SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999
Commission file number 0-19957
QUANTECH LTD.
(Name of Small Business Issuer in its Charter)
Minnesota 41-1709417
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1419 Energy Park Drive
St. Paul, Minnesota 55108
(Address of Principal Executive Offices; Zip Code)
Issuer's Telephone Number Including Area Code: (651) 647-6370
Securities Registered Under Section 12(b) of the Act: None
Securities Registered Under Section 12(g) of the Act:
Common Stock, no par value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
X Yes No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended June 30, 1999 were $0.
The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of September 17, 1999, was approximately $ 3,485,000
(based on the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, no par value, outstanding on September 17, 1999:
3,028,507.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
PART I Page
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Item 1. Description of Business......................................... 3
Item 2. Description of Property.........................................24
Item 3. Legal Proceedings...............................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........25
Item 6. Management's Discussion and Analysis or Plan of Operation.......26
Item 7. Financial Statements............................................30
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............55
Item 10. Executive Compensation..........................................55
Item 11. Security Ownership of Certain Beneficial Owners and Management..55
Item 12. Certain Relationships and Related Transactions..................55
Item 13. Exhibits and Reports on Form 8-K................................55
Signatures...................................................................57
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Summary
General
Quantech Ltd. is completing development of its Hospital Emergency
Department Patient Treatment Information Platform. We refer to this platform as
the PTIP. The PTIP is expected to run tests for a number of different medical
conditions and deliver that test information by wireless communication devices
to the Emergency Department ("ED") staff treating a patient.
The PTIP consists of an instrument that sits on the top of a counter
and reads disposable test cartridges developed by Quantech. Each Quantech test
cartridge will contain from one to three different medical tests such as those
for a heart attack or pregnancy. The instrument 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"), which involves the interaction of light with
electrons. Quantech's technology creates SPR in a controlled environment which
enables its instrument 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. Transmission of this test information to the ED treatment staff will
be performed though the use of a wireless local area network communications
system and handheld receiving devices similar to a pager.
We are designing the PTIP for the emergency department. It 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 PTIP in the emergency
department will economically provide physicians with faster test results than
hospital central or STAT laboratories.
We expect our system to include an initial menu of more than 20 STAT
tests grouped in patient diagnosis-related panels such as cardiac enzymes (heart
attack), pregnancy, red and white blood cell counts, blood coagulation, kidney
function, pancreas function and electrolytes. Tests for liver functions, drugs
of abuse, therapeutic drugs and additional STAT tests will also be made
available on the system. Quantech's cardiac marker for myoglobin has received
FDA 510(k) approval. The second heart attack test for CK-MB and a test for
pregnancy are being reviewed by the FDA. The final heart attack marker for
Troponin I meets clinical requirements and the remaining launch menu of tests
are in various stages of development.
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The ED is a significant and consolidated market. Current processes for
providing test information to the ED staff are complicated and require a
multitude of steps that greatly increase patient treatment turnaround time. The
challenge is to increase efficiency and decrease costs. Time delays and
interruption of batch testing in the central lab, and the cost of tests run in
STAT labs, have caused both to fall well short of meeting the burden of
providing fast and economic STAT test results. Although there are some
point-of-care STAT testing products available for the ED, they do not have the
required test menu, ease of use, communication capability or quality of results
necessary to streamline the entire ED testing process. The solution is seven day
a week, 24 hour a day disintermediation of the process for providing ED
treatment information. We believe our product will provide this capability.
Product Description
ED Treatment Process
When an ED patient requires a test, in most cases a blood sample is
drawn and sent to the central or STAT lab through use of a runner or tube
system. The lab receives the sample, prepares and processes it and then the
results are sent to a computer printer or screen in the ED. An ED staff person
must then go to the printer or screen to obtain the result and assemble the
treatment team for that patient. Because of the numerous steps/persons necessary
to produce results, test turnaround time for ED patients can be up to three
hours.
Patient Treatment Information Platform ("PTIP")
The Quantech Patient Treatment Information Platform is a new multi-menu
STAT testing system with real time communication capabilities that is in the
final stages of commercial development. The system consists of the reading
instrument, disposable test cartridges and communication units. It will combine
accuracy with simplicity of use and automatically transfer information to the
appropriate ED personnel. The cartridges can process up to three tests at a time
and the instrument can simultaneously run up to 20 cartridges.
The Instrument
Our testing instrument is designed to fill the needs of the ED. Most
importantly, the instrument is designed to be compatible with new test
disposables when we introduce them to the market. As a result, when we add tests
through the introduction of new disposables, our original instrument will
accommodate these various tests without system obsolescence or significant
training of personnel.
The instrument consists of a communication module and up to five
testing modules. It will be of a size capable of sitting on a bench top or cart.
The communication module will contain a microprocessor, a computer touch screen,
barcode readers, interfaces for hospital information systems and Quantech
testing modules and systems to communicate with our communicators. Each test
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module will be able to run up to four test disposables and contain a white light
source and a number of optical components. The light is split into a number of
channels, providing for quality controls and multiple tests per disposable. When
the test disposable is inserted into a port of the test module an internal
bar-code reader identifies the type of tests to be run.
A touch screen and/or an external barcode reader on the communication
module will enable the user to enter both a user number and the patient or
specimen ID number. The instrument's computer screen and a screen on each test
module will display test results. The data or results produced by the instrument
will also be stored on an internal hard drive, downloaded to the hospital
information system, and may be provided on a hard copy through use of a printer
or sent to the ED staff via the Quantech communicators.
The module configuration of the instrument allows it to run up to 20
test cartridges simultaneously. This provides flexibility to meet the necessary
test throughput capability for a given institution. The instrument size allows
it to be located in the ED or associated STAT or rapid response lab. We intend
to offer several industry standard reagent rental programs whereby the
instrument will be provided to the hospital and it may retain the instrument
without cost as long as a specified number of test disposables are purchased.
The ability of our biosensor system to convert biological data into digital
signals should also permit designs that capitalize on future advances in
microcomputer and microfluidic technology.
The Disposable Test Cartridges
Our disposable test cartridges consist of an injection molded plastic
carrier containing a metal coated sensor surface. The metallic surface is
overlaid with reagents that react specifically with the analyte to be identified
and measured. An important feature of our disposable will be the ability to
attach a standard vacutainerTM tube, complete with its top intact, to the
disposable so that it is easy to use and the user has minimal exposure to the
patient sample. We intend that the disposables will be configured identically
for all of the tests we manufacture. One or more separate tests may be performed
on a single disposable providing Quantech the capability to develop clinically
related panels of tests by simply adding the appropriate reagents. Future
disposables for certain tests may also be configured to handle samples of urine
and other body fluids.
A further advantage of our disposable will be that an operator will not
be required to add reagents. This simplicity translates into ease of use and
immediacy of results. Disposables will be configured to provide single tests or
multiple clinically-related tests. Because the same disposable configuration is
intended to be used for all tests, manufacturing and quality control costs
should be minimized. Disposables are expected to have retail prices ranging from
$10.00 to $30.00 per disposable depending on the tests provided. Additional
development of the disposable is currently being conducted and future
development will be undertaken to expand the number of tests that may be
performed in general and on each disposable.
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The Communicators
Our system will include a wireless communication capability to allow
the ED staff to input all emergency test information directly into the PTIP from
"patient-side" and automatically provide the appropriate ED staff members with
test results at "patient-side". The local area network transmission unit will be
located in the instruments' communication module. Hand held receivers or
communicators similar to pagers will be provided to the ED staff. When the
patient arrives in the ED, the ED staff member can input necessary information.
When the ED staff member begins the test process at the instrument, the
instrument will be directed to send the results to the ED team for the
particular patient. When the results are completed they are provided to the
communicators and the receiving parties acknowledge receipt of the information.
The receipt of test information through the communicators speeds
results by eliminating the need for the ED staff to go back to the instrument or
printer multiple times to determine if the tests are finished. Also, because the
treatment team may be scattered throughout the ED, it will no longer be
necessary to track down individual team members to provide them with the
results. Our communicators will also have the ability to receive other patient
information such as hospital records if made available.
Comparison of Product Technologies
A number of basic methods, whether performed manually or by automated
instruments, are utilized in diagnostic testing including immunoassays, DNA
probes, electrochemistry, coagulation and chemical reactions. Each of these
testing methodologies requires a separate system and the performance of a series
of operations by a skilled technologist. These operations consist of sample
preparation, addition of reagents, further method-specific manipulations, and
reading and interpretation of raw data. Central and STAT laboratory automated
systems have mechanized, rather than eliminated many of these steps and have
been unable to combine a number of different methodologies or technologies into
a single system. Quantech's digital SPR technology, in contrast, can be used for
these and other basic testing methods within a single instrument, but without
complicated processing by the operator.
Central labs provide quality results on a menu of tests; however STAT
test results take from 45 minutes to 3 hours to be returned to the ED.
Additionally, STAT tests disrupt the batch testing of central labs. Although
STAT labs have quicker turnaround time with the quality advantages of the
central lab, personnel and equipment requirements of STAT labs result in high
test costs. Point-of-care instruments have reduced turnaround time, and in some
instances have lower test costs than STAT labs, but fail to meet laboratory
quality and ED needs due to lack of interface to the laboratory information
system, manipulation of patient sample, nonconcordance with central lab results
and lack of quantitative results. Most importantly, their limited test menu
keeps them from reducing the testing time for tests they cannot perform thus
making the treatment process only as fast and efficient as the slowest test from
the lab.
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Quantech's system addresses these shortcomings of the current testing
environment and products by combining the advantages of central lab and
point-of-care testing into a system with the following features:
o STAT quantitative test menu (a number instead of qualitative
yes/no)
o User-friendly system, rapid test turnaround time (10-20
minutes)
o Real time monitoring of test information status
o Multi-test, single use disposable (up to three clinically
related tests per disposable)
o Cost effective (comparable to central lab STAT test costs,
2x-4x less than STAT lab)
o Remote results receipt acknowledgement; auto-release of test
module for next patient
o Throughput of up to 20 cartridges simultaneously
o Concordance with central lab test results
o Whole blood/closed tube (vacutainerTM) patient sample
capability
o Full-time laboratory information system interface
o Automatic user/patient/test/QC input
o Internet ordering, training and information transfer
The Market
General Discussion
Excluding home diagnostics, the overall worldwide in-vitro diagnostic
market ("IVD") is more than $18.5 billion. Commercial, hospital central and
hospital STAT/rapid response laboratories currently account for the majority of
this market with testing divided between non-urgent and urgent (STAT) tests. We
are focused on the ED STAT testing portion of this market.
STAT tests are required by critical care physicians in areas such as
surgical suites, ICUs/CCUs and emergency departments because of the time
sensitive nature of their treatment. However, results of STAT tests from the
central laboratory can take a minimum of 45 minutes and up to three hours for
the physician to receive the results. This delay affects patient treatment and
increases costs. Although STAT laboratories have been established to reduce this
time delay, test costs are often 2-4 times that of the central lab and reduced
test time turnaround has not been effectively achieved.
The United States ED testing market is highly concentrated. There are
approximately 1,032 EDs in the United States that each sees more than 30,000
patients per year with the average ED in this group seeing 50,000 patients
annually. These EDs represent approximately 55% of the ED testing market.
Additionally, the majority of hospitals belong to a small number of buying
groups such as Columbia/HCA and the Voluntary Hospital Association of America
Inc. (VHA). This concentration results in a high level of revenue passing
through a limited number of sites.
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Pressure has increased to reduce the length of patient stay and provide
a greater portion of services in outpatient settings. Because the cost of
providing care in the ED far exceeds those of general medical or surgical units,
a primary goal of the ED is to determine the appropriate care path for a patient
so the patient may be treated, sent home or moved to a different area of the
hospital. Quick determination of this care path is made possible by rapid,
accurate and clinically relevant quantitative test results that are efficiently
delivered to the care provider. For this reason, STAT labs were established to
reduce test turnaround time, but their high test cost and still often lengthy
turnaround time have limited their effectiveness in reducing patient treatment
costs. Point-of-care ("POC") testing represents a growing segment of the IVD
market and a response to rising costs of health care that have produced changes
in hospital reimbursement. POC instruments have tried to fill the gap left by
STAT labs, but lack of central and STAT lab features and true increases in
efficiencies have kept them from penetrating the ED testing market.
The strategic direction we have chosen is to exploit the inherent
technological advantages of our SPR technology which allows us to address the
shortfalls of the central and STAT labs and POC instruments. As such, we will
focus on the STAT testing and information delivery needs of hospital EDs. The ED
requires a large menu of cost effective STAT tests and represents a significant
market opportunity.
The Emergency Department
Critical Care Units include Intensive Care Units, Surgical Suites and
Emergency Departments ("ED"). Our PTIP will first be marketed to EDs. EDs must
respond to critical patient conditions and conduct tests on an as needed basis
in order to support the health care team when a patient's condition is life
threatening. Most tests conducted in the ED are required STAT (urgent) and are
processed 24 hours a day.
Tests processed in a STAT manner significantly increase cost as they
require the hospital central or STAT laboratory to remain open at times when
they are not otherwise busy. Further, STAT testing in the central lab interrupts
batch testing and thus negatively affects cost while STAT labs costs are high
because of the inability to spread operating and capital costs across a larger
number of tests. The solution to this difficulty and expense is to bring a
system designed for STAT testing close to the patient in a manner that will
provide cost-effective test results promptly and accurately.
Because of space limitations in the ED, and a desire not to train
personnel on a number of different instruments, a single instrument for the ED
STAT test menu is required. Such ED STAT test menu includes:
o Cardiac marker panel (CK-MB, troponin I, myoglobin)
o hCG (Pregnancy)
o Blood Cell panel (WBC, RBC, Hct and Hgh)
o Coagulation
o Electrolytes (not blood gases which are performed by pulse
oximetry in ED)
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o Kidney Panel (Bun/Creatinine)
o Pancreas Panel
o Therapeutic Drug Monitoring (Digoxin, Theophylline)
o Drugs of Abuse (e.g., Cocaine, Marijuana)
o Amylase
o Liver Panel
In 1998 there were 98 million patient visits to 4200 EDs in the United
States of which 1,032 EDs saw 55% of the patients. Approximately 60% of these
patients received tests, which are reimbursed at the highest level. Europe
represents a similar number and concentration of ED patient testing. Quantech
estimates the worldwide ED STAT testing market to be more than $6 billion. As a
result, a limited number of sites produce a significant amount of STAT testing
revenue.
We anticipate introducing our system with a cardiac panel to test for
heart attacks, pregnancy test, blood cell panel, kidney panel, pancreas
function, electrolytes and coagulation. The combination of these tests provides
a significant market and more importantly combines a number of tests that are
typically required for a single patient. Because no other system can provide
this initial menu, or the additional tests to be provided after launch, we
believe our system can achieve substantial market penetration. We expect to
expand our menu beyond these first tests by adding the additional STAT tests
required by the ED paying attention to groupings of tests for particular needs
so that all tests necessary for a particular patient can be run off the
instrument. Since the needs of other areas of critical care are similar to those
tests required by the ED, we anticipate that growth into these other areas will
be evolutionary.
Cardiac Markers
Cardiac markers are needed to triage and treat individuals that arrive
at the ED with chest pain. Hospitals are aware of a need for more rapid cardiac
diagnosis and in response have started to establish chest pain centers in
emergency departments for triaging patients. Lacking, however, are whole blood,
cost effective, rapid cardiac test results. We have chosen a test panel for
heart attacks as one of our initial tests because of the high need,
reimbursement and volume these tests represent.
During a myocardial infarction ("AMI"), certain proteins are released
from the damaged heart muscle into the blood stream as a result of damage to the
muscle. These proteins are in varying concentrations and consist of CK-MB,
troponin, myosin light chain and myoglobin. Myoglobin is the earliest of the
markers to be detected and the first to leave the body. CK-MB and troponin I are
later markers but stay in the body longer and are more specific to cardiac
damage. Combinations of these markers are thus used to cover the required time
frames.
Cardiac markers are important to help identify patients who have
suffered an AMI. Such tests, however, are most useful if they can be performed
in less than twenty minutes in the ED or mobile care unit so that medical
personnel may take immediate action. Most of the existing test modalities
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require a central laboratory system that may delay the results beyond their
effective need. Our system will provide emergency personnel with the ability to
receive quantitative results for a heart attack in less than 20 minutes.
An estimated 6 million patients are evaluated for chest pain annually
in the United States with approximately 3 million admitted to an Intensive Care
Unit for further evaluation. Of those admitted only 30% subsequently "rule-in"
for acute AMI. Assuming an average cost of $3,000 per admission, this represents
a total expenditure of $6 billion annually on patients who do not have AMI. This
also does not take into account that 2-8% of patients with acute chest pain that
are released from the ED without treatment subsequently fulfill criteria for AMI
resulting in deaths and complications that represent greater than 20% of the
malpractice dollars awarded in the field of emergency medicine.
Not only are costs of admission and malpractice claims an important
issue, making a rapid definitive diagnosis of chest pain has become more
important. In the past when a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within four to six hours of the onset of a heart attack, it can dissolve
the blood clot, clear arteries and save heart muscle tissue. Because these
therapies are expensive and present undesirable side effects (e.g. allergic
reactions, bleeding) if the patient has not suffered an AMI, rapid accurate
testing for an AMI is very important.
