As filed with the Securities and Exchange Commission on January 12, 1999
Registration No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
QUANTECH LTD.
(Exact name of registrant as specified in its charter)
Minnesota 3573 41-1709417
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation of organization) Classification Code) Identification Number)
Quantech Ltd.
1419 Energy Park Drive
St. Paul, MN 55108
(651) 647-6370
(Address and telephone number of principal executive offices
and principal place of business)
---------------------------
Gregory G. Freitag, Chief Financial Officer and Chief Operating Officer
Quantech Ltd.
1419 Energy Park Drive
St. Paul, MN 55108
(651) 647-6370
(Name, address and telephone number of agent for service)
Copies to:
Timothy M. Heaney, Esq.
Fredrikson & Byron, P.A.
900 Second Avenue South, Suite 1100
Minneapolis, Minnesota 55402
(612) 347-7000
---------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of each class Proposed maximum Proposed maximum Amount of
of securities to be Amount to be offering price aggregate offering registration
registered registered per unit(1) price(1) fee
<S> <C> <C> <C> <C>
Common Stock, no par value 8,507,349 $1.59375 $13,558,588 $3,770
</TABLE>
(1) Estimated solely for the purpose of calculating registration fees
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
---------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effectiveness until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 12, 1999
[logo]
QUANTECH LTD.
8,507,349 shares of Common Stock
Selling Shareholders identified in this Prospectus are offering all of
the shares to be sold in the offering. Selling Shareholders include persons who
are currently shareholders of Quantech's Common Stock or who may become such
holders upon conversion of outstanding Series A Preferred Stock or upon exercise
of outstanding warrants. Selling Shareholders may offer these shares from time
to time through or to brokers or dealers in the over-the-counter markets at
market prices prevailing at the time of sale or in negotiated transactions at
prices acceptable to the Selling Shareholders. Quantech will not receive any of
the proceeds from the offering.
Shares of Quantech common stock trade on the local over-the-counter
markets and the NASD Bulletin Board under the symbol QQQQ. The closing sale
price of the Common Stock on January 8, 1999, as reflected on such markets was
$1.5625 per share.
----------------------
This Investment Involves a High Degree of Risk. You Should Purchase
Shares Only If You Can Afford a Complete Loss. See "Risk Factors" Beginning on
Page 3 of This Prospectus.
----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------
The information in this Prospectus is not complete and may be changed.
The Selling Shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and it is not an offer to
buy these securities in any state where the offer or sale is not permitted.
----------------------
The date of this Prospectus is _____________, 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 1
Special Note Regarding Forward-Looking Statements.......................... 3
Risk Factors............................................................... 3
Price Range of Common Stock................................................ 10
Dividend Policy............................................................ 11
Selected Financial Data.................................................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operation................................................... 14
Business................................................................... 19
Management................................................................. 35
Principal and Selling Shareholders......................................... 40
Description of Securities.................................................. 48
Plan of Distribution....................................................... 53
Legal Matters.............................................................. 54
Experts.................................................................... 54
Available Information...................................................... 54
----------------------
Quantech's principal executive offices are located at 1419 Energy Park
Drive, St. Paul, Minnesota 55108 and its telephone number is (651) 647-6370.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in the common stock.
Quantech
Quantech Ltd. ("Quantech" or the "Company") is a Minnesota company
originally founded in 1991. We are completing development of our multi-test
critical care DBx diagnostic system (the "DBx"). The DBx uses Quantech's
proprietary and robust digital detection Surface Plasmon Resonance ("SPR")
biosensor technology. Our use of SPR enables us to integrate multiple diagnostic
methodologies, such as immunoassays, DNA probes and chemical binding, into a
single, simple system. This flexibility should allow the DBx to provide an
extensive menu of rapid, quantitative STAT tests to hospital critical care
units.
Excluding home diagnostics, the overall world wide in-vitro diagnostic
market is more than $16 billion. Central and STAT laboratories currently account
for the majority of this market with testing divided between non-urgent and
urgent (STAT) tests. We are focused on the critical care 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
physicians to receive. This delay affects patient treatment and increases costs.
Although STAT laboratories have been established to reduce this time delay, test
costs are higher than the central lab and reduced test time turnaround is not
always achieved.
We believe the Emergency Department ("ED") represents the most pressing
and unmet customer need for critical care STAT testing. The ED is a significant
market requiring a complete menu of clinically related, quantitative, rapid
turnaround tests on a single instrument. Although there are some STAT testing
products available for the ED, only systems in the central and STAT labs provide
the required test menu, features and quality of results. However, 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 to the ED and other critical care
areas of the hospital.
We are designing the DBx for the ED. To meet the needs of the ED, the
DBx is expected to have the STAT test menu and test performance of central and
STAT labs, but with test results in 10 to 20 minutes. The DBx system
configuration will consist of a bench top instrument and a series of disposables
each offering a single test or a panel of clinically related STAT tests. The
system analyzes both whole blood and urine without preparation or addition of
reagents by lab technicians or removal of sample from the collection device. We
believe this ease of use and ability to locate the DBx in the ED will
economically provide hospital physicians with faster STAT test results than
hospital central or STAT laboratories.
Some of the most important STAT tests in the ED are those for cardiac
markers and pregnancy. Cardiac tests help to identify whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack).
Pregnancy tests are important in the ED to determine if a procedure that could
<PAGE>
harm a fetus can be performed, or to identify an ectopic pregnancy. We expect
the DBx to be launched with at least a panel of three cardiac tests (myoglobin,
CK-MB and troponin I) and a single whole blood quantitative test for pregnancy.
Additional STAT tests are expected to be added to the DBx system to provide a
complete ED STAT testing menu.
We received FDA 510(k) approval for our first cardiac marker test
myoglobin and have submitted to the FDA a 510(k) for the cardiac marker CK-MB.
We expect submission to the FDA of our pregnancy test in January 1999. Launch of
the DBx system is expected in late 1999. We believe the capabilities of our DBx
system as a diverse diagnostic testing platform will meet the needs of the
critical care STAT testing market enabling us to be competitive in the global
medical diagnostics market.
The Offering
Securities offered................. 8,507,349 shares of Common Stock (1).
Securities outstanding............. 2,723,082 shares of Common Stock (2).
1,702,319 shares of Series A Convertible
Preferred Stock.
Use of Proceeds.................... Quantech will not receive any proceeds
from the sale of Common Stock in the
offering.
.........
(1) Includes (i) 179,570 shares of Common Stock currently outstanding, (ii)
4,921,795 shares issuable upon conversion of outstanding shares of Series A
Convertible Preferred Stock, and (iii) shares issuable upon exercise of
outstanding warrants to purchase 3,405,984 shares of Common Stock.
(2) Does not include 4,921,795 shares issuable upon conversion of shares of
Series A Convertible Preferred Stock outstanding and upon exercise of
outstanding warrants to purchase 3,405,984 shares of Common Stock.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts but are
forward-looking statements. Such forward-looking statements may be identified by
the use of terminology such as "anticipate," "believe," "estimate," "expect,"
"intend," "may," "plans," "project," and similar expressions. Such statements
involve risks and uncertainties including, but not limited to, those relating to
the development stage in which Quantech is operating; the lack of revenues; the
ability of the Company to continue as a going concern; the need for additional
financing; Year 2000 compliance; uncertainty of market acceptance of Quantech's
product once introduced; inability or delay in obtaining FDA product approval;
competition; technological obsolescence; ability to maintain patent protection
on the Company's technology and not violate others rights; effects of government
regulation on Quantech's product and its sale; ability to manufacture its
product; dependence on key personnel; exposure to the risk of product liability
and market for the Company's shares as well as other factors detailed in "Risk
Factors" below and elsewhere in this Prospectus and in the Company's other
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
RISK FACTORS
Investing in Quantech is risky. You should be able to bear a complete
loss of your investment. You should carefully consider the following risk
factors and other information in this Prospectus before deciding to invest in
shares of common stock.
Immediate and Future Capital Needs
We do not have sufficient funds to complete commercial development or
commence production and sales of our system. Quantech's ability to continue as a
going concern, complete its system, submit its commercial system and tests to
the FDA and commence sales will depend upon the continued availability of
investment capital, funding made by strategic partner(s) or licensing revenues,
until the revenues from sale of the instruments and associated test disposables
are sufficient to maintain operations. There can be no assurance that any such
additional financing can be obtained on favorable terms, if at all. Such
additional financing will result in dilution to Company shareholders. If funding
is not available when needed, we may be forced to cease operations and abandon
our business. In such event, Company shareholders could lose their entire
investment.
No History of Operations; Development Stage Company; Going Concern Uncertainty
To date, we do not have a product ready to be brought to market.
Accordingly, Quantech has no operating history and its proposed operations are
subject to all of the risks inherent in a new business enterprise, including
commercial development of its products, lack of marketing experience and lack of
production history.
The likelihood of our success must be considered in light of the
expenses, difficulties and delays frequently encountered in connection with the
start-up of new businesses, those historically encountered by us, and the
competitive environment in which we will operate. We have not had any
<PAGE>
significant revenues to date. As of June 30, 1998 and September 30, 1998, we had
an accumulated deficit of $18,057,048 and $19,600,366, respectively. The report
of the independent auditors on the Company's financial statements for the year
ended June 30, 1998, includes an explanatory paragraph relating to the
uncertainty of the Company's ability to continue as a going concern. We are a
development stage company which has suffered losses from operations, require
additional financing, need to continue development of our product, and
ultimately needs to generate revenues and successfully attain profitable
operations. These factors raise substantial doubt about our ability to continue
as a going concern. There can be no assurance that we will be able to develop a
commercially viable product or marketing system or attain profitable operations.
No Assurance of Successful and Timely Development of Quantech's System
Our DBx system, consisting of reading instrumentation and associated
disposables, is under various stages of development. We are conducting such
development using both internal and external resources. Further development and
testing will be required to prove additional testing capability beyond our
current tests, commercial viability of our system, and to obtain all required
FDA clearances. Until the development process for the commercial system is
completed and cleared through the FDA, there can be no assurance that such
system will be finished according to our current development timetable and
budget, or that development will result in a system that will perform in the
manner we anticipated. Additionally, the final cost of our instrument and
disposables cannot be finalized until system completion. Our success, if any,
will depend on our ability to timely complete our system within estimated cost
parameters and efficiently develop tests to expand the DBx's menu of tests.
Uncertainty of Market Acceptance
The commercial success of Quantech's DBx system will depend upon its
acceptance by the medical community and third-party payers as reliable, accurate
and economical. Market acceptance will depend upon several factors, including
the establishment of the utility and cost-effectiveness of our tests, the
receipt of regulatory clearances in the United States and elsewhere and the
availability of third-party reimbursement. Diagnostic tests similar to those
developed and to be developed by us are generally performed by a central or STAT
laboratory at a hospital or clinic. The approval of the purchase of diagnostic
equipment 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 like that of Quantech's. We will also have to demonstrate to physicians
that our diagnostic products perform as intended, meaning that the level of
accuracy and precision attained by our products must be comparable to test
results achieved by the hospital lab. Failure of our products to achieve market
acceptance or third-party payer approval would have a material adverse effect on
the Company.
Lack of Marketing Experience
We have had no experience in marketing the DBx. We intend to market our
system in both the United States and in foreign markets through a strategic
partner(s) with an established distribution system, but no assurance can be
given that such an arrangement can be made. If such a strategic relationship is
not entered into prior to product launch, we will market our system through a
combination of our own sales force and distributors. Establishing a sales and
marketing capability sufficient to support the level of sales necessary for us
to attain profitability will require substantial efforts and significant
<PAGE>
management and financial resources. There can be no assurance that we will be
able to recruit and retain direct sales and marketing personnel in order to
build a sales and marketing organization, engage distributors to supplement the
United States direct sales activity and sell products in foreign markets or have
our marketing efforts be successful.
If we are required to rely heavily upon distributors, as will be the
case outside of the United States, sales by such distributors could account for
a significant portion of our revenues. There can be no assurance that these
distributors will devote the resources necessary to provide effective sales and
marketing support to us. In addition, our distributors may not give their full
efforts to sell our products. Our distributors, if any, may not be contractually
committed to make future purchases of our products and could therefore
discontinue carrying our products in favor of a competitor's at any time and for
any reason. If we are unable to establish appropriate arrangements with
distributors when required, or if distributors are engaged and they become
unwilling or unable to promote, market and sell our system, our business and
financial condition would be adversely affected.
Limited Manufacturing and Production Experience
The DBx consists of a reading instrument and a series of disposable
testing cartridges. To be successful, we must manufacture these items in
compliance with regulatory requirements and Good Manufacturing Process ("GMP"),
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. The instrument and many components
of the test disposables will be manufactured for us by outside vendors. We have
not entered into agreements with vendors to manufacture the instrument or
certain parts of the disposables. 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 our test
disposables. We have never operated a manufacturing/assembly business and we
will have to establish a manufacturing facility, or contract with a third party
for manufacturing, which is registered with the FDA. Production of our
disposables requires the placement of antibodies or other binding reagents on
metalized sensor surfaces. The chemical and physical conditions for coating are
substantially equivalent to those used to produce other solid state binding
assays. Although we believe that our production methods will be effective for
manufacturing our disposables, there can be no assurance that the methods will
be applicable to all the tests we expect to develop or that we will be able to
manufacture accurate and reliable products in large commercial quantities on a
timely basis and at an acceptable cost. Inability to manufacture a full range of
diagnostic tests would limit our access to our intended market.
Government Regulation
Our instrument and test disposables are human diagnostic medical
devices subject to regulation by the United States Federal Government and
federal agencies of foreign countries. The United States Food and Drug
Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act ("FDC
Act") will regulate our system as a medical device that requires pre-market
regulatory clearance before commercialization in the United States. We believe
that pre-market clearance can be obtained for our instrument and substantially
all of our test disposables through submission of a 510(k) pre-market
<PAGE>
notification ("510(k) Notification") demonstrating the product's substantial
equivalence to another device legally marketed pursuant to 510(k) Notification
clearance. In this regard, we have received FDA approval for our cardiac marker
myoglobin test. We will have to perform in-house clinical trials designed to
produce the data necessary to demonstrate the substantial equivalence of our
instrument and tests. Although 510(k) submissions are supposed to be completed
by the FDA within 90 days of submission, there can be no assurance the FDA will
approve our initial system pursuant to a 510(k) Notification, or do so in a
timely manner, and therefore there can be no assurance that we will be able to
introduce our initial system in the United States within our anticipated time
frame. If we cannot establish to the satisfaction of the FDA that our products
are substantially equivalent, we will have to seek pre-market approval ("PMA")
of our system through the submission of an application supported by extensive
data to prove safety and efficacy. If a PMA is required, introduction of the
initial system would be significantly delayed, which could have a material
adverse effect on Quantech. By regulation, FDA review of PMA applications is
required within 180 days of its acceptance for filing; however, reviews more
often occur over a significantly protracted period, usually 12 to 18 months, and
a number of products have never been approved.
The degree of regulation and areas of concern differ in each country or
region. We will be required to comply with regulations regarding product
approval and performance and, in addition, regulations concerning electronic
devices. For example, the European Community has drafted a Directive for In
vitro Diagnostic Products which we intend to comply with when the Directive
becomes effective and our products will be required to have "CE Marks" for sale
in major European markets. Additionally, manufacturing facilities are subject to
inspection by the FDA and, for International Standards Organization ("ISO")
certified facilities, by notified bodies, on a periodic basis. Quantech and its
contract manufacturers must demonstrate compliance with applicable quality
system requirements. No regulatory clearances have yet been obtained in any
country and there is no assurance that any will be obtained. Further,
regulations and standards are subject to frequent changes. If 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 system
could be materially adversely affected.
Competition
The diagnostic testing market is highly competitive. We expect that
manufacturers of central and STAT laboratory testing equipment will compete to
maintain their revenue and market share and that new testing products will be
developed. 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. There can be no assurance that if our DBx is completed,
that it can successfully compete in its market.
Compliance with CLIA
Our products will be subject to the Clinical Laboratory Improvement Act
of 1988 ("CLIA") which has been implemented by the Health Care Financing
Administration ("HCFA"). This law is intended to ensure the quality and
reliability of all medical testing in the United States regardless of where
tests are performed. Our marketing plan is based on non-laboratory personnel
operating the system. HCFA has allowed electronic controls for some instruments
to serve the function of daily quality control performance to allow
<PAGE>
non-laboratory personnel to run such testing systems. We have not yet applied
for this exception. If we are unable to obtain this exception, we would not have
the user-friendly operation advantage of our system and this could have an
adverse affect on sales. Further, there can be no assurance that CLIA
regulations or future administrative interpretations of CLIA or various state
regulations requiring licensed technicians to operate diagnostic systems will
not have a material adverse effect on us.
Adverse Changes in Government Health Care Policy and Reimbursement
Purchases of our system and test disposables will be affected by cost
reimbursement requirements and regulations, including regulations promulgated by
HCFA, and uncertainties often faced by proposed changes in government health
care policy. Sales volumes and prices of our test disposables will in part be
dependent on the level of availability of reimbursement to health care providers
for tests from third-party payers, such as government and private insurance
plans, health maintenance organizations and preferred provider organizations.
There can be no assurance that current reimbursement amounts for tests will not
be decreased in the future, and that any such decreases will not reduce the
demand for, or the price of, our tests. Any health care reform measures adopted
by the federal government could adversely affect the amount of test
reimbursement available in the United States, and consequently could adversely
affect the prices we receive for its tests.
Technological Obsolescence/Single Technology Basis
Our reading instrument and test disposables, all of which are based
upon a single set of core technologies, are currently our only proposed products
and are expected to account for substantially all of our revenues, if any, for
the foreseeable future. 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 products 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 must continually make substantial expenditures for
development of both equipment and testing disposables. Because our system
represents our sole product focus, lack of market acceptance or obsolescence of
our system would have a significant adverse effect.
Obtaining Antibodies and Chemistries
Many of the chemistries that will be necessary for our diagnostic
system must be obtained through commercial suppliers or agreements for the
licensing of such chemistries. Although we believe we can obtain the necessary
chemistries, there can be no assurance that we will be able to make satisfactory
arrangements to provide our customers with as wide a variety of products as they
might desire. The lack of a sufficient number of chemistries would greatly limit
our ability to expand the test menu for our system and market it.
<PAGE>
Patent Protection
No assurance can be given that other companies will not develop
technologies substantially equivalent to those we own or that we may acquire or
develop. 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 systems. The existence or issuance of such patents may require
us to make significant changes in the design of our systems or operational
plans. Although we believe that our proposed products will not infringe patent
rights of others, there can be no assurance that such infringement does not, or
will not, exist with respect to the completed product. We have not conducted an
independent patent search or evaluation with respect to the SPR technology.
Ares-Serono, the licensor to us of our basic SPR technology, has made no
warranties as to the enforceability of any of our 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 or those issued to us. Cost of defending
patents can be substantial.
Dependence on the Ares-Serono License
We are dependent upon the worldwide license (the "License") we acquired
from Ares-Serono to certain patents, proprietary information and associated
hardware (e.g. molds, test rigs, prototypes) 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 us. If we sublicense the technology, we will
pay a royalty of 15 percent of all revenues received by us under any sublicense.
We must make a $150,000 minimum royalty payment on December 31, 1999. If such
payment is not made, Ares-Serono has the right to cause a reversion to
Ares-Serono of a royalty-free license, thereby depriving us of our exclusive
rights under the License.
Ares-Serono specifically reserved, and did not license to us, any
rights to or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). We believe that such limitation does
not materially impact the value of the License given our current plan of
commercialization. In addition, the 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 technology for
applications outside the field of the commercial interests of Quantech.
Dependence on Personnel
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 any
of our personnel could, to varying degrees, have an adverse effect on our
operations and system development. The loss of either Robert Case, CEO or Greg
Freitag, COO and CFO would have a material adverse affect on the Company.
<PAGE>
Possibility of Exposure to Product Liability Claims
We could be exposed to risk of product liability claims or other
lawsuits in the event of incorrect diagnosis caused by a failure of our system.
Although we will evaluate obtaining liability insurance when our products are
brought to market, there can be no assurance that we will be able to obtain or
maintain such insurance or that we will not be subject to claims in excess of
our insurance coverage.
Absence of Dividends
The Company has not declared or paid any cash dividends on its Common
Stock since its inception and the Board of Directors intends to retain all
earnings for use by the Company for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors and will depend upon a number of factors,
including among others, earnings of the Company, the operating and financial
condition of the Company, the Company's capital requirements, and general
business conditions.
