued upon exercise of warrant: August 1998 Common stock issued for equipment and services received: July 1998 August 1998 September 1998 December 1998 Stock options issued for services: October 1998 $42,000 Compensation expense recorded on stock options $43,000 Common stock issued upon conversion of preferred stock: November 1998 January 1999 March 1999 April 1999 Warrants issued for services: November 1998 $781,000 Series B Preferred Stock issued: June 1999 ($60,000) Accrete to redemption value on Series A Preferred Stock ($377,420) --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 $2,342,745 ($22,724,284 ($60,000) $0 $0 $0 Net Loss ($6,022,853) Series B Preferred Stock issued: July 1999 August 1999 September 1999 October 1999-adjust price to $1.00 November 1999 December 1999 ($20,000) January 2000 February 2000 Beneficial conversion expense on Preferred Stock $2,742,670 ($2,742,670) Series C Preferred Stock issued: February 2000 Common stock issued: February 2000 ($4,500) Common stock issued upon conversion of preferred stock: July 1999 August 1999 September 1999 October 1999 December 1999 January 2000 February 2000 March 2000 April 2000 May 2000 June 2000 Common stock issued upon exercise of warrants: September 1999 February 2000 March 2000 May 2000 June 2000 Warrants issued: September 1999 $10,000 ($10,000) November 1999 $15,000 ($15,000) January 2000 $152,000 February 2000 $469,000 March 2000 $25 Common stock issued upon exercise of options: January 2000 February 2000 June 2000 Common stock issued for equipment and services received: January 2000 February 2000 Compensation expense recorded on stock options $332,300 Subsidiary stock issued $1,250,088 Payment received on subscriptions receivable $89,500 Accrete to redemption value on Series A Preferred Stock ($410,445) --------------------------------------------------------------------------------------------------------------------------- Balance June 30, 2000 $7,313,828 ($31,900,252) ($20,000) $0 $0 $0 Net Loss ($2,069,815) Series D Preferred Stock issued: August 2000 September 2000 Common stock issued upon conversion of preferred stock: August 2000 September 2000 Warrants issued: August 2000 $576,000 September 2000 $206,000 Subsidiary stock issued $91,250 Beneficial conversion expense on Preferred Stock $1,771,904 ($1,771,904) Accrete to redemption value on Series A Preferred Stock ($118,249) --------------------------------------------------------------------------------------------------------------------------- Balance September 30, 2000 $9,958,982 ($35,860,220) ($20,000) $0 $0 $0
QUANTECH LTD (A Development Stage Company) STATEMENTS OF CASH FLOWS
Period From September 30, Three Months Three Months 1991 (Date of Ended Ended Inception), to September 30, September 30, September 30, 2000 1999 2000 ----------- ------------ ------------ Cash Flows From Operating Activities Net Loss $ (2,069,815) $ (1,238,514) $(30,439,532) Adjustments to reconcile net loss to net cash used in operating activities: Elimination of cumulative translation adjustment -- -- (178,655) Depreciation 33,570 20,182 452,300 Amortization 81,659 110,408 2,587,796 Noncash compensation, services and interest -- -- 4,019,205 Minority interest (82,993) -- 256,692 Other -- -- 623,650 Change in assets and liabilities: (Increase) decrease in prepaid expenses (5,433) (315) 91,898 Increase (decrease) in accounts payable 12,401 231,656 363,425 Increase (decrease) in accrued expenses (3,750) 37,500 412,887 ----------- ------------ ------------ Net cash used in operating activities (2,034,361) (839,083) (21,810,334) ----------- ------------ ------------ Cash Flows From Investing Activities Purchase of property and equipment (382,710) (31,766) (1,367,996) Proceeds on disposition of property -- -- 37,375 Patent expenses (34,664) -- (62,019) Organization expenses -- -- (97,547) Deposits (20,537) -- (99,994) Officer advances, net -- -- (109,462) Note receivable from officer (4,597) -- (145,597) Purchase of investment -- -- (225,000) Purchase of license agreement -- -- (1,950,000) Advances to Spectrum Diagnostics, Inc. -- -- (320,297) Prepaid securities issuance costs -- -- (101,643) Purchase of Spectrum Diagnostics, Inc., net of cash and cash equivalents acquired -- -- (1,204,500) ----------- ------------ ------------ Net cash used in investing activities (442,508) (31,766) (5,646,680) ----------- ------------ ------------ Cash Flows From Financing Activities Net proceeds from the sale of Series A Preferred Stock -- -- 1,523,909 Net proceeds from the sale of Series B Preferred Stock -- 431,318 2,993,573 Net proceeds from the sale of Series C Preferred Stock -- -- 973,100 Net proceeds from the sale of Series D Preferred Stock 3,941,299 -- 3,941,299 Net proceeds from the sale of common stock and warrants 782,000 500,000 14,602,922 Net proceeds from the sale of common stock of subsidiary 125,000 4,000 1,375,088 Proceeds from debt obligations -- -- 6,051,085 Payments received on stock subscriptions receivable -- -- 45,000 Payments on debt obligations (763,302) -- (1,315,279) ----------- ------------ ------------ Net cash provided by financing activities 4,084,997 935,318 30,190,697 ----------- ------------ ------------ Effect of Exchange Rate Changes on Cash -- -- 203,242 ----------- ------------ ------------ Net increase in cash 1,608,128 64,469 2,936,925 Cash and Cash Equivalents Beginning 1,328,797 436,223 -- ----------- ------------ ------------ Ending $ 2,936,925 $ 500,692 $ 2,936,925 =========== ============ ============