Pregnancy
Every woman of childbearing age who enters the ED and requires a
procedure that could injure a fetus (x-ray or drugs) should have a pregnancy
test. Because of the delays in obtaining tests from the central or STAT lab,
many women are treated without the physician receiving the results of the
pregnancy test. Malpractice claims in this area are second only to cardiac
markers. Our system will have a whole blood quantitative test for the pregnancy
marker hCG. Whole blood is an advantage in the ED as it is the preferred method
of sample collection as compared to urine and may be obtained from a patient
that is unconscious.
A rapid quantitative pregnancy test is also important for treatment of
ectopic pregnancies (gestation outside of uterus, often in fallopian tube).
Ectopic pregnancy is a leading cause of abdomen pain for women presenting to the
ED. Determination of an ectopic pregnancy is made through the quantitative
testing of hCG. The ability of the Quantech system to perform pregnancy and
other tests will show its advantage as a quantitative multi-test platform.
Additional Tests
Quantech's initial test menu was chosen to provide tests for important
areas of critical need such as heart attacks and treatment of pregnant woman.
However, a heart attack test alone, although important, is not the only test
information required by a physician to complete treatment. A patient requires a
combination of tests. In the case of a heart attack, tests for cardiac markers,
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blood cell count, coagulation, electrolytes and, increasingly, pregnancy for
women who are presenting with chest pain, may all be necessary. Without the
ability to quickly provide all of these tests patient turnaround time cannot be
increased. Our system and test menu rollout is based on the need to look at the
patient need, not running a single test, and providing the information that
truly reduces the steps in the treatment process.
Sales and Marketing
General
We will form a strategic marketing group of approximately three
persons. Initially this marketing group will begin creating awareness of
Quantech and our system. Currently we are evaluating engagement of a strategic
distribution partner with a presence in diagnostic testing to market our
products in the United States. If a strategic distribution partner is engaged,
the marketing group will support this distribution partner and maintain contact
with customers to help us monitor the market for future products. If we
establish a direct sales force the marketing group will initiate that effort.
Determination of whether to ultimately market through a strategic
partner will be based upon factors such as size of sales force, presence in
hospital, pricing and discounts. The benefits of a strategic partner of lowering
marketing and sales cost and penetration of the market will be weighed against
distribution discounts, commitment to the sale of our product and our ability to
cost effectively rollout our product.
If an appropriate distribution partner cannot be engaged, the marketing
group will focus on sales of the system to the highest volume emergency
departments. Because of the small number of emergency departments in the United
States, and the large amount of revenue that can be provided by each one, we
believe that a small focused sales effort will enable us to effectively
penetrate the ED market.
International
Simultaneously with the launch of our system in the United States, we
intend to begin sales in western Europe and after appropriate approvals, in
Japan. These markets are similar to the United States in both menu of STAT
testing and concentration of patients in a small number of facilities. We will
manage and support international distributors if a strategic distribution
partner is not engaged. We completed our international marketing research and
have begun identifying potential distribution partners.
Clients
The laboratory manager makes the purchasing decision for diagnostic
testing equipment, although the end user of the Quantech system will be ED
personnel. Under CLIA regulation, the laboratory is responsible for training,
instrument calibration and quality assurance of testing systems. As such, the
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laboratory manager prefers a STAT testing instrument with the following
features:
o Comparable performance to central lab instrument with
concordant results
o One (maximum of two) instruments for entire ED STAT menu
o Full-time, bi-directional laboratory information system
("LIS") interface with information automatically downloaded to
LIS
o Automated user/patient/test/QC information input
o User ID and lockout capability by laboratory
o Minimum user training
o Costs comparable to central lab STAT tests and less than STAT
lab
ED personnel as the ultimate users must also accept any system that
will be used for their STAT testing needs. Although they cannot buy a testing
system without laboratory approval, they are capable of preventing a system from
being purchased. A system that is acceptable to the ED must provide the
following features:
o Comparable performance to central lab instrument with
concordant results
o Rapid turnaround time (less than 20 minutes)
o One (maximum of two) instruments for entire ED STAT menu
o Whole blood, closed collection tube sampling and transfer
o Automatic LIS download
o User friendly - minimum training and time at instrument
o High reliability
o Test menu so all patient testing completed
o Limitation of steps necessary to receive information
To achieve market penetration of the system, our marketing strategy
will be focused on achieving the acceptance of both laboratory and ED personnel.
We believe that testing systems to date have been unable to meet the needs of
both groups because of technology limitations. Quantech's PTIP is designed to
meet the requirements of both groups by incorporating all of the required
features into a single platform.
Internal Support
A support staff will be maintained to provide 24-hour product service
both in the interpretation of results and the use of the system, as well as
emergency shipping. There will be no field service. Faulty instruments will be
replaced in the event of failure.
Competition
The majority of in-vitro medical diagnostic testing is conducted in
hospital and commercial reference laboratories. These facilities are
particularly suited for efficiently processing a large number of patient
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single patient sample, most of the samples handled
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by central laboratories are processed so that one type of test, such as
pregnancy tests, are all run at one time or in batches. The competitors for this
market have addressed these laboratories' needs for high test throughput, low
reagent cost and low labor cost by developing automated systems. STAT labs have
been developed to address the needs of STAT testing and generally use the same
instrumentation found in the central laboratory. These laboratory systems are
generally complex and expensive, incorporating designs appropriate to the
central laboratories they serve which employ skilled operators who are expected
to perform sample preparation, system calibration and basic instrument
maintenance.
Both the health care providers and their suppliers are heavily
committed to the current central/STAT laboratory testing system model. The
laboratories are constrained by their organization structure, their substantial
capital investment in instrumentation and the task of processing a large number
of routine non-STAT tests. The suppliers' corporate infrastructures, marketing
and sales organizations, research and development activities and production
capabilities are committed to this market. As a result, hospitals may maintain
their established means of having testing performed.
There are a significant number of companies serving this central
clinical laboratory market. Most of them compete in only one or two segments of
the overall market. Abbott Laboratories, Roche Diagnostics, and Johnson &
Johnson are notable exceptions. These companies have achieved their broad market
penetration by developing several technologies, each targeted for the specific
needs of a market segment, and focusing their marketing, distribution and sales
activities on the central laboratory. Our PTIP must in general compete with
central and /or STAT laboratory testing systems to gain market share and, as a
result, we will meet with competition from these companies in both sales of our
system and the individual tests to be provided on the system.
There is significant new product activity in certain areas of critical
care STAT testing. Point-of-care testing systems are addressing limited testing
areas such as coagulation, blood gas and basic chemistry including electrolytes.
Two such point-of care systems, i-STAT Corp. and Diametrics Medical, which
market biosensor testing instruments capable of determining blood gas and
electrolyte levels have become recognized point of care testing systems. We do
not believe current products of i-STAT or Diametrics are capable, however, of
providing the breadth of tests and features required by the emergency
department.
With respect to testing for cardiac markers to diagnose a heart attack,
most testing is done in the hospital central and STAT labs with test result
turnaround times of more than 45 minutes. We are aware of only a limited number
of companies that provide rapid testing for heart attacks. Of such companies,
Spectral Diagnostics Limited, a Canadian company, markets a manual method
available for certain heart attack tests. Roche Diagnostics markets a manual
test for the heart attack marker troponin I. As configured Spectral's and
Roche's heart attack tests can provide only yes/no results instead of
quantitative results such as those provided by central laboratory systems.
Biosite Diagnostics has introduced an instrument and tests for heart attacks,
but we believe the Biosite system is not able to provide the number of tests and
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other STAT testing requirements expected to be available on our system.
Limitation of the tests that competitors' system can perform and the ability to
eliminate a number of steps in the testing and test information delivery process
provides us a competitive advantage because our system is expected to provide
results for a large number of different tests in an efficient manner.
All of the industry leaders, and many of the other companies
participating in the diagnostic testing market, have substantially greater
resources than those available to Quantech, including, but not limited to,
financial resources and skilled personnel. However, we believes our system
provides a product that is currently lacking for the Emergency Room STAT testing
market. There can be no assurance that current or future companies will not
invent systems that will have broad testing capabilities and features like those
expected in the PTIP. If we are able to launch our system, no assurance exists
that competitive pressures will not negatively affect our pricing.
The Technology
The PTIP's instrument and test disposable are a biosensor, which
incorporates Quantech's proprietary method of using surface plasmon resonance
("SPR") to detect certain chemical conditions. A biosensor is an analytical
device that combines a biological sensing or detection element with a suitable
transducer that converts biochemical activity into a measurable form of energy.
A biosensor's input is a specific biological event. Its output is a measurable
signal that corresponds to the input.
SPR is an optical-electrical phenomenon involving the interaction of
light with the electrons of a metal. The optical-electrical basis of SPR is the
transfer of the energy carried by photons of light to a group of electrons (a
plasmon) at the surface of a metal. Our proprietary method of using SPR consists
of a disposable cartridge composed of a plastic base with a fine grating molded
into its surface. The grating is coated with a very thin layer of gold. Gold is
used because it does not oxidize like other metals, which can affect chemistry
binding. The gold is subsequently coated with binding molecules. The binding
molecules may be antibodies, DNA probes, enzymes or other reagents chosen
because they react exclusively with a specific analyte. The analyte is the
substance being measured, such as a heart attack marker, and defines the test to
be done.
The coated metal surface interacts with light at a characteristic
resonant wavelength that depends upon the molecular composition at the metal's
surface. When the coated metal is exposed to a sample that contains the analyte
being tested, the analyte becomes bound to the metal through its specific
interaction with the binding molecules. As an analyte is bound, the composition
at the surface changes and consequently the resonant wavelength shifts. The
magnitude of the change in the resonant wavelength is proportional to the amount
of binding that takes place, which is proportional to the concentration of the
analyte in the sample.
Our SPR based technology combines the strengths of biology and physics
into a single entity. Other applications of technology using SPR that have been
reported in the scientific literature or explored by us include immunoassays for
cardiac markers, hormones, drugs, viruses and bacteria, quantitation of
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anesthetic gases, and DNA binding assays. Our SPR based technology thus
represents a simple, unified platform that is capable of performing a wide range
of diagnostic tests. Our SPR based technology is also a valuable research tool
that we expect will allow us to quickly and efficiently develop further tests
for the PTIP.
Manufacturing
The PTIP is comprised of a modular instrument, disposable tests and
communicators. The instrument consists of electronics and optics, most of which
are off the shelf parts, and does not require complicated assembly procedures.
The communicators are based upon current handheld data transfer devices (pager).
A contract manufacturer to be engaged under quality standards set by us will
perform production of the instrument and communicators. The contract supplier
has not yet been selected. We will take delivery of the instrument and
communicators, perform final quality inspection and inventory the units for
final shipment.
Our test disposable consists of two parts, the sensor grating piece
with the metal coating and the carrier for such piece. Contract suppliers
working pursuant to our specifications will produce both the coated sensor
grating and carrier. These pieces will be shipped either to us or to a contract
manufacturer to complete final manufacturing of the disposable. This final
manufacturing will consist of applying the assay (chemistry) on the gold coated
sensor grating, placing the final grating piece into the carrier, performing the
final assembly, labeling the unit and packaging the disposable for final
shipment.
Regulatory Environment
We believe that the products we initially propose to manufacture and
market will be classified as medical devices and will therefore be subject to
regulation by the FDA and, in some instances, by foreign government authorities.
Manufacturers of medical devices must comply with certain United States
regulations governing the testing, manufacturing and packaging of medical
devices. Medical devices are subject to different levels of testing and review
and may be subject to periodic inspection, without warning, to ensure
compliance. Comparable agencies in certain states and foreign countries will
also regulate our activities. Quantech's products could be subject to recall by
the FDA or Quantech itself, if it appears that the products and their use do not
conform to regulations.
Generally, medical devices intended for human use that are to be
marketed in the United States are placed in one of three regulatory
classifications depending upon the degree of testing and review to which the
device will be subject. We expect that our products will not be subjected to the
highest level of scrutiny because they do not come into contact directly with a
living human being. Specifically, the system would be classified as either Class
I or Class II devices as distinguished from implantable devices, which are
classified as Class III devices.
We believe that premarket clearance can be obtained for our initial
system and tests through submission to the FDA of a "510(k) premarket
notification" that demonstrates the product's substantial equivalence to another
device legally marketed pursuant to 510(k) premarket notification clearance. The
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FDA may also require, in connection with such notification, that it be provided
with the test results supporting this claim and demonstrating the safety and
efficacy of the device. Under certain circumstances, such clinical data can be
obtained only after submitting to the FDA an application for an investigational
device exemption.
For new products that are not considered to be "substantially
equivalent" to an existing device, two levels of FDA approval will probably be
required before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve Quantech's application for an
investigational device exemption, permitting clinical evaluations of the product
utilizing human samples under controlled experimental conditions. Second, the
FDA must grant to Quantech a premarket approval, which is granted if the FDA
finds that the product complies with all regulations and manufacturing
standards. In addition, the FDA may require further clinical evaluation of the
product, or it may grant a premarket approval but restrict the number of devices
distributed or require additional patient follow-up for an indefinite period of
time. Completion of this process could take up to 12 months and involve
significant costs.
We believe it is unlikely that we will be required to obtain FDA
premarket approval with respect to any of our currently proposed products,
except where mandated by the FDA such as HIV, cancer and hepatitis detection
tests. Any claims of panel diagnostics are subject to a premarket approval
procedure. Quantech anticipates that it will make claims in reference to its
heart attack tests. These claims will be made after the heart attack test is
marketed with only single claim implications. Accordingly, the heart attack test
should not be delayed in its initial introduction. If FDA premarket approval is
required for our initial system and heart attack tests, introduction of the
system would be significantly delayed, which could have a material adverse
effect on Quantech, although preliminary indications from the FDA are consistent
with a 510(k) filing.
For products subject to either 510(k) premarket notification or
premarket approval regulations, the FDA requires that Quantech conduct any
required studies following its guidelines known as Good Clinical Practices and
Good Laboratory Practices. Also, the manufacture of products subject to 510(k)
premarket notification or premarket approval regulations both must be in
accordance with current FDA regulations known as Good Manufacturing Practices.
Sales of medical devices outside the United States are subject to
foreign regulatory requirements. Compliance with ISO 9000 standards and receipt
of CE mark certification will be required for products sold in the European
Union. Quantech's products will be manufactured according to ISO 9001 and EN
46001 quality standards and Quantech expects to be able to apply the CE mark to
its products. In addition, international sales of medical devices manufactured
in the United States but not approved by the FDA for distribution in the United
States are subject to FDA export requirements. Under these requirements,
Quantech must assure that the product is not in conflict with the laws of the
country for which it is intended for export, in addition to complying with the
other requirements of Section 801(e) of the United States Food, Drug and
Cosmetic Act. No regulatory clearances have yet been obtained in any country
other than the United States and there is no assurance that any will be
obtained. Further, regulations and standards are subject to frequent changes. If
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regulatory clearances are not obtained, compliance with changes in regulations
or standards are not met or our manufacturing facilities and those of our
contract manufacturers are in violation of applicable regulations, the sale of
our product could be materially adversely affected.
Specific requirements demanded of a laboratory depend upon the
complexity of the test performed. Regulations under the Clinical Laboratory
Improvement Act of 1988 establish the following three categories of laboratory
tests:
1) tests that require little or no operator skill which allows for a waiver
of the regulations;
2) tests of moderate complexity; and
3) highly complex tests which require significant operator skill or training.
Regulatory requirements become increasingly stringent as the complexity
of the test rises. All laboratories performing tests of moderate or high
complexity must obtain either a registration certificate or a certificate of
accreditation from the Health Care Financing Administration or an organization
to whom HCFA has delegated such authority. HCFA has allowed electronic controls
for some point of care instruments to serve the function of daily quality
control performance to allow non-laboratory personnel to run such point of care
testing systems. The tests to be performed by the Quantech system are initially
expected to be of moderate complexity (class 2). Similar point of care systems
that are presently on the market are classified in this manner. In practical
terms, performing a test of moderate complexity means that the individual
supervising the test, i.e. the physician, pathologist or laboratory director,
must be well-educated and well-trained, but the individual operating the machine
requires no formal laboratory education and only task-specific training. We may,
but have not yet, applied for the waiver to have our system placed in class 2.
We have received FDA 510(k) premarket approval for our myoglobin heart
attack test for use in the clinical environment. We have submitted our heart
attack test for the cardiac marker CK-MB and our pregnancy test for hCG to the
FDA for similar approval. Each test for our system must obtain FDA approval. We
must also submit our system to the FDA for approval in both the clinical setting
and point of care use. The system will be provided to the FDA for such approvals
after each stage of commercial development is completed.
Significant Agreements
Ares-Serono License
We have acquired from Ares-Serono at a total cost of $3.4 million a
worldwide exclusive license to certain patents, proprietary information and
associated hardware (e.g. molds, test rigs, prototypes) related to Quantech's
SPR based technology. The Ares-Serono license calls for an ongoing royalty of 6
percent on all products utilizing the SPR based technology which are sold by
Quantech. If we sublicense the technology, we will pay a royalty of 15 percent
of all revenues received by us under any sublicense. We have paid $1,150,000 in
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minimum royalties to date and must make an additional payment of $150,000 on
December 31, 1999. If such payment is not made, Ares-Serono has the right to
cause a reversion to it of a royalty-free license, thereby depriving us of our
exclusive rights under the Ares-Serono license. The obligations of us to pay
royalties terminate when the total royalty payments reach a gross amount of $18
million, which amount would be increased by $2,000,000 each time a benchmark is
not met. After such total payments, our rights in the licensed SPR based
technology continue in perpetuity with no further obligations to Ares-Serono.