Shares Eligible for Future Sale
As a result of this Registration Statement, all shares of the Company'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 Preferred Stock. The sale of a substantial number of
the shares available for sale or shares underlying options, warrants and Series
A Preferred Stock could adversely affect the market price and liquidity of the
Company's securities.
Limited Market for Securities
There is a limited trading market for the Company's Common Stock, which
is traded on the NASD Bulletin Board. Although trading in the Company'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 the
Company's Common Stock will be available in the future.
Volatility of Stock Price
We believe that factors such as announcements of developments by us or
our competitors, general conditions in the health care or medical diagnostic
markets and conditions in the financial markets could cause the price of our
Common Stock to fluctuate substantially. In addition, the stock market has
recently experienced extreme price and volume fluctuations which have affected
the market prices for many emerging growth companies and which have often been
unrelated to the operating performance of the specific companies. These market
fluctuations may adversely affect the price of the Company's Common Stock.
<PAGE>
Year 2000 Compliance
We believe the Company's internal systems and products are year 2000
compliant. 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 system is 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 customers or suppliers, the
general economy or the ability of businesses to generally receive essential
service (such as telecommunications, banking services, etc.) Any such occurrence
could adversely affect our business. Furthermore, year 2000 problems involving
third parties may have a negative impact on our customers or suppliers, the
general economy or the ability of businesses to generally receive essential
service (such as telecommunications, banking services, etc.). Any such
occurrence could adversely affect our business.
Price Range of Common Stock
Quantech's Common Stock is traded on the local over-the-counter markets
and the NASD Bulletin Board under the symbol of QQQQ. Trading for Quantech's
Common Stock has been volatile, therefore investors should not rely on
historical stock performance as an indication of future stock performances.
The following table summarizes the high and low sale prices of
Quantech's Common Stock for the periods indicated. The prices have been adjusted
to reflect a 1-for-20 reverse stock split effected by the Company on June 2,
1998. The closing price of Quantech's Common Stock on January 8, 1999 was
$1.5675 per share.
High Low
Fiscal 1997:
Third Quarter..................... $ 12.40 $ 8.20
Fourth Quarter.................... $ 8.00 $ 4.20
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
As of December 31, 1998, Quantech had approximately 500 holders of record of
its Common Stock, excluding shareholders 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
shareholders of Quantech's Common Stock whose stock is held in either nominee
name or street name brokerage accounts.
<PAGE>
DIVIDEND POLICY
Quantech has never paid a cash dividend on its Common Stock. Payment of
dividends is at the discretion of the Board of Directors. The Board of Directors
plan to retain earnings, if any, for operations and does not intend to pay
dividends in the near future.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the
years ended June 30, 1997 and 1998 is derived from the financial statements that
have been audited by McGladrey & Pullen, LLP, independent auditors. The
Company's financial statements for the three month period ended September 30,
1997 and 1998 and the period from September 30, 1991 (date of inception) to
September 30, 1998 are unaudited. However, in the opinion of the Company, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation have been made. Interim results may not be indicative of the
results of operations to be expected for a full fiscal year. This financial data
should be read in conjunction with the Company's financial statements and the
notes thereto included elsewhere in this Prospectus and to the Management's
Discussion and Analysis of Results of Operations and Financial Condition which
follows.
QUANTECH LTD.
(A Development Stage Company)
Statements of Operations Data
(in thousands except per share data)
<TABLE>
<CAPTION>
Period From
September 30,
1991 (Date of
Three Months Ended Years Ended Inception), to
September 30, June 30, September 30,
--------------------------------------------------------
1997 1998 1997 1998 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 7 $ 1 $ 81 $ 12 $ 184
--------------------------------------------------------------------------
Expenses:
General and administrative 223 307 1,779 1,221 9,469
Research and development 314 528 2,114 2,608 6,782
Minimum royalty expense 19 38 75 113 1,113
Losses resulting from transactions
with Spectrum Diagnostics Inc. -- -- -- -- 556
Net exchange gain -- -- -- -- (67)
Interest 39 671 18 719 1,889
--------------------------------------------------------------------------
Total expenses 595 1,544 4,006 3,661 19,742
--------------------------------------------------------------------------
Loss before income taxes (588) (1,543) (3,925) (3,649) (19,558)
Income taxes -- -- -- -- 42
--------------------------------------------------------------------------
Net Loss $ (588) $ (1,543) $ (3,925) $ (3,649) $ (19,600)
==========================================================================
Loss per basic and diluted
common share $ (0.24) $ (0.60) $ (1.66) $ (1.45)
Weighted average common shares
outstanding 2,425 2,578 2,366 2,524
</TABLE>
<PAGE>
QUANTECH LTD.
(A Development Stage Company)
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, June 30, September 30,
1997 1998 1998
------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Total current assets $ 833 $ 203 $ 137
Total property and equipment 206 179 197
Total other assets 2,105 2,803 2,725
------------------------------------------------------
Total assets $ 3,144 $ 3,185 $ 3,059
======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Short-term debt $ 1,070 $ 3,113 $ 4,143
Accounts payable 101 97 222
Accrued expenses 295 247 426
------------------------------------------------------
Total current liabilities 1,466 3,457 4,791
------------------------------------------------------
Stockholders' Equity (Deficit)
Common stock 480 16,308 16,391
Additional paid-in capital 15,606 1,477 1,477
Deficit accumulated during the development stage (14,408) (18,057) (19,600)
------------------------------------------------------
Total stockholders' equity (deficit) 1,678 (272) 1,732
------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,144 $ 3,185 $ 3,059
======================================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Prospectus. This Prospectus includes certain forward-looking
statements which reflect the Company's plans, estimates and beliefs. The
Company's actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences are discussed in the Risk Factors section and elsewhere in this
Prospectus. In evaluating an investment in the securities, prospective investors
should carefully consider the Risk Factors and other information contained in
this Prospectus.
History
Quantech Ltd. ("Quantech" or the "Company") is a Minnesota corporation
originally founded in 1991. Quantech is completing development of its critical
care DBx diagnostic system. Quantech's proprietary and robust digital detection
Surface Plasmon Resonance ("SPR") biosensor technology provides the DBx with
user friendly multi-test capabilities. Quantech's critical care system will have
the ability to perform a complete range of clinically related, quantitative
whole blood tests on a single instrument near the patient in 10 to 20 minutes.
The system will be marketed to hospital Critical Care Units, with the initial
focus being Emergency Departments. Hospital Critical Care Units, such as the
Emergency Department, are best able to recognize the immediate positive impact
Quantech's system will have on patient treatment and satisfaction, determination
of appropriate clinical care path and cost containment.
Quantech's system will consist of an easy to use bench top instrument
and test disposables. Each disposable will contain one test, or a panel of up to
four clinically related tests, which will define the particular tests to be
conducted by the instrument. The Company has received FDA 510(k) approval for
its first test for the detection and quantification of the cardiac marker
Myoglobin and submitted to the FDA its cardiac marker CK-MB. These cardiac
markers are an aid to physicians in the diagnosis of an early stage heart
attack. Further tests, including the cardiac marker troponin I and the pregnancy
marker hCG, are being developed.
Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading
supplier of life science systems and analytical instruments, are parties to a
technology and development agreement. Such agreement provides Perkin-Elmer with
exclusive licenses to certain Quantech technology for use outside of Quantech's
core area of non-nucleic medical diagnostics. Quantech has licensed back from
Perkin-Elmer technology that provides a large density, high throughput
diagnostic testing capacity for its SPR technology. Quantech believes this
capability will allow it to expand its digital SPR technology into central lab,
ICU/CCU, surgical, doctor office and home testing markets.
Quantech is a development stage company which has suffered significant
losses from operations, requires additional financing, and ultimately needs to
complete development of its product, generate revenues, and successfully attain
profitable operations to realize the value of its license agreement and remain a
going concern. These factors raise substantial doubt about the Company's ability
to continue as a going concern.
<PAGE>
Results of Operations
For the Three Months Ended September 30, 1998 and 1997
The Company has incurred a net loss of $19,600,366 from September 30,
1991 (date of inception) through September 30, 1998 due to expenses related to
formation and operation of Quantech's predecessor, Spectrum Diagnostics Inc.
("SDS") in Italy, continuing costs of raising capital, normal expenses of
operating over an extended period of time, funds applied to research and
development, royalty payments related to the SPR technology, losses due to
expenses of SDS and interest on borrowed funds. In addition, an investment of
$3,356,629 was made when Quantech purchased the exclusive rights to the SPR
technology.
For the three months ended September 30, 1998 the Company had interest
income of $653 compared to $6,824 for the same period in 1997. This decrease is
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 by $83,971 to $306,828
for the three months ended September 30, 1998 from $222,857 for the three months
ended September 30, 1997. The increase in general and administrative spending
was primarily due to costs associated with financing activities, expenses
incurred to attend the American Association for Clinical Chemistry meeting, and
additional expenses related to Company expansion. The Company anticipates that
these expenses will continue to increase as the Company completes development of
its system and begins to manufacture and distribute its products.
Research and development costs increased to $528,111 in the three
months ended September 30, 1998 from $314,261 in the same period of 1997. This
increase was primarily due to expenses related to the preparation of 510(k)
submissions to the FDA, and engineering design work on the DBx commercial
instrument and related disposables. The Company expects R&D spending to increase
significantly as the Company completes the commercial development of its system,
conducts additional FDA work, and begins to establish higher volume
manufacturing capabilities.
Minimum royalty expense increased to $37,500 during the quarter ended
September 30, 1998 compared to $18,750 for the same quarter in 1997. This
increase was due to the accrual for the minimum payments scheduled for December
1998 and 1999. Royalty expense is expected to remain at $37,500 per quarter
through December 1999 (see Notes to Financial Statements, Note 2 - License
Agreement).
Interest expense increased to $671,532 for the quarter ended September
30, 1998 compared to $39,376 during the same period in 1997. The higher interest
cost was primarily the result of increased debt from the sale of promissory
notes including a $546,902 one-time charge to reflect the conversion feature of
the notes. Future interest expense is expected to decrease significantly due to
the conversion of the promissory notes into Series A Convertible Preferred Stock
subsequent to September 30, 1998.
For the three months ended September 30, 1998 Quantech had a loss of
$1,543,318 as compared to $588,420 for the same period ended September 30, 1997.
<PAGE>
A substantial portion of this increased loss was interest cost, with the
remaining increase a result of higher operating expenses and lower interest
income.
The timetable for submitting additional tests to the FDA and
introduction of Quantech's system to the market will be influenced by the
Company's ability to obtain further funding, enter into strategic relationships,
complete commercial prototype development of its system and develop further
tests, and delays it may encounter with the FDA in its review of Quantech's
tests and system. There can be no assurance that the Company will be able to
obtain the required funding, enter into any strategic agreements or ultimately
complete its commercial system.
For the Year Ended June 30, 1998 and 1997
The Company has incurred a net loss of $18,057,048 from September 30,
1991 (date of inception) through June 30, 1998 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, 1998 the Company had interest income of
$12,435 compared to $80,854 for the 1997 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 decreased from $1,799,117 for the
year ended June 30, 1997 to $1,221,196 for the year ended June 30, 1998. The
decrease in general and administration expenses resulted from the restructuring
that the Company implemented in the second half of 1997. The restructuring was
aimed at reducing expenses and focusing the Company's resources on completing
development of its diagnostic system. Changes that were made included reducing
the number of employees, consultants and outside services employed in the
administrative functions. The Company anticipates that these expenses will
increase significantly in the future as the Company completes development of its
system and begins to manufacture and distribute its products.
Research and development costs decreased from $2,114,586 in 1997 to
$1,608,361 in 1998. The decrease was due to the above mentioned restructuring,
with cost reductions resulting primarily from reduced outside contract
development work as the Company focused its resources on completing system
development with a reconfigured internal development team. Spending began to
increase significantly, however, near the end of fiscal 1998 as the Company
incurred expenses necessary to prepare and file its first 510(k) submission with
the FDA, and engaged outside design engineering firms to assist in finishing the
commercial development of its DBx system. The Company expects R&D spending to
continue at a considerably higher rate in fiscal 1999 as the Company completes
the commercial development of its system, conducts additional FDA work, and
begins to establish higher volume manufacturing capabilities.
Minimum royalty expense increased to $112,500 in 1998 as compared to
$75,000 in 1997 as a result of the higher minimum royalties owed under
Quantech's amended license with Ares-Serono. Royalty expense is expected to
<PAGE>
increase to $150,000 in fiscal 1999 to reflect the minimum royalties owed under
Quantech's amended license with Ares-Serono.
Interest expense increased in 1998 to $719,126 as compared to $17,611
in 1997. The higher interest expense was primarily the result of increased debt
from the sale of promissory notes including a $441,542 charge to reflect the
beneficial conversion feature of the notes. Interest expense during fiscal 1999
is expected to be similar to 1998, but may change depending upon the future
capital structure of the Company.
For the year ended June 30, 1998 Quantech had a loss of $3,648,748 as
compared to $3,925,460 for the same period ended June 30, 1997. This decrease
was a result of the decrease in research and development and general and
administrative expenses in 1998 exceeding increases in such period in minimum
royalty and interest expenses and the decrease in interest income.
The Company has made significant progress in the development of its
system, but this progress has been much slower than anticipated. Although
Quantech has been able to complete prototype systems that demonstrate that its
SPR technology does work to detect certain conditions and obtained FDA approval
for its cardiac marker test myoglobin, it has not been able to achieve
reproducible results at sensitivity levels necessary for quantitative analysis
throughout the entire required clinical range for all of its intended STAT test
menu. Quantech's development is focused upon expanding its test menu and
completing its system for FDA approval and market launch. In addition to
development activity, the Company is in discussions with potential strategic
partners regarding the sublicensing of Quantech's technology outside of its core
medical area, distribution of its system once developed and device
manufacturing. The timetable for submitting the Company's system to the FDA and
introduction to the market will be influenced by the Company's ability to obtain
further funding, enter into strategic relationships, complete commercial
prototype development of its system, necessary testing for submission of its FDA
filing and delays it may encounter with the FDA in its review of the system.
There can be no assurance that the Company will be able to obtain the required
funding, enter into any strategic agreements or ultimately complete its system.
Liquidity and Capital Resources
From inception to June 30, 1998, Quantech has raised approximately
$18,400,000 through a combination of public stock sales and private sales of
stock and debt obligations. The Company requires additional funding to continue
operations. Funds to continue operations will be applied to development of
additional tests and the DBx system, obtaining FDA approval, establishing sales
and marketing and production capabilities, and sales of the Company's product
once development is completed. Quantech is currently reviewing multiple avenues
of future funding including a secondary offering of securities, private sale of
equity or debt with equity features or arrangements with strategic partners. The
Company does not have any commitments for any such financing and there can be no
assurance that the Company will obtain additional capital when needed or that
additional capital will not have a dilutive effect on current shareholders.
Although the Company has a limited lending arrangement with its bank, it does
not anticipate receiving significant funding from lenders.
Quantech incurred capital expenditures of approximately $40,000 in
fiscal 1998. The Company anticipates significantly higher capital expenditures
in the near future for laboratory and production equipment and office expansion
<PAGE>
as the Company nears product introduction. The timing and amount of such
expenditures will be governed by the Company's development and market
introduction schedules which are subject to change due to a number of factors
including development delays, FDA approval and availability of future financing.
On June 2, 1998 the Company effected a 1-for-20 reverse split of its
Common Stock to reduce the number of outstanding and authorized shares. All
share amounts in this report have been adjusted to reflect this change. The
Company currently has outstanding 2,723,082 shares of Common Stock and 1,702,319
shares of Series A Convertible Preferred Stock. It also has options and warrants
outstanding to purchase an additional 6,255,031 shares of Common Stock.
Year 2000 Compliance
We believe the Company's internal systems and products are year 2000
compliant. 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 system is 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 customers or suppliers, the
general economy or the ability of businesses to generally receive essential
service (such as telecommunications, banking services, etc.) Any such occurrence
could adversely affect our business. Furthermore, year 2000 problems involving
third parties may have a negative impact on our customers or suppliers, the
general economy or the ability of businesses to generally receive essential
service (such as telecommunications, banking services, etc.). Any such
occurrence could adversely affect our business.
<PAGE>
BUSINESS
Summary
Quantech Ltd. ("Quantech" or the "Company") is a Minnesota company
originally founded in 1991. We are completing development of its multi-test
critical care DBx diagnostic system (the "DBx"). The DBx uses Quantech's
proprietary and robust digital detection Surface Plasmon Resonance ("SPR")
biosensor technology. Our use of SPR enables us to integrate multiple diagnostic
methodologies, such as immunoassays, DNA probes and chemical binding, into a
single, simple system. This flexibility should allow the DBx to provide an
extensive menu of rapid, quantitative STAT tests to hospital critical care
units.
Excluding home diagnostics, the overall world wide in-vitro diagnostic
market is more than $16 billion. Central and STAT laboratories currently account
for the majority of this market with testing divided between non-urgent and
urgent (STAT) tests. We are focused on the critical care 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
physicians to receive. This delay affects patient treatment and increases costs.
Although STAT laboratories have been established to reduce this time delay, test
costs are higher than the central lab and reduced test time turnaround is not
always achieved.
We believe the Emergency Department ("ED") represents the most pressing
and unmet customer need for critical care STAT testing. The ED is a significant
market requiring a complete menu of clinically related, quantitative, rapid
turnaround tests on a single instrument. Although there are some STAT testing
products available for the ED, only systems in the central and STAT labs provide
the required test menu, features and quality of results. However, 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 short of meeting the burden of providing
fast and economic STAT test results to the ED and other critical care areas of
the hospital.
We are designing the DBx for the ED. To meet the needs of the ED, the
DBx is expected to have the STAT test menu and test performance of central and
STAT labs, but with test results in 10 to 20 minutes. The DBx system
configuration will consist of a bench top instrument and a series of disposables
each offering a single test or a panel of clinically related STAT tests. The
system analyzes both whole blood and urine without preparation or addition of
reagents by lab technicians or removal of sample from the collection device. We
believe this ease of use and ability to locate the DBx in the ED will
economically provide hospital physicians with faster STAT test results than
hospital central or STAT laboratories.
Some of the most important STAT tests in the ED are those for cardiac
markers and pregnancy. Cardiac tests help to identify whether a patient
experiencing chest pain has suffered a myocardial infarction (heart attack).
Pregnancy tests are important in the ED to determine if a procedure that could
harm a fetus can be performed, or to identify an ectopic pregnancy. We expect
<PAGE>
the DBx to be launched with at least a panel of three cardiac tests (myoglobin,
CK-MB and troponin I) and a single whole blood quantitative test for pregnancy.
Additional STAT tests are expected to be added to the DBx system to provide a
complete ED STAT testing menu.
The expected broad test menu of the DBx system is a result of
Quantech's SPR technology. The robust nature of this SPR technology is confirmed
by its ability to be used in many areas other than medical diagnostics. In this
regard, Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading
supplier of life science systems and analytical instruments with sales in excess
of $1 billion, are parties to a License Agreement. The agreement provides
Perkin-Elmer with exclusive licenses to certain Quantech technology for use
outside of Quantech's core area of medical diagnostics.
Quantech has licensed back from Perkin-Elmer technology that provides a
large density, high throughput diagnostic testing capacity for its SPR
technology. Through the optical and chemistry deposition advancements made by
Perkin-Elmer, they are able to read up to 100 test areas on a single 1 cm by 1
cm SPR disposable and plan to expand capacity to beyond 5,000 tests within the
same area. Such two dimensional (2D) array capability, as now used in genomic
screening research, is believed by Quantech to provide it the ability to expand
its digital SPR technology upstream from the critical care area to the central
lab and provide further vertical expansion to ICU/CCU, surgical suites, doctor
office and home testing. Future generations of Quantech's proposed DBx system
may also benefit from the Perkin-Elmer technology by decreasing the number of
unique disposables needed to perform the same number of tests, reducing
inventory requirements and manufacturing costs.
We have received FDA 510(k) approval for our first cardiac marker test
myoglobin and have submitted to the FDA a 510(k) for the cardiac marker CK-MB.
We expect submission to the FDA of our pregnancy test in January 1999. Launch of
the DBx system is expected in late 1999. Quantech believes the capabilities of
its DBx system as a diverse diagnostic testing platform will meet the needs of
the critical care STAT testing market enabling Quantech to be competitive in the
global medical diagnostics market.