QUANTECH LTD. ( A Development Stage Company ) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1. BASIS OF PRESENTATION In the opinion of the management of Quantech, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the financial position of Quantech as of September 30, 2000 and the results of operations and its cash flows for the three month periods ended September 30, 2000 and 1999. 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, 2000. 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. To date, Quantech has paid $1,300,000 of cumulative royalty payments. This amount satisfies the requirements of the license agreement until royalty accruals based on revenues exceed such minimum payment amount. Note 3. CONVERTIBLE PREFERRED STOCK On October 2, 2000, Quantech closed on a private equity offering greater than $5 million causing all of its Series A redeemable, B, C and D preferred stock outstanding on September 30, 2000 to automatically convert into common shares. Note 4. HTS BIOSYSTEMS Quantech's consolidated financial statements include the results of HTS Biosystems, Inc. ("HTS") of which Quantech currently has 73% ownership. HTS was formed around a combination of SPR technologies and intellectual property from both Quantech and Applied Biosystems (NYSE:PEB). This technology supports the accelerated development of label-free, cost effective detection systems, initially for the scientific research market. HTS intends to become the definitive source of analytical systems and chemistry for the high-speed detection of molecular and cellular interactions in the fields of functional genomics, proteomics and drug discovery. HTS expects its first product, the FLEX CHIP Kinetic Analysis System, to be available next year. Note 5. BENEFICIAL CONVERSION FEATURE EXPENSE Quantech's earnings per share figure for the quarter ended September 30, 2000 reflects large non-cash charges primarily from beneficial conversion feature resulting from equity sales of units consisting of four shares of convertible preferred stock and a warrant. A large number of such unregistered preferred shares were sold in a private placement at a customary discount to the current market price of the common stock. For accounting purposes, the selling price of the equity unit was split between the shares and the warrant, with the warrant value calculated using the Black-Scholes model and the remainder of the selling price assigned to the preferred shares. The resulting difference between the accounting value of the preferred stock and the market price of the common stock created large beneficial conversion feature charges. These charges were due to the nature of the equity sales and had no effect on net loss or cash flow. 8 Note 6. SEGMENTS The Company has two reportable segments: Quantech Ltd. (Quantech) and HTS Biosystems, Inc. (HTS). Quantech is completing development of a system for the hospital emergency department that is expected to run tests for a number of different medical conditions utilizing its proprietary technology, surface plasmon resonance (SPR). HTS is focused on developing and marketing SPR and other technologies for use in functional genomics, proteomics and drug discovery. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Quantech HTS Total ----------------------------------------- ----------- ----------- ----------- Net Sales $ 0 $ 40,000 $ 40,000 Interest Income 8,108 20,841 28,949 Interest Expense 19,226 0 19,226 Depreciation and amortization 113,683 1,546 115,229 Segment loss (1,762,435) (307,380) (2,069,815) Total assets $ 5,486,893 $ 1,100,275 $ 6,587,168 ----------------------------------------- ----------- ----------- -----------
No segment information is presented for the quarter ended September 30, 1999 as HTS as not formed until December 1999. Note 7. REVENUE RECOGNITION In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements." SAB No. 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles related to revenue recognition. The Company adopted SAB No. 101 in the first quarter of the fiscal year ending June 30, 2001. The adoption of SAB No. 101 did not have an effect on the Company's financial statements. 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 FasTraQTM. The FasTraQ consists of an instrument that sits on the top of a counter or cart and reads PrePaQTM disposable test cartridges developed by Quantech. Each Quantech PrePaQ test cartridge will contain a number of different medical tests such as those for a heart attack or pregnancy. Hand-held communication devices called ReaLinQTM communicators provide real time test results directly from the FasTraQ instrument to the medical staff members treating a patient. The FasTraQ produces test results in a manner different than other testing systems because it uses Quantech's proprietary technology based on the quantum physics phenomenon known as surface plasmon resonance ("SPR"), which involves the interaction of light with the electrons of metal. Quantech's technology creates SPR in a controlled environment which enables the FasTraQ 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 $20 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 FasTraQ to address what we believe is a pressing need for a test system that can quickly, in less than 15 minutes, and cost effectively provide test results, especially for patients with critical problems in emergency departments. The FasTraQ will be launched with at least a panel of three heart attack tests and a single test for pregnancy. Other tests are under development and are expected to be added to the FasTraQ system to provide the number of different quantitative tests the emergency department requires on an urgent basis. We have received clearance from the U.S. Food and Drug Administration to market for clinical use our tests for the cardiac enzymes Myoglobin and CK-MB and the pregnancy enzyme hCG. Quantech also owns 73% of HTS Biosystems, Inc. ("HTS"). HTS was formed around a combination of SPR technologies and intellectual property from both Quantech and Applied Biosystems, Inc. (NYSE:PEB). This technology supports the accelerated development of label-free, cost effective detection systems, initially for the scientific research market. HTS intends to become the definitive source of analytical systems and chemistry for the high-speed detection of molecular and cellular interactions in the fields of functional genomics, proteomics and drug discovery. HTS expects its first product, the FLEX CHIP Kinetic Analysis System, to be available next year. 