Ares-Serono specifically reserved, and did not license to us, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology. We believe that such limitation does not materially impact
the value of the Ares-Serono license given our current plan of
commercialization. In addition, the Ares-Serono license is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
biosensor technology for applications outside the field of the commercial
interests of Quantech.
The PE Corp. Agreement
Quantech and PE Corp. are parties to a technology and development
agreement. Such agreement provides PE with exclusive licenses to certain
Quantech technology for use outside of medical diagnostics and co-exclusive
rights to nucleic acid medical diagnostics. PE, pursuant to the agreement,
provides technical assistance related to our medical diagnostic system and
future royalty payments if PE sells products using Quantech's technology. The
royalty is set at 8% of gross sales. Minimum royalties of $500,000 per year
begin in December of 2000 and expire in conjunction with the related patents,
provided, however, that if PE does not proceed to commercialize the licensed SPR
biosensor technology prior to such date all rights revert back to Quantech.
Quantech, pursuant to an exclusive license agreement with PE, has
licensed PE technology that provides a large density, high throughput diagnostic
testing capacity for Quantech's SPR based technology in medical diagnostics
other than nucleic acid testing. Through the optical and chemistry deposition
advancements made by PE, they are able to read up to 100 test areas on a single
1 cm by 1 cm slide and plan to expand this capacity. Quantech believes such two
dimensional array capability, as now used in genomic screening research, should
allow Quantech to expand its system upstream from the critical care area to the
central laboratory. Vertical expansion to intensive care units, surgical suites,
doctor offices and home testing should also be possible. Future generations of
Quantech's current system are also expected to benefit from the PE technology by
reducing the number of unique test cartridges needed to perform the same number
of tests which reduces inventory requirements and manufacturing costs.
The royalty to be paid by Quantech will be 8% of gross sales of
Quantech products which include the PE technology. Minimum royalties to PE of
$500,000 per year begin in December of 2000, provided, however, that if Quantech
does not proceed to commercialize the SPR based technology licensed from PE
prior to such date, all rights revert back to PE. The PE technology will not be
initially incorporated into the PTIP.
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Patents and Proprietary Rights
The Ares-Serono license covers a total of eight patents. Some of these
patents relate to the optics, mirrors, light refraction and calibration of the
SPR based instrument. The remaining patents are on the grating, optics
enhancement of the disposals, sensitivity of the chemistry on the disposable,
attachment of the assay reagents to the disposal grating and features of the
prototype instrument. The chart below provides a listing of the patents and
their status.
<TABLE>
<CAPTION>
PATENT NAME DESCRIPTION U.S. GRANT COUNTRIES GRANTED
DATE
<S> <C> <C> <C>
Merlin I Main patent for grating coupled SPR 06/05/90 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. JP, LU, NL, NO, SE, WO
Merlin II Main patent for grating coupled SPR 21/11/89 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. JP, LU, NL, NO, SE, WO
Cellulose Nitrate Films Main patent for grating coupled SPR 12/02/91 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
biosensor. GR, IL, IT, JP, LU, NL, SE
Calibration Notches Minor patent. 09/05/89 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
GR, IL, IT, JP, LU, NL, SE
Enhanced SPR biosensor Minor patent. Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
assay GR, IL, IT, JP, LU, NL, SE
Sensor Using Photoresist Minor patent. 09/03/88 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
LU, NL, NO, SE, WO
Waveguide Sensor Minor patent. Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
IT, JP, LU, NL, NO, SE, WO
Restrahlen Effect Sensor Minor patent. N/A GB ONLY
</TABLE>
All developments by Quantech pursuant to the Ares-Serono license,
either proprietary or patentable in nature, are the property of Quantech. We
have made a number of advances that may be patentable and we are reviewing
registration of additional patents.
Employees
Quantech employs 23 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the PTIP and marketing. We expect to hire other personnel as
necessary for chemistry development, quality control, sales and marketing,
manufacturing and administration.
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CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-KSB and other written and
oral statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategy, financial results, product approvals, development programs and
marketing efforts. One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be affected by inaccurate assumptions, including,
among others, those discussed herein. Consequently, no forward-looking statement
can be guaranteed and actual results may vary materially. The Company notes
these factors as permitted by the Private Securities Litigation Reform Act of
1995. The Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual operations and cause such operations to differ
materially from those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company:
We need additional cash and will require at least $10 million in additional
financing to complete commercial development of our system and have no
commitments to receive any additional significant funding.
Quantech does not have sufficient funds to complete commercial
development or commence production and sales of its system. Quantech anticipates
that its cash on hand, bank credit facility, and completion of Quantech's Series
B convertible preferred stock offering for up to an additional $500,000 will
allow it to maintain operations through the end of calendar 1999. Additional
financing of at least $10 million of investment capital, funding by strategic
partner(s) or licensing revenues will be needed for the following: to operate
through September 2000. This financing will be used to develop and submit to the
FDA additional tests, complete clinical evaluation of the system, establish
manufacturing capabilities and prepare for sales of the system. 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 will result in
dilution to Quantech stockholders.
"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,
1998 and 1999, we had an accumulated deficits of $18,057,048 and $22,727,284,
respectively. The report of the independent auditors on Quantech's financial
statements for the year ended June 30, 1999, 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.
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Failure to complete development of the system on the current timetable and
budget would increase the amount of additional financing required and might make
it impossible for Quantech to continue operations.
Components of the system are under various stages of development. Until
system development is completed and cleared through the FDA, there can be no
assurance that the 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 and make it more difficult to
raise the additional funding. Additionally, the final price that we will need to
charge to cover the costs of the 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 system with certain
required features at a cost acceptable to potential customers, it will be
impossible for Quantech to continue operations.
We may not succeed in persuading potential buyers to replace existing equipment
and facilities with our system or in convincing the medical community and
third-party payers of the reliability, faster speed and lower cost of tests
conducted on our system.
In general, the commercial success of Quantech's system will depend
upon its acceptance by the medical community and third-party payers as a
reliable and economical product. The approval of the purchase of diagnostic test
systems by a hospital is generally controlled by its central laboratory. We
expect that there will be resistance by some central laboratories to a new
system until it is proven to have a level of accuracy and precision comparable
to current hospital tests. Finally, the system must provide results of STAT
tests quicker than current hospital tests for emergency department doctors.
We have not established a distribution system and may not have the resources to
effectively market our product.
We have had no experience in marketing our system. We intend to market
our system in the United States through either a direct sales force or through a
strategic partner with an established distribution system, and in foreign
markets through a strategic partner(s), but no assurance can be given that such
arrangements can be made. Establishing sales and marketing capability sufficient
to support the level of sales necessary for us to attain profitability will
require substantial efforts and significant management and financial resources.
There can be no assurance that we will be able to recruit and retain direct
sales and marketing personnel, engage distributors or have our marketing efforts
be successful.
We have very limited manufacturing and production experience and have not yet
contracted with third party manufacturers.
To be successful, we must timely manufacture sufficient quantities of
the instrument, test cartridges and communicators in compliance with regulatory
requirements, such as the FDA's Good Manufacturing Practices while maintaining
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product quality and acceptable manufacturing costs. The instrument,
communicators and many components of the test cartridges will be manufactured by
outside vendors. We have not entered into agreements with any of these vendors.
There can be no assurance that we can engage such vendors. Further, if engaged,
the limited control we have over any third party manufacturers as to timeliness
of production, delivery and other factors could affect our ability to supply
products on a timely basis.
We ultimately intend to chemically coat and assemble test cartridges
ourselves. We have never operated a manufacturing/assembly business. We will
have to establish a manufacturing facility, or contract for such services with a
third party, which is registered with the FDA.
We need FDA approval of the instrument and test cartridges in order to market
them and failure to obtain approval would mean failure for Quantech.
The instrument and test cartridges are human diagnostic medical devices
subject to regulation by the United States FDA and agencies of foreign
countries. The FDA regulates the system as a medical device that requires
clearance before sales can be made in the United States. We believe that such
pre-market clearance can be obtained for our instrument and substantially all of
our test cartridges through submissions of a 510(k) pre-market notification
demonstrating the particular product's substantial equivalence to another device
legally marketed under a similar clearance. There can be no assurance that the
FDA or other government regulators will approve the instrument and test
cartridges in a timely manner or at all. Delay in approvals, or failure to
achieve approvals, would increase the capital necessary to maintain operations
and make it more difficult to raise required funds.
We may not succeed in marketing our product against multiple levels of
competition, including from manufacturers of central and STAT laboratory testing
equipment and point-of-care testing products.
The medical testing market is highly competitive. We expect that
manufacturers of central and STAT laboratory testing equipment will compete to
maintain their market shares. Also, point-of-care testing products exist and
additional products are likely to be introduced to compete with certain tests to
be performed on the Quantech system. All of the industry leaders and many of the
other companies participating in this market have substantially greater
resources than the resources available to us, including, but not limited to,
financial resources and skilled personnel. Current central lab systems are also
well accepted and entrenched so that sale of our system may require a
significant sales effort to gain market share. If the features and costs of our
system are not compelling it will not successfully compete in its market.
Our system must comply with regulations governing the qualifications of persons
operating it and high qualification requirements could adversely affect sales.
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Use of Quantech's system will be subject to the Clinical Laboratory
Improvement Act of 1988. This regulation governs the qualifications of persons
supervising a laboratory test and the persons performing the laboratory test. We
have based our marketing plan on the belief that our system will be classified
as a test of moderate complexity. However, we have not sought the necessary
regulatory approval of this classification. In practical terms, performing a
test of moderate complexity means that the individual supervising the test must
be well educated and well trained, but the individual operating the system
requires no formal laboratory education and only task-specific training. If our
system were not classified as a test of moderate complexity, we would not have a
user-friendly operation advantage, which could have an adverse effect on sales.
Our system initially will be Quantech's only product making the company
vulnerable to technological obsolescence.
Our system will be Quantech's only initial product and is based upon a
single set of core technologies. We operate in a market characterized by rapid
and significant technological change. While we are not aware of any developments
in the medical industry which would render our current or planned product less
competitive or obsolete, there can be no assurance that future technological
changes or the development of new or competitive products by others will not do
so. To remain competitive, we will need continually to make substantial
expenditures for development of both equipment and additional tests.
Failure to maintain patent protection of our system would put Quantech at
substantial risk.
No assurance can be given that we will be able to protect our
proprietary technology. We are not aware of any issued patents that would
prohibit the use of any technology we currently have under development. However,
patents may exist or be issued in the future to other companies covering
elements of our system. The existence or issuance of such patents may require us
to make costly significant changes in the design of our systems or operational
plans. We have not conducted an independent patent search or evaluation with
respect to our patented technology. Ares-Serono, the company licensing certain
technology to us made no warranties as to the enforceability of any of the
patents or the commercial potential of the technology. Although Ares-Serono may
defend the patents they have licensed to us, we will be responsible for the
defense of any patents Ares-Serono elects not to defend and all of those issued
to us. The cost of patent litigation can be very substantial.
We are dependent on the Ares-Serono license for the SPR biosensor technology and
will lose exclusive rights to the technology if we do not make our last minimum
royalty payment.
We are dependent upon the worldwide license we acquired from
Ares-Serono to certain patents, proprietary information and associated hardware
related to the SPR biosensor technology. The Ares-Serono license calls for
ongoing royalties based on revenues and a $150,000 minimum royalty payment on
December 31, 1999. If the minimum royalty payment is not made, Ares-Serono has
the right to cause a reversion to it of a royalty-free license, thereby
depriving us of our exclusive rights under the Ares-Serono license.
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We are dependent upon our few employees and the loss of our CEO, CFO/COO or
Executive VP of R&D could leave Quantech without sufficient management expertise
to continue operations successfully.
We have a small number of employees. Although we believe we maintain a
core group sufficient for us to effectively conduct our operations, the loss of
any of our personnel could, to varying degrees, have an adverse effect on our
operations and system development. The loss of Robert Case, our CEO, Greg
Freitag, our COO and CFO or Thomas Witty, our Executive V.P. of R&D, would have
a material adverse effect on Quantech.
Shares eligible for future sale could depress the market price of Quantech's
Common Stock and make it more difficult for Quantech to raise the funds it needs
to survive.
Nearly all shares of Quantech's outstanding common stock are eligible
to be sold in the public market along with all shares that may be obtained upon
exercise of outstanding options, warrants or conversion of Series A Convertible
Preferred Stock. The sale of a large number of shares could adversely affect the
market price and liquidity of Quantech's securities. Such potential adverse
effects on price and liquidity, or the concern over these issues, could make it
more difficult for Quantech to raise required future funds.
ITEM 2. DESCRIPTION OF PROPERTY
Quantech leases offices (comprised of approximately 6,800 sq. ft.) at
1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent of
approximately $5,800 pursuant to a lease arrangement which expires February 2000
and will thereafter proceed on a month-to-month basis. Quantech is currently
reviewing plans to move to a new facility. It is anticipated that such facility
would be approximately 15,000 sq. ft. and meet Quantech's need for more than
three years.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the local over-the-counter and
the OTC Bulletin Board under the symbol QQQQ. Although trading in Quantech's
common stock does occur on a consistent basis, the volume of shares traded has
been sporadic. There can be no assurance that an established trading market will
develop, the current market will be maintained or a liquid market for Quantech's
common stock will be available in the future. Investors should not rely on
historical stock price performance as an indication of future price performance.
The following table summarizes the quarterly high and low sale prices
of Quantech's common stock for the last two fiscal years as adjusted for a
1-for-20 reverse stock split effected on June 2, 1998. The closing price of
Quantech's common stock on September 17, 1999 was $1.25 per share.
High Low
----------- ------------
Fiscal 1998
First Quarter $ 5.60 $ 2.20
Second Quarter $ 5.60 $ 2.80
Third Quarter $ 4.00 $ 2.70
Fourth Quarter $ 7.00 $ 2.60
Fiscal 1999
First Quarter $ 3.88 $ 0.94
Second Quarter $ 2.56 $ 0.53
Third Quarter $ 2.00 $ 1.38
Fourth Quarter $ 1.81 $ 1.38
As of September 23, 1999, the Company had approximately 500 holders of
record of its common stock, excluding stockholders whose stock is held either in
nominee name or street name brokerage accounts. Based on information obtained
from Quantech's transfer agent, as of such date, there were approximately 3,800
stockholders of Quantech's common stock whose stock is held in either nominee
name or street name brokerage accounts.
DIVIDEND POLICY
Quantech has never paid a cash dividend on its common stock or Series A
or B Convertible Preferred Stock. Payment of dividends is at the discretion of
the board of directors. The board of directors plans to retain earnings, if any,
for operations and does not intend to pay dividends in the near future.
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UNREGISTERED SALES OF STOCK
During May through September 1999, Quantech sold 943,334 shares of
Series B Preferred Stock to accredited investors at a price of $1.50 per share.
Each share of Series B Preferred Stock is convertible into one share of Quantech
Common Stock. The sale of such shares was deemed to be exempt from registration
under Section 4(2) of the Securities Act of 1933 (the "1933 Act") and Rule 506
promulgated thereunder. The Company paid commissions and accountable expenses in
the aggregate amount of $92,182 to registered investment banks for acting as
selling agents and issued the investment banks warrants to purchase up to 94,333
shares of Common Stock as additional compensation. The purchasers acquired these
securities for their own account and not with a view to any distribution thereof
to the public.
In September 1999 Quantech sold a warrant to an accredited investor to
purchase 175,000 shares of Quantech common stock at $1.25 per share. The warrant
was sold for $10,000 and may be exercised any time before September 9, 2004. The
sale of the warrant was deemed to be exempt from registration under Section 4(2)
of the 1933 Act and Rule 506 promulgated thereunder. The purchaser acquired this
security for its own account and not with a view to any distributon thereof to
the public.
In April 1999, 20,000 shares of Common Stock were issued pursuant to
conversion of 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
purchaser acquired these securities for its own account and not with a view to
any distribution thereof to the public.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS
History
Quantech was formed under the laws of Minnesota for the purpose of
effecting the change of domicile of Spectrum Diagnostics S.p.A ("SDS") from
Italy to the state of Minnesota through the merger with SDS on April 14, 1993.
Quantech had no operations prior to the merger and is continuing the business of
SDS to commercialize Surface Plasmon Resonance ("SPR") technology licensed from
Ares-Serono. SPR is the core technology of Quantech's proposed Patient Testing
Information Platform ("PTIP"). The PTIP will first be marketed to hospital
emergency departments ("ED") and is expected to provide a single, simple
economical system providing the rapid, quantitative STAT test menu EDs require.
The Quantech system configuration will consist of a bench top modular
instrument, a series of disposable tests with one or up to three tests per
disposable and wireless handheld communication devices to quickly provide test
information.
Quantech is a development stage company, which has suffered losses from
operations, and will require additional financing to complete development,
obtain FDA approval and commercialize its product. Our product development must
be completed, FDA approval obtained, the product introduced to the market and
ultimately Quantech will need to successfully attain profitable operations.