Product Description
The Instrument
The Company's instrument combines accuracy with simplicity of use and
will process up to four tests at a time on a single disposable. Additional
reading ports will be designed to be attached to the initial instrument to
provide greater throughput required by higher volume testing facilities. The
ability of Quantech's biosensor system to convert biological data into digital
signals will also permit designs that capitalize on future advances in
microcomputer technology.
The Quantech instrument is designed to fill the needs of hospital
Critical Care Units, in particular the ED. Most importantly, the instrument is
designed to be compatible with new test disposables when Quantech introduces
them to the market. As a result, when Quantech adds tests through the
introduction of new disposables, its original instrument will accommodate these
various tests without system obsolescence or significant training of personnel.
The instrument will be of a size capable of sitting on a bench top or
cart and moved from room to room if necessary. It contains a white light source,
a microprocessor, a number of optical components, a computer touch screen and
<PAGE>
barcode readers. 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 the instrument, an internal bar-code reader identifies the type of
test to be run. A touch screen and/or an external barcode reader will enable the
user to enter both a user number and the patient or specimen ID number. The
instrument's computer screen will display results of a given test. 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.
The small size and configuration of the instrument enables it to be
located in the ED or associated STAT or rapid response lab. It is anticipated
that Critical Care Units such as the ED will have several of these instruments
at various locations. Quantech intends to offer several industry standard
reagent rental programs whereby the DBx 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. For customers who wish to purchase the instrument,
the retail price is anticipated to be $15,000.
The Disposables
Quantech's disposable consists 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 the Quantech disposable will be the ability to attach a
standard vacutainer 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.
The disposables will be configured identically for all of the tests manufactured
by the Company. The only difference between the disposables will be the reagents
coated on each grating to define the particular test. One or more separate tests
may be performed on a single disposable providing Quantech the capability to
develop clinically related panels of tests by 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 Quantech's disposable will be that an operator
will not be required to add reagents. This simplicity translates into easier use
and immediacy of results. Disposables will be configured to provide single tests
or multiple clinically-related tests. Because the same disposable configuration
may be used for all tests, manufacturing and quality control costs should be
minimized. Disposables are expected to have retail prices ranging from $12.00 to
$35.00 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.
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 and chemical reactions. Each of these testing methodologies requires 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. Each
methodology also requires a specific instrument to perform the particular test.
Central and STAT laboratory automated systems have mechanized, rather than
eliminated many of these steps and have been unable to combine a number of
<PAGE>
different methodologies or technologies into a single system. Quantech's digital
SPR technology, in contrast, is expected to be able to 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 and 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 critical care
needs due to limited test menu, lack of interface to laboratory information
system, manipulation of patient sample, nonconcordance with central lab results
and lack of quantitative results. Quantech's DBx system is a new diagnostic
systems that combines the advantages of central lab and point of care testing by
providing the following features and capabilities:
o STAT test menu (cardiac panel, pregnancy, white blood count panel,
coagulation panel, electrolytes, amylase, therapeutic drugs, drugs of
abuse panel, etc.)
o Rapid turn-around time (10-20 minutes)
o Quantitative results using whole blood (no sample processing by user) o
Multi-test, single use disposable (up to four clinically related tests
per disposable) o User-friendly o Cost effective (less than STAT lab
test costs)
o No addition of reagents by the operator
o Transportable, bench top instrument
o Concordance with central lab test results
o Whole blood/closed tube (vacutainer) patient sample capability
o Full-time laboratory information system interface
o Automatic user/patient/test/QC input
The Market
Excluding home diagnostics, the overall world wide in-vitro diagnostic
market ("IVD") is more than $16 billion. Central and STAT/rapid response
laboratories currently account for the majority of this market with testing
divided between non-urgent and urgent (STAT) tests. The Company is focused on
the 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 higher than the
central lab and reduced test time turnaround is not always achieved.
Pressure has increased to reduce the length of patient stay and provide
a greater portion of services in ambulatory and outpatient settings. Because the
cost of providing care in Critical Care Units far exceeds those of general
medical or surgical units, a primary goal of critical care medicine is to
determine the appropriate care path for a patient so they 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 tests. For this reason, STAT labs were established to reduce test
<PAGE>
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 have kept them from penetrating the
critical care testing market.
The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology which allow it to address the
shortfalls of the central and STAT labs and POC instruments. As such, Quantech
will focus on the STAT testing needs of hospital Critical Care Units which are
defined as those areas where immediate diagnostic information is needed to
effect either the treatment or processing of a patient. These critical care
areas require a large menu of cost effective STAT tests and represent a
significant market.
Critical Care
Critical Care Units include Intensive Care Units, Surgical Suites and
Emergency Departments ("ED"). Quantech's DBx system 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 whether or not any tests are being conducted. The hospital must staff
laboratories around the clock, use sophisticated technology, respond to urgent
and critical patient needs, and yet do not have the large test volumes that
allow them to spread the operating and capital costs across a broad testing
base. The solution to this difficulty and expense is to bring a system designed
for STAT testing to the patient site 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's
STAT test needs is required. Such ED STAT test menu includes:
o Cardiac marker panel (CK-MB, troponin I, myoglobin)
o hCG (Pregnancy)
o White Blood Count panel (count with absolute neutrophils, Hct and Hgh)
o Coagulation
o Therapeutic Drug Monitoring (Digoxin, Theophylline)
o Drugs of Abuse (e.g., Cocaine, Marijuana)
o Electrolytes (not blood gases which are performed by pulse oximetry in
ED)
o Amylase
o Liver Enzymes
o Bun/Creatinine
Quantech will introduce its DBx system with at least a cardiac panel to
test for heart attacks and a pregnancy test. These tests provide a significant
market. Because no other system known to Quantech can provide the menu of STAT
tests required by the ED, Quantech believes it can make substantial market
penetration. Quantech will expand its menu beyond its first tests by adding the
<PAGE>
additional STAT tests required by the ED. Since the needs of other areas of
critical care are similar to those tests required by the ED, the Company
anticipates 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. Quantech has chosen a test panel for
heart attacks as one of its 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 to identify patients who have
suffered an AMI. Such tests, however, are most useful if they can be performed
in under twenty minutes in the ED or mobile care unit so that medical personnel
may take immediate action. Most of the existing test modalities require a
central laboratory system that may delay the results beyond their effective
need. Quantech's system will provide emergency personnel with the ability to
receive quantitative results in 10 to 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 (allergic
reactions, bleeding) if the patient has not suffered an AMI, rapid accurate
testing for an AMI is very important.
<PAGE>
Pregnancy
Every woman of child bearing 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. The DBx system will have a whole blood quantitative test for the
pregnancy marker hCG.
A rapid 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.
Sales and Marketing
General
The United States ED testing market is highly concentrated. There are
223 high volume trauma centers in the United States that each see more than
100,000 patients per year. Approximately two thousand two hundred (2,200) EDs
represent over 75% of the STAT 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).
Quantech will form a strategic marketing group of approximately three
persons. Initially this marketing group will begin creating awareness of
Quantech and its DBx system. It is intended that Quantech will engage a
strategic distribution partner with a presence in diagnostic testing to market
its 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 Quantech to monitor the market for future
products.
If an appropriate distribution partner cannot be engaged, then 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, the Company believes that a small focused sales effort will enable it to
effectively penetrate the ED STAT testing market. Initially this direct sales
group would total six persons and be increased as Quantech expanded beyond the
high volume trauma centers.
Clients
The purchasing decision for diagnostic testing equipment is in the
hands of the laboratory manager, although the end user of the Quantech DBx
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 laboratory wishes a STAT testing instrument to have the following
features:
<PAGE>
o Comparable performance to central lab instrument with concordant results
o One (maximum of two) instruments for 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 Physically robust - large enough so it does not get stolen or dropped
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 in many instances they
cannot buy a testing system without laboratory approval, they are capable of
keeping 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 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 and large enough to locate and not be stolen or
misplaced
To achieve market penetration of its DBx system, Quantech's marketing
strategy will be focused on achieving the acceptance of both laboratory and ED
personnel. Testing systems to date have been unable to meet the needs of both
groups because of technology limitations. Quantech's DBx system is designed to
meet the requirements of both groups by incorporating all of the required
features into a single instrument.
Quantech Organization
Quantech's original marketing and sales group will consist of a Vice
President of Marketing, who will also be in charge of the Midwest region, an
east and west coast regional representative and an international sales director.
These representatives will be familiar with ED routines and needs and have prior
diagnostic sales experience. Prior to engaging a strategic distribution partner,
these representatives and their support staffs will focus on system placements
in the high volume trauma centers. Once a distribution partner is engaged, the
sales group will provide customer driven support for such partner.
International
Simultaneously with the launch of the DBx in the United States Quantech
intends 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. The
Company will manage and support international distributors, if a strategic
<PAGE>
distribution partner is not engaged. Quantech is currently conducting further
international marketing research and has begun identifying potential
distribution partners.
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 clinical
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single samples, most of the samples handled by
central laboratories are processed in batches. The competitors for this market
have addressed these laboratories' needs for high sample throughput, low reagent
cost and low labor cost by developing automated systems. STAT/rapid response
labs have been developed to address the needs of STAT testing and generally use
the same instrumentation found in the central lab. These central lab systems are
generally complex and expensive, incorporating designs appropriate to the
central labs 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 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 (i.e., non-STAT) samples. 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 is 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 lab. The Quantech DBx system in general must compete
with central and /or STAT laboratory systems to gain market share and, as a
result, Quantech will meet with competition from these companies in both sales
of its system and the individual tests to be provided on the DBx.
<PAGE>
There is significant activity in certain areas of the Critical Care
STAT testing segment. Point of care systems are addressing limited testing areas
such as coagulation, blood gas and basic chemistry (including electrolytes). Two
such systems, i-STAT Corp. and Diametrics Medical, which market biosensor
instruments capable of determining blood gas and electrolyte levels have become
recognized point of care testing instruments. The Company does not believe
current products of i-STAT or Diametrics are capable, however, of providing the
test menu and features required by the ED.
With respect to testing for cardiac markers to diagnose AMI, most
testing is done in the Central and STAT labs with turnaround times of more than
45 minutes. The Company is aware of only a limited number of companies that
provide rapid testing for AMI. Of such companies, Spectral Diagnostics Limited,
a Canadian company, markets a manual method available for certain cardiac
markers and Roche Diagnostics through its acquisition of Boehringer Mannheim
markets a manual test for troponin T. As configured, neither Spectral's nor
Boehringer's AMI tests can provide quantitative results. Biosite Diagnostics has
introduced an instrument and tests for the cardiac markers myoglobin, CK-MB and
troponin I. It is unclear what the extent of their sales activity is as they
have announced problems in the supply of their test disposable. However, the
Company believes that such system is not able to provide the breadth of test
menu and other STAT testing requirements expected to be available on the DBx
system and this menu limitation by its competitors provides Quantech a
competitive advantage.
The Company believes that there is a need for rapid, accurate and
quantitative measurement of cardiac markers, pregnancy and other STAT tests.
Quantech plans to enter the market by serving this unmet need first with tests
for heart attacks and pregnancy and to extend its penetration by delivering a
full range of high value, clinically relevant ED STAT tests on a single
platform. In doing so, the Company will compete directly with providers of
currently available testing methods.
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 the Company, including, but not limited to,
financial resources and skilled personnel. However, the Company believes its SPR
technology will enable it to provide products to the Critical Care STAT testing
market, a market segment believed by the Company to lack testing systems that
adequately address its needs. 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 Quantech's DBx system. If Quantech is able to
launch its system, no assurance exists that competitive pressures will not
negatively affect its pricing.
The Technology
Biosensors
The Quantech system is a biosensor using the Company's proprietary
Surface Plasmon Resonance (SPR) technology as its core. A biosensor is defined
as an analytical device incorporating a biological sensing element coupled to a
suitable transducer that converts biochemical activity into a measurable form of
energy. Almost all analytical systems combine sensing (i.e., detection) and
transducing components. The distinct feature of biosensors is that the two
functions are coupled in a single physical entity. A biosensor's input is a
specific biological event (e.g., binding of an antigen to an antibody). Its
output is a measurable signal that corresponds to the input. A biosensor's
biological component provides specificity, the ability to selectively recognize
one type of chemical or event. Its transducer confers sensitivity, the ability
to transform the very low energy of the biological event into a measurable
signal.
<PAGE>
Surface Plasmon Resonance (SPR)
Surface Plasmon Resonance is an optical-electrical phenomenon involving
the interaction of light with the electrons of a metal. The optical-electronic
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. Quantech's SPR sensor
is a disposable 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
since 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 and defines the test to be done such as a cardiac marker.
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 analyte, 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.
Quantech's SPR biosensor combines the strengths of biology and physics
into a single entity. Applications of SPR that have been reported in the
scientific literature or explored by the Company include immunoassays for
cardiac markers, hormones, drugs, viruses and bacteria, quantitation of
anesthetic gases, and DNA binding assays. Quantech's SPR biosensor technology
thus represents a simple, unified platform that is capable of performing a wide
range of diagnostic test. SPR is also a valuable research tool that the Company
expects will allow it to quickly and efficiently develop further tests for its
system.
Manufacturing
Quantech's system is comprised of an instrument and disposable tests.
The instrument consists of electronics and optics and does not require
complicated assembly procedures. Production of the instrument will be performed
by a contract manufacturer to Quantech under quality standards set by the
Company. The contract supplier has not yet been selected. Quantech will take
delivery of the instrument, perform final quality inspection and inventory the
instrument for final shipment.
Quantech's disposable consists of two parts, the sensor grating piece
with the metal coating and the carrier for such piece. Both the coated sensor
grating and carrier will be produced by contract suppliers according to Quantech
specifications. These pieces will be shipped to either Quantech or another
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.
<PAGE>
Regulatory Environment
The Company believes that the products it initially proposes to
manufacture and market will be classified as medical devices and will therefore
be subject to regulation by the United States Food and Drug Administration (the
"FDA") and, in some instances, by foreign government authorities. Under the 1976
amendments to the Federal Food, Drug and Cosmetics Act (the "FFDCA") and
regulations promulgated thereunder, manufacturers of medical devices must comply
with certain regulations governing the testing, manufacturing and packaging of
medical devices. Under the FFDCA, medical devices are subject to different
levels of testing and review. The most comprehensive level of review requires
that a clinical evaluation program be conducted before a device receives
premarket approval by the FDA for commercial distribution. As a manufacturer of
medical devices, the Company will also be subject to certain other FDA
regulations, and its manufacturing processes and facilities will be subject to
periodic inspection, without warning, to ensure compliance. Comparable agencies
in certain states and foreign countries will also regulate the Company's
activities. The Company's products could be subject to recall by the FDA or the
Company 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. The Company expects that its products will not be
subjected to the highest level of scrutiny because they are in-vitro (outside of
the body) diagnostic devices which do not come into contact directly with a
living human being. Specifically, the systems would be classified as either
Class I or Class II devices as distinct from implantable devices, which are
classified as Class III devices.
The Company believes that premarket clearance can be obtained for its
initial system and tests through submission of a 510(k) premarket notification
("510(k) Notification") demonstrating the product's substantial equivalence to
another device legally marketed pursuant to 510(k) Notification clearance. The
FDA may also require, in connection with the 510(k) Notification, that it be
provided with the test results supporting this claim. The FDA may further
require, in connection with the 510(k) Notification, that it be provided with
test results 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 ("IDE").
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 the Company's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to the
Company a Premarket Approval ("PMA"). The FDA should grant a PMA if it 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 PMA 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. The
Company believes it is unlikely that it will be required to obtain a PMA with
respect to any of its 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 PMA procedure. The Company anticipates that it will
make claims in reference to its cardiac markers. These claims will be made after
the products are marketed with only single claim implications. Accordingly, the
products should not be delayed in their initial introduction. If a PMA is
required for the Company's initial system and CK-MB test, introduction of the
<PAGE>
initial system likely would be significantly delayed, which could have a
material adverse effect on the Company, although preliminary indications from
the FDA are consistent with a 510(k) filing.
For products subject to either 510(k) or PMA regulations, the FDA
requires that the Company conduct any required studies following Good Clinical
Practice and Good Laboratory Practice guidelines. Also, the manufacture of
products subject to 510(k) or PMA regulations both must be in accordance with
current Good Manufacturing Practice. For sale in foreign countries, compliance
with ISO 9000 standards will be required. Sales of medical devices outside the
U.S. are subject to foreign regulatory requirements. Medical devices may not be
sold in EU countries unless they display CE mark certification. The Company's
products will be manufactured according to ISO 9001 and EN 46001 quality
standards and the Company expects to be able to apply the CE mark to its
products. In addition, international sales of medical devices manufactured in
the U.S. but not approved by the FDA for distribution in the U.S. are subject to
FDA export requirements. Under these requirements, the Company 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.
Specific requirements demanded of a laboratory depend upon the
complexity of the test performed. Clinical Laboratory Improvement Act of 1988
("CLIA") regulations establish three categories of laboratory tests, for which
regulatory requirements become increasingly stringent as the complexity of the
test rises: (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. All
laboratories performing tests of moderate or high complexity must obtain either
a registration certificate or a certificate of accreditation from Health Care
Financing Administration ("HCFA") or an organization to whom HCFA has delegated
such authority. HCFA has allowed electronic controls for some POC instruments to
serve the function of daily quality control performance to allow non-laboratory
personnel to run such POC systems. The tests to be performed by the Company's
system are initially expected to fall within the moderate complexity class as
defined by current CLIA regulations, as all analogous POC instruments 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, whereas the individual who operates the machine
requires no formal laboratory education and only task-specific training. The
Company may, but has not yet, applied for the waiver.
The Company has received FDA approval for its myoglobin test for use in
the clinical environment and has submitted its cardiac test for CK-MB to the
FDA. Each test for the DBx system must obtain FDA approval. The Company must
also submit its DBx system to the FDA for approval. The system will be provided
to the FDA for such approval after its commercial development is completed.
Significant Agreements
Ares-Serono License
Quantech has acquired from Ares-Serono at a total cost of $3.4 million
a worldwide exclusive license (the "License"), to certain patents, proprietary
information and associated hardware (e.g. molds, test rigs, prototypes) related
to the SPR technology. The Ares-Serono affiliated companies (the "Ares-Serono
<PAGE>
Group"), based in Switzerland, comprise a multinational organization engaged in
the development and marketing of ethical pharmaceuticals, primarily in the field
of human fertility, human growth, immunology and virology. The SPR diagnostic
technology was developed by a research and development partnership (the "R&D
Partnership"), the General Partner of which was a company belonging to the
Ares-Serono Group.
The License calls for an ongoing royalty of 6 percent on all products
utilizing the SPR technology which are sold by the Company. 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. Quantech has paid
$1,150,000 in 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
the Company of its exclusive rights under the License. The obligations of
Quantech to pay royalties terminate when the total royalty payments reach a
gross amount of $18 million. After such date, Quantech's rights in the licensed
SPR technology continue in perpetuity with no further obligations to
Ares-Serono.
Ares-Serono specifically reserved, and did not license to Quantech, any
rights with or otherwise integrated with certain fluorescence capillary fill
device technology (the "FCFD Technology"). The Company believes that such
limitation does not materially impact the value of the License given Quantech's
current plan of commercialization. In addition, the 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
technology for applications outside the field of the commercial interests of
Quantech.
The Perkin-Elmer Corporation
Quantech and The Perkin-Elmer Corporation ("Perkin-Elmer"), a leading
supplier of life science systems and analytical instruments, are parties to a
technology and development agreement. Such agreement provides Perkin-Elmer with
exclusive licenses to certain Quantech technology for use outside of medical
diagnostics and co-exclusive rights to nucleic acid medical diagnostics.
Perkin-Elmer, pursuant to the agreement, provides technical assistance related
to Quantech's medical diagnostic system and future royalty payments if
Perkin-Elmer sells products using Quantech's technology.
The technical assistance provided by Perkin-Elmer covers many areas
including math, software, system hardware, optics, chemistry, optical molding,
microfluidics, mechanical engineering, environmental and regulatory performance
and value engineering. Four phases of assistance have been established with a
reduction in Perkin-Elmer's royalty each time a phase is completed. Phase I and
II have been completed setting the royalty at 8% of gross sales of Perkin-Elmer
products which include Quantech technology. If all phases are met, the royalty
will be set at 6% 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 Perkin-Elmer does not proceed to commercialize the
licensed SPR technology prior to such date all rights revert back to Quantech.