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 $30,439,532 from September 30, 1991 (date of inception) through September 30, 2000 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 HTS 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, and $1,300,000 of minimum royalties have been paid on the license. Net sales increased to $40,000 for the three months ended September 30, 2000 from $0 for the same period in 1999 due to the sale of an evaluation system. General and administration expenses increased to $634,735 for the three months ended September 30, 2000 from $332,153 for the same period in 1999 primarily due to expenses associated with financing activities, HTS start-up costs and spending related to company expansion. We expect general and administrative expenses to increase in the future as Quantech and HTS complete development of their systems, prepare for market launch and begin to manufacture and distribute their products. Marketing expenses decreased to $197,153 for the three months ended September 30, 2000 from $269,182 for the same period in 1999 due to lower market research expenses. We expect marketing expenses to increase in the future as we prepare for market launch and begin to distribute our products. Research and development costs increased to $1,370,643 for the three months ended September 30, 2000 from $591,454 for the same period in 1999 primarily due to increased internal and outside development work at Quantech, and the initial development work at HTS. We expect R&D spending to significantly increase as Quantech and HTS complete the commercial development of their systems and begin to establish higher volume manufacturing capabilities. Minimum royalty expense decreased to $0 for the three months ended September 30, 2000 compared to $37,500 for the same period in 1999 due to the final minimum royalty payment made in January 2000. In the future we expect to incur additional royalty expense when royalties based on revenues exceed minimum payments (see Notes to Financial Statements, Note 2 - License Agreement). Interest income increased to $28,949 for the three months ended September 30, 2000 compared to $1,383 for the same period in 1999 as a result of more cash on hand from the proceeds of offerings for Quantech and HTS Biosystems. Interest expense increased to $19,226 for the three months ended September 30, 2000 from $9,608 during the same period in 1999 as a result of higher debt. Interest expense is expected to be lower for the remainder of the fiscal year as Quantech does not anticipate any debt other than $125,000 of capital lease obligations. For the three months ended September 30, 2000 Quantech had losses of $2,069,815 as compared to $1,238,514 for the same period in 1999. The higher loss was primarily due to higher operating expenses, especially for research and development. Quantech's earnings per share figure for the quarter ended September 30, 2000 reflects $1,771,904 of non-cash charges resulting from equity sales of units consisting of four shares of convertible preferred stock and a warrant. A large number of such unregistered preferred shares were sold in a private placement at a customary discount to the current market price of the common stock. For accounting purposes, the selling price of the equity unit was split between the shares and the warrant, with the warrant value calculated using the Black-Scholes model and the remainder of the selling price assigned to the preferred shares. The resulting difference between the accounting value of the preferred stock and the market price of the common stock created large beneficial conversion feature charges. These charges were due to the nature of the equity sales and had no effect on cash flow. The timetable for submitting additional tests to the FDA and introduction of Quantech's 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 September 30, 2000, Quantech has raised approximately $28,900,000 through a combination of public stock sales, private stock sales and debt obligations. In June 2000, Quantech began offering for sale units of its Series D convertible preferred stock to accredited investors. The units were priced at $10.00 per unit consisting of 4 shares of Series D preferred stock and a warrant to purchase one share of common stock at an exercise price of $3.50 per share. Each share of Series D stock was convertible into one share of common stock. During August through October 2000, Quantech raised net proceeds of $6,763,011 from the sale of 748,550 units. This offering triggered the conversion of all of Quantech's preferred stock into common stock subsequent to September 30, 2000. After such conversion, Quantech sold units priced at $10.00 per unit consisting of 4 shares of common stock and a warrant to purchase one share of common stock at an exercise price of $3.50 per share. During October 2000, Quantech raised net proceeds of $125,369 from the sale of 14,000 units. Quantech anticipates that its cash on hand will allow it to maintain operations through January, 2001. Additional financing of approximately $15 million will be needed to develop and submit to the FDA additional tests, complete clinical evaluation of the system, establish manufacturing capabilities and begin sales of the system. 