These factors raise substantial doubt about our ability to continue as a going
concern.
26
<PAGE>
Results of Operations
The Company has incurred a net loss of $22,346,864 from September 30,
1991 (date of inception) through June 30, 1999 due to expenses related to
formation and operation of 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 Quantech's predecessor, Spectrum Diagnostics Inc. and
interest on borrowed funds. In addition, an investment of $3,356,629 was made
when Quantech purchased the rights to the SPR technology.
For the year ended June 30, 1999 Quantech had interest income of $1,886
compared to $12,435 for the 1998 fiscal year as a result of less cash on hand as
proceeds obtained from Quantech's private placements of securities have been
used for operations and research and development.
General and administration expenses increased from $1,221,196 for the
year ended June 30, 1998 to $1,593,451 for the year ended June 30, 1999. The
increase in general and administration expenses was primarily due to costs
related to financing activities and market research. The financing costs
included commissions, charges for warrants and options issued in connection with
financing activities and professional fees. Market research expenses included
fees paid to consultants and research firms and costs to attend industry trade
shows. We expect general and administrative expenses to increase in the future
as we complete development of our system, prepare for market launch and begin to
manufacture and distribute our products. The Company will also begin to incur
increasing sales and marketing expenses.
Research and development costs increased from $1,608,361 in 1998 to
$1,815,727 in 1999. The increase was primarily due to costs related to the
preparation of 510(k) submissions to the FDA and increased development work. We
expect R&D spending to significantly increase as we complete the commercial
development of our system, conduct additional FDA work, and begin to establish
higher volume manufacturing capabilities.
Minimum royalty expense increased to $150,000 in 1999 as compared to
$112,500 in 1998 as a result of the higher minimum royalties owed under
Quantech's amended license with Ares-Serono. We will continue to accrue royalty
expense of $37,500 per quarter until the final minimum payment is made in
December 1999. In the future we expect to incur additional royalty expense when
royalties based on revenues exceed minimum payments.
Interest expense of $732,524 in 1999 was only slightly changed from
$719,126 in 1998. Interest expense during fiscal year 2000 is expected to be
significantly lower due to reduced debt.
For the year ended June 30, 1999 Quantech had a loss of $4,289,816 as
compared to $3,648,748 for the same period ended June 30, 1998. This increased
loss was primarily a result of higher general and administrative and research
and development expenses in 1999. Net cash used in operations, however,
decreased slightly to $2,398,520 in 1999 from $2,476,331 in 1998 primarily due
to higher non-cash charges for development work performed by Millennium Medical
Systems in exchange for a warrant to purchase shares of Quantech common stock.
We expect cash used in operations to increase during fiscal year 2000 as we
complete development of our system and prepare for market launch.
27
<PAGE>
Liquidity and Capital Resources
From inception to June 30, 1999, Quantech has raised approximately
$21,300,000 through a combination of public stock sales and private sales of
stock and debt obligations. In May 1999 Quantech began offering for sale a
minimum of $500,000 and a maximum of $2,000,000 of its Series B Preferred Stock
to accredited investors. The shares are priced at $1.50 per share and each share
is convertible into one share of Common Stock. During May through September 1999
Quantech raised net proceeds of $1,322,818 from the sale of 943,334 shares of
its Series B Preferred Stock at $1.50 per share.
Quantech anticipates that its cash on hand, bank credit facility, and
completion of Quantech's Series B convertible preferred stock offering for up to
an additional $500,000 will allow it to maintain operations through calendar
1999. Additional financing of approximately $10 million will be needed to
develop and submit to the FDA additional tests, complete clinical evaluation of
the system, establish manufacturing capabilities and prepare for 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 need additional cash
and will require at least $10 million in additional financing to complete
commercial development of our system and have no commitments to receive any
additional significant funding." 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 calendar 1999, it does not anticipate receiving any
additional significant funding from commercial lenders.
Quantech incurred capital expenditures of approximately $61,000 in
fiscal 1999. We anticipate significantly higher capital expenditures in the near
future for laboratory and production equipment and office expansion as we 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 September 17, 1999 Quantech had 3,028,507 shares of Common Stock
outstanding. It also had options and warrants outstanding to purchase an
additional 7,169,670 shares, and Series A and B Preferred Stock convertible into
7,447,185 shares of Common Stock.
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. As a development stage company, year 2000
issues are not significant to Quantech absent a national catastrophe. We believe
28
<PAGE>
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 because they are easily replaced. 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.
New Accounting Pronouncements
Comprehensive Income. The FASB has issued Statement No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Statement No. 130 requires reporting items, which are components of other
comprehensive income, such as foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities. Quantech adopted
this statement in the fiscal year ending June 30, 1999; however, it did not have
an effect on the presentation of Quantech's financial statements.
Segments. The FASB has issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, effective for fiscal years
beginning after December 15, 1997. Statement No. 131 requires disclosure of
certain information for each reportable segment, including general information,
profit and loss information, segment assets, etc. Quantech adopted this
statement in the fiscal year ending June 30, 1999; however, this statement did
not have an effect on its financial statements.
29
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as
follows:
Page
----
INDEPENDENT AUDITOR'S REPORT 31
Balance sheets as of June 30, 1998 and 1999 32-33
Statements of operations for the years ended June 30, 1998
and 1999, and the period from September 30, 1991
(date of inception) to June 30, 1999 34
Statements of stockholders' equity (deficit) for the period
from September 30, 1991 (date of inception) to June 30,
1999 35-42
Statements of cash flows for the years ended June 30,
1998 and 1999, and the period from September 30, 1991
(date of inception) to June 30, 1999 43-45
Notes to financial statements 46-58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and the
Board of Directors
Quantech Ltd.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Quantech Ltd. (A Development
Stage Company) as of June 30, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1998 and 1999, and for the period from September 30, 1991 (date of
inception), to June 30, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quantech Ltd. (A Development
Stage Company) as of June 30, 1998 and 1999, and the results of its operations
and its cash flows for the years ended June 30, 1998 and 1999, and for the
period from September 30, 1991 (date of inception), to June 30, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company which has
suffered significant losses from operations, requires significant additional
financing, and ultimately needs to continue development of its product, obtain
FDA approval, generate revenues, and successfully attain profitable operations
to realize the value of its license agreement and remain a going concern. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 14, 1999 (September 23, 1999, as
to the last paragraph of Note 7)
31
<PAGE>
QUANTECH LTD. (A Development Stage Company)
BALANCE SHEETS
June 30, 1998 and 1999
<TABLE>
<CAPTION>
ASSETS (Note 3) 1998 1999
---------- ----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 46,135 $ 436,223
Prepaid expenses:
Product development expense 115,000 57,500
Other 42,044 36,037
---------- ----------
Total current assets 203,179 529,760
---------- ----------
Property and Equipment
Equipment 366,493 427,508
Leasehold improvements 15,000 15,000
---------- ----------
381,493 442,508
Less accumulated depreciation 202,201 276,295
---------- ----------
179,292 166,213
---------- ----------
Other Assets
License agreement, at cost, less accumulated amortization (Note 4) 2,735,807 2,409,180
Prepaid product development expense, less current portion (Note 4) 57,500 --
Patents 9,029 13,045
---------- ----------
2,802,336 2,422,225
---------- ----------
$3,184,807 $3,118,198
========== ==========
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1999
------------ ------------
<S> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 3,112,818 $ 746,000
Accounts payable 97,333 111,857
Accrued expenses:
Minimum royalty commitment (Note 4) 75,000 75,000
Spectrum Diagnostics, Inc. obligations 19,846 --
Payroll and vacation 103,157 120,300
Interest 48,594 3,100
------------ ------------
Total current liabilities 3,456,748 1,056,257
------------ ------------
Redeemable Series A Preferred Stock, authorized 2,500,000 shares;
issued and outstanding 1,697,706 shares at June 30, 1999;
redeemable after November 5, 2003, at $5,470,538 (Note 6) -- 5,113,143
------------ ------------
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity (Deficit) (Notes 2, 3, 6, 7, and 9)
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 2,565,040 and 2,741,534 shares at
June 30, 1998 and 1999, respectively 16,308,438 16,498,837
Series B Preferred Stock, no par value; authorized 2,000,000
shares; issued and outstanding 623,334 shares at June 30, 1999 -- 891,500
Stock subscription receivable for Series B Preferred Stock -- (60,000)
Additional paid-in capital 1,476,669 2,342,745
Deficit accumulated during the development stage (18,057,048) (22,724,284)
------------ ------------
(271,941) (3,051,202)
------------ ------------
$ 3,184,807 $ 3,118,198
============ ============
</TABLE>
33
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
-------------------------------------
1998 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 12,435 $ 1,886 $ 185,102
------------ ------------ ------------
Expenses:
General and administrative 1,221,196 1,593,451 10,755,235
Research and development 1,608,361 1,815,727 8,069,793
Minimum royalty expense (Note 4) 112,500 150,000 1,225,000
Losses resulting from transactions with Spectrum
Diagnostics, Inc. -- -- 556,150
Net exchange gain -- -- (67,172)
Interest 719,126 732,524 1,950,365
------------ ------------ ------------
3,661,183 4,291,702 22,489,371
------------ ------------ ------------
Loss before income taxes (3,648,748) (4,289,816) (22,304,269)
Income taxes (Note 8) -- -- 42,595
------------ ------------ ------------
Net loss $ (3,648,748) $ (4,289,816) $(22,346,864)
============ ============ ============
Net loss attributable to common stockholders:
Net loss $ (3,648,748) $ (4,289,816)
Preferred stock accretion -- (377,420)
------------ ------------
Net loss attributable to common
stockholders $ (3,648,748) $ (4,667,236)
============ ============
Loss per basic and diluted common share $ (1.45) $ (1.75)
============ ============
Weighted-average common shares outstanding 2,523,975 2,673,812
============ ============
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Series B Preferred Stock Common Stock Paid-In
------------------------ ---------------------------------
Shares Issued Amount Shares Issued Amount Capital
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, at inception - $ -- -- $ -- $ --
Net loss - -- -- -- --
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 - -- -- -- --
--------- ----------- --------- ---------- -----------
Balance, December 31, 1991 - -- 190,000 3,766,320 898,405
Net loss - -- -- -- --
Common stock transactions:
Common stock issued, September 1992 - -- 35,000 699,033 875,967
Common stock issuance costs - -- -- -- (312,755)
8,000 shares of common stock to be issued - -- -- -- --
Officer advances, net - -- -- -- --
Cumulative translation adjustment - -- -- -- --
Elimination of cumulative translation adjustment - -- -- -- --
--------- ----------- --------- ---------- -----------
Balance, December 31, 1992 - -- 225,000 4,465,353 1,461,617
Net loss - -- -- -- --
Common stock transactions:
Common stock issued, January 1993 - -- 8,000 1,600 118,400
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 - -- -- -- --
--------- ----------- --------- ---------- -----------
Balance, June 30, 1993 - -- 234,500 46,900 6,012,070
Net loss - -- -- -- --
12,000 shares of common stock to be issued - -- -- -- --
Repayments - -- -- -- --
--------- ----------- --------- ---------- -----------
Balance, June 30, 1994 - -- 234,500 46,900 6,012,070
Net loss - -- -- -- --
Common stock issued, June 1995 - -- 107,500 21,500 276,068
Warrants issued for services - -- -- -- 40,200
--------- ----------- --------- ---------- -----------
</TABLE>
(Continued)
35
<PAGE>
<TABLE>
<CAPTION>
(Table continued)
Deficit
Accumulated Accumulated
Common Stock Common Stock During the Other
Paid for, but Subscriptions Due From Development Comprehensive
Not Issued Receivable Officers Stage Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, at inception $ -- $ -- $ -- $ -- $ --
Net loss -- -- -- (594,620) --
Common stock transactions:
Common stock issued, October 1991 -- -- -- -- --
Common stock issued, November 1991 -- -- -- -- --
Common stock issuance costs -- -- -- -- --
Cumulative translation adjustment -- -- -- -- 387,754
--------- ----------- --------- ---------- -----------
Balance, December 31, 1991 -- -- -- (594,620) 387,754
Net loss -- -- -- (2,880,988) --
Common stock transactions:
Common stock issued, September 1992 -- (53,689) -- -- --
Common stock issuance costs -- -- -- -- --
8,000 shares of common stock to be issued 120,000 -- -- -- --
Officer advances, net -- -- (27,433) -- --
Cumulative translation adjustment -- -- -- -- (209,099)
Elimination of cumulative translation adjustment -- -- -- -- (178,655)
--------- ----------- --------- ---------- -----------
Balance, December 31, 1992 120,000 (53,689) (27,433) (3,475,608) --
Net loss -- -- -- (996,089) --
Common stock transactions:
Common stock issued, January 1993 (120,000) -- -- -- --
Common stock issued, April 1993 -- -- -- -- --
Change in common stock par value resulting
from merger -- -- -- -- --
Repayments -- -- 5,137 -- --
--------- ----------- --------- ---------- -----------
Balance, June 30, 1993 -- (53,689) (22,296) (4,471,697) --
Net loss -- -- -- (1,543,888) --
12,000 shares of common stock to be issued 30,000 -- -- -- --
Repayments -- 53,689 22,296 -- --
--------- ----------- --------- ---------- -----------
Balance, June 30, 1994 30,000 -- -- (6,015,585) --
Net loss -- -- -- (2,070,292) --
Common stock issued, June 1995 (30,000) (20,000) -- -- --
Warrants issued for services -- -- -- -- --
--------- ----------- --------- ---------- -----------
</TABLE>
36
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Additional
Series B Preferred Stock Common Stock Paid-In
------------------------ ---------------------------------
Shares Issued Amount Shares Issued Amount Capital
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -- -- 342,000 68,400 6,328,338
Net loss -- -- -- -- --
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
Payment received on subscription receivable -- -- (960) (192) (14,808)
Compensation expense recorded on stock options -- -- -- -- 125,000
---------- ---------- ---------- ----------- -----------
Balance, June 30, 1996 -- -- 2,345,035 469,008 15,296,856
Net loss -- -- -- -- --
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
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 -- -- -- -- --
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
---------- ---------- ---------- ----------- -----------
Balance, June 30, 1997 -- -- 2,402,035 480,408 15,606,017
Net loss -- -- -- -- --
Conversion of common stock from par value to
no par value -- -- -- 15,392,446 (15,392,446)
</TABLE>
(Continued)
37
<PAGE>
<TABLE>
<CAPTION>
(Table continued)
Deficit
Accumulated Accumulated
Common Stock Common Stock During the Other
Paid for, but Subscriptions Due From Development Comprehensive
Not Issued Receivable Officers Stage Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -- (20,000) -- (8,085,877) --
Net loss -- -- -- (2,396,963) --
Common stock issued, net of issuance costs of
$848,877:
July 1995 -- -- -- -- --
August 1995 -- -- -- -- --
September 1995 -- -- -- -- --
November 1995 -- -- -- -- --
December 1995 -- -- -- -- --
May 1996 -- -- -- -- --
June 1996 -- -- -- -- --
Payment received on subscription receivable -- 20,000 -- -- --
Compensation expense recorded on stock options -- -- -- -- --
---------- ---------- ---------- ----------- -----------
---
Balance, June 30, 1996 -- -- -- (10,482,840) --
Net loss -- -- -- (3,925,460) --
Stock offering costs -- -- -- -- --
Common stock issued upon exercise of options
and warrants:
September 1996 -- -- -- -- --
October 1996 -- -- -- -- --
November 1996 -- -- -- -- --
December 1996 -- (57,500) -- -- --
January 1997 -- -- -- -- --
February 1997 -- -- -- -- --
March 1997 -- -- -- -- --
Payments received on subscription receivable -- 57,500 -- -- --
Compensation expense recorded on stock options -- -- -- -- --
Common stock issued, June 1997 -- -- -- -- --
Warrants issued with notes payable -- -- -- -- --
---------- ---------- ---------- ----------- -----------
---
Balance, June 30, 1997 -- -- -- (14,408,300) --
Net loss -- -- -- (3,648,748) --
Conversion of common stock from par value to
no par value -- -- -- -- --
</TABLE>
38
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Additional
Series B Preferred Stock Common Stock Paid-In
------------------------ ---------------------------------
Shares Issued Amount Shares Issued Amount Capital
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 (continued)
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
Net loss -- -- -- -- --
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 --
</TABLE>
(Continued)
39
<PAGE>
<TABLE>
<CAPTION>
(Table continued)
Deficit
Accumulated Accumulated
Common Stock Common Stock During the Other
Paid for, but Subscriptions Due From Development Comprehensive
Not Issued Receivable Officers Stage Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 (continued)
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 -- -- -- -- --
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 -- -- -- -- --
---------- ---------- ---------- ----------- -----------
Balance, June 30, 1998 -- -- -- (18,057,048) --
Net loss -- -- -- (4,289,816) --
Warrants issued with notes payable -- -- -- -- --
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 -- -- -- -- --
</TABLE>
40
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Additional
Series B Preferred Stock Common Stock Paid-In
------------------------ ---------------------------------
Shares Issued Amount Shares Issued Amount Capital
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 (continued)
Stock options issued for services:
October 1998 -- -- -- -- 42,000
Common stock issued upon conversion of preferred
stock:
November 1998 -- -- 74,052 55,539 --
January 1999 -- -- 15,952 11,964 --
March 1999 -- -- 500 375 --
April 1999 -- -- 20,000 15,000 --
Warrants issued for acquisition of engineering
development agreement:
November 1998 -- -- -- -- 554,000
Compensation expense recorded on stock options -- -- -- -- 43,000
Warrants issued in conjunction with Series A
Preferred Stock -- -- -- -- 227,000
Accretion to redemption value of Series A
redeemable Preferred Stock -- -- -- -- --
Issuance of Series B Preferred Stock 623,334 891,500 -- -- --
---------- ---------- ---------- ------------ -----------
Balance, June 30, 1999 623,334 $ 891,500 2,741,534 $ 16,498,837 $ 2,342,745
========== ========== ========== ============ ===========
</TABLE>
See Notes to Financial Statements
41
<PAGE>
<TABLE>
<CAPTION>
(Table continued)
Deficit
Accumulated Accumulated
Common Stock Common Stock During the Other
Paid for, but Subscriptions Due From Development Comprehensive
Not Issued Receivable Officers Stage Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 (continued)