Quantech granted to Perkin-Elmer in December 1997 a warrant to purchase
1.4 million shares of Quantech Common Stock. The warrant expires in December
2002 and is immediately exercisable. The exercise price of the warrant is 95% of
<PAGE>
the average market price of Quantech's Common Stock for the 25 days prior to the
date Perkin-Elmer provides notice to Quantech of its intent to exercise the
warrant.
Quantech, pursuant to an exclusive license agreement with Perkin-Elmer,
has licensed Perkin-Elmer technology that provides a large density, high
throughput diagnostic testing capacity for Quantech's SPR technology in medical
diagnostics other than nucleic acid testing. Through the optical and chemistry
deposition advancements made by Perkin-Elmer, they are able to read up to 100
test areas on a single 1 cm by 1 cm SPR disposable and plan to expand this
capacity. Quantech believes such two dimensional (2D) array capability, as now
used in genomic screening research, should allow Quantech to expand its digital
SPR technology upstream from the critical care area to the central lab and
provide further vertical expansion to ICU/CCU, surgical suite, doctor office and
home testing. Future generations of Quantech's current DBx system are also
expected to benefit from the Perkin-Elmer technology by reducing the number of
unique disposables 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 Perkin-Elmer technology. Minimum royalties
to Perkin-Elmer of $500,000 per year begin in December of 2000, provided,
however, that if Quantech does not proceed to commercialize the SPR technology
licensed from Perkin-Elmer prior to such date, all rights revert back to
Perkin-Elmer. The Perkin-Elmer technology will not be initially incorporated
into the DBx system.
Patents and Proprietary Rights
The License covers a total of eight patents. Some of these patents
relate to the optics, mirrors, light refraction and calibration of the SPR
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.
<PAGE>
<TABLE>
<CAPTION>
PATENT NAME DESCRIPTION U.S. GRANT COUNTRIES GRANTED
DATE
- -------------------------- ------------------------------------- -------------- ----------------------------------------------
<S> <C> <C> <C>
Merlin I Main patent for grating coupled 06/05/90 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT, JP,
SPR. Used in DBx System LU, NL, NO, SE, WO
Merlin II Main patent for grating coupled 21/11/89 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT, JP,
SPR. Used in DBx System LU, NL, NO, SE, WO
Cellulose Nitrate Films Main patent for grating coupled 12/02/91 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB, GR,
SPR. Used in DBx System IL, IT, JP, LU, NL, SE
Calibration Notches Minor patent. Not used in DBx 09/05/89 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB, GR,
IL, IT, JP, LU, NL, SE
Enhanced SPR assay Minor patent. Not used in DBx Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB, GR,
IL, IT, JP, LU, NL, SE
Sensor Using Photoresist Minor patent. Not used in DBx 09/03/88 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT, LU,
NL, NO, SE, WO
Waveguide Sensor Minor patent. Not used in DBx Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB, IT,
JP, LU, NL, NO, SE, WO
Restrahlen Effect Sensor Minor patent. Not used in DBx N/A GB ONLY
</TABLE>
All developments by Quantech pursuant to the License, either
proprietary or patentable in nature, are the property of Quantech. The Company
has made a number of advances that may be patentable and is reviewing
registration of additional patents.
Employees and Property
The Company employs 16 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the DBx system and marketing. The Company expects to hire other
personnel as necessary for chemistry development, quality control, sales and
marketing, manufacturing and administration.
The Company leases offices (comprised of approximately 6,800 sq. ft.)
at 1419 Energy Park Drive, St. Paul, Minnesota at a base monthly rent of
approximately $5,600 pursuant to a lease arrangement which expires February 2000
and will thereafter proceed on a month-to-month basis.
Legal Proceedings
The Company is not a party to any litigation that would have a material
adverse effect on its financial condition or results of operations.
<PAGE>
MANAGEMENT
Directors and Officers
The directors and officers of the Company are as follows:
Name Age Position
Robert Case............. 56 Chief Executive Officer and Director
Gregory G. Freitag...... 38 Chief Operating Officer, Chief
Financial Officer and Secretary
Thomas R. Witty, Ph.D... 52 Vice President of Research and
Development
Vincent A. Fischer...... 60 Vice President of Manufacturing
James F. Lyons.......... 70 Chairman of the Board of Directors
Richard W. Perkins...... 69 Director
Edward E. Strickland.... 73 Director
Robert Case has been Chief Executive Officer of the Company since June
1997 and a director of the Company since October 1996. He 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 multi-national, 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 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 U.S. 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 over 23
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
<PAGE>
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 in the U.S. Army Medical Service Corp. and as a
Professor at Colorado State University.
Vincent A. Fischer has been Vice President of Manufacturing of the
Company since October 1996. Prior to joining Quantech, he was Manager of
Instrument Systems for Boehringer Mannheim in Fremont, California. In that
position, he had responsibility for the manufacture of Boehringer's coagulation
and therapeutic drug instruments. Mr. Fischer has 28 years of experience in the
medical device industry, starting his career in the field of electrical
engineering. Mr. Fischer has an extensive background in positions ranging from
manufacturing and quality control to regulatory affairs and product development.
In addition to Boehringer Mannheim, he has gained his experience at such
companies as Baxter Laboratories, Abbott Laboratories, G.D. Searle, United
Medical Manufacturing and Amersham. Mr. Fischer received his BS degree in
Electrical Engineering from the University of Marquette.
James F. Lyons has been Chairman of the Board of the Company since June
1997 and a director of the Company since September 1995. From September 1993
through October 1994, when he retired, Mr. Lyons was Chief Executive Officer of
Bio-Vascular, Inc., a cardiovascular medical products company. From 1978 through
1990, Mr. Lyons was President and Chief Executive Officer of BioMedicus, Inc., a
cardiovascular medical products company. Mr. Lyons was also a director and
Chairman of the Board from 1991 through 1996 of AVECOR Cardiovascular Inc., and
was a director of ATS Medical, Inc., Bio-Vascular, Inc. and Spine-Tech, Inc.
Richard W. Perkins has been a director of the Company since September
1995. Since 1985, Mr. Perkins has been President, Chief Executive Officer and a
director of Perkins Capital Management, Inc., Wayzata, Minnesota. Prior thereto,
he was a Senior Vice President of Piper Jaffray Inc., Minneapolis, Minnesota. He
is also a director of Bio-Vascular, Inc., Eagle Pacific Industries, Inc.,
Children's Broadcasting Corporation, Peerless Industrial Group, Inc., Lifecore
Biomedical, Inc., Nortech Systems, Inc., and CNS, Inc.
Edward E. Strickland has been a director of the Company since September
1995. Mr. Strickland has been an independent financial consultant for more than
seven years. From October 1990 to January 1991, he performed the duties of Chief
Executive Officer while serving on the Executive Committee of the Board of
Directors of Reuter, Inc., where he currently serves as the Chairman of the
Board. Mr. Strickland also serves as a director of Bio-Vascular, Inc., Hector
Communications Corp., Communication Systems, Inc., and AVECOR Cardiovascular
Inc.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to, or
earned by, the Chief Executive Officer of the Company and to all executive
officers whose compensation exceeded $100,000 for fiscal 1998.
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------- ---------------
All Other
Other Annual Securities Compensation
Name and Fiscal Salary Bonus Compensation Underlying
Principal Position Year ($) ($) ($) Options (#) ($)
- ----------------------- --------- ------------ --------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Case, 1998 $0 0 0 102,500 0
CEO 1997 $0 0 0 12,500 0
Gregory G. Freitag, 1998 $125,000 0 0 115,000
COO, CFO 1997 $125,000 0 0 0 0
1996 $ 72,917 0 0 25,000 0
Robert R. McKiel, 1998 $119,792 0 $5,200 (1) 0 0
former Executive 1997 $125,000 0 0 0 0
VP of R & D 1996 $117,500 0 0 0 0
</TABLE>
- ------------------------
(1) Other Annual Compensation for Mr. McKiel consisted of amounts paid for
consulting services pursuant to an arrangement in connection with his
resignation from the Company.
Option/SAR Grants During 1998 Fiscal Year. The following table provides
information related to options granted to the named executive officers during
fiscal 1998. The Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of Total
Securities
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date
- ---------------------------- -------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
Robert Case 2,500 (1) 0.6% $3.00 April 3, 2003
Robert Case 100,000 (2) 25.3% $3.00 July 14, 2002
Gregory G. Freitag 90,000 (2) 22.7% $3.00 July 14, 2002
Gregory G. Freitag 25,000 (2) 6.3% $3.00 December 1, 2000
Robert R. McKiel 0 N/A N/A N/A
</TABLE>
- ------------------------
(1) Such option is a nonqualified stock option with 1,667 shares
immediately exercisable and 833 shares exercisable on April 3, 1999.
(2) Such option is an incentive stock option and is immediately
exercisable.
Option Exercises and Value of Options at End of Fiscal 1998. The
following table sets forth, for each of the executive officers named in the
Summary Compensation Table above, the year-end value of unexercised options.
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised
Shares Securities Underlying Value of Unexercised
Acquired Options at End In-the-Money Options
on Value of Fiscal 1998 (1) at End of Fiscal 1998 (1)(2)
---------------------------- -----------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------------ ----------- -------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert Case 0 N/A 114,167 883 $25,417 $208
Gregory G. Freitag 0 N/A 115,000 0 $28,750 $0
Robert R. McKiel 0 N/A 41,542 0 $0 $0
</TABLE>
- ------------------------
(1) The shares represented for Mr. McKiel were granted as warrants to
purchase Common Stock and not options. As such, these shares are not
included in the Company's Nonqualified Stock Option Plan described
below.
(2) Value based on market value of the Company's Common Stock on June 30,
1998 ($3.25 per share closing price) less the exercise price.
Election of Officers and Directors; Committees of the Board of
Directors. Executive officers of the Company are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors. The Company's Board of Directors is divided into three classes with
each class being elected for a term of three years after their initial term is
completed. The Company's directors hold office until their term has expired and
their successors have been elected and qualified.
The Company's Board of Directors has established two committees. The
Audit Committee has the responsibility of selecting Quantech's independent
auditors and communicating with such auditors on matters of auditing and
accounting. The Audit Committee is comprised of directors Perkins, Lyons and
Strickland with Mr. Strickland as Chairman. The Compensation Committee has the
responsibility of reviewing on an annual basis all officer compensation and
administering any employee options and plans related thereto. The Compensation
Committee is also comprised of directors Perkins, Lyons and Strickland with Mr.
Lyons as Chairman.
Employment Agreements. Each of Messrs. Case and Freitag have employment
contracts. Both contracts allow for termination at-will by the Company. Mr. Case
under his contract is entitled to a lump-sum payment of $150,000 if his
employment is terminated as a result of a sale of substantially all of the
assets of the Company or a change in the control of more than 50% of the
Company's Capital Stock pursuant to a single transaction or a series of
transactions by the same acquiring party. In the event Mr. Freitag is terminated
by the Company for any reason other than for "cause" he is entitled to six
months base salary and bonus.
Certain Transactions. In March 1998, the Company issued warrants to
purchase 60,000 and 15,000 shares of its Common Stock to James F. Lyons and
Edward E. Strickland, respectively, directors of the Company, as compensation
for the guarantee of a $500,000 bank loan to the Company. The warrants have an
exercise price of $0.75. The amount under such loan was increased by $250,000 in
August and such directors received additional options in September to purchase
an aggregate of 75,000 shares of Common Stock at $1.13 per share for their
extension of the guarantee to this amount. In April 1998, the Company issued a
warrant to purchase 2,500 shares of its Common Stock to Gregory G. Freitag, the
<PAGE>
Company's COO and CFO, as compensation for providing short term loans to the
Company on several occasions during 1997 and 1998. The warrant has an exercise
price of $1.49.
Stock Options. In April 1998, the Company's Board of Directors adopted
the 1998 Stock Option Plan (the "Plan") and reserved 2,000,000 shares for
issuance thereunder. If any options granted under the 1998 plan expire or are
terminated prior to being exercised in full, then the unexercised portion of
such options will once again be available for additional option grants. Options
to purchase 980,800 shares of Common Stock have been issued pursuant to the
Plan.
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 will depend to a large
degree.
Under the 1998 Stock Plan, all employees, officers and directors
(including Non-Employee Directors) of the Company or a subsidiary, and
consultants and advisors who perform bona fide services for the Company or a
subsidiary, provided such services are not in connection with the offer or sale
of securities in a capital raising transaction, are eligible to receive stock
options. It is the intention of the Company to grant options which qualify as
incentive stock options ("ISOs") under section 422 of the Internal Revenue Code,
as well as nonqualified stock options ("NSOs"). The 1998 Plan is administered by
the Board of Directors or by a Committee appointed by the Board (referred to as
the "Administrator") which selects the individuals to whom options will be
granted, the number of shares subject to each option and the exercise price and
terms and conditions of each option.
The exercise price for ISOs cannot be less than 100% of the fair market
value of the Common Stock per share on the date the option is granted, and, in
the case of ISOs granted to holders of more than 10% of the voting power of the
Company, not less than 110% of such fair market value. The term of an option
cannot exceed 10 years, and the term of an ISO granted to a holder of more than
10% of the voting power of the Company cannot exceed five years. The exercise
price for NSOs is generally 100% of the fair market value of the Common Stock
per share on the date the option is granted unless otherwise determined by the
Administrator, provided that the exercise price is not less than 85% of the fair
market value of the Common Stock per share on the date granted.
Non-Employee Directors of the Company are granted upon election an
option to purchase 10,000 shares of Common Stock at a price per share equal to
100% of the fair market value of the Common Stock on such date. One-third of
such options are exercisable immediately, with one-third becoming exercisable on
each of the second and third anniversaries of the date of grant. After each
shareholders meeting, if the director is re-elected or his term of office
continues after such shareholders meeting, each Non-Employee Director is granted
an option to purchase 2,500 shares of the Common Stock at an exercise price per
share equal to 100% of the fair market value of the Common Stock on such date.
These options are immediately exercisable.
On September 3, 1996, the Company's Board of Directors adopted the
Quantech Ltd. Nonqualified Stock Option Plan (the "Plan"). The Plan provides for
the granting of nonqualified options to purchase Common Stock of the Company to
employees, directors and members of the Company's Scientific Advisory Board. A
total of 465,750 shares of the Company's Common Stock have been reserved for
<PAGE>
issuance upon exercise of options granted under the Plan. Outstanding options
for the purchase of up to 465,750 shares of Company Common Stock have been
granted under the Plan of which 427,418 have vested. The Company's Compensation
Committee has complete discretion to determine the persons to whom options are
granted under the Plan and to set the terms of such options including, but not
limited to, terms relating to price (which generally will be the fair market
value of the Company's Common Stock on the date of grant), duration, vesting,
termination and the number of shares subject to such option. The Plan will
continue for an indefinite period until terminated by the Board of Directors or
Compensation Committee. No additional options will be granted under this plan.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of December 31, 1998
concerning the beneficial ownership of Quantech's Common Stock by (i) each
director, (ii) each Named Executive Officer, (iii) each shareholder known by
Quantech to be the beneficial owner of more than 5% of its outstanding Common
Stock (iv) the directors and officers as a group and (v) each Selling
Shareholder. Except as otherwise indicated, the persons named in the table have
sole voting and investing power with respect to all shares of Common Stock owned
by them.