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 stockholders. See "Cautionary Statements -- We expect to incur losses in the future and we need additional financing to achieve sales necessary to reach a break-even cash flow." Quantech has terminated its limited lending arrangement with its bank and does not anticipate receiving any significant funding from commercial lenders. In addition, HTS Biosystems anticipates raising up to $15 million for its operations either through strategic partners or the sale of securities. An equity sale would result in a dilution of Quantech ownership of HTS. Quantech incurred capital expenditures of $382,710 in the three month period ended September 30, 2000 primarily for automated production equipment and office systems and equipment. We anticipate significantly higher capital expenditures in the near future for laboratory and production equipment and office expansion as Quantech and HTS Biosystems near product introduction. The timing and amount of such expenditures will be governed by our 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. As of November 7, 2000 Quantech had 18,417,987 shares of common stock outstanding. 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 regarding financing needs, expenditures and other matters made in this document and elsewhere by or on behalf of Quantech. We expect to incur losses in the future and we need additional financing to achieve sales necessary to reach a break-even cash flow. We have incurred net losses in each year since inception. We expect to increase significantly our research and development, sales and marketing, manufacturing and general and administrative expenses in the future. We will spend these amounts before we receive any incremental revenue from these efforts. Further financing will be necessary to complete the Company's menu of tests, establish sales and marketing and manufacturing capacity and achieve the sales level required to achieve a break-even cash flow. Additional financing through investment capital, funding by strategic partner(s) or licensing revenues will be needed to operate until revenues can be generated in an amount sufficient to support operations. Quantech does not have any commitments for any such additional financing and does not anticipate receiving any additional significant funding from commercial lenders until product sales commence. 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 and could depress the market price of our common stock. "Going concern" statement in auditor's report may make it difficult to raise new capital. Quantech has not had any significant revenues to date. As of June 30, 2000 and September 30, 2000, we had accumulated deficits of $31,900,252 and $35,860,220, respectively. The report of the independent auditors on Quantech's financial statements for the year ended June 30, 2000, 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 FasTraQ is not complete and may not be completed on the current timetable and budget. Components of the FasTraQ system are under various stages of development. Until the FasTraQ development is completed and cleared through the FDA, there can be no assurance that the FasTraQ 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 in "We expect to incur losses in the future and we need additional financing to achieve sales necessary to obtain break-even cash flow" above. Additionally, the final price that we will need to charge to cover the costs of the FasTraQ instrument and the PrePaQ test cartridges cannot be determined until development is complete and FDA clearances have been obtained. If Quantech cannot receive FDA approval and offer the FasTraQ system with certain required features and tests at a cost acceptable to potential customers, it will be impossible for Quantech to continue operations. Failures in any of these areas will disappoint investors and could result in a decline in our stock price thus causing investors to lose substantial money. Other Factors As described in Quantech's Form 10-KSB for the year ended June 30, 2000 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. PART II OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities During August through October 2000, Quantech sold 748,550 units at $10.00 per unit (each unit consisting of 4 shares of Series D preferred stock and a warrant to purchase one share of common stock at $3.50 per share) to accredited investors. Each share of Series D preferred stock was convertible into one share of common stock. The sale of such shares was deemed to be exempt from registration under Section 4(2) of the 1933 Act and rule 506 promulgated thereunder. Quantech paid commissions and accountable expenses in the aggregate amount of $722,489 to registered investment banks for acting as selling agents, and issued the investment banks warrants to purchase up to 283,420 shares of common stock as additional compensation. The purchasers acquired these securities for their own accounts and not with a view to any distribution thereof to the public. During August through October 2000, Quantech issued 10,865,092 shares of common stock pursuant to conversion of 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 acquired these securities for their own accounts and not with a view to any distribution thereof to the public. During October 2000, Quantech sold 14,000 units at $10.00 per unit (each unit consisting of 4 shares of common stock and a warrant to purchase one share of common stock at $3.50 per share) to accredited investors. The sale of such shares was deemed to be exempt from registration under Section 4(2) of the 1933 Act and rule 506 promulgated thereunder. Quantech paid commissions and accountable expenses in the aggregate amount of $14,631 to a registered investment bank for acting as selling agent, and issued the investment bank a warrant to purchase up to 5,600 shares of common stock as additional compensation. 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 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: November 14, 2000 Chief Financial Officer EXHIBIT INDEX QUANTECH LTD. FORM 10-QSB for Quarter Ended September 30, 2000 Exhibit Number Description -------------- --------------------------------------------------------- 27 Financial Data Schedule (filed in electronic format only)