Stock options issued for services:
October 1998 -- -- -- -- --
Common stock issued upon conversion of preferred
stock:
November 1998 -- -- -- -- --
January 1999 -- -- -- -- --
March 1999 -- -- -- -- --
April 1999 -- -- -- -- --
Warrants issued for acquisition of engineering
development agreement:
November 1998 -- -- -- -- --
Compensation expense recorded on stock options -- -- -- -- --
Warrants issued in conjunction with Series A
Preferred Stock -- -- -- -- --
Accretion to redemption value of Series A
redeemable Preferred Stock -- -- -- (377,420) --
Issuance of Series B Preferred Stock -- (60,000) -- -- --
---------- ---------- ---------- ------------ ---------
Balance, June 30, 1999 $ -- $ (60,000) $ -- $(22,724,284) $ --
========== ========= ========== ============ =========
</TABLE>
42
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
-------------------------------
1998 1999 June 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(3,648,748) $(4,289,816) (22,346,864)
Adjustments to reconcile net loss to net cash used in operating
activities:
Elimination of cumulative translation adjustment -- -- (178,655)
Depreciation 62,934 74,094 322,649
Amortization 379,727 441,627 2,177,971
Noncash compensation, services, and interest 787,429 1,403,241 2,727,920
Losses resulting from transactions with Spectrum
Diagnostics, Inc. -- -- 556,150
Write-down of investment -- -- 67,500
Changes in assets and liabilities, net of effects from purchase
of Spectrum Diagnostics, Inc.:
Decrease in prepaid expenses 1,062 6,007 48,055
Increase (decrease) in accounts payable (10,128) 14,524 103,635
Increase (decrease) in accrued expenses (48,607) (48,197) 472,524
---------- ---------- -----------
Net cash used in operating activities (2,476,331) (2,398,520) (16,049,115)
---------- ---------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (16,713) (61,015) (499,266)
Proceeds on disposition of property -- -- 37,375
Organization expenses -- -- (97,547)
Patent expenses (134) (4,016) (13,045)
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 -- -- (101,643)
Purchase of Spectrum Diagnostics, Inc., net of cash and cash
equivalents acquired -- -- (1,204,500)
---------- ---------- -----------
Net cash used in investing activities (16,847) (65,031) (4,483,385)
---------- ---------- -----------
</TABLE>
(Continued)
43
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
-------------------------------
1998 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net proceeds from the sale of common stock and warrants -- -- 12,880,797
Net proceeds from sale of Series A Preferred Stock -- 1,523,909 1,523,909
Net proceeds from sale of Series B Preferred Stock -- 831,500 831,500
Proceeds from debt obligations 1,820,420 498,230 6,047,085
Payments received on stock subscriptions receivable -- -- 5,000
Payments on debt obligations -- -- (522,810)
------------ ------------ ------------
Net cash provided by financing activities 1,820,420 2,853,639 20,765,481
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash -- -- 203,242
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (672,758) 390,088 436,223
Cash and Cash Equivalents
Beginning 718,893 46,135 --
------------ ------------ ------------
Ending $ 46,135 $ 436,223 $ 436,223
============ ============ ============
Cash Payments for Interest $ 20,374 $ 46,795 $ 207,265
============ ============ ============
Supplemental Schedule of Noncash Investing and Financing Activities
Issuance of debt obligations for services, accounts payable, and
accrued interest $ 219,300 $ -- $ 259,500
Issuance of debt for acquisition of license 550,000 -- 550,000
Issuance of warrants in connection with:
Product development 230,000 -- 230,000
Acquisition of sublicense agreement 165 -- 165
Issuance of convertible debt 451 76 527
Guarantee of debt 15,716 -- 15,716
Acquisition of engineering development agreement -- 554,000 554,000
Series A Preferred Stock sales and exchange for debt -- 227,000 227,000
Amount attributable to amortization of value of beneficial debt
conversion feature 988,444 546,902 1,535,346
Capital expenditures included in accounts payable 6,667 -- 6,667
Advances to Spectrum Diagnostics, Inc. -- -- 20,000
</TABLE>
(Continued)
44
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
------------------------------
1998 1999 June 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing and Financing
Activities (Continued)
Prepaid security issuance costs (acquired from Spectrum
Diagnostics, Inc.) ultimately used to reduce proceeds from
the sale of common stock -- -- 58,830
Due from Ital-American Securities, Inc. -- -- (674,374)
Stock issuance costs to be paid -- -- 237,201
Subscriptions receivable offset by accrued compensation -- -- 53,689
Officer advances offset by accrued compensation -- -- 109,462
Issuance of options and warrants for compensation and services 45,203 85,000 220,203
Series A Preferred Stock issued for debt obligations and accrued
interest -- 3,521,692 3,521,692
Accretion to redemption value of Series A redeemable
Preferred Stock -- 377,420 377,420
=========== =========== ===========
Acquisition of Spectrum Diagnostics, Inc.:
Fair value of other assets acquired, principally the license
agreement $ -- $ -- $ 1,489,500
Liabilities assumed -- -- (285,000)
----------- ----------- -----------
Cash purchase price paid, less $5,199 cash
acquired $ -- $ -- $ 1,204,500
=========== =========== ===========
Common stock issued for:
Services, equipment, and interest $ 45,584 $ 64,595 $ 384,229
Exercise of warrant -- 5,114 5,114
Acquisition of license agreement 390,000 -- 390,000
Subscriptions receivable -- -- 5,000
Debt obligations -- 37,812 2,355,937
Accounts payable -- -- 40,000
Accrued expenses -- -- 360,394
Series A Preferred Stock -- 82,878 82,878
----------- ----------- -----------
$ 435,584 $ 190,399 $ 3,623,552
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of the state of Minnesota for the purpose of effecting the change in
domicile of Spectrum Diagnostics S.p.A (SDS) from Italy to the state of
Minnesota through a merger with SDS on April 14, 1993. The merger was accounted
for as if it were a pooling of interests.
The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize the Surface Plasmon Resonance (SPR) technology.
Commercialization will consist of developing and introducing an instrument which
will run various tests capable of diagnosing various human health conditions and
which the Company intends to market to the world medical diagnostic industry.
A summary of the Company's significant accounting policies follows:
Cash equivalents: The Company maintains its cash in bank deposit and money
market accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating the fair value of each class of financial
instruments:
Cash and cash equivalents: The carrying amount approximates fair value because
of the nature or short maturity of those instruments.
Short-term debt: The fair value of the Company's short-term debt is estimated
based on interest rates for the same or similar debt having the same or similar
remaining maturities with similar risk and collateral requirements. The recorded
value of short-term debt approximates its fair value.
Prepaid product development expense: Prepaid product development expense arose
from the valuation of warrants issued to a licensee in return for technical
assistance to be rendered to the Company by the licensee over a period of
approximately two years via a technology and development agreement. The expense
is being recognized over this period (see Note 4).
Other assets: The license agreement is being amortized using the straight-line
method over the remaining life of the underlying patents of 15 years (see Note
4). Costs of obtaining additional patents are capitalized and will be amortized
over their useful lives.
The Company reviews its intangible assets periodically to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows. Though the Company has had no sales to date nor an
established market for its product, it has performed market studies to determine
potential size of the market and expected acceptance of its product. This has
been the basis for the Company's expected future net cash flows. Should the sum
of the expected future net cash flows be less than the carrying value, the
Company would determine whether an impairment loss should be recognized. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the intangible. Fair value would be determined
based on estimated expected future discounted cash flows or appraised value. To
date, management has determined that no impairment of intangible assets exists.
46
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over five years, or the life of the
related lease, whichever is less.
Debt discount attributable to value of conversion feature: The Company has
allocated a portion of the proceeds of its debt to a beneficial conversion
feature, measured by the intrinsic value of that feature. This amount was
amortized to interest expense using the straight-line method over the term of
the debt based on the expected conversion date of September 30, 1998 (see Note
3). This debt was immediately convertible, with a conversion price of the lesser
of $3.53 per share or 80 percent of the average trading price for 20 consecutive
days before a) a financing, sale, merger, or licensing transaction occurred or
b) the maturity date of September 30, 1998. The Company determined the discount
should be amortized over the period from date of issuance to September 30, 1998,
for the following reasons:
o The Company's history with these types of securities had shown that the
debt holders do not convert until the maturity date;
o No additional financing arrangement was expected to occur before the
maturity date;
o If no additional financing arrangement occurred before the maturity
date, the conversion rate at September 30, 1998, would likely be more
favorable to the debt holders; and
o By not converting, the debt holders would be in a senior secured
position in the event the Company had significant adverse financial
circumstances prior to September 30, 1998.
Substantially all of the notes were converted to preferred stock after September
30, 1998. The remaining debt holders elected to convert their instruments to
common stock prior to the expected conversion date, and the unamortized portion
of the discount related to their converted debt was charged to interest expense
in the period of conversion.
Income taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Research and development: The Company contracts with certain outside parties for
the design and development of its products in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Basic and diluted net loss per share: Basic per share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
47
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loss per share has been adjusted for accretion on the Company's mandatory
redeemable Series A Preferred Stock, which totaled $377,420 for the year ended
June 30, 1999. As described in Notes 6 and 7, the Company has options and
warrants outstanding to purchase shares of common stock, and the Series A and B
Preferred Stock is convertible into common stock. However, because the Company
has incurred losses in all periods presented, the inclusion of those potential
common shares in the calculation of diluted loss per share would have an
antidilutive effect. Therefore, basic and diluted loss per share amounts are the
same in each period presented.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive income: The FASB has issued Statement No. 130, Reporting
Comprehensive Income, which the Company adopted in the fiscal year ended June
30, 1999. Statement No. 130 requires reporting items which are components of
other comprehensive income, such as foreign currency items and unrealized gains
and losses on certain investments in debt and equity securities. The Company had
no comprehensive income as defined by SFAS No. 130 for the years ended June 30,
1998 and 1999. The Company's accumulated other comprehensive income in previous
years consisted of the cumulative translation adjustment.
Segments: The FASB has issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, which the Company adopted in the fiscal
year ended June 30, 1999. Statement No. 131 requires disclosure of certain
information for each reportable segment, including general information, profit
and loss information, segment assets, etc. The Company operates in only one
segment as defined by SFAS No. 131.
Translation of foreign currency statements: Prior to September of 1992, the
functional and reporting currency for SDS was the Italian lira. Concurrent with
the receipt of net proceeds from its initial public offering of common stock in
the United States in September 1992, and in connection with the phase-out of its
Italian operations, the functional and reporting currency of SDS changed from
the Italian lira to the United States dollar. As a result, the cumulative
translation adjustment component of equity was eliminated in 1992.
Note 2. Basis of Presentation
The Company was incorporated for the purpose of acquiring, developing, and
commercializing SPR technology for use in medical diagnostics. The Company has
had no sales, and the only revenue generated by the Company since its inception
has been interest income.
48
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation (Continued)
The Company is a development stage company which has suffered significant losses
from operations, requires significant additional financing, and ultimately needs
to continue development of its product, obtain FDA approval, generate revenues,
and successfully attain profitable operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern and realize the
value of its assets, including its license agreement. These financial statements
do not reflect any adjustments which might be necessary should the Company not
remain a going concern.
The Company does not have sufficient funds to complete commercial development or
commence production and sales of its system. The Company anticipates that its
cash on hand, bank credit facility, and the completion of Quantech's Series B
convertible Preferred Stock offering for up to an additional $500,000 will allow
it to maintain operations through part of fiscal year 2000. Additional financing
of at least $10 million of investment capital, funding by strategic partner(s),
or licensing revenues will be needed for the following: to develop and submit to
the FDA additional tests, to complete clinical evaluation of the system, to
establish manufacturing capabilities, and to prepare for sales of the system.
The Company 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.
Note 3. Short-Term Debt Obligations
Short-term debt obligations as of June 30, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
1998 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
13.5% convertible secured promissory notes, payable September
1998, secured by substantially all of the Company's assets
(converted to common stock and Series A Preferred Stock
in 1999) $ 3,159,720 $ -
Less discount attributable to value of beneficial conversion
feature (546,902) -
Prime rate unsecured note payable to a bank, due December
1999, guaranteed by a shareholder 500,000 746,000
--------------------------------------------
$ 3,112,818 $ 746,000
============================================
</TABLE>
As of June 30, 1998, the Company had secured promissory notes payable totaling
$3,159,720, which were due September 30, 1998. The notes were immediately
convertible (see Note 1) into shares of common stock at a price equal to the
lesser of $3.53 or 80 percent of the market price of the common stock for (i)
the 20 consecutive trading days prior to the maturity date of the notes or (ii)
the price at which the transaction which triggers the repayment of the notes was
completed.
49
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 3. Short-Term Debt Obligations (Continued)
In conjunction with the 1997 and 1998 offerings of the above notes, the
investors received warrants to purchase 619,681 shares of common stock. In
addition, the selling agents also received warrants to purchase 21,889 shares of
common stock. The warrants' exercise price is calculated in the same manner as
the notes' conversion price. The warrants were valued at stated cost of $1,310,
which approximated their fair value. The fair value was based upon management's
determination that the effective interest rate of the debt approximated the
market rate of similar debt instruments with similar risk. Also, the value
assigned to the warrants was not materially different than the value computed
using the Black-Scholes pricing model.
During the fiscal year ended June 30, 1999, the Company completed the offering
by selling an additional $252,230 of the notes. Warrants to purchase 37,835
shares of common stock were issued. In conjunction with this offering, the
selling agent received warrants to purchase 3,314 shares of common stock. These
warrants were valued at $76. This fair value was based upon management's
determination that the effective interest rate of the debt approximated the
market rate of similar debt instruments with similar risk. Also, the value
assigned to the warrants was not materially different than the value computed
using the Black-Scholes pricing model.
During 1999, the notes and the related accrued interest were converted to 30,400
shares of common stock and 1,173,902 shares of redeemable Series A Preferred
Stock (see Note 6).
Note 4. Agreements
License agreement: The Company has a license agreement for certain patents,
proprietary information, and associated hardware related to the SPR technology.
The license calls for an ongoing royalty of 6 percent on all products utilizing
the SPR technology which are sold by the Company. In addition, if the Company
sublicenses the technology, the Company will pay a royalty of 15 percent of all
revenues received by the Company under any sublicense. If the cumulative
payments of these two royalties fail to reach at least $500,000 by December 31,
1993, $850,000 by December 31, 1995, $1,000,000 by December 31, 1997, $1,150,000
by December 31, 1998, and $1,300,000 by December 31, 1999, the licensor has the
right to deprive the Company of its exclusive rights under the license agreement
(each time one of such benchmarks is not met). As of June 30, 1999, the Company
has paid $1,150,000 of the cumulative payment. The Company has also ratably
accrued additional minimum royalty payments of $75,000 as of June 30, 1999,
because sales or sublicense revenues through June 30, 1999, may not be adequate
to meet the cumulative minimum royalty payments. The Company intends to continue
accruing and paying minimum royalties for future periods until royalties based
on revenues exceed the minimum payment amounts.
The obligations of the Company to pay royalties terminate when the total royalty
payments reach a gross amount of $18,000,000, which amount would be increased by
$2,000,000 each time a benchmark is not met. After such date, the Company's
rights in the licensed SPR technology continue in perpetuity with no further
royalty obligations.
50
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 4. Agreements (Continued)
On March 3, 1994, the Company entered into an agreement with an investor group,
which included a shareholder of the Company, that granted them rights for a
sublicense of the research portion of the original license. This agreement had
no expiration date. The investor group received this sublicense in exchange for
a promise to purchase 10 percent of the aggregate number of shares offered in
the next public offering by the Company, not to exceed an aggregate amount of
$500,000. The investor group did not purchase any shares under the agreement.
In September 1997, the Company entered into an agreement to purchase certain
sublicense rights that had previously been granted to the investor group. In
return for these sublicense rights, the Company issued 150,000 shares of the
Company's common stock, convertible secured promissory notes totaling $550,000,
and warrants to purchase 82,500 shares of the Company's common stock, and
canceled the requirement to purchase shares in the next public offering. The
purchase of the sublicense rights was expected to provide the Company with
future benefits as the Company was subsequently able to sign an exclusive
sublicense agreement for nonmedical markets. This agreement provides the Company
with a possibility of receiving a future royalty stream from the sale of
products under this new sublicense agreement. Therefore, the Company capitalized
the sublicense rights at $940,165, the amount that approximates the fair market
price of the equity and debt instruments issued as of the date of the agreement.