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ted Adams 500 500 -- *
American Holographic 12,000 12,000 -- *
Roy Anderson III 10,000 2,500 2,500 10,000 *
Roy Anderson, Jr. 10,000 2,500 2,500 10,000 *
Gregory & Ann Anklam 2,000 500 500 2,000 *
David & Meleah Arnold 15,000 15,088 67,260 82,348 15,000 *
Mark Ashton 750 11,305 79,748 24,386 67,417 2.4%
John G. Ballenger 10,000 2,500 2,500 10,000 *
Bank Heusser & Co. Ltd. 5,000 5,000 -- *
David Barash 1,078 1,078 2,156 -- *
Richard T. Bennett 6,103 44,676 17,446 33,333 1.2%
Les Biller 6,036 6,036 -- *
Nicholas Bluhm 5,750 5,750 -- *
Bob, Inc. 12,805 93,824 39,962 66,667 2.4%
Donald Brattain 2,500 133,332 135,832 -- *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Braun 2,787 21,424 24,211 -- *
Courtney Brown 10,533 2,523 14,276 16,799 10,533 *
Timothy Burton 3,542 25,936 29,478 -- *
Anthony Carideo 1,000 500 500 1,000 *
Robert Case (2)(10) 314,167 6,314 48,952 21,933 347,500 11.2%
Joseph Catarious 2,500 2,500 -- *
Lee Chapman 5,500 1,250 1,250 5,500 *
Lee Chapman Profit Plan 19,868 19,868 -- *
Christianson Investments Co. Ltd. 25,000 5,000 5,000 25,000 *
Ann M. Christianson 2,402 599 599 2,402 *
Lynn A. Christianson 2,402 599 599 2,402 *
Warren G. Christianson 31,511 3,895 3,895 31,511 1.2%
Warren T. A. Christianson 2,402 599 599 2,402 *
Kenneth E. Dawkins Rev. Trust 66,668 66,668 -- *
David Dent 10,118 71,372 81,490 -- *
Brad deWerd 100 100 -- *
Robert W. and Rita M. deWerd 1,000 250 250 1,000 *
Tom and Kathy deWerd 1,000 250 250 1,000 *
Glenn Diamond 2,045 2,045 -- *
John & Emily Dirksen 1,000 1,000 -- *
DRAFTCO 2,500 2,500 -- *
Thomas Dunleavy 33,332 33,332 -- *
Herbert Dubuisson 13,336 13,336 -- *
Neil Durhman 10,000 10,000 -- *
Frazier Eales 28,000 28,000 -- *
Mike Edwards 20,545 20,545 -- *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Paul Ehlen 2,511 15,952 5,130 13,333 *
Stan & Carol Eilers 22,618 99,136 121,754 -- *
Engelkes-Abels Funeral Home Inc. 4,000 1,000 1,000 4,000 *
Weems Estelle 22,500 22,500 -- *
Richard Evans 500 500 -- *
Kelly M. Farrell 25,200 25,200 -- *
Lee Felicetta 500 500 -- *
John E. Feltl 200 200 -- *
Richard Fentin 133,332 133,332 -- *
Carol M. Freeman 2,402 599 599 2,402 *
Gregory G. Freitag (3)(10) 307,775 9,761 15,952 12,380 321,108 10.5%
Jim Gahlon 10,063 1,169 8,248 2,262 17,218 *
R.W. Gaines, Jr., M.D. (4) 5,000 6,783 47,852 14,635 45,000 1.6%
Robert D. Gearou 7,500 3,125 3,125 7,500 *
Thomas Gearou 12,050 2,500 2,500 12,050 *
Robert Gjerde 10,133 71,480 81,613 -- *
Ronald L. Glassman 6,103 44,672 17,442 33,333 1.2%
Glymar Inc. 500 500 -- *
David Goldsteen (5) 170,504 51,038 359,088 466,028 114,602 3.7%
Mark W. Goldsteen 20,000 12,800 72,152 84,952 20,000 *
Sima Griffith 15,707 15,707 -- *
Donald F Hagen Revocable Trust 6,071 42,824 48,895 -- *
Thomas Harkness 5,000 2,500 2,500 5,000 *
Bill Hay 4,000 750 750 4,000 *
Timothy Heaney 1,000 6,924 7,924 -- *
Julie A Higgins 2,402 599 599 2,402 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HK Financial Corp 71,033 16,305 79,748 29,386 137,700 4.9%
Bruce Hubbard 400 400 -- *
Richard G. Hubers 56,000 56,000 -- *
Industricorp & Co. 5,000 2,220 2,220 5,000 *
Intermed Anstalt 13,750 2,500 2,500 13,750 *
Roland Isaacson 9,414 60,172 32,333 37,253 1.3%
Jon & Susan Iverson 10,579 84,956 95,535 -- *
Stanley Johnson 12,500 16,510 93,380 43,223 79,167 2.8%
Theodore Johnson 5,000 1,250 1,250 5,000 *
Wesley Johnson 3,250 500 500 3,250 *
Jeanne M. Jungbauer 6,852 50,156 57,008 -- *
E. Elmer & E. Joyce Jutila 2,000 500 500 2,000 *
John Jutila 500 500 -- *
Judith K. Kaufmann 750 6,960 7,710 -- *
Nasser J. Kazeminy 33,332 33,332 -- *
Nasser J. Kazeminy 1992 GRAT 33,332 33,332 -- *
Yvonne P. Kazeminy 1992 GRAT 33,332 33,332 -- *
Bernard Kegan 1,000 500 500 1,000 *
Michael S. Kelly 200 200 -- *
Kessler Ashler Group LTD. 10,000 10,000 -- *
Kurt King DDS, IRA 1,250 1,250 -- *
Steven King 5,000 1,250 1,250 5,000 *
John G. Kinnard & Company, Inc. 469,054 159,492 495,213 133,333 4.0%
Peter & Shelagh Klein 3,035 21,412 24,447 -- *
Steven H. Kopesky 16,597 120,568 43,832 93,333 3.3%
Brandon Koress 3,699 1,250 1,250 3,699 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell Krieger 5,000 14,613 93,332 38,612 74,333 2.6%
David & Kathryn Kruskopf 2,000 500 500 2,000 *
Martin Lackner 3,500 20,808 24,308 -- *
Lakewood Ortho Clinic-Mark Mills 2,000 500 500 2,000 *
Dennis LaValle 24,668 71,561 466,488 204,716 358,001 11.0%
Bruce A. Lawin 6,783 47,852 14,635 40,000 1.4%
Phillip Levin 13,336 13,336 -- *
Clifford S. Lozinski 2,850 7,662 50,508 58,170 2,850 *
Roger Lucas 5,000 1,250 1,250 5,000 *
Wayne Lund 22,000 7,500 7,500 22,000 *
James F. Lyons (6)(10) 90,000 97,688 562,720 406,753 343,655 9.9%
Mark Lyons 5,353 37,760 9,780 33,333 1.2%
Joan C. Maclin 1,055 7,444 8,499 -- *
Plato Marroulis 1,250 1,250 -- *
Jerry E. Mathwig 66,668 66,668 -- *
Victor Mavar 5,000 1,250 1,250 5,000 *
Andrea McAllister 6,383 625 625 6,383 *
Timothy McDonald 525 525 -- *
Robert & Teresa McDonnell 10,118 69,336 79,454 -- *
Sally McGuire 33,332 33,332 -- *
Bob McKiel 41,542 41,542 -- *
Lawrence Meacham 5,794 42,620 48,414 -- *
David Metz 625 625 -- *
Millennium Medical Systems LLC 1,800,000 1,800,000 -- *
Jonathan E. Miller 1,166 8,580 9,746 -- *
Steven E. Miller 3,847 27,316 31,163 -- *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minn Shares, Inc. 2,533 17,868 20,401 -- *
David Mitchell and Connie Foote 10,185 71,844 82,029 -- *
James Murphy 4,000 1,000 1,000 4,000 *
Nathan Newman 100 100 -- *
Andy O'Connell 20,000 20,000 -- *
H. Vince O'Connell 21,965 143,480 165,445 -- *
William F. Ogden Jr. 33,332 33,332 -- *
Steve O'Hara 500 500 -- *
Okabena Partnership K 75,000 59,922 399,484 534,406 -- *
John W. Owensby 3,000 3,000 -- *
John & Delores Ownesby TTEES 1,500 1,500 -- *
John Pagnucco 15,706 15,706 -- *
Deming L. Payne 11,283 47,852 19,135 40,000 1.4%
Richard W. Perkins (7)(10) 50,000 2,500 2,500 50,000 1.8%
Thomas Pierce 500 500 -- *
William W. and Judith S. Prain 5,000 1,250 1,250 5,000 *
Charles Pulley 17,100 9,772 45,680 28,785 43,767 1.6%
Joseph D. Pupel 1,125 10,000 11,125 -- *
Mary J. Rasley 2,402 599 599 2,402 *
Willard Rehbein 20,000 5,000 5,000 20,000 *
Willard C. & Kathy A. Rehbein 2,500 2,500 -- *
Richardson Grating 8,000 8,000 -- *
Richfield Bank & Trust/Wiggins 2,000 500 500 2,000 *
River Edge Partners Inc. 10,000 2,500 66,668 69,168 10,000 *
Richard S. Rog 7,197 86,032 53,229 40,000 1.4%
Richard S. & Sylvia C. Rog 7,656 56,056 23,712 40,000 1.4%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Albert Rubenstein 5,000 5,000 -- *
Robert & Lois Schmiege 5,000 1,875 1,875 5,000 *
Thomas Schrade 14,000 14,000 -- *
John & Gloria Schweich 2,500 625 625 2,500 *
Allan Sekhavat 2,500 2,500 -- *
Sekhavat, Ltd. 28,000 7,000 7,000 28,000 1.0%
Gerald Shaughnessy 17,206 14,108 31,314 -- *
R.H. Joseph Shaw 47,500 47,500 -- *
Franciska Shuler 1,042 7,352 8,394 -- *
Patrick Sidders 50 50 -- *
Patrick & Barbra Sidders 3,106 250 250 3,106 *
Six C's Investment Group 5,000 2,500 2,500 5,000 *
Al Steffes 5,000 1,250 1,250 5,000 *
Meindret M. & Bobbi Stek 32,000 32,000 -- *
Michael Stone 50 50 -- *
Edward E. Strickland (8)(10) 82,500 35,935 334,980 270,915 182,500 5.8%
Strickland Family Limited Partnership 5,000 6,380 118,648 91,695 38,333 1.3%
Scott Strickland 7,371 63,756 57,794 13,333 *
William R. & Catherine A. Swanson 3,841 28,156 11,997 20,000 *
Douglas V. Swanson 2,319 16,048 18,367 -- *
James Swenson 8,855 2,505 8,800 11,305 8,855 *
William J. Szlaius 750 6,980 7,730 -- *
Scott Taylor 750 6,968 7,718 -- *
David & Susan Thymian 11,058 76,064 47,122 40,000 1.4%
David Thymian 1,250 1,250 -- *
Larry & Gayla Torguson 2,000 500 500 2,000 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Owned % Owned
Warrant Conversion Offered After After
Name/Group Shares Shares Shares (1) Hereby Offering (1) Offering (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marlin Torguson 34,750 16,000 687,436 703,436 34,750 1.0%
Allen J. Tower 6,783 47,852 14,635 40,000 1.4%
Ben Trainer 12,750 3,750 3,750 12,750 *
Charles Underbrink 16,250 6,250 6,250 16,250 *
Frank Vargas 693 693 -- *
Thomas M. Vertin 5,200 36,684 11,217 30,667 1.1%
George Vitalis 17,500 17,500 -- *
Randall S.& Nancy B. Vollertsen 4,033 28,448 8,281 24,200 *
Joel Walters 14,000 14,000 -- *
Chris Warren 5,000 5,000 -- *
Larry Weaver 12,500 12,500 -- *
James Weinzetl 3,747 61,088 64,835 -- *
Were Living Trust 13,336 13,336 -- *
John A. White 10,118 71,372 81,490 -- *
Jeff Zalasky 22,159 7,946 57,148 39,874 47,379 1.7%
Alvin Zelickson 2,500 625 625 2,500 *
Richard D. & Deborak K. Zimmerman 16,958 16,958 -- *
All directors and executive officers as 844,442 152,198 962,604 714,481 1,244,763 26.8%
a Group (5 persons) (9)(10)
</TABLE>
* Less than 1.0%
(1) Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are deemed to be beneficially owned by an individual
if such individual has the right to acquire the shares within 60 days of
December 31, 1998. Pursuant to such rules, shares deemed beneficially
owned by virtue of an individual's right to acquire them are also treated
as outstanding when calculating the percent of class owned by such
individual and when determining the percent owned by any group in which
the individual is included.
(2) Includes 314,167 shares issuable upon exercise of options.
(3) Includes 307,500 shares issuable upon exercise of options.
(4) Does not includes 1,800,000 shares issuable upon exercise of warrants held
by Millenium Medical Systems, LLC ("Millenium") reflected below. Dr.
Gaines, as the sole member of Millenium, has sole voting power and
investment power over such shares. Dr. Gaines' address is 640 N. LaSalle
Street, Chicago, Illinois 60610.
(5) Dr. Goldsteen's address is 2332 IDS Center, Minneapolis, Minnesota 55402.
<PAGE>
(6) Includes 75,000 shares issuable upon exercise of options.
(7) Includes 35,000 shares issuable upon exercise of options.
(8) Includes 72,500 shares issuable upon exercise of options, but excludes
5,000 shares held by the Strickland Family Limited Partnership.
(9) Includes 801,667 shares issuable upon exercise of options, but excludes
5,000 shares held by the Strickland Family Limited Partnership.
(10) The address of each executive officer and director of the Company is 1419
Energy Park Drive, St. Paul, Minnesota 55108.
DESCRIPTION OF SECURITIES
General
The Company's Articles of Incorporation authorize the issuance of up to
75,000,000 shares, 50,000,000 shares consisting of Common Stock, no par value
per share, 12,500,000 undesignated shares and 2,500,000 shares of Series A
Convertible Preferred Stock. None of the holders of any class or series of the
Company's capital stock have preemptive rights or a right to cumulative voting.
<PAGE>
Common Stock
As of the date of this Prospectus, there were 2,723,082 shares of the
Company's Common Stock issued and outstanding. The Board of Directors may issue
additional shares of Common Stock without the consent of the holders of Common
Stock.
Voting Rights. Each outstanding share of Common Stock is entitled to
one vote except as may be otherwise required under the terms of the MBCA. The
holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares voting for the election
of directors can elect all of the directors of the Company to be elected, if
they so choose.
No Preemptive Rights. Holders of Common Stock are not entitled to any
preemptive rights.
Dividends and Distributions. Holders of Common Stock are entitled to
receive such dividends as may be declared by the directors out of funds legally
available therefor and to share pro rata in any distributions to holders of
Common Stock upon liquidation or otherwise. However, the Company has not paid
cash dividends on its Common Stock, and does not expect to pay such dividends in
the foreseeable future.
Series A Convertible Preferred Stock
The following description of the Series A Convertible Preferred Stock
is subject to the detailed provisions contained in the Company's Articles of
Incorporation and the Company's Statement of Designation which are available for
inspection upon request.
Voting Rights. Each share of Series A Convertible Preferred Stock
entitles its holder to one vote for each share of Common Stock into which such
share may be converted. Holders of Common Stock and Series A Convertible
Preferred Stock vote as a single class on all matters submitted to the Company's
shareholders, except where the Minnesota Business Corporation Act requires
separate class voting, such as with respect to voting on a merger, exchange,
liquidation or amendment to the Company's Articles of Incorporation which may
adversely affect holders of the Company's securities.
Furthermore, without the affirmative vote of the holders of at least a
majority of the shares of Series A Convertible Preferred Stock then outstanding,
the Company may not: (i) alter or change the rights, preferences or privileges
of the Series A Convertible Preferred Stock; (ii) increase the authorized number
of shares of Series A Convertible Preferred Stock; (iii) issue any shares of
capital stock with any preference over Series A Convertible Preferred Stock as
to dividends or as to distributions in the event of the liquidation, dissolution
or winding up of the Company, provided that such prohibition shall not prevent
the Company from issuing any shares which may receive distributions in such
events on a pari passu basis prorated, in the event assets are insufficient to
pay the original purchase price of all such securities, to the original purchase
price of each; or (iv) declare a dividend on the Common Stock.
<PAGE>
Dividends. Holders of Series A Convertible Preferred Stock are not
entitled to any special dividends. Any dividends paid by the Company, which
dividends are not anticipated, will be paid equally among holders of Common
Stock and Series A Convertible Preferred Stock.
Liquidation Preference. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, assets or surplus
funds of the Company shall be distributed first to the holders of Series A
Convertible Preferred Stock in an amount equal to $3.00 per share, as adjusted,
next, pro rata to the holders of Common Stock in an amount equal to the per
share initial amount of paid-in capital represented by such Common Stock, and
the remainder pro rata, according to shares owned, among the holders of Series A
Convertible Preferred Stock and Common Stock treating the Series A Convertible
Preferred Stock for these purposes on an as-if-converted basis.
Conversion of Shares. Each share of Series A Convertible Preferred
Stock is convertible, at the option of each holder, at any time into four (4)
shares of the Company's Common Stock, subject to proportional adjustment in the
event of the Company's payment of a stock dividend, stock split of its
outstanding shares of Common Stock, a combination of its outstanding shares of
Common Stock into a smaller number of shares, a capital reorganization or
merger. There are 1,702,319 shares of Series A Convertible Preferred Stock
Outstanding. The Company has reserved a sufficient number of shares of its
Common Stock for issuance upon conversion of the Shares, which number of
reserved shares will be adjusted in the event of certain actions by the Company
so as to maintain a level of shares of Common Stock necessary to provide for the
conversion of all of the Shares.
Concurrently with the occurrence of the closing of an offering of
Company securities for aggregate gross proceeds of at least $5,000,000 or the
date of conversion of more than 50% of the outstanding Shares, each outstanding
share of Series A Convertible Preferred Stock shall automatically convert into
Common Stock. In addition, in the event that the Company sells Common Stock, or
securities convertible into Common Stock with a conversion price, less than
$0.75 per share, then the number of shares of Common Stock into which the Shares
may be converted will be adjusted to a number equal to the Shares per share
liquidation preference divided by such sale or conversion price.
Undesignated Shares
The Board of Directors of the Company is authorized to establish from
the undesignated shares, by resolution adopted and filed in the manner provided
by law, one or more classes or series of shares, to designate each such class or
series (which may include, but is not limited to designation as additional
common shares), and to fix the relative rights and preferences of each such
class or series, which rights and preferences may adversely affect the rights of
holders of Common Stock. None of the undesignated shares have been designated by
the Company's Board.
<PAGE>
Warrants
The Company currently has outstanding warrants to purchase 4,805,981
shares of Common Stock at exercise prices from $.75 to $14.40 per share. The
shares issuable upon exercise of these warrants are part of the shares offered
by this Prospectus.
Transfer Agent
StockTrans, Inc., 7 East Lancaster Ave., Ardmore, PA 19003 (800)
733-1121, is the transfer agent for the Common Stock.
Minnesota Business Corporation Act
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of the Company (from a person
other than the Company, and other than in connection with certain mergers and
exchanges to which the Company is a party) resulting in the beneficial ownership
of 20 percent or more of the voting stock then outstanding. Section 302A.671
requires approval of any such acquisitions by a majority vote of the
stockholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the stockholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by the Company, or any subsidiary of the Company, with any
stockholder which purchases 10 percent or more of the Company's voting shares
(an "interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company serving before the interested stockholder's share
acquisition date.
Certain Limited Liability and Indemnification Provisions
The Company's Restated Articles of Incorporation, as amended, limit the
personal liability of its directors. Specifically, directors of the Company will
not be personally liable to the Company or its stockholders for monetary damages
for any breach of their fiduciary duty as directors, except to the extent that
<PAGE>
the elimination or limitation of liability is in contravention of the MBCA, as
amended. This provision will generally not limit liability under state or
federal securities law.
Section 302A.521 of the MBCA provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Section 5.1 of the Company's Bylaws provides that each director,
officer and employee of the Company shall be indemnified by the Company in
accordance with, and to the fullest extent permissible by, applicable law. The
Company maintains an insurance policy covering director and officer liability.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the foregoing provisions, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
<PAGE>
PLAN OF DISTRIBUTION
The Company is registering the shares on behalf of the Selling
Shareholders. As used in this Prospectus, the term "Selling Shareholder"
includes donees and pledgees selling shares received from a named Selling
Shareholder after the date of this Prospectus. All costs, expenses and fees in
connection with the registration of the shares offered hereby will be borne by
the Company. Brokerage commissions and similar selling expenses, if any,
attributable to the sale of Shares will be borne by the Selling Shareholders.
Sales of shares may be effected by Selling Shareholders from time to time in one
or more types of transactions (which may include block transactions), in the
over-the-counter markets, in negotiated transactions, through put or call
options transactions relating to the shares, through short sales of shares or a
combination of such methods of sale, at market prices prevailing at the time of
sale or at negotiated prices. Such transactions may or may not involve brokers
or dealers. The Selling Shareholders have advised the Company that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the Selling Shareholders.
The Selling Shareholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such brokers-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Shareholders and/or the
purchasers of Shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Shareholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act. The Company has agreed to indemnify each Selling
Shareholder against certain liabilities, including liabilities arising under the
Securities Act. The Selling Shareholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
Shares against certain liabilities, including liabilities arising under the
Securities Act.
Because Selling Shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the Selling Shareholders
will be subject to the prospectus delivery requirements of the Securities Act.
The Company has informed the Selling Shareholders that the anti-manipulative
provisions of Regulation M promulgated under the Exchange Act may apply to their
sales in the market.
Selling Shareholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
Upon the Company being notified by a Selling Shareholder that any
material arrangement has been entered into with a broker-dealer for the sale of
shares through a block trade, special offering, exchange distribution or
<PAGE>
secondary distribution or a purchase by a broker or dealer, a supplement to this
Prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing (i) the name of each such Selling Shareholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction. In addition, upon the Company being notified by a
Selling Shareholder that a donee or pledgee intends to sell more than 500
shares, a supplement to this prospectus will be filed.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for
Quantech by Fredrikson & Byron, P.A.
EXPERTS
The financial statements of Quantech as of June 30, 1997 and 1998 and
for the years ended June 30, 1997 and 1998, included in this Prospectus and
Registration Statement of which this Prospectus is a part, have been audited by
McGladrey & Pullen, L.L.P., independent certified public accountants, as set
forth in their report on such financial statements, and are included in this
Prospectus in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Quantech files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission
("Commission"). You may read and copy any reports, statements or other
information on file at the Commission's public reference room in Washington,
D.C. You can request copies of those documents, upon payment of a duplicating
fee, by writing to the Commission.
Quantech has filed a Registration Statement on Form SB-2 with the
Commission. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement.
Certain information is omitted and you should refer to the Registration
Statement and its exhibits. With respect to references made in this Prospectus
to any contract or other document of Quantech, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement at the Commission's public reference
room at 450 N.W. Fifth Street, N.W., Washington, D.C., 20549 and at the
Commission's regional offices at CitiCorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300, New
York, New York 10048. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Quantech's
Commission filings and the Registration Statement can also be reviewed by
accessing the Commission's Internet web site at http://www.sec.gov.
<PAGE>
QUANTECH LTD.
FINANCIAL STATEMENTS
INDEX
Independent auditor's report F-2
Balance sheets as of June 30, 1997 and 1998, and
September 30, 1998 (unaudited) F3 - F4
Statements of operations for the years ended June 30, 1997
and 1998, the three months ended September 30, 1997
and 1998, and the period from September 30, 1991 (date
of inception) to September 30, 1998 (unaudited) F5
Statements of stockholders' equity (deficit) for the period
from September 30, 1991 (date of inception) to
September 30, 1998 (unaudited) F6 - F11
Statements of cash flows for the years ended June 30, 1997
and 1998, the three months ended September 30, 1997
and 1998, and the period from September 30, 1991 (date
of inception) to September 30, 1998 (unaudited) F12 - F14
Notes to financial statements F15 - F26
<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, 1997 and 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
June 30, 1997 and 1998. 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, 1997 and 1998, and the results of its operations
and its cash flows for the years ended June 30, 1997 and 1998, 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 additional financing, and
ultimately needs to continue development of its product, 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.