The value assigned to the common stock was based on the quoted market value. The
values of the convertible debt instrument and the detachable warrants were based
on similar instruments previously placed by the Company (see Note 3). The value
assigned to the warrants was not materially different than the value computed
using the Black-Scholes pricing model.
Technology and development agreement: During the year ended June 30, 1998, the
Company entered into a technology and development agreement with a leading
supplier of life science systems and analytical instruments, which provides
exclusive license rights to certain of the Company's technology for use outside
of medical diagnostics, and co-exclusive rights to nucleic acid medical
diagnostics. The licensee, pursuant to the agreement, is providing technical
assistance related to the Company's medical diagnostic system and will be
required to pay future royalty payments of 8 percent of gross sales if the
licensee sells products containing the Company's technology. Minimum annual
royalties to be paid by the licensee will be $500,000 beginning December 2000,
expiring in conjunction with the related patents. Should the licensee fail to
commercialize the licensed technology, all rights will revert back to the
Company.
The licensee also received a warrant to purchase 1,400,000 shares of common
stock. The warrant expires December 2002 and is exercisable immediately. The
exercise price of the warrant is 95 percent of the average market price of the
Company's common stock for the 25 days prior to the date the licensee elects to
exercise the warrant. The warrant was valued at $230,000, based on the fair
value of technical assistance expected to be received by the Company over the
term of the technology and development agreement. As the technical assistance
was received, the prepaid asset resulting from this transaction was reduced, and
research and development expense was charged.
51
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 4. Agreements (Continued)
In conjunction with the above technology and development agreement, the Company
entered into a license for certain portions of this technology. The Company will
be required to pay royalties at 8 percent of its sales on products featuring the
technology. Minimum annual royalties of $500,000 begin in December 2000,
expiring in conjunction with the related patents. Should the Company fail to
commercialize the licensed technology, all rights will revert back to the
licensor, and future minimum annual royalty obligations will be canceled.
Research and development agreement: In November 1998, a warrant to purchase
1,800,000 shares of common stock was issued in conjunction with a research and
development services agreement. The warrant is nonforfeitable, fully vested, and
exercisable immediately at $1.10 per share and was valued at approximately
$518,000 using the Black-Scholes model as of the contract date, which is the
measurement date. Since all of the services under this agreement have been
rendered, the value has been expensed. In conjunction with this agreement,
warrants to purchase 144,000 shares of common stock were issued, and $190,000 in
cash was paid to the investment banking firm that arranged the transaction.
These warrants were valued at $36,000 using the Black-Scholes model.
Employment agreements: The Company has at-will employment agreements with its
Chief Executive Officer and Chief Financial Officer. The agreements require the
payment of one year's salary (for the chief financial officer) or $150,000 (for
the chief executive officer) if employment is terminated due to the sale of the
Company or a greater than 50 percent change in ownership. In addition, the Chief
Financial Officer is entitled to six months' salary if he is terminated without
cause.
Note 5. Leases
The Company leases its office space under an agreement which expires February
28, 2000. Approximate minimum aggregate rental commitments under this lease are
$46,000. In addition, there are monthly payments required for common area
maintenance and other related expenses.
Rental expense for the years ended June 30, 1998 and 1999, and for the period
from September 30, 1991 (date of inception), to June 30, 1999, was approximately
$58,000, $79,000, and $580,000, respectively.
Note 6. Stockholders' Equity
Capital stock: As of June 30, 1998, the Company had 12,500,000 capital shares
authorized consisting of 10,000,000 common shares and 2,500,000 undesignated
shares. In December 1998, the Company amended its Articles of Incorporation to
increase the number of authorized shares from 12,500,000 to 75,000,000. As of
June 30, 1998, the Board of Directors designated 50,000,000 shares as common
stock, 2,500,000 shares as Series A Preferred Stock, 2,000,000 shares as Series
B Preferred Stock, and 20,500,000 shares as undesignated.
Reverse stock split: On June 2, 1998, the Company reduced the number of shares
outstanding in a 1-for-20 reverse stock split. All share and per share amounts
presented have been retroactively adjusted to reflect the reverse split.
52
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6. Stockholders' Equity (Continued)
Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to change the par value of common stock from $0.01 per share to no
par value. The cumulative amount paid in excess of the previously stated par
value has been reclassed from additional paid-in capital to common stock on the
statement of stockholders' equity (deficit).
Redeemable Series A Preferred Stock: In November 1998, the Company established
Series A Preferred Stock (Series A Stock). The shares have no par value and a
liquidation value of $3.00 per share. Each share of Series A Stock is
convertible into, and has voting rights equal to, four shares of common stock.
The Series A Stock is not redeemable until November 5, 2003. If any time after
November 5, 2003, the Company receives a written request from the holders of at
least 50 percent of the outstanding share of Series A Stock, the Company 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 percent return per annum. Series A
Stock is automatically converted into shares of common stock if (i) the Company
closes on an equity offering of at least $5,000,000 or (ii) at least 50 percent
of the number of shares of Series A Stock that were outstanding as of November
30, 1998, have been converted or redeemed. The excess of redemption value over
carrying value is being accreted, using the interest method, over the period
until the first redemption date of November 5, 2003.
In November and December 1998, the Company sold 600,617 shares of its Series A
Stock to accredited investors at $3.00 per share and issued 1,173,902 shares of
Series A Stock pursuant to conversion of promissory notes and the related
accrued interest at a conversion price of $3.00 per share. The holders of the
promissory notes also received warrants to purchase 728,957 shares of common
stock at an exercise price of $0.75. The receipt of these warrants canceled the
detachable warrants issued in conjunction with the promissory notes. The new
warrants were valued at $162,000 using the Black-Scholes model. In conjunction
with these transactions, the Company paid commissions and expenses of $125,700
and issued warrants to purchase 176,420 shares of common stock to the selling
agents, which were valued at approximately $65,000 using the Black-Scholes
model.
In November 1998 through June 1999, 110,504 shares of common stock were issued
pursuant to conversion of Series A Stock.
Series B Preferred Stock: In May 1999, the Company established Series B
Preferred Stock (Series B Stock). The shares have no par value and a liquidation
value of $1.50 per share. Each share of Series B Stock is convertible into, and
has voting rights equal to, one share of common stock. Series B Stock is
automatically converted into shares of common stock if (i) the Company closes on
an equity offering of at least $5,000,000 or (ii) at least 50 percent of the
number of shares of Series B Stock that were outstanding have been converted. In
the event the next sale of securities by the Company results in a price lower
than $1.875 per share, holders of Series B Stock will receive additional common
stock upon conversion equal to an amount obtained by dividing the holder's
original investment by 80 percent of the price of the next offering less the
number of Series B Stock shares originally received.
53
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 6. Stockholders' Equity (Continued)
In May and June 1999, the Company sold 623,334 shares of its Series B Stock to
accredited investors at $1.50 per share. In conjunction with this transaction,
the Company paid commissions and expenses of $43,500 and will be issuing
warrants to purchase shares of common stock equal to 10 percent of the
underlying shares sold to the selling agents.
Subsequent to year-end, the Company sold 320,000 additional shares of Series B
Stock to accredited investors at $1.50.
Note 7. Stock Options and Warrants
Options--employee grants: The Company regularly grants options to its employees,
some of which are granted under the Company's 1998 Stock Option Plan (the Plan).
The Plan may grant options for up to 2,000,000 shares, of which 1,719,424 were
outstanding at June 30, 1999. If any of the options granted under the Plan
expire or are terminated prior to being exercised in full, the unexercised
portion of such options will once again be available for additional option
grants. The options granted will have a maximum term of ten years and an
exercise price not less than the market price on the date of grant. Vesting of
options granted to employees is determined on a discretionary basis. One-third
of the options granted to directors are exercisable immediately, with one-third
becoming exercisable on each of the first and second anniversaries of the date
of grant.
As permitted under generally accepted accounting principles, these grants are
accounted for following APB Opinion No. 25 and related interpretations.
Accordingly, compensation cost has been recognized for those grants whose
exercise price is less than the fair market value of the stock on the date of
grant. There was no compensation expense recorded for employee grants for the
years ended June 30, 1998 and 1999.
Options and warrants--nonemployee grants: The Company also grants options and
warrants to nonemployees for goods, services, and in conjunction with certain
agreements. These grants are accounted for under FASB Statement No. 123 based on
the grant date fair values.
Options and warrants--pro forma information: Had compensation cost for all of
the stock-based compensation grants and warrants issued been determined based on
the grant date fair values of awards, reported net loss attributable to common
stockholders and net loss per common share would have been increased to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1998 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss attributable to common stockholders, as reported $ (3,648,748) $ (4,667,236)
Net loss attributable to common stockholders, pro forma (4,016,450) (5,073,371)
Net loss per basic and diluted common share, as reported (1.45) (1.75)
Net loss per basic and diluted common share, pro forma (1.59) (1.90)
</TABLE>
54
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 7. Stock Options and Warrants (Continued)
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net loss for future years because
options vest over several years and additional awards generally are made each
year. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1998 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield $ - $ -
Expected stock price volatility 67.31% 68.67%
Risk-free interest rate 6.00% 6.00%
Expected life of options (years) 3 3
</TABLE>
Transactions involving stock options and warrants are summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Stock Average Exercise
Warrants Options Price Per Share
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 602,505 186,250 $ 5.40
Granted 172,140 56,175 8.60
Exercised (22,750) (16,000) 4.60
Expired (12,500) (10,916) 9.60
--------------------------------------------------------------------------
Balance, June 30, 1997 739,395 215,509 6.20
Granted 2,120,148 521,000 3.30
Expired (187,828) (243,009) 7.26
--------------------------------------------------------------------------
Balance, June 30, 1998 2,671,715 493,500 3.58
Granted 2,156,766 1,650,604 1.10
Exercised (22,500) - 2.50
Expired - (50,140) 3.47
--------------------------------------------------------------------------
Balance, June 30, 1999 4,805,981 2,093,964 $ 1.59
==========================================================================
</TABLE>
The fair value of warrants granted during 1998 and 1999 was $0.127 and $0.271
per warrant, respectively.
The fair value of equity instruments granted for goods and services during 1998
and 1999 was $0.419 and $0.339 per equity instrument, respectively.
The weighted-average fair value of options granted during 1998 and 1999 was
$1.09 and $0.50 per option, respectively.
55
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 7. Stock Options and Warrants (Continued)
The following tables summarize information about stock options and warrants
outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING
Weighted-
Average Weighted-
Range of Number of Remaining Average
Exercise Units Contractual Exercise
Price Outstanding Life Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.75 1,794,878 4.1 $ 0.75
$1.10-$1.18 1,902,548 4.4 1.10
$1.32 144,000 4.4 1.32
$1.43 1,400,000 (1) 3.5 1.43
$1.50 636,000 4.8 1.50
$1.63-$2.00 27,964 4.8 1.71
$2.40-$2.50 91,400 0.9 2.46
$3.00 373,000 3.0 3.00
$5.00 495,280 1.2 5.00
$12.00 5,000 1.8 12.00
$14.40 29,875 1.8 14.40
---------------------
6,899,945 1.59
=====================
OPTIONS AND WARRANTS EXERCISABLE
Weighted-
Range of Number of Average
Exercise Units Exercise
Price Exercisable Price
- --------------------------------------------------------------------------------
$0.75 1,332,712 $ 0.75
$1.10-$1.18 1,902,548 1.10
$1.32 144,000 1.32
$1.43 1,400,000 (1) 1.43
$1.50 232,001 1.50
$1.63-$2.00 2,500 1.81
$2.40-$2.50 91,400 2.46
$3.00 348,085 3.00
$5.00 495,280 5.00
$12.00 5,000 12.00
$14.40 29,875 14.40
--------------------------
5,983,401 1.65
==========================
</TABLE>
(1) These warrants are exercisable at a price equal to 95 percent of the
average of the last sale price of the Company's common stock in 25
consecutive trading days immediately preceding the date of the first
notice of exercise of the warrant received by the Company. The exercise
price of these warrants will change as the market value of the
Company's common stock changes.
56
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 7. Stock Options and Warrants (Continued)
The number of options and warrants exercisable at June 30, 1998, was 3,093,882,
with a weighted-average exercise price of $3.60.
On September 23, 1999, warrants to purchase approximately 455,000 shares of
common stock at $1.10 per share were exercised for a total of $500,000.
Note 8. Income Taxes
The Company's income tax expense consisted solely of a franchise tax in Italy
during the year ended December 31, 1992, since the Company has incurred no
United States income taxes. For United States income tax purposes, under
provisions of the Internal Revenue Code, the Company has approximately
$11,920,000 in operating loss carryforwards and $316,000 in research and
development credits at June 30, 1998, which may be used to offset otherwise
future taxable income. These carryforwards are subject to certain limitations
under the provisions of the Internal Revenue Code, Section 382, which relate to
a 50 percent change in control over a three-year period. At June 30, 1999, the
annual net operating loss carryforward limitation due to Section 382 was
approximately $200,000 per year, which reduced the carryforward by $2,800,000.
Further changes of control, including those discussed in Note 6, may result in
additional limitations and expiration of additional amounts of the net operating
loss carryforwards. Usage of the net operating loss carryforwards is also
dependent upon the Company attaining profitable operations in the future.
Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 1999, have the following expiration
dates:
Net Research and
Expiration Operating Development
Date Loss Credits
- -----------------------------------------------------------------------
2006 $ 241,000 $ -
2007 1,115,000 -
2008 827,000 20,000
2009 849,000 26,000
2010 - 45,000
2011 2,193,000 -
2012 3,738,000 117,000
2013 2,957,000 108,000
2014 3,397,000 108,000
-------------------------------------------------
$ 15,317,000 $ 424,000
=================================================
57
<PAGE>
Quantech Ltd. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 8. Income Taxes (Continued)
The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
June 30
-------------------------
1998 1999
- -------------------------------------------------------------------------------
Deferred tax assets:
Loss carryforwards $ 4,053,000 $ 5,208,000
Royalties 26,000 26,000
Research and development credits and deductions 521,000 629,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 30,000 295,000
Beneficial conversion feature 150,000 -
Other accruals 29,000 35,000
-------------------------
4,924,000 6,308,000
Valuation allowance for deferred tax assets (4,924,000) (6,308,000)
-------------------------
Net deferred tax assets $ - $ -
=========================
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
June 30, 1998 and 1999, due to the valuation allowance recorded against deferred
tax assets.
58
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
Robert Case 55 Chief Executive Officer and Director
Gregory G. Freitag 37 Chief Financial Officer, Chief Operating
Officer and Director
Thomas Witty 52 Executive Vice President Research and
Development
Robert Case has been Chief Executive Officer since June 1997 and a
director since October 1996. Mr. Case founded Case + Associates, Inc. in 1978
and has been its President since such time. Case + Associates is a leading
consultant in the research, design, development and engineering of medical
products. Its consulting activities include work for major multinational, as
well as development stage, medical companies in the design of products from
diagnostic instrumentation and implantable devices to surgical instruments. He
has served as a Chairman of the Industrial Designers Society of America, and was
a member of its national Board of Directors. Mr. Case has also been a longtime
member of the Biomedical Marketing Association. In addition, Mr. Case conducts
both US and European seminars in product definition and development for Frost &
Sullivan, the Society of Plastics Engineers, the Society for the Advancement of
Medical Packaging Institute and Northwestern University. His educational
background includes product design, engineering and marketing at Syracuse
University, the Illinois Institute of Technology and DePaul University.
Gregory G. Freitag has been Chief Operating Officer of the Company
since June 1997, and Chief Financial Officer and Secretary of the Company since
December 1995. From 1987 until joining the Company, Mr. Freitag was a lawyer
with the Minneapolis, Minnesota law firm of Fredrikson & Byron, P.A. As a
shareholder with Fredrikson & Byron, he practiced in the corporate, securities
and merger and acquisition areas of law. Mr. Freitag has his J.D. and CPA, has
served on securities advisory committees to the Minnesota Commissioner of
Commerce, was included in the Minnesota Business Guide to Law & Leading
Attorneys, and received from City Business its "40 Under 40" award recognizing
Mr. Freitag as one of the Twin Cities' next generation of business and community
leaders.
Thomas R. Witty, Ph.D. was an Organizational and Program Management
Consultant to Quantech Ltd. from August 1997 until October 1997 when he joined
Quantech as Vice President of Research and Development. Dr. Witty has been
59
<PAGE>
Executive Vice President of Research and Development since September 1999. Dr.
Witty has over 24 years of experience in the field of medical diagnostics. Dr.
Witty has had senior program management responsibilities for clinical instrument
systems while at Rohm and Haas, Becton Dickinson, Sanofi and ICN
Pharmaceuticals. In addition, he was a key contributor to the development of a
near patient diagnostic system at Biocircuits and was on the Board of Directors
of SeaLite Sciences, a small biotechnology company. In these roles, Dr. Witty
has led over 20 products to market through clinical trials and the FDA. Dr.
Witty received his Doctor of Philosophy in Medicinal Chemistry from Purdue
University and his Bachelor of Arts degree with honors in chemistry from
Macalester College in St. Paul, Minnesota. Further academic training was
completed under an NIH Fellowship at the University of Illinois and as a
Professor at Colorado State University.
The information required by Item 9 relating to directors and compliance
with Section 16 of the Exchange Act is incorporated herein by reference to the
sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" which appear in the Company's definitive proxy
statement for its 1999 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the section entitled "Shareholdings of Principal Shareholders and Management"
which appears in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference
to the section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the fourth quarter ended June 30, 1999.
60
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 of the
Securities Exchange Act of 1934, the Registrant caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUANTECH LTD.
("Registrant")
Dated: September 28, 1999 By: /s/ Robert Case
Robert Case,
CEO
In accordance with the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
ROBERT CASE and GREGORY G. FREITAG as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert Case Chief Executive Officer, and Director September 28, 1999
Robert Case (Principal Executive Officer)
/s/ Gregory G. Freitag Chief Financial Officer, COO, Secretary and September 28, 1999
Gregory G. Freitag Treasurer (Chief Financial and Accounting
Officer)
/s/ James F. Lyons Chairman September 28, 1999
James F. Lyons
/s/ Richard W. Perkins Director September 28, 1999
Richard W. Perkins
/s/ Edward E. Strickland Director September 28, 1999
Edward E. Strickland
</TABLE>
61
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
QUANTECH LTD.
For The Fiscal Year Ended June 30, 1999
Commission File Number: 0-19957
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of Quantech Ltd., as amended (incorporated by
reference to Exhibit 3.2 of the Registrant's Registration Statement on
Form SB-2; Reg. No. 333-70487).
3.2 Bylaws of Quantech Ltd. (incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.1 Form of Stock Certificate (incorporated by reference to Exhibit 4.1 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.2 Form of Private Placement Warrant (incorporated by reference to Exhibit
4.2 of the Registrant's Registration Statement on Form SB-2; Reg. No.
333-6809).
10.1 Lease for office space at 1419 Energy Park Drive, St. Paul, MN 55108
(incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-KSB for the Year Ended June 30, 1995).
10.2 Option Agreement with Ares-Serono, as amended (including license)
assigned to Quantech Ltd. pursuant to the Merger (incorporated by
reference to Exhibit 10.2 of the Registrant's Registration Statement on
Form S-4; Reg. No. 33-55356).
10.3 Letter of Amendment to Ares-Serono License (incorporated by reference
to Exhibit 10.6 of the Registrant's Form 10-KSB for the Year Ended June
30, 1995).
10.4* Employment Agreement with Gregory G. Freitag (incorporated by reference
to Exhibit 10.1 of the Registrant's Form 10-Q for the Quarter Ended
March 31, 1998).
10.5* Employment Agreement with Robert Case (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q for the Quarter Ended March
31, 1998).
10.6 Technology and Development License Agreement dated December 16, 1997
(incorporated by reference to Exhibit 1 of Schedule 13D filed by The
Perkin-Elmer Corporation on December 23, 1997, File No. 0-19957).
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 of the Registrant's Form
10-KSB for the year ended June 30, 1998).
62
<PAGE>
10.8 Warrant dated November 13, 1998 issued to 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).
10.9* 1998 Stock Option Plan and Forms of Incentive and Nonqualified Stock
Option Agreements used in connection therewith.
22 Quantech has no subsidiaries.
23 Accountants Consent
24 Power of Attorney (included on signature page)
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
63
QUANTECH LTD.
1998 STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. As long
as the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, then, to the extent
necessary for compliance with Rule 16b-3, or any successor provision,
each of the members of the Committee shall be a "Non-Employee
Director." For purposes of this Section 1(a) "Non-Employee Director"
shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(b) The "Company" shall mean Quantech Ltd., a Minnesota corporation.
(c) "Fair Market Value" shall mean (i) if such stock is reported by the
Nasdaq National Market or Nasdaq SmallCap Market or is listed upon an
established stock exchange or exchanges, the reported closing price of
such stock by the Nasdaq National Market or Nasdaq SmallCap Market or
on such stock exchange or exchanges on the date the option is granted
or, if no sale of such stock shall have occurred on that date, on the
next preceding day on which there was a sale of stock; (ii) if such
stock is not so reported by the Nasdaq National Market or Nasdaq
SmallCap Market or listed upon an established stock exchange, the
average of the closing "bid" and "asked" prices quoted by the National
Quotation Bureau, Inc. (or any comparable reporting service) on the
date the option is granted, or if there are no quoted "bid" and "asked"
prices on such date, on the next preceding date for which there are
such quotes; or (iii) if such stock is not publicly traded as of the
date the option is granted, the per share value as determined by the
Board, or the Committee, in its sole discretion by applying principles
of valuation with respect to all such options.
(d) The "Internal Revenue Code" is the Internal Revenue Code of 1986,
as amended from time to time.
(e) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any Subsidiary.
1
<PAGE>
(f) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant to
this Plan.
(g) The "Optionee" means an employee of the Company or any Subsidiary
to whom an incentive stock option has been granted pursuant to Section
9; a consultant or advisor to or director (including a Non-Employee
Director), employee or officer of the Company or any Subsidiary to whom
a nonqualified stock option has been granted pursuant to Section 10; or
a Non-Employee Director to whom a nonqualified stock option has been
granted pursuant to Section 11.
(h) "Parent" shall mean any corporation which owns, directly or
indirectly in an unbroken chain, fifty percent (50%) or more of the
total voting power of the Company's outstanding stock.
(i) The "Plan" means the Quantech 1998 Stock Option Plan, as amended
hereafter from time to time, including the form of Option Agreements as
they may be modified by the Board from time to time.
(j) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and
its Subsidiaries by facilitating the retention of competent personnel and by
furnishing incentive to officers, directors, employees, consultants, and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Sections 10 and 11 of this Plan.
Adoption of this Plan shall be and is expressly subject to the condition of
approval by the shareholders of the Company within twelve (12) months before or
after the adoption of the Plan by the Board of Directors. Any incentive stock
options granted after adoption of the Plan by the Board of Directors shall be
treated as nonqualified stock options if shareholder approval is not obtained
within such twelve-month period.
2
<PAGE>
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described in this Plan)
to determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other determinations necessary or advisable for the administration
of the Plan. The Administrator's interpretation of the Plan, and all actions
taken and determinations made by the Administrator pursuant to the power vested
in it hereunder, shall be conclusive and binding on all parties concerned.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and
without approval of the shareholders, designate those employees, officers,
directors (including Non-Employee Directors), consultants, and advisors of the
Company or of any Subsidiary to whom nonqualified stock options shall be granted
pursuant to Section 10 of this Plan; provided, however, that consultants or
advisors shall not be eligible to receive stock options hereunder unless such
3
<PAGE>
consultant or advisor renders bona fide services to the Company or Subsidiary
and such services are not in connection with the offer or sale of securities in
a capital raising transaction; and, provided further, that Non-Employee
Directors will be granted options pursuant to Section 11 of this Plan without
any further action by the Administrator. The Administrator shall, from time to
time, at its discretion and without approval of the shareholders, designate
those employees of the Company or any Subsidiary to whom incentive stock options
shall be granted under Section 9 of this Plan. The Administrator may grant
additional incentive stock options or nonqualified stock options under this Plan
to some or all participants then holding options or may grant options solely or
partially to new participants. In designating participants, the Administrator
shall also determine the number of shares to be optioned to each such
participant. The Board may from time to time designate individuals as being
ineligible to participate in the Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Option Stock. Forty Million (40,000,000) shares of Option
Stock shall be reserved and available for options under the Plan; provided,
however, that the total number of shares of Option Stock reserved for options
under this Plan shall be subject to adjustment as provided in Section 13 of the
Plan. In the event that any outstanding option under the Plan for any reason
expires or is terminated prior to the exercise thereof, the shares of Option
Stock allocable to the unexercised portion of such option shall continue to be
reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time
to time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant
to this Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's then Fair Market Value, or such other form of payment as may be
4
<PAGE>
authorized by the Administrator. The Administrator may, in its sole discretion,
limit the forms of payment available to the Optionee and may exercise such
discretion any time prior to the termination of the option granted to the
Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee; provided, however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Administrator grants the option; provided,
however, that if an Optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock per share on the date of the grant of
the option. The Administrator shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than ten (10) years after the date on which it is
granted; provided, however, that if an Optionee owns stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of its parent or any Subsidiary, the
incentive stock option granted to such Optionee shall be exercisable
during a term of not more than five (5) years after the date on which
it is granted.
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The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement. The Administrator may accelerate the exercisability
of any incentive stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Administrator
shall deem advisable. Any such Option Agreement shall contain such
limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10
shall be evidenced by a written Option Agreement. The Option Agreement shall be
in such form as may be approved from time to time by the Administrator and may
vary from Optionee to Optionee; provided, however, that each Optionee and each
Option Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Administrator, the option price per
share shall be one hundred percent (100%) of the Fair Market Value of
the Common Stock per share on the date the Administrator grants the
option; provided, however, that the option price may not be less than
eighty-five percent (85%) of the Fair Market Value of the Common Stock
per share on the date of grant.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Administrator.
The Option Agreement shall state when the nonqualified stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event a nonqualified stock option
is exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
stock option agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
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nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's
election to have shares withheld for this purpose shall be made on or
before the date the option is exercised or, if later, the date that the
amount of tax to be withheld is determined under applicable tax law.
Such election shall be approved by the Administrator and otherwise
comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in
effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Administrator
shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director of the Company whose
initial election or appointment to the Board of Directors occurs on or
after the date this Plan is approved by the Company's shareholders
shall, as of the date of such election, automatically be granted an
option to purchase 200,000 shares of the Common Stock at an option
price per share equal to 100% of the Fair Market Value of the Common
Stock on such date. Options granted pursuant to this subsection (a)
shall be immediately exercisable to the extent of 66,667 shares subject
to such option and to the extent of an additional 66,667 and 66,666
shares on each of the first and second anniversaries, respectively, of
the date of grant.
(b) Upon Re-election to Board. Each Non-Employee Director who, on and
after the date this Plan is approved by the Company's shareholders, is
re-elected as a director of the Company or whose term of office
continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 50,000 shares
of the Common Stock at an option price per share equal to 100% of the
Fair Market Value of the Common Stock on the date of such re-election
or shareholder meeting. Options granted pursuant to this subsection (b)
shall be immediately exercisable in full.
(c) General. No director shall receive more than one option pursuant to
subsection (b) of this Section 11 in any one fiscal year. All options
granted pursuant to this Section 11 shall be designated as nonqualified
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options and shall be subject to the same terms and provisions as are
then in effect with respect to granting of nonqualified options to
officers and employees of the Company except that the option shall
expire on the earlier of (i) three months after the Optionee ceases to
be a director (except by death) and (ii) ten (10) years after the date
of grant. Notwithstanding the foregoing, in the event of the death of a
Non-Employee Director, any option granted to such Non-Employee Director
pursuant to this Section 11 may be exercised at any time within six
months of the death of such Non-Employee Director or on the date on
which the option, by its terms expires, whichever is earlier.
SECTION 12.
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part,
by the Optionee other than by will or by the laws of descent and distribution
and, during the Optionee's lifetime, the option may be exercised only by the
Optionee. If the Optionee shall attempt any transfer of any incentive stock
option granted under the Plan during the Optionee's lifetime, such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.
The Administrator may, in its sole discretion, permit the Optionee to
transfer any or all nonqualified stock options to any member of the Optionee's
"immediate family" as such term is defined in Rule 16a-1(e) promulgated under
the Securities Exchange Act of 1934, or any successor provision, or to one or
more trusts whose beneficiaries are members of such Optionee's "immediate
family" or partnerships in which such family members are the only partners;
provided, however, that the Optionee receives no consideration for the transfer
and such transferred nonqualified stock option shall continue to be subject to
the same terms and conditions as were applicable to such nonqualified stock
option immediately prior to its transfer.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Option Stock reserved under Section 6 hereof and the
number of shares of Option Stock covered by each outstanding option and the
price per share thereof shall be adjusted by the Board to reflect such change.
Additional shares which may be credited pursuant to such adjustment shall be
subject to the same restrictions as are applicable to the shares with respect to
which the adjustment relates.
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Unless otherwise provided in the stock option agreement, in the event
of an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding options shall become immediately exercisable,
whether or not such options had become exercisable prior to the transaction;
provided, however, that if the acquiring party seeks to have the transaction
accounted for on a "pooling of interests" basis and, in the opinion of the
Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the foregoing, in the event of such a
transaction, the Board may provide for one or more of the following:
(a) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Optionees a reasonable period of time in
which to exercise the options prior to the effectiveness of such
transaction);
(b) that Optionees holding outstanding incentive or nonqualified
options shall receive, with respect to each share of Option Stock
subject to such options, as of the effective date of any such
transaction, cash in an amount equal to the excess of the Fair Market
Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of
such options; provided that the Board may, in lieu of such cash
payment, distribute to such Optionees shares of stock of the Company or
shares of stock of any corporation succeeding the Company by reason of
such transaction, such shares having a value equal to the cash payment
herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such
plan for such transaction and provide to Optionees holding such options
the right to exercise their respective options as to an equivalent
number of shares of stock of the corporation succeeding the Company by
reason of such transaction.
The Board may restrict the rights of or the applicability of this Section 13 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
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SECTION 14.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation, those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Option Stock to Optionee, the Administrator may require Optionee
to (i) represent that the shares of Option Stock are being acquired for
investment and not resale and to make such other representations as the
Administrator shall deem necessary or appropriate to qualify the issuance of the
shares as exempt from the Securities Act of 1933 and any other applicable
securities laws, and (ii) represent that Optionee shall not dispose of the
shares of Option Stock in violation of the Securities Act of 1933 or any other
applicable securities laws.
As a further condition to the grant of any incentive or nonqualified
stock option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
(a) In the event the Company advises Optionee that it plans an
underwritten public offering of its Common Stock in compliance with the
Securities Act of 1933, as amended, and the underwriter(s) seek to
impose restrictions under which certain shareholders may not sell or
contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common
Stock, Optionee will not, for a period not to exceed 180 days from the
prospectus, sell or contract to sell or grant an option to buy or
otherwise dispose of any incentive or nonqualified stock option granted
to Optionee pursuant to the Plan or any of the underlying shares of
Common Stock without the prior written consent of the underwriter(s) or
its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary
to reduce the number of issued but unexercised stock purchase rights so
as to comply with any states securities or Blue Sky law limitations
with respect thereto, the Board of Directors of the Company shall have
the right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written
notice of such acceleration, and (ii) to cancel any options or portions
thereof which Optionee does not exercise prior to or contemporaneously
with such public offering.
(c) In the event of a transaction (as defined in Section 13 of the
Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Optionee will comply with Rule 145 of
the Securities Act of 1933 and any other restrictions imposed under
other applicable legal or accounting principles if Optionee is an
"affiliate" (as defined in such applicable legal and accounting
principles) at the time of the transaction, and Optionee will execute
any documents necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock
certificate issued upon exercise of an option granted pursuant to the Plan to
assure compliance with this Section 14.
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SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend
or discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any
applicable law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee
to exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period
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INCENTIVE STOCK OPTION AGREEMENT
QUANTECH LTD.
1998 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this _________ day of __________,
by and between Quantech Ltd., a Minnesota corporation (the "Company"), and
_________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee or officer of
the Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1998 Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator of the Plan has authorized the grant of an
incentive stock option to Optionee and has determined that, as of the effective
date of this Agreement, the fair market value of the Company's Common Stock is
$_____ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of __________________ shares of Common
Stock at a per share price of $_______ on the terms and conditions set forth
herein, and subject to adjustment pursuant to Section 12 of the Plan. Except as
otherwise provided in Paragraphs 2(b) and 2(c), this Option is intended to be an
incentive stock option within the meaning of Section 422, or any successor
provision, of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
2. Duration and Exercisability.
a. The term during which this Option may be exercised shall terminate
on ___________________, except as otherwise provided in Paragraphs 2(b) through
2(e) below. This Option shall become exercisable according to the following
schedule:
Vesting Date Percentage/Number of Shares
_____________ _________
_____________ _________
_____________ _________
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Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. Termination of Employment (other than Change of Control, Disability or
Death). If Optionee's employment with the Company or any Subsidiary is
terminated for any reason other than because of a "change of control
transaction" as described in Paragraph 2(c) or because of disability or death,
this Option shall completely terminate on the earlier of (i) the close of
business on the three-month anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2 above.
Notwithstanding the foregoing, if, upon such termination of employment, Optionee
continues to serve as a consultant, advisor or nonemployee director of the
Company or Subsidiary, this Option shall terminate on the earlier of (i) the
close of business on the three-month anniversary date of the termination of all
of Optionee's relationships with the Company or Subsidiary, and (ii) the
expiration date of this Option stated in Paragraph 2(a) above, and the Option
shall not, upon Optionee's termination of employment, be treated as an incentive
stock option within the meaning of Code Section 422.