Minneapolis, Minnesota
August 3, 1998
<PAGE>
QUANTECH LTD. (A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30, September 30,
ASSETS (Note 3) 1997 1998 1998
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 718,893 $ 46,135 $ 1,236
Debt issuance costs 78,699 - -
Prepaid expenses:
Product development expense - 115,000 86,250
Other 35,452 42,044 49,370
--------------------------------------------------------
Total current assets 833,044 203,179 136,856
--------------------------------------------------------
Property and Equipment
Equipment 329,780 366,493 402,539
Leasehold improvements 15,000 15,000 15,000
--------------------------------------------------------
344,780 381,493 417,539
Less accumulated depreciation 139,267 202,201 219,959
--------------------------------------------------------
205,513 179,292 197,580
--------------------------------------------------------
Other Assets
License agreement, at cost, less accumulated
amortization (Note 4) 2,096,558 2,735,807 2,654,152
Prepaid product development expense, less
current portion - 57,500 57,500
Patents 8,895 9,029 13,045
Organization expenses, net 113 - -
--------------------------------------------------------
2,105,566 2,802,336 2,724,697
--------------------------------------------------------
$ 3,144,123 $ 3,184,807 $ 3,059,133
========================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' June 30, June 30, September 30,
EQUITY (DEFICIT) 1997 1998 1998
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 1,070,000 $ 3,112,818 $ 4,142,888
Accounts payable 100,794 97,333 221,876
Accrued expenses:
Minimum royalty commitment (Note 4) 112,500 75,000 112,500
Spectrum Diagnostics, Inc. obligations (Note 8) 36,509 19,846 19,846
Payroll and vacation 54,226 103,157 132,844
Accrued severance 77,265 - -
Interest 10,685 48,594 161,279
Other 4,019 - -
--------------------------------------------------------
Total current liabilities 1,465,998 3,456,748 4,791,233
--------------------------------------------------------
Commitments and Contingencies (Notes 4, 5, and 8)
Stockholders' Equity (Deficit) (Notes 2, 3, and 6)
Common stock, no par value; authorized
10,000,000 shares; outstanding, 2,402,035,
2,565,040, and 2,599,952 shares at June 30,
1997 and 1998, and September 30, 1998,
respectively 480,408 16,308,438 16,391,521
Additional paid-in capital 15,606,017 1,476,669 1,476,745
Deficit accumulated during the development stage (14,408,300) (18,057,048) (19,600,366)
--------------------------------------------------------
1,678,125 (271,941) (1,732,100)
--------------------------------------------------------
$ 3,144,123 $ 3,184,807 $ 3,059,133
========================================================
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Three Months Ended Inception) to
Years Ended June 30 September 30 September 30,
------------------------------ ------------------------------
1997 1998 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income $ 80,854 $ 12,435 $ 6,824 $ 653 $ 183,869
------------------------------------------------------------------------------
Expenses:
General and administrative 1,799,117 1,221,196 222,857 306,828 9,468,612
Research and development 2,114,586 1,608,361 314,261 528,111 6,782,177
Minimum royalty expense (Note 4) 75,000 112,500 18,750 37,500 1,112,500
Losses resulting from transactions with Spectrum
Diagnostics, Inc. (Note 8) - - - - 556,150
Net exchange gain - - - - (67,172)
Interest 17,611 719,126 39,376 671,532 1,889,373
------------------------------------------------------------------------------
4,006,314 3,661,183 595,244 1,543,971 19,741,640
------------------------------------------------------------------------------
Loss before income taxes (3,925,460) (3,648,748) (588,420) (1,543,318) (19,557,771)
Income taxes (Note 7) - - - - 42,595
------------------------------------------------------------------------------
Net loss $ (3,925,460) $ (3,648,748) $ (588,420) $ (1,543,318) $ (19,600,366)
==============================================================================
Loss per basic and diluted common share $ (1.66) $ (1.45) $ (0.24) $ (0.60)
Weighted-average common shares outstanding 2,365,914 2,523,975 2,424,864 2,577,751
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- ----------------------------------------------------------------------------------------------------------------------
<S> <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
--------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Paid for, Common Stock During the Cumulative
but Not Subscriptions Due From Development Translation
Issued Receivable Officers Stage Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<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>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- ----------------------------------------------------------------------------------------------------------------------
<S> <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)
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Paid for, Common Stock During the Cumulative
but Not Subscriptions Due From Development Translation
Issued Receivable Officers Stage Adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
<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>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------------- Paid-In
Shares Issued Amount Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <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 (unaudited) - - -
Warrants issued with notes payable (unaudited) - - 76
Common stock issued upon conversion of notes
payable (unaudited):
July 1998 2,000 7,060 -
September 1998 3,400 12,002 -
Common stock issued upon exercise of warrant
(unaudited):
August 1998 2,045 5,114 -
Common stock issued for equipment and services
received (unaudited):
July 1998 5,714 20,000 -
August 1998 9,196 27,589 -
September 1998 12,557 11,318 -
--------------------------------------------------------
Balance, September 30, 1998 (unaudited) 2,599,952 $ 16,391,521 $ 1,476,745
========================================================
See Notes to Financial Statements.
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Paid for, Common Stock During the Cumulative
but Not Subscriptions Due From Development Translation
Issued Receivable Officers Stage Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<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 (unaudited) - - - (1,543,318) -
Warrants issued with notes payable (unaudited) - - - - -
Common stock issued upon conversion of notes
payable (unaudited):
July 1998 - - - - -
September 1998 - - - - -
Common stock issued upon exercise of warrant
(unaudited):
August 1998 - - - - -
Common stock issued for equipment and services
received (unaudited):
July 1998 - - - - -
August 1998 - - - - -
September 1998 - - - - -
---------------------------------------------------------------------------------
Balance, September 30, 1998 (unaudited) $ - $ - $ - $ (19,600,366) $ -
=================================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Three Months Ended Inception) to
Years Ended June 30 September 30 September 30,
------------------------------ ------------------------------
1997 1998 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (3,925,460) $ (3,648,748) $ (588,420) $ (1,543,318) $ (19,600,366)
Adjustments to reconcile net loss to net
cash used in operating activities:
Elimination of cumulative translation adjustment - - - - (178,655)
Depreciation 60,610 62,934 15,603 17,758 266,313
Amortization 228,338 379,727 80,408 81,655 1,817,999
Noncash compensation services and interest 48,000 787,429 - 597,595 1,922,274
Losses resulting from transactions with Spectrum
Diagnostics, Inc. (Note 8) - - - - 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 5,817 1,062 319 7,239 49,287
Increase (decrease) in accounts payable (14,140) (10,128) (27,664) 124,543 213,654
Increase (decrease) in accrued expenses 204,067 (48,607) (25,102) 179,872 700,593
------------------------------------------------------------------------------
Net cash used in operating activities (3,392,768) (2,476,331) (544,856) (534,656) (14,185,251)
------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (99,097) (16,713) (1,353) (8,457) (446,708)
Proceeds on disposition of property 37,375 - - - 37,375
Organization expenses - - - - (97,547)
Patent expenses (8,895) (134) (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 (78,699) - (10,403) - (101,643)
Purchase of Spectrum Diagnostics, Inc., net of
cash and cash equivalents acquired - - - - (1,204,500)
------------------------------------------------------------------------------
Net cash used in investing activities (149,316) (16,847) (11,890) (12,473) (4,430,827)
------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock and
warrants 215,061 - 7 - 12,880,797
Proceeds from debt obligations 1,070,000 1,820,420 25,000 502,230 6,051,085
Payments received on stock subscriptions
receivable 57,500 - - - 5,000
Payments on debt obligations (24,455) - - - (522,810)
------------------------------------------------------------------------------
Net cash provided by financing activities 1,318,106 1,820,420 25,007 502,230 18,414,072
------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Three Months Ended Inception) to
Years Ended June 30 September 30 September 30,
------------------------------ ------------------------------
1997 1998 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Effect of Exchange Rate Changes on Cash - - - - 203,242
------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,223,978) (672,758) (531,739) (44,899) 1,236
Cash and Cash Equivalents
Beginning 2,942,871 718,893 718,893 46,135 -
------------------------------------------------------------------------------
Ending $ 718,893 $ 46,135 $ 187,154 $ 1,236 $ 1,236
==============================================================================
Cash Payments for Interest $ 6,925 $ 20,374 $ 682 $ 11,945 $ 172,415
==============================================================================
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 for:
Product development - 230,000 - - 230,000
Acquisition of sublicense agreement - 165 165 - 165
Issuance of convertible debt - 451 7 - 451
Guarantee of debt - 15,716 - - 15,716
Amount attributable to value of beneficial
debt conversion feature - 988,444 - - 988,444
Capital expenditures included in accounts
payable - 6,667 - - 6,667
==============================================================================
Acquisition of Spectrum Diagnostics, Inc.
(Note 8):
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
==============================================================================
(Continued)
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
Three Months Ended 1991 (Date of
Years Ended June 30 September 30 Inception) to
------------------------------ ------------------------------ September 30,
1997 1998 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities (Continued)
Advances to Spectrum Diagnostics, Inc. (Note 8)$ - $ - $ - $ - $ 20,000
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 - - 135,203
==============================================================================
Common stock issued for:
Services, equipment, and interest $ - $ 45,584 $ - $ 58,907 $ 378,541
Exercise of warrant - - - 5,114 5,114
Acquisition of license agreement - 390,000 390,000 - 390,000
Subscriptions receivable - - - - 5,000
Debt obligations - - - 19,062 2,337,187
Accounts payable - - - - 40,000
Accrued expenses - - - - 360,394
------------------------------------------------------------------------------
$ - $ 435,584 $ 390,000 $ 83,083 $ 3,516,236
==============================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
QUANTECH LTD. (A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997 and
1998, are unaudited)
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 arises
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. 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.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
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 is being
amortized to interest expense using the straight-line method over the remaining
term of the debt based on the expected conversion date (see Note 3).
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 product in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Loss per common share: The FASB has issued Statement No. 128, Earnings Per
Share, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per share amounts. All
other entities are required to present basic and diluted per share amounts.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the income per common share from continuing operations.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company has granted options and warrants to purchase shares of common stock
at various amounts per share (see Note 6). Those options and warrants were not
included in the computation of diluted earnings per share because the Company
has incurred losses in all periods. The inclusion of potential common shares in
the calculation of diluted loss per share would have an antidilutive effect.
Therefore, basic and diluted loss per share amounts are the same in each period
presented.
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, 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. The Company will
adopt this statement in the fiscal year ending June 30, 1999. However, it is not
expected to have an effect on the presentation of the Company'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. The Company will adopt this statement
in the fiscal year ending June 30, 1999. The Company does not expect this
statement to have an effect on its financial statements.
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.
Interim financial information (unaudited): The financial statements and notes
related thereto as of September 30, 1998, for the three-month periods ended
September 30, 1997 and 1998, and the period from September 30, 1991 (date of
inception), to September 30, 1998, are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations. The operating results for the interim periods are not
indicative of the operating results to be expected for a full year or for other
interim periods. Not all disclosures required by generally accepted accounting
principles necessary for a complete presentation have been included.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
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.
The Company is a development stage company which has suffered significant losses
from operations, requires additional financing, and ultimately needs to continue
development of its product, 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. The financial statements do not reflect any
adjustments which might be necessary should the Company not remain a going
concern.
Without immediate funding from equity or debt financing, the Company does not
have sufficient funds to remain a going concern, or to complete commercial
development of and bring its instrument and disposables to commercial production
and realize the value of the license agreement. The Company obtained funding
through a private offering of its Series A convertible preferred stock in
November 1998 and converted notes payable, due September 30, 1998, to Series A
convertible preferred stock (see Note 10). The Company has also increased its
note payable to a bank by $250,000. In addition, the Company intends to pursue a
$5 to $7 million offering in early 1999 with terms yet to be determined. There
is no assurance that additional financing can be obtained.
Note 3. Short-Term Debt Obligations
Short-term debt obligations as of June 30, 1997 and 1998, and September 30,
1998, were as follows:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------- September 30,
1997 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
13.5% convertible secured promissory notes,
payable September 1998, secured by
substantially all of the Company's assets $ 1,070,000 $ 3,159,720 $ 3,392,888
Less discount attributable to value of
beneficial conversion feature - (546,902) -
8.5% unsecured note payable to a bank, due
December 1998, guaranteed by certain
shareholders - 500,000 750,000
--------------------------------------------------------------------------
$ 1,070,000 $ 3,112,818 $ 4,142,888
==========================================================================
</TABLE>
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 3. Short-Term Debt Obligations (Continued)
In April 1998, the Company completed an offering of secured promissory notes of
$1,625,150 to accredited investors and issued warrants in connection with the
sale of such notes to the investors for the purchase of 243,773 shares of common
stock. In addition, the selling agent also received warrants to purchase 1,451
shares of common stock. All warrants issued were valued at $488. The notes are
convertible 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 repayment of the notes is completed. The warrants
exercise price is calculated in the same manner as the notes conversion price.
During May 1998, holders of the Company's convertible secured promissory notes
agreed to convert $219,300 of accrued interest in notes and extend the maturity
date of the notes to September 30, 1998, from June 1, 1998. The note holders
received additional warrants to purchase 178,618 shares of common stock in
conjunction with the agreement.
During May 1998, the Company began an offering of convertible secured promissory
notes to accredited investors. The maximum amount of notes to be issued was
$500,000. As of June 30, 1998, notes in the amount of $245,270 were issued.
Purchasers of the notes also received warrants for the purchase of 36,790 shares
of common stock. Conversion and warrant exercise terms are the same as those
discussed above.
Subsequent to year end, 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 3,134 shares of common stock.
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, 1998, the Company
has paid $1,000,000 of the cumulative payment. The Company has also ratably
accrued additional minimum royalty payments of $75,000 as of June 30, 1998
($112,500 as of September 30, 1998), because sales or sublicense revenues
through December 31, 1998, may not be adequate to meet the cumulative minimum
royalty payments. The Company intends to accrue $150,000 by December 31, 1998,
and continue accruing and paying minimum royalties for future periods until
royalties based on revenues exceed the minimum payment amounts.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 4. Agreements (Continued)
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.
In September 1997, the Company entered into an agreement to cancel certain
sublicense rights that had been granted to an investor group which included a
shareholder of the Company. 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. The Company has capitalized the sublicense rights at
an amount that approximates the fair market value of the common stock,
convertible promissory notes, and stock purchase warrants.
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 if the licensee sells products
containing the Company's technology. The royalties to be received will vary
between 6 and 12 percent, depending on the phase of assistance. When all phases
are complete, the royalty will be 6 percent. 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.
In conjunction with the above technology and development agreement, the Company
has licensed additional technology. The Company will be required to pay
royalties at 8 percent of 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 license
technology, all rights will revert back to the licensor, and future minimum
annual royalty obligations will be canceled.
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.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
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
as follows:
Years ending June 30:
1999 $ 38,000
2000 26,000
Rental expense for the years ended June 30, 1997 and 1998, was approximately
$68,000 and $58,000, respectively.
Note 6. Stockholders' Equity
Capital stock: The Company has authorized 12,500,000 of capital shares
consisting of 10,000,000 common shares and 2,500,000 undesignated shares. (See
Note 10 for subsequent activity.)
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 split.
Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to reduce the number of authorized shares from 90,000,000 to
12,500,000. In addition, the common stock was changed from $0.01 per share par
value 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) for the year ended June
30, 1998.
Options and warrants: The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Had compensation cost for the Company's stock option and warrant
grants been determined based on the fair value at the grant date for awards in
1997 and 1998 consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss, as reported $ (3,925,460) $ (3,648,748)
Net loss, pro forma (4,197,373) (4,016,450)
Net loss per basic and diluted share, as reported (1.66) (1.45)
Net loss per basic and diluted share, pro forma (1.77) (1.59)
</TABLE>
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.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 6. Stockholders' Equity (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998:
1997 1998
- --------------------------------------------------------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 71.63% 67.31%
Risk-free interest rate 6.00% 6.00%
Expected life of options (years) 3 3
Transactions involving stock options and warrants during the two years ended
June 30, 1998, are summarized as follows (see Note 10 for subsequent activity):
Weighted-
Stock Average Exercise
Warrants Options Price Per Share
- --------------------------------------------------------------------------------
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
Exercised - - -
Expired (187,828) (243,009) 7.26
--------------------------------------------------------
Balance, June 30, 1998 2,671,715 493,500 $ 3.58
========================================================
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 6. Stockholders' Equity (Continued)
The weighted-average fair value of options and warrants granted during 1997 and
1998 was $7.20 and $1.09, respectively. The following tables summarize
information about stock options and warrants outstanding as of June 30, 1998:
OPTIONS AND WARRANTS OUTSTANDING
Weighted-
Average
Range of Number of Remaining Weighted-
Exercise Units Contractual Average
Price Outstanding Life Exercise Price
- --------------------------------------------------------------------------------
$2.40 - $2.50 113,900 1.5 $ 2.47
$3.00 396,000 3.9 3.00
$3.08 1,400.000 (1) 4.5 3.08
$3.53 720,148 4.9 3.53
$5.00 495,292 2.1 5.00
$12.00 10,000 1.5 12.00
$14.40 29,875 2.8 14.40
----------------- --------
3,165,215 $ 3.58
================= ========
OPTIONS AND WARRANTS EXERCISABLE
Range of Number of Weighted-
Exercise Units Average
Price Exercisable Exercise Price
- --------------------------------------------------------------------------------
$2.40 - $2.50 113,900 $ 2.47
$3.00 324,667 3.00
$3.08 1,400,000 (1) 3.08
$3.53 720,148 3.53
$5.00 495,292 5.00
$12.00 10,000 12.00
$14.40 29,875 14.40
------------------------------------------------
3,093,882 $ 3.60
================================================
(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.
Compensation expense related to stock option grants was $48,000 in 1997 and
$28,000 in 1998.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 7. Income Taxes
The Company's income tax expense consists 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. The annual net
operating loss carryforward limitation due to Section 382 is approximately
$200,000 per year, which reduced the carryforward by $2,800,000. The Company has
"post change" carryforwards of approximately $8,888,000 that are not limited.
Further changes of control may result in the additional expiration of a portion
of the remaining carryforwards before they can be used and are 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, 1998, 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
-------------------------------------------------
$ 1,192,000 $ 316,000
=================================================
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 7. 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:
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Loss carryforwards $ 4,053,000 $ 3,047,000
Royalties 26,000 38,000
Research and development credits and deductions 521,000 414,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 30,000 59,000
Beneficial conversion feature 150,000 -
Other accruals 29,000 (10,000)
-------------------------------------------------
4,924,000 3,663,000
Valuation allowance for deferred tax assets (4,924,000) (3,663,000)
-------------------------------------------------
Net deferred tax assets $ - $ -
=================================================
</TABLE>
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, 1997 and 1998, due to the valuation allowance recorded against deferred
tax assets.
Note 8. Spectrum Diagnostics, Inc.
During 1991, SDS acquired substantially all of the assets of Spectrum
Diagnostics, Inc. (SDI) for 1,200,000 shares of SDS common stock plus the
assumption of certain SDI liabilities and guarantees.
As a result of its merger with SDS (see Note 1), Quantech now guarantees payment
of certain SDI liabilities previously guaranteed by SDS. SDI expects to sell an
investment it has in Quantech's common stock, the proceeds of which are expected
to be used to pay certain of SDI's obligations, but are not expected to be
sufficient to pay the entire amount guaranteed by Quantech.
Quantech has accrued its estimated loss which may result should SDI be unable to
pay the obligations discussed above. The Company has recorded a liability of
approximately $19,800 as of June 30, 1998.
Note 9. Subsequent Events
During July and August 1998, the Company sold 14,910 shares of its common stock
at prices ranging from $3.00 per share to $3.50 per share. In addition, 2,000
shares were issued pursuant to the conversion of a promissory note, and 2,045
shares were issued pursuant to the exercise of a warrant.
<PAGE>
QUANTECH LTD. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information applicable to the three-month periods ended September 30, 1997
and 1998, are unaudited)
Note 10. Additional Subsequent Events (Unaudited)
In September and October 1998, 3,400 and 25,000 shares of common stock,
respectively, were issued pursuant to the conversion of promissory notes. In
September and from October to December 1998, 12,557 and 6,078, respectively,
shares of common stock were sold at prices ranging from $0.75 to $1.83 per
share.
In November 1998, the Company established Series A Preferred Stock (Series A
Stock) and designated 2,500,000 of its authorized and previously undesignated
shares as 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. 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.
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, of which
50,000,000 is common stock, 2,500,000 is Series A Stock, and 22,500,000 is
undesignated.
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 1,124,715 shares of
Series A Stock pursuant to conversion of promissory notes at a conversion price
of $3.00 per share. 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.
In November 1998, 92,052 shares of common stock were issued pursuant to
conversion of Series A Stock.
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 exercisable immediately at $1.10 per share and was valued at
approximately $518,000.
In October through December 1998, the Company issued options to purchase 908,300
shares of common stock under the Company's 1998 Stock Option Plan. Under the
1998 Stock Option Plan, options for up to 2,000,000 shares may be granted. If
any of the options granted under the plan expire or are terminated prior to
being exercised in full, then 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. One-third of the option grant is exercisable immediately,
with one-third becoming exercisable on each of the second and third
anniversaries of the date of grant.
<PAGE>
================================================================================
Prospective investors may rely only on the information contained in this
Prospectus. Neither Quantech nor the Selling Shareholders has authorized anyone
to provide prospective investors with information different form that contained
in this Prospectus. The information in this Prospectus is correct only as of the
date of this Prospectus, regardless of the time of delivery of this Prospectus
or any sale of these securities.
Until , 1999 all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a Prospectus.
This is in addition to the dealers' obligation to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
[logo]
8,507,349 Shares
Common Stock
---------------------
PROSPECTUS
---------------------
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the
Company to indemnify a person made or threatened to be made a party to a
proceeding by reason of the former or present official capacity of the person
with respect to the Company, against judgments, penalties, fines, including,
without limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions if such person (1) has not
been indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
stockholders, or by a court.
Provisions regarding indemnification of officers and directors of the
Company are contained in Article 5 of the Restated Bylaws (Exhibit 3.2 to this
Registration Statement). The Company maintains a director and officer liability
policy.
Item 25. Other Expenses of Issuance and Distribution.
The following expenses will be paid by the Company in connection with
the distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee and Nasdaq listing fee, are estimated.
SEC Registration Fee............................................$ 3,770
Legal Fees...................................................... 7,500
Accountants' Fees and Expenses.................................. 5,000
Printing Expenses............................................... 5,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent Fees and Expenses................................ 0
Miscellaneous................................................... 730
---------
Total......................................................$ 27,000
=========
Item 26. Recent Sales of Unregistered Securities.
During the past three years, the Registrant has sold the securities
listed below pursuant to exemptions from registration under the Securities Act.
The information below is presented on a post-reverse stock split basis.
During May 1998, holders of the Company's Convertible Secured
Promissory Notes agreed to convert $219,300 of accrued interest into Notes and
extend the maturity date of the Notes to September 30, 1998 from June 1, 1998.
The Note holders received warrants to purchase 178,618 shares of Common Stock.
The extension of the Notes and issuance of the warrants were made in reliance
upon exemptions from registration provided under Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act") and Rule 506 of Regulation D. The
holders of these notes and warrants acquired these securities for their own
account and not with a view to any distribution thereof to the public.
<PAGE>
During May through August 1998, the Company completed an offering of
Convertible Secured Promissory Notes in the principal amount of $497,500 to
accredited investors and issued warrants in connection with the sale of such
notes to the investors for the purchase of 74,625 shares of Common Stock. The
sales were made in reliance upon exemptions from registration provided under
Section 4(2) of the 1933 Act and Rule 506 of Regulation D. The Company paid
commissions and accountable expenses in the aggregate amount of $20,900 to a
registered investment bank for acting as selling agent and issued the investment
bank a warrant to purchase up to 3,134 shares of Common Stock as additional
compensation. Such warrant was sold pursuant to Section 4(2) of the 1933 Act.
The purchasers of these notes and warrants acquired these securities for their
own account and not with a view to any distribution thereof to the public.
In July 1998, the Company sold 5,714 shares of its Common Stock at
$3.50 per share to an accredited investor. The shares were sold pursuant to
Section 4(2) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.
Also in July 1998, 2,000 shares of Common Stock were issued pursuant to
conversion of a promissory note. The shares were sold pursuant to Section
3(a)(9) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account.
In August 1998, the Company sold 9,196 shares of its Common Stock at
$3.00 per share to an accredited investor. The shares were sold pursuant to
Section 4(2) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account and not with a view to any distribution thereof
to the public.
Also in August 1998, 2,045 shares of Common Stock were issued pursuant
to exercise of a warrant. The shares were sold pursuant to Section 4(2) of the
1933 Act. The purchaser of such Common Stock acquired these securities for its
own account and not with a view to any distribution thereof to the public.
In September 1998, 3,400 shares of Common Stock were issued pursuant to
conversion of a promissory note. The share were sold pursuant to Section 3(a)(9)
of the 1933 Act. The purchaser of such Common Stock acquired these securities
for its own account.
In September 1998, the Company sold 7,557 shares of Common Stock at
$0.75 per share to an accredited investor. Also in September 1998, the Company
sold 5,000 shares of Common Stock at $1.13 per share to an accredited investor.
The shares were sold pursuant to Section 4(2) of the 1933 Act. The purchasers of
such Common Stock acquired these securities for their own accounts and not with
a view to any distribution thereof to the public.
In October 1998, 25,000 shares of Common Stock were issued pursuant to
conversion of a promissory note. The shares were sold pursuant to Section
3(a)(9) of the 1933 Act. The purchaser of such Common Stock acquired these
securities for its own account.
In November and December 1998, the Company sold 600,617 shares of its
Series A Convertible Preferred Stock to accredited investors at a price of $3.00
per share, and issued 1,124,715 shares of Series A Convertible Preferred Stock
pursuant to conversion of promissory notes at a conversion price of $3.00 per
share. The Company paid commissions and accountable expenses in the aggregate
amount of $125,700 to registered investment banks for acting as selling agents
and issued the investment banks warrants to purchase up to 176,420 shares of
Common Stock as additional compensation. Each share of Series A Convertible
Preferred Stock is convertible into four shares of the Company's Common Stock.
The shares were sold pursuant to Section 4(2) of the 1933 Act and Rule 506
promulgated thereunder. The purchasers of such Preferred Stock acquired these
securities for their own accounts and not with a view to any distribution
thereof to the public.
In November 1998, 92,052 shares of Common Stock were issued pursuant to
conversion of Series A Convertible Preferred Stock. The shares were sold
pursuant to Section 3(a)(9) of the 1933 Act. The purchasers of such Common Stock
acquired these securities for their own accounts.
In November 1998, the Company issued a warrant to purchase 1,800,000
shares of Common Stock to a company in exchange for engineering development
work, and issued another warrant to purchase 144,000 shares of Common Stock to
an investment banking firm that arranged the transaction. The exercise prices of
the warrants are $1.10 per share and $1.32 per share, respectively. Both
<PAGE>
warrants expire in November 2003. The warrants were sold pursuant to Section
4(2) of the 1933 Act. The purchasers of such warrants acquired these securities
for their own accounts and not with a view to any distribution thereof to the
public.
In December 1998, the Company sold 3,792 shares of Common Stock at
$1.50 per share to an accredited investor. Also in December 1998, the Company
sold 2,286 shares of Common Stock at $1.83 to an accredited investor. The shares
were sold pursuant to Section 4(2) of the 1933 Act. The purchasers of such
Common Stock acquired these securities for their own accounts and not with a
view to any distribution thereof to the public.
The sales of securities listed above were made in reliance upon
Sections 4(2) and 3(a)(9)of the Securities Act, which provide exemptions for
transactions not involving a public offering, and Regulation D thereunder. The
purchasers of securities described above acquired them for their own account and
not with a view to any distribution thereof to the public. The certificates
evidencing the securities bear legends stating that the shares are not to be
offered, sold or transferred other than pursuant to an effective registration
statement under the Securities Act, or an exemption from such registration
requirements. Except as specified above, no underwriting commissions or
discounts were paid with respect to the sales of unregistered securities
described above.
Item 27. Exhibits and Financial Statement Schedules.
<PAGE>
Exhibit
Number Description
2.1 Plan of Reorganization, dated November 24, 1992, by and among Quantech
Ltd. and Spectrum Diagnostics S.p.A. (incorporated by reference to
Exhibit 2.1 of the Registrant's Registration Statement on Form S-4;
Reg. No. 33-55356).
2.2 Amendment and Restatement Agreement and Plan of Merger dated January
20, 1993 by and among Quantech Ltd., Spectrum Diagnostics S.p.A. and
Spectrum Diagnostics Corp. (incorporated by reference to Exhibit 2.2 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
3.1* Articles of Incorporation of Quantech Ltd., as amended.
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).
5.1* Opinion and Consent of Fredrikson & Byron, P.A.
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).
<PAGE>
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-KSB for the year ended June 30, 1998).
10.8 Research and Development Services Agreement, dated November 13, 1998,
with Millenium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millenium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
22 Quantech has no subsidiaries.
23.1* Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2* Consent of Independent Accountants
24* Power of Attorney (included on signature page)
* Filed herewith.
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
<PAGE>
The undersigned Registrant further undertakes that it will:
(1) file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) include any additional or changed material
information on the plan of distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
the time to be the initial bona fide offering; and
(3) file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, on January 12,
1999.
QUANTECH LTD.
By /s/ Gregory G. Freitag
Gregory G. Freitag, Chief Operating
Officer, Chief Financial Officer and
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Robert Case
and Gregory G. Freitag, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, any registration statement filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and
all instruments or documents filed as part of or in connection with any of such
amendments or registration statements, and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his or her
substitutes, shall do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
Chief Executive Officer, Director
/s/ Robert Case (principal executive officer) January 12, 1999
Robert Case
Chief Operating Officer, Chief
/s/ Gregory G. Freitag Financial Officer and Secretary January 12, 1999
Gregory G. Freitag (principal financial and accounting
officer)
/s/ James F. Lyons Director January 12, 1999
James F. Lyons
/s/ Richard W. Perkins Director January 12, 1999
Richard W. Perkins
/s/ Edward E. Strickland Director January 12, 1999
Edward E. Strickland
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quantech Ltd.
EXHIBIT INDEX TO FORM SB-2
Exhibit
Number Description
2.1 Plan of Reorganization, dated November 24, 1992, by and among Quantech
Ltd. and Spectrum Diagnostics S.p.A. (incorporated by reference to
Exhibit 2.1 of the Registrant's Registration Statement on Form S-4;
Reg. No. 33-55356).
2.2 Amendment and Restatement Agreement and Plan of Merger dated January
20, 1993 by and among Quantech Ltd., Spectrum Diagnostics S.p.A. and
Spectrum Diagnostics Corp. (incorporated by reference to Exhibit 2.2 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
3.1* Articles of Incorporation of Quantech Ltd., as amended.
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).
5.1* Opinion and Consent of Fredrikson & Byron, P.A.
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).
<PAGE>
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-KSB for the year ended June 30, 1998).
10.8 Research and Development Services Agreement, dated November 13, 1998,
with Millenium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millenium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
22 Quantech has no subsidiaries.
23.1* Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2* Consent of Independent Accountants
24* Power of Attorney (included on signature page)
* Filed herewith.
ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
The undersigned individual, being of full age, for the purpose of
forming a corporation under and pursuant to Chapter 302A of the Minnesota
Statutes, as amended, hereby adopts the following Articles of Incorporation:
ARTICLE 1 - NAME
1.1) The name of the corporation shall be Quantech Ltd.
ARTICLE 2 - REGISTERED OFFICE
2.1) The registered office of the corporation is located at 1021
Bandana Boulevard East, Suite 212, St. Paul, Minnesota 55108.
ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series. The
aggregate number of shares the corporation has authority to issue shall be
30,000,000 shares, which shall have a par value of $.01 per share solely for the
purpose of a statute or regulation imposing a tax or fee based upon the
capitalization of the corporation, and which shall consist of 15,000,000 shares
of Common Stock and 15,000,000 undesignated shares. The Board of Directors of
the corporation is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law, one or more classes
or series of shares, to designate each such class or series (which may include
but is not limited to designation as additional shares of Common Stock), and to
fix the relative rights and preferences of each such class or series.
3.2) Issuance of Shares. The Board of Directors of the corporation is
authorized from time to time to accept subscriptions for, issue, sell and
deliver shares of any class or series of the corporation to such persons, at
such times and upon such terms and conditions as the Board shall determine,
valuing all nonmonetary consideration and establishing a price in money or other
consideration, or a minimum price, or a general formula or method by which the
price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is
further authorized from time to time to grant and issue rights to subscribe for,
purchase, exchange securities for, or convert securities into, shares of the
corporation of any class or series, and to fix the terms, provisions and
conditions of such rights, including the exchange or conversion basis or the
price at which such shares may be purchased or subscribed for.
<PAGE>
3.4) Issuance of Shares to Holders of Another Class or Series. The
Board is further authorized to issue shares of one class or series to holders of
that class or series or to holders of another class or series to effectuate
share dividends or splits.
ARTICLE 4 - RIGHTS OF SHAREHOLDERS
4.1) No Preemptive Rights. No shares of any class or series of the
corporation shall entitle the holders to any preemptive rights to subscribe for
or purchase additional shares of that class or series or any other class or
series of the corporation now or hereafter authorized or issued.
4.2) No Cumulative Voting Rights. There shall be no cumulative voting
by the shareholders of the corporation.
ARTICLE 5 - DIRECTORS
5.1) The names of the person constituting the first Board of Directors
is as follows:
R. H. Joseph Shaw
ARTICLE 6 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION
6.1) Where approval of shareholders is required by law, the affirmative
vote of the holders of at least a majority of the voting power of all shares
entitled to vote shall be required to authorize the corporation (i) to merge
into or with one or more other corporations, (ii) to exchange its shares for
shares of one or more other corporations, (iii) to sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets,
including its good will, or (iv) to commence voluntary dissolution.
ARTICLE 7 - AMENDMENT OF ARTICLES OF INCORPORATION.
7.1) After the issuance of shares by the corporation, any provision
contained in these Articles of Incorporation may be amended, altered, changed or
repealed by the affirmative vote of the holders of at least a majority of the
voting power of the shares present and entitled to vote at a duly held meeting
or such greater percentage as may be otherwise prescribed by the laws of the
State of Minnesota.
<PAGE>
ARTICLE 8 - LIMITATION OF DIRECTOR LIABILITY
8.1) To the fullest extent permitted by Chapter 302A, Minnesota
Statutes, as the same exists or may hereafter be amended, a director of this
corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director.
ARTICLE 9 - INCORPORATOR
9.1) The name and mailing address of the incorporator are as follows:
Gregory G. Freitag
900 Second Avenue South
1100 International Centre
Minneapolis, Minnesota 55402
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his
hand this 13th day of November, 1992.
/s/ Gregory G. Freitag
Gregory G. Freitag
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes
Sections 302A.135 and 302A.139
WHEREAS, the Board of Directors of the Corporation believes it
is in the best interest of the Corporation to amend the Articles of
Incorporation to increase the number of authorized common stock shares
from 30,000,000 to 60,000,000 and has previously adopted similar
recitals and resolutions as those proposed here;
IT IS HEREBY RESOLVED THAT:
The shareholders, in accordance with the Corporation's Bylaws,
do hereby approve amending the Corporation's Articles of Incorporation
to increase the number of authorized common stock shares from
30,000,000 to 60,000,000;
RESOLVED FURTHER:
Section 3.1 is hereby amended to read:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock which
this corporation shall have the authority to issue is Sixty Million
(60,000,000) shares, $.01 par value per share. The Board of Directors
of the corporation is authorized to establish from the undesignated
shares, by resolution adopted and filed in the manner provided by law,
one or more classes or series of shares, to designate each such class
or series (which may include but is not limited to designation as
additional shares of Common Stock), and to fix the relative rights and
preferences of each such class or series.
RESOLVED FURTHER:
The corporation's officers are hereby authorized to complete
all documents necessary and make all filings necessary to effectuate
the amendment to the Corporation's Articles of Incorporation and to
record such Amendment in the Corporation's official record books.
Dated and effective: September 28, 1995.
/s/ George Vitalis
George Vitalis, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
WHEREAS, the Board of Directors of the Corporation believes it is in
the best interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 60,000,000 Common Shares to
120,000,000 shares consisting of 90,000,000 Common Shares and 30,000,000
undesignated shares and has previously adopted similar recitals and resolutions
as those proposed here.
IT IS HEREBY RESOLVED THAT,
The shareholders, in accordance with the Corporation's Bylaws, do
hereby approve amending the Corporation's Articles of Incorporation to increase
the number of authorized shares from 60,000,000 Common Shares to 120,000,000
shares consisting of 90,000,000 Common Shares and 30,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock which this
corporation shall have the authority to issue is One Hundred and Twenty Million
(120,000,000) shares, $.01 par value per share, consisting of 90,000,000 Common
Shares and 30,000,000 undesignated shares. The Board of Directors of the
corporation is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law, one or more classes
or series of shares, to designate each such class or series (which may include
but is not limited to designation as additional shares of Common Stock), and to
fix the relative rights and preferences of each such class or series.
RESOLVED FURTHER,
The corporation's officers are hereby authorized to complete all
documents necessary and make all filings necessary to effectuate the amendment
to the Corporation's Articles of Incorporation and to record such Amendment in
the Corporation's official record books.
Dated and effective: November 25, 1996.
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the shareholders, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
WHEREAS, the Board of Directors of the Corporation believes it is in
the best interest of the Corporation to amend the Articles of Incorporation to
increase the number of authorized shares from 120,000,000 Common Shares to
250,000,000 shares consisting of 200,000,000 Common Shares and 50,000,000
undesignated shares and has previously adopted similar recitals and resolutions
as those proposed here.
IT IS HEREBY RESOLVED THAT,
The shareholders, in accordance with the Corporation's Bylaws, do
hereby approve amending the Corporation's Articles of Incorporation to increase
the number of authorized shares from 120,000,000 Common Shares to 250,000,000
shares consisting of 200,000,000 Common Shares and 50,000,000 undesignated
shares.
RESOLVED FURTHER, that Section 3.1 is hereby amended to read as
follows:
ARTICLE 3.1
CAPITAL STOCK
The aggregate number of shares of all classes of stock, which this
corporation shall have the authority to issue is Two Hundred and Fifty Million
(250,000,000) shares, which shall have a par value of $.01 per share solely for
the purpose of a statute or regulation imposing a tax or fee based upon the
capitalization of the corporation, and which shall consist of 200,000,000 Common
Shares and 50,000,000 undesignated shares. The Board of Directors of the
corporation is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law, one or more classes
or series of shares, to designate each such class or series (which may include
but is not limited to designation as additional shares of Common Stock), and to
fix the relative rights and preferences of each such class or series.
RESOLVED FURTHER,
The corporation's officers are hereby authorized to complete all
documents necessary and make all filings necessary to effectuate the amendment
to the Corporation's Articles of Incorporation and to record such Amendment in
the Corporation's official record books.
Dated and effective: December 2, 1997
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF QUANTECH LTD.
The undersigned, being the Secretary of Quantech Ltd., a Minnesota
corporation, (the "Corporation"), on behalf of the Corporation, does hereby
certify that the following recitals and resolutions were adopted at a duly
called special meeting of the directors, pursuant to Minnesota Statutes,
Sections 302A.135 and 302A.139.
The Board discussed and determined that it was in the interest of
Quantech to effect the reverse split of its Capital Stock to conform its capital
structure to companies in Quantech's industry, so as to attract potential
financing and strategic partners and to position Quantech for filing on NASDAQ
when it meets such organization's listing requirements. It was determined that
the timing of the split should be coordinated with the release of information
concerning Quantech's filing with the FDA of its test for myoglobin.
A MOTION was made by Mr. Lyons that the directors hereby adopt the
following plan of recapitalization in order to effect a 1-for-20 reverse stock
split effective on the date on which the Amendment of Articles hereinafter
adopted is filed with the Minnesota Secretary of State (the "Effective Date"):
1. One (1) share of Common Stock of the Company shall be issued
in exchange for every twenty (20) shares of Common Stock
outstanding on the Effective Date.
2. Fractional shares resulting on account of such reverse split
shall be rounded down.
3. Promptly following the Effective Date, shareholders shall
exchange certificates representing shares of Common Stock
outstanding on the Effective Date for certificates
representing the appropriate number of shares of Common Stock
to reflect the reverse stock split.
4. On the Effective Date, the number of shares of the Company's
Common Stock reserved for issuance under, or covered by, any
outstanding option or warrant shall be decreased by twenty
times and the per share exercise price shall be increased by
such amount as may be necessary so that the aggregate purchase
price of each outstanding option or warrant after adjustment
is equal to the aggregate purchase price of such option or
warrant before adjustment.
FURTHER RESOLVED, that Section 3.1 of Article 3 of the Articles of
Incorporation is amended to read as follows:
"ARTICLE 3 - CAPITAL STOCK
3.1) Authorized Shares; Establishment of Classes and Series.
The aggregate number of shares the corporation has authority
to issue shall be 12,500,000 shares, which shall have a par
value of $.01 per share solely for the purpose of a statute or
regulation imposing a tax or fee based upon the capitalization
of the corporation, and which shall consist of 10,000,000
Common Shares (hereinafter referred to as "Common Stock") and
<PAGE>
2,500,000 undesignated shares. Except as otherwise provided by
these Articles of Incorporation or in a contractual obligation
of the corporation, the Board of Directors of the corporation
is authorized to establish from the undesignated shares, by
resolution adopted and filed in the manner provided by law,
one or more classes or series of shares, to designate each
such class or series (which may include but is not limited to
designation as additional shares of Common Stock), and to fix
the relative rights and preferences of each such class or
series, which rights and preferences may be superior to those
of any of the shares of Common Stock."
FURTHER RESOLVED, that any officer of the Company be and he hereby is
authorized to execute Articles of Amendment of the Articles of Incorporation of
the Company and to cause such Articles of Amendment to be filed with the
Minnesota Secretary of State.
FURTHER RESOLVED, that the form of stock certificate reviewed this date
be and it hereby is adopted to represent the Company's Common Stock from and
after the Effective Date.
FURTHER RESOLVED, that the officers of the Company are hereby
authorized and directed to take all such further action and execute and deliver
all such further documents and instruments as may be necessary or advisable to
effectuate such reverse stock split.
Mr. Perkins seconded the motion and the motion was unanimously approved
by the directors.
Dated and effective: March 17, 1998
/s/ Gregory G. Freitag
Gregory G. Freitag, Secretary
<PAGE>
STATEMENT OF DESIGNATION OF SHARES
OF
QUANTECH LTD.
I hereby certify that the resolutions set forth on Exhibit A attached
hereto were adopted by written action of the Board of Directors of QUANTECH LTD.
on November 5, 1998.
I certify that I am authorized to execute this Statement and I further
certify that I understand that by signing this Statement I am subject to the
penalties of perjury as set forth in Section 609.48 as if I had signed this
Statement under oath.
/s/ Gregory G. Freitag
Gregory G. Freitag, Chief Operating Officer
<PAGE>
EXHIBIT A
Designation of Series A Preferred Stock
WHEREAS, the corporation's current authorized capitalization consists
of 10,000,000 authorized shares of Common Stock and 2,500,000 authorized but
undesignated shares; and
WHEREAS, the Board of Directors deems it advisable to establish an
additional class of shares from the 2,500,000 authorized but undesignated
shares;
NOW, THEREFORE, RESOLVED, that of the 2,500,000 undesignated shares
which the corporation is authorized to issue under its Articles of
Incorporation, 2,500,000 are hereby designated as shares of Series A Preferred
Stock (the "Series A Stock"), with a par value of $0.01 per share solely for
purposes of a statute or regulation imposing a tax or fee based upon the
capitalization of the corporation.
FURTHER RESOLVED, that the rights and preferences of the Series A Stock
shall be as follows:
1. Dividends. In the event that the corporation declares and pays any
dividends in cash with respect to Common Stock, the holder of a share of Series
A Stock will be entitled to receive a dividend per share equal to the dividend
that would have been otherwise payable with respect to such share if it had been
converted into shares of Common Stock prior to the record date of such dividend.
2. Voting. Each outstanding share of Series A Stock shall entitle its
holder to that number of votes on all matters submitted to the stockholders that
is equal to the number of shares of Common Stock into which such holder's shares
of Series A Stock are then convertible, as hereinafter provided (except that
shares of Series A Stock shall have class voting rights as provided in paragraph
3 below and as otherwise now or hereafter required by agreement or law).
3. Additional Class Votes by Series A Stock. Without the affirmative
vote or written consent of the holders (acting together as a class) of at least
a majority of the shares of Series A Stock at the time outstanding, the
corporation shall not:
a. amend the Articles of Incorporation of the corporation in
any respect, including without limitation any certificate or
designation relating to the Series A Stock, so as to alter any existing
provision relating to Series A Stock or the holders thereof or waive
any of the rights granted to the holders of the Series A Stock by the
Articles of Incorporation of the corporation; or
b. increase the authorized number of shares of Series A Stock;
or
c. authorize or issue any shares of capital stock having
priority or preference over, or on parity with, Series A Stock as to
dividends or distributions in the event of the liquidation, dissolution
<PAGE>
or winding up of the corporation, provided that such prohibition shall
not prevent the corporation from issuing any shares which may receive
distributions in such events on a pari passu basis prorated, in the
event assets are insufficient to pay the original purchase price of all
such securities, to the original purchase price of each; or
d. declare or pay any dividend or make any other distribution
on any shares of capital stock of the corporation at any time created
and issued ranking junior to Series A Stock with respect to the rights
to the distribution of assets upon liquidation, dissolution or winding
up of the corporation, other than distributions payable solely in
shares of junior stock.
4. Liquidation.
a. In the event of the liquidation, dissolution or winding up
of the corporation, whether voluntary or involuntary, the holders of
the shares of Series A Stock shall be entitled, subject to the
participation right of certain lenders/guarantors as provided in
subparagraph (d) below, to receive in cash, out of the assets of the
corporation, before any payment shall be made or any assets distributed
to the holders of Common Stock with respect to the payment of dividends
or upon dissolution or liquidation of the corporation, an amount equal
to the sum of (i) $3.00 per share ("Original Purchase Price")
(appropriately adjusted to reflect stock splits, stock dividends,
reorganizations, consolidations and similar changes hereafter
effected), (ii) all dividends unpaid and accumulated or accrued thereon
to the date of such distribution, if any, and (iii) an amount equal to
a return on investment at the rate of 10% per annum, compounded
annually, over the period commencing on the date of original issuance
of the Series A Stock by the corporation and ending on the date of
distribution of assets as specified by the corporation's Board of
Directors. If, upon any liquidation or dissolution of this corporation,
the assets of the corporation shall be insufficient to pay such amount,
the holders of such shares shall share pro rata in any such
distribution in proportion to the full amounts to which they would
otherwise be respectively entitled.
b. After the payment of all preferential amounts required to
be paid pursuant to subparagraph a above, any remaining assets and
funds of the corporation available for distribution to its stockholders
upon the liquidation, dissolution or winding up of the corporation
shall be distributed ratably among the holders of Common Stock.
Thereafter, any such remaining assets and funds shall be distributed.
c. The merger or consolidation of the corporation into or with
another corporation which results in the exchange of outstanding shares
of the corporation for securities or other consideration issued or paid
or caused to be issued or paid by such other corporation or an
affiliate thereof (except if such merger or consolidation does not
result in the transfer of more than 60% of the voting securities of the
corporation), change in control of more than 60% of the voting
securities of the corporation or the sale of all or substantially all
the assets of the corporation, shall be deemed to be a liquidation,
dissolution or winding up of the corporation for purposes of this
paragraph, unless the holders of a majority of the Series A Stock then
<PAGE>
outstanding vote otherwise. The amount deemed distributed to the
holders of Series A Stock upon any such merger or consolidation shall
be the cash or the value of the property, rights and/or securities
distributed to such holders by the acquiring person, firm or other
entity. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the corporation.
d. The corporation and one of its current directors are
parties to that certain Agreement dated November 5, 1998, which
agreement provides that if the director is required to make any payment
pursuant to that certain Guaranty and Collateral Pledge Agreement, each
dated August 7, 1998, between such director and Norwest Bank Minnesota,
National Association, which has provided the corporation a bank credit
facility in the aggregate principal amount of $750,000, such director
waives any right of recovery of such payment from the corporation
except in the event of a liquidation by the corporation in which event
such director shall be entitled to participate in the distribution of
the corporation's assets in liquidation on a pro rata basis with
holders of Series A Stock pursuant to subparagraph a above as if such
director held an amount of Series A Stock equal to the amount of such
director's payment under the Guaranty and Collateral Pledge Agreement
divided by $3.00.
5. Conversion Right. At the option of the holders thereof, the shares
of Series A Stock shall be convertible, at the office of the corporation (or at
such other office or offices, if any, as the Board of Directors may designate),
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the corporation, at the
conversion price, determined as hereinafter provided, in effect at the time of
conversion, each share of Series A Stock being deemed to have a value of $3.00
for the purpose of such conversion. The price at which shares of Common Stock
shall be delivered upon conversion of shares of Series A Stock (herein called
the "conversion price") shall be initially $0.75 per share of Common Stock
(i.e., at an initial conversion rate of four shares of Common Stock for each
share of Series A Stock), provided, however, that such initial conversion price
shall be subject to adjustment from time to time in certain instances as
hereinafter provided. The following provisions shall govern such right of
conversion:
a. In order to convert shares of Series A Stock into shares of
Common Stock of the corporation, the holder thereof shall surrender at
any office hereinabove mentioned the certificate or certificates
therefor, duly endorsed to the corporation or in blank, and give
written notice to the corporation at such office that such holder
elects to convert such shares. Shares of Series A Stock shall be deemed
to have been converted immediately prior to the close of business on
the day of the surrender of such shares for conversion as herein
provided, and the person entitled to receive the shares of Common Stock
of the corporation issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock at
such time. As promptly as practicable on or after the conversion date,
the corporation shall issue and deliver or cause to be issued and
delivered at such office a certificate or certificates for the number
of shares of Common Stock of the corporation issuable upon such
conversion.
<PAGE>
b. The conversion price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the
conversion price each holder of shares of Series A Stock shall
thereafter be entitled to receive the number of shares of Common Stock
of the corporation obtained by multiplying the conversion price in
effect immediately prior to such adjustment by the number of shares
issuable pursuant to conversion immediately prior to such adjustment
and dividing the product thereof by the conversion price resulting from
such adjustment.
c. If and whenever the corporation shall issue or sell any
shares of its Common Stock for a consideration per share less than the
conversion price in effect immediately prior to the time of such issue
or sale of the Common Stock, then, forthwith upon such issue or sale,
the conversion price shall be reduced to such lower price.
No adjustment of the conversion price of the Series A Stock, however,
shall be made in an amount less than 2% of such conversion price in effect on
the date of such adjustment, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any such adjustment so carried forward, shall be
an amount equal to or greater than 4% of the conversion price of the Series A
Stock then in effect.
The holders of at least a majority of the Series A Stock then
outstanding may elect to waive the application of the provisions of this
paragraph 5 with respect to any issue or sale by the corporation of shares of
its Common Stock for a consideration per share less than the conversion price of
the Series A Stock in effect immediately prior to the time of such issue or
sale.
For the purposes of this paragraph 5, the following provisions (i) to
(v), inclusive, shall also be applicable:
(i) In the event the corporation shall grant (whether directly
or by assumption in a merger or otherwise) any rights to subscribe for
or to purchase, or any options for the purchase of, (a) Common Stock or
(b) any obligations or any shares of stock of the corporation which are
convertible into, or exchangeable for, Common Stock (any of such
obligations or shares of stock being hereinafter called "Convertible
Securities") whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon the exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by dividing (x) the
total amount, if any, received or receivable by the corporation as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration payable to the
corporation upon the exercise of such rights or options, plus, in the
case of such rights or options which relate to Convertible Securities,
the minimum aggregate amount of additional consideration, if any,
payable upon the issue of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or options) shall
be less than the conversion price of the Series A Stock in effect
immediately prior to the time of the granting of such rights or
options, then the total maximum number of shares of Common Stock
<PAGE>
issuable upon the exercise of such rights or options or upon conversion
or exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to have been
issued for such price per share. Except as provided in subparagraph d
below, no further adjustments of the conversion price of the Series A
Stock shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such rights or options or
upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities.
(ii) In case the corporation shall issue or sell (whether
directly or by assumption in a merger or otherwise) any Convertible
Securities, whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the corporation upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities) shall be
less than the conversion price of the Series A Stock in effect
immediately prior to the time of such issue or at the time of such
issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued for
such price per share, provided that (a) except as provided in
subparagraph d below, no further adjustments of the conversion price
shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (b) if any
such issue or sale of such Convertible Securities is made upon exercise
of any rights to subscribe for or to purchase or any option to purchase
any such Convertible Securities for which adjustments of the conversion
price of the Series A Stock have been or are to be made pursuant to
other provisions of this paragraph 5, no further adjustment of the
conversion price shall be made by reason of such issue or sale.
(iii) In case any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock
or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the corporation therefor, without deducting therefrom any
expenses incurred or any underwriting commissions, discounts or
concessions paid or allowed by the corporation in connection therewith.
In case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the
corporation shall be deemed to be the fair value of such consideration
as determined by the Board of Directors of the corporation, without
deducting therefrom any expenses incurred or any underwriting
commissions, discounts or concessions paid or allowed by the
corporation in connection therewith. In case any shares of Common Stock
or Convertible Securities or any rights or options to purchase such
Common Stock or Convertible Securities shall be issued in connection
with any merger or consolidation in which the corporation is the
surviving corporation, the amount of consideration therefor shall be
<PAGE>
deemed to be the fair value as determined by the Board of Directors of
the corporation of such portion of the assets and business of the
non-surviving corporation or corporations as such Board shall determine
to be attributable to such Common Stock, Convertible Securities, rights
or options, as the case may be. In the event of any consolidation or
merger of the corporation in which the corporation is not the surviving
corporation or in the event of any sale of all or substantially all of
the assets of the corporation for stock or other securities of any
other corporation, the corporation shall be deemed to have issued a
number of shares of its Common Stock for stock or securities of the
other corporation computed on the basis of the actual exchange ratio on
which the transaction was predicated and for a consideration equal to
the fair market value on the date of such transaction of such stock or
securities of the other corporation, and if any such calculation
results in adjustment of the conversion price of the Series A Stock,
the determination of the number of shares of Common Stock issuable upon
conversion immediately prior to such merger, conversion or sale, for
purposes of subparagraph d below, shall be made after giving effect to
such adjustment of the conversion price.
(iv) In case the corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or in any rights or options to purchase any
Common Stock or Convertible Securities, or (b) to subscribe for or
purchase Common Stock or Convertible Securities, then such record date
shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of
the granting of such rights of subscription or purchase, as the case
may be.
b. In case the corporation shall (i) declare a dividend upon
the Common Stock payable in Common Stock (other than a dividend
declared to effect a subdivision of the outstanding shares of Common
Stock, as described in subparagraph e below) or Convertible Securities,
or in any rights or options to purchase Common Stock or Convertible
Securities, or (ii) declare any other dividend or make any other
distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus, then thereafter each holder of shares of
Series A Stock upon the conversion thereof will be entitled to receive
the number of shares of Common Stock into which such shares of Series A
Stock have been converted, and, in addition and without payment
therefor, each dividend described in clause (i) above and each dividend
or distribution described in clause (ii) above which such holder would
have received by way of dividends or distributions if continuously held
since such holder became the record holder of such shares of Series A
Stock such holder (i) had been the record holder of the number of
shares of Common Stock then received, and (ii) had retained all
dividends or distributions in stock or securities (including Common
Stock or Convertible Securities, and any rights or options to purchase
any Common Stock or Convertible Securities) payable in respect of such
Common Stock or in respect of any stock or securities paid as dividends
or distributions and originating directly or indirectly from such
Common Stock. For the purposes of the foregoing, a dividend or
distribution other than in cash shall be considered payable out of
earnings or earned surplus only to the extent that such earnings or
earned surplus are charged an amount equal to the fair value of such
dividend or distribution as determined by the Board of Directors of the
corporation.
<PAGE>
c. In case the corporation shall at any time split or
subdivide its outstanding shares of Common Stock into a greater number
of shares, the conversion price of Series A Stock in effect immediately
prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the
corporation shall be combined into a smaller number of shares, the
conversion price of Series A Stock in effect immediately prior to such
combination shall be proportionately increased.
d. If (i) the purchase price provided for in any right or
option referred to in clause (i) of subparagraph a, or (ii) the
additional consideration, if any, payable upon the conversion or
exchange of Convertible Securities referred to in clause (i) or clause
(ii) of subparagraph a, or (iii) the rate at which any Convertible
Securities referred to in clause (i) or clause (ii) of subparagraph a
are convertible into or exchangeable for Common Stock, shall change at
any time (other than under or by reason of provisions designed to
protect against dilution), the conversion price of the Series A Stock
then in effect hereunder shall forthwith be increased or decreased to
such conversion price as would have obtained had the adjustments made
upon the issuance of such rights, options or Convertible Securities
been made upon the basis of (a) the issuance of the number of shares of
Common Stock theretofore actually delivered upon the exercise of such
options or rights or upon the conversion or exchange of such
Convertible Securities, and the total consideration received therefor,
and (b) the issuance at the time of such change of any such options,
rights, or Convertible Securities then still outstanding for the
consideration, if any, received by the corporation therefor and to be
received on the basis of such changed price; and on the expiration of
any such option or right or the termination of any such right to
convert or exchange such Convertible Securities, the conversion price
of the Series A Stock then in effect hereunder shall forthwith be
increased to such conversion price as would have obtained had the
adjustments made upon the issuance of such rights or options or
Convertible Securities been made upon the basis of the issuance of the
shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights or
options or upon the conversion or exchange of such Convertible
Securities. If the purchase price provided for in any right or option
referred to in clause (i) of subparagraph a, or the rate at which any
Convertible Securities referred to in clause (i) or clause (ii) of
subparagraph a are convertible into or exchangeable for Common Stock,
shall decrease at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of
the delivery of Common Stock upon the exercise of any such right or
option or upon conversion or exchange of any such Convertible Security,
the conversion price of the Series A Stock then in effect hereunder
shall forthwith be decreased to such conversion price as would have
obtained had the adjustments made upon the issuance of such right,
option or Convertible Security been made upon the basis of the issuance
of (and the total consideration received for) the shares of Common
Stock delivered as aforesaid.
e. The corporation shall at all times insure and keep
available out of its authorized but unissued shares of Common Stock,
for the purpose of effecting the conversion of Series A Stock, the full
number of shares of Common Stock then deliverable upon the conversion
of all shares of Series A Stock then outstanding.
<PAGE>
f. No fractional shares shall be issued upon conversion of the
Series A Stock, and the number of shares of Common Stock to be issued
shall be rounded to the nearest whole share (with one-half being
rounded to the upward). Such conversion shall be determined on the
basis of the total number of shares of Series A Stock the holder is at
the time converting into Common Stock and the aggregate number of
shares of Common Stock issuable upon such conversion.
6. Mandatory Conversion. The Series A Stock shall automatically be
converted into shares of Common Stock of the corporation, without any act by the
corporation or the holders of the Series A Stock, (i) concurrently with the
closing of an offering of the corporation's equity in which the aggregate
offering price of the securities sold for cash by the corporation in the
offering is at least $5,000,000, or such lower amount as may be approved by the
holders of at least a majority of the shares of Series A Stock then outstanding,
voting separately as a class or (ii) at such time as at least 50% of the number
of shares of Series A Stock that were outstanding as of November 30, 1998 have
been converted or redeemed. As used herein, the term "closing" shall mean the
delivery by the corporation of certificates representing the securities of the
corporation offered against delivery to the corporation of payment therefor. Any
conversion of Series A Stock occurring on the date of the closing of a financing
by the corporation satisfying the conditions set forth above shall be deemed to
be a conversion pursuant to the terms of this paragraph 6.
Each holder of a share of Series A Stock converted pursuant to the
preceding paragraph shall be entitled to receive the full number of shares of
Common Stock into which such share of Series A Stock held by such holder could
be converted if such holder had exercised its conversion right at the time of
closing of such financing.
7. Redemption of Series A Stock.
a. If any time after November 5, 2003 the corporation receives
a written request of the holders of not less than fifty percent (50%)
of the then outstanding shares of Series A Stock, voting together as a
single class and on an as-converted basis, (collectively, the
"Initiating Holders"), the corporation shall within thirty (30) days
after the receipt of such notice redeem all of the then outstanding
shares of Series A Stock (or, if less, the maximum amount it may
lawfully redeem) by paying in cash therefor an amount equal to the sum
of the Original Purchase Price and an amount equal to a return on
investment at the rate of 10% per annum, compounded annually, over the
period commencing on the date of original issuance of the Series A
Stock by the corporation and ending on the Redemption Date (defined
below). The aggregate amounts payable with respect to Series A Stock
are hereinafter collectively referred to as the "Redemption Price."
b. At least twenty (20) days prior to the date fixed for any
redemption of any Series A Stock (the "Redemption Date"), written
notice shall be mailed, first class postage prepaid, to each holder of
record (at the close of business on the business day next preceding the
day on which notice is given) of the Series A Stock to be redeemed, at
the address last shown on the records of the corporation for such
<PAGE>
holder or given by the holder to the corporation for the purpose of
notice or if no such address appears or is given at the principal
executive office of the corporation, notifying such holder of the
redemption to be effected, specifying the number of shares to be
redeemed from