In such period following the termination of Optionee's employment or,
if applicable, such other relationship, this Option shall be exercisable only to
the extent the Option was exercisable on the vesting date immediately preceding
such termination of employment or such other relationship, but had not
previously been exercised. To the extent this Option was not exercisable upon
such termination of employment or such other relationship, or if Optionee does
not exercise the Option within the time specified in this Paragraph 2(b), all
rights of Optionee under this Option shall be forfeited.
c. Change of Control. If (i) Optionee's employment with the Company or
any Subsidiary is terminated because of a "change of control transaction," (ii)
such transaction is treated as a "pooling of interests" under generally accepted
accounting principles, and (iii) Optionee is an "affiliate" of the Company or
Subsidiary under applicable legal and accounting principles, this Option shall
completely terminate on the later of (A) the close of business on the
three-month anniversary date of such termination of employment or (B) the close
of business on the date that is sixty (60) days after the date on which
affiliates are no longer restricted from selling, transferring or otherwise
disposing of the shares of stock received in the change of control transaction.
Notwithstanding the foregoing, if, upon such termination of employment, Optionee
continues to serve as a consultant, advisor or nonemployee director of the
Company or Subsidiary, this Option shall terminate on the later of (X) the close
of business on the three-month anniversary date of the termination of all of
Optionee's relationships with the Company or Subsidiary, and (Y) the close of
business on the date that is sixty (60) days after the date on which affiliates
are no longer restricted from selling, transferring or otherwise disposing of
the shares of stock received in the change of control transaction, and this
Option shall not, upon Optionee's termination of employment, be treated as an
incentive stock option within the meaning of Code Section 422.
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In such period following the termination of Optionee's employment or,
if applicable, such other relationship, this Option shall be exercisable only to
the extent the Option was exercisable on the vesting date immediately preceding
such termination of employment or such other relationship, but had not
previously been exercised, unless the exercisability of this Option has been
accelerated as provided in Section 12 of the Plan. To the extent this Option was
not exercisable upon such termination of employment or such other relationship,
or if Optionee does not exercise the Option within the time specified in this
Paragraph 2(c), all rights of Optionee under this Option shall be forfeited. If
Optionee exercises this Option on a date that is after the three-month
anniversary of the termination of Optionee's employment or on a date that is
more than ten years (or five years, if applicable) after the Date of Grant, this
Option shall not be treated as an incentive stock option within the meaning of
Code Section 422.
For purposes of this Paragraph 2(c), a "change of control transaction"
means an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture (including a spin-off) or liquidation of the Company.
d. Disability. If Optionee ceases to be an employee of the Company or
any Subsidiary due to disability (as such term is defined in Code Section
22(e)(3), or any successor provision), this Option shall completely terminate on
the earlier of (i) the close of business on the twelve-month anniversary date of
such termination of employment, and (ii) the expiration date under this Option
stated in Paragraph 2(a) above. In such period following such termination of
employment, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
termination of employment. If Optionee does not exercise the Option within the
time specified in this Paragraph 2(d), all rights of Optionee under this Option
shall be forfeited.
e. Death. In the event of Optionee's death, this Option shall terminate
on the expiration date of this Option stated in Paragraph 2(a) above. In such
period following Optionee's death, this Option shall be exercisable by the
person or persons to whom Optionee's rights under this Option shall have passed
by Optionee's will or by the laws of descent and distribution only to the extent
the Option was exercisable on the vesting date immediately preceding the date of
Optionee's death. If such person or persons do not exercise this Option within
the time specified in this Paragraph 2(e), all rights under this Option shall be
forfeited.
3. Manner of Exercise.
a. General. The Option may be exercised only by Optionee (or other
proper party in the event of death or incapacity), subject to the conditions of
the Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the Option Period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the Option price for all shares designated in
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the notice. The exercise of the Option shall be deemed effective upon receipt of
such notice by the Company and upon payment that complies with the terms of the
Plan and this Agreement. The Option may be exercised with respect to any number
or all of the shares as to which it can then be exercised and, if partially
exercised, may be so exercised as to the unexercised shares any number of times
during the Option period as provided herein.
b. Form of Payment. Subject to approval by the Administrator, payment
of the Option price by Optionee shall be in the form of cash, personal check,
certified check or previously acquired shares of Common Stock of the Company, or
any combination thereof. Any stock so tendered as part of such payment shall be
valued at its Fair Market Value as provided in the Plan. For purposes of this
Agreement, "previously acquired shares of Common Stock" shall include shares of
Common Stock that are already owned by Optionee at the time of exercise.
c. Stock Transfer Records. As soon as practicable after the effective
exercise of all or any part of the Option, Optionee shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Optionee one or more duly issued stock certificates
evidencing such ownership. All requisite original issue or transfer documentary
stamp taxes shall be paid by the Company.
4. Miscellaneous.
a. Employment; Rights as Shareholder. This Agreement shall not confer
on Optionee any right with respect to continuance of employment by the Company
or any of its Subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment. Optionee shall have no rights as a
shareholder with respect to shares subject to this Option until such shares have
been issued to Optionee upon exercise of this Option. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such shares are issued, except as provided in Section 12 of
the Plan.
b. Securities Law Compliance. The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject
to Section 12 of the Plan, certain changes in the number or character of the
Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
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d. Shares Reserved. The Company shall at all times during the option
period reserve and keep available such number of shares as will be sufficient to
satisfy the requirements of this Agreement.
e. Withholding Taxes on Disqualifying Disposition. In the event of a
disqualifying disposition of the shares acquired through the exercise of this
Option, Optionee hereby agrees to inform the Company of such disposition. Upon
notice of a disqualifying disposition, the Company may take such action as it
deems appropriate to insure that, if necessary to comply with all applicable
federal or state income tax laws or regulations, all applicable federal and
state payroll, income or other taxes are withheld from any amounts payable by
the Company to Optionee. If the Company is unable to withhold such federal and
state taxes, for whatever reason, Optionee hereby agrees to pay to the Company
an amount equal to the amount the Company would otherwise be required to
withhold under federal or state law. Optionee may, subject to the approval and
discretion of the Administrator or such administrative rules it may deem
advisable, elect to have all or a portion of such tax withholding obligations
satisfied by delivering shares of the Company's Common Stock having a fair
market value equal to such obligations.
f. Nontransferability. During the lifetime of Optionee, the accrued
Option shall be exercisable only by Optionee or by the Optionee's guardian or
other legal representative, and shall not be assignable or transferable by
Optionee, in whole or in part, other than by will or by the laws of descent and
distribution.
g. 1998 Stock Option Plan. The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. Lockup Period Limitation. Optionee agrees that in the event the
Company advises Optionee that it plans an underwritten public offering of its
Common Stock in compliance with the Securities Act of 1933, as amended, and that
the underwriter(s) seek to impose restrictions under which certain shareholders
may not sell or contract to sell or grant any option to buy or otherwise dispose
of part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
i. Blue Sky Limitation. Notwithstanding anything in this Agreement to
the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
5
<PAGE>
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. Accounting Compliance. Optionee agrees that, in the event a "change
of control transaction" (as defined in Paragraph 4(g) above) is treated as a
"pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting principles, and will execute any documents necessary to ensure
such compliance.
k. Stock Legend. The certificates for any shares of Common Stock
purchased by Optionee (or, in the case of death, Optionee's successors) shall
bear an appropriate legend to reflect the restrictions of Paragraphs 4(b), 4(h),
4(i) and 4(j) of this Agreement.
l. Scope of Agreement. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 4(f) above.
m. Arbitration. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced securities or business litigation for at least 10 years. If
the parties cannot agree on an arbitrator within 20 days, any party may request
that the chief judge of the District Court for Hennepin County, Minnesota,
select an arbitrator. Arbitration will be conducted pursuant to the provisions
of this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that a court
of this state could order or grant; provided, however, that punitive or
exemplary damages shall not be awarded. The arbitrator may award to the
prevailing party, if any, as determined by the arbitrator, all of its costs and
fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Hennepin
County, Minnesota.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the day and year first above written.
QUANTECH LTD.
________________________________
Gregory G. Freitag, COO
________________________________
_________
7
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
QUANTECH LTD.
1998 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this day of _________, 19__, by
and between Quantech Ltd., a Minnesota corporation (the "Company"), and
_________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee, officer,
consultant, nonemployee director or advisor of the Company or one of its
Subsidiaries; and
WHEREAS, the Company wishes to grant a nonqualified stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1998 Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator has authorized the grant of a nonqualified
stock option to Optionee and has determined that, as of the effective date of
this Agreement, the fair market value of the Company's Common Stock is
$_________ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Optionee on the date
set forth above (the "Date of Grant"), subject to shareholders of the Company
approving an increase in the number of shares available under the Plan, the
right and option (the "Option") to purchase all or portions of an aggregate of
______________ shares of Common Stock at a per share price of $__________ on the
terms and conditions set forth herein, and subject to adjustment pursuant to
Section 12 of the Plan. This Option is a nonqualified stock option and will not
be treated as an incentive stock option, as defined under Section 422, or any
successor provision, of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder.
2. Duration and Exercisability.
a. The term during which this Option may be exercised shall terminate
on ____________, except as otherwise provided in Paragraphs 2(b) through 2(e)
below. This Option shall become exercisable according to the following schedule:
Vesting Date Number of Shares
_____________ _________
_____________ _________
_____________ _________
1
<PAGE>
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
b. Termination of Relationship (other than Change of Control,
Disability or Death). If Optionee ceases to be an employee, consultant,
nonemployee director or an advisor of the Company or any Subsidiary for any
reason other than because of a "change of control transaction" as described in
Paragraph 2(c) or because of disability or death, this Option shall completely
terminate on the expiration date of this Option as stated in paragraph 2(a). In
such period following the termination of Optionee's relationship with the
Company, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding such termination of
relationship, but had not been previously exercised.
c. Change of Control. If Optionee ceases to be an employee, consultant,
nonemployee director or advisor of the Company or any Subsidiary because of a
"change of control transaction", this Option shall terminate on the expiration
date of this Option as stated in paragraph 2(a) above.
For purposes of this Paragraph 2(c), a "change of control transaction"
means an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company.
d. Disability. If Optionee ceases to be an employee, consultant,
nonemployee director or advisor of the Company or any Subsidiary because of
disability (as such term is defined in Code Section 22(e)(3), or any successor
provision), this Option shall completely terminate on the earlier of (i) the
close of business on the three-month anniversary date of the termination of all
such relationships, and (ii) the expiration date under this Option stated in
Paragraph 2(a) above. In such period following such termination, this Option
shall be exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding the termination of all of Optionee's
relationships. If Optionee does not exercise the Option within the time
specified in this Paragraph 2(d), all rights of Optionee under this Option shall
be forfeited.
e. Death. In the event of Optionee's death, this Option shall terminate
on the earlier of (i) the close of business on the three-month anniversary date
of the date of Optionee's death, and (ii) the expiration date of this Option
stated in Paragraph 2(a) above. In such period following Optionee's death, this
Option may be exercised by the person or persons to whom Optionee's rights under
this Option shall have passed by Optionee's will or by the laws of descent and
distribution only to the extent the Option was exercisable on the vesting date
immediately preceding the date of Optionee's death. If such person or persons
fail to exercise this Option within the time specified in this Paragraph 2(e),
all rights under this Option shall be forfeited.
2
<PAGE>
3. Manner of Exercise.
a. General. The Option may be exercised only by Optionee (or other
proper party in the event of death or incapacity), subject to the conditions of
the Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt of
such notice by the Company and upon payment that complies with the terms of the
Plan and this Agreement. The Option may be exercised with respect to any number
or all of the shares as to which it can then be exercised and, if partially
exercised, may be exercised as to the unexercised shares any number of times
during the option period as provided herein.
b. Form of Payment. Subject to the approval of the Administrator,
payment of the option price by Optionee shall be in the form of cash, personal
check, certified check or previously acquired shares of Common Stock of the
Company, or any combination thereof. Any stock so tendered as part of such
payment shall be valued at its Fair Market Value as provided in the Plan. For
purposes of this Agreement, "previously acquired shares of Common Stock" shall
include shares of Common Stock that are already owned by Optionee at the time of
exercise.
c. Stock Transfer Records. As soon as practicable after the effective
exercise of all or any part of the Option, Optionee shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Optionee one or more duly issued stock certificates
evidencing such ownership. All requisite original issue or transfer documentary
stamp taxes shall be paid by the Company.
4. Miscellaneous.
a. Rights as Shareholder. This Agreement shall not confer on Optionee
any right with respect to the continuance of any relationship with the Company
or any of its Subsidiaries, nor will it interfere in any way with the right of
the Company to terminate any such relationship. Optionee shall have no rights as
a shareholder with respect to shares subject to this Option until such shares
have been issued to Optionee upon exercise of this Option. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such shares are issued, except as provided in Section 12 of
the Plan.
b. Securities Law Compliance. The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
3
<PAGE>
further distribution thereof and that such shares will be not transferred or
disposed of except in compliance with applicable state and federal securities
laws.
c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject
to Section 12 of the Plan, certain changes in the number or character of the
Common Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. Shares Reserved. The Company shall at all times during the option
period reserve and keep available such number of shares as will be sufficient to
satisfy the requirements of this Agreement.
e. Withholding Taxes. In order to permit the Company to comply with all
applicable federal or state income tax laws or regulations, the Company may take
such action as it deems appropriate to insure that, if necessary, all applicable
federal or state payroll, income or other taxes are withheld from any amounts
payable by the Company to Optionee. If the Company is unable to withhold such
federal and state taxes, for whatever reason, Optionee hereby agrees to pay to
the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law. Optionee may, subject to the
approval and discretion of the Administrator or such administrative rules it may
deem advisable, elect to have all or a portion of such tax withholding
obligations satisfied by delivering shares of the Company's Common Stock having
a fair market value equal to such obligations.
f. Transferability of Options. Optionee may, for no consideration,
transfer this Option to a member of Optionee's immediate family, to a trust for
the benefit of Optionee's immediately family member(s) or to a partnership in
which such family member(s) are the only partners. The family member to whom, or
the trust or partnership to which, this Option has been transferred shall be
subject to all terms and conditions set forth herein, and shall not subsequently
assign or transfer this Option, either voluntarily or involuntarily, unless such
transfer is to another family member, trust or partnership which meets the
requirements of this Paragraph 4(f). If Optionee does not transfer this Option
to such a family member, trust or partnership, this Option shall be exercisable
only by Optionee or by Optionee's guardian or other legal representative and,
upon Optionee's death, shall be exercisable by the person or persons to whom
Optionee's rights under this Option have passed by will or by the laws of
descent and distribution.
g. 1998 Stock Option Plan. The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
4
<PAGE>
h. Lockup Period Limitation. Optionee agrees that in the event the
Company advises Optionee that it plans an underwritten public offering of its
Common Stock in compliance with the Securities Act of 1933, as amended, and that
the underwriter(s) seek to impose restrictions under which certain shareholders
may not sell or contract to sell or grant any option to buy or otherwise dispose
of part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
i. Blue Sky Limitation. Notwithstanding anything in this Agreement to
the contrary, in the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary to reduce
the number of issued but unexercised stock purchase rights so as to comply with
any state securities or Blue Sky law limitations with respect thereto, the Board
of Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. Accounting Compliance. Optionee agrees that, in the event a "change
of control transaction" (as defined in Paragraph 4(g) above) is treated as a
"pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting principles, and will execute any documents necessary to ensure
such compliance.
k. Stock Legend. The certificates for any shares of Common Stock
purchased by Optionee (or, in the case of death, Optionee's successors) shall
bear an appropriate legend to reflect the restrictions of Paragraph 4(b), 4(h),
4(i) and 4(j) of this Agreement.
l. Scope of Agreement. This Agreement shall bind and inure to the
benefit of the Company and its successors and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 2(b) above.
m. Arbitration. Any dispute arising out of or relating to this
Agreement or the alleged breach of it, or the making of this Agreement,
including claims of fraud in the inducement, shall be discussed between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy. If, notwithstanding, such dispute cannot be resolved, such
dispute shall be settled by binding arbitration. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced securities or business litigation for at least 10 years. If
the parties cannot agree on an arbitrator within 20 days, any party may request
that the chief judge of the District Court for Hennepin County, Minnesota,
select an arbitrator. Arbitration will be conducted pursuant to the provisions
5
<PAGE>
of this Agreement, and the commercial arbitration rules of the American
Arbitration Association, unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of depositions. Unresolved discovery disputes may be
brought to the attention of the arbitrator who may dispose of such dispute. The
arbitrator shall have the authority to award any remedy or relief that a court
of this state could order or grant; provided, however, that punitive or
exemplary damages shall not be awarded. The arbitrator may award to the
prevailing party, if any, as determined by the arbitrator, all of its costs and
fees, including the arbitrator's fees, administrative fees, travel expenses,
out-of-pocket expenses and reasonable attorneys' fees. Unless otherwise agreed
by the parties, the place of any arbitration proceedings shall be Hennepin
County, Minnesota.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Nonqualified
Stock Option Agreement to be executed on the day and year first above written.
"Company"
QUANTECH LTD.
____________________________________
Gregory G. Freitag, COO
"Optionee"
____________________________________
______________
7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated July 14, 1999 and
September 23, 1999 (as to the last paragraph of Note 7), which contains an
emphasis paragraph relating to an uncertainty as to the Company's ability to
continue as a going concern and is included in this Form 10-KSB, into the
previously filed Registration Statements of Quantech, Ltd. on Form S-8 (No.
333-70499 and No. 333-11475), and in the related Prospectuses.
/s/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
September 28, 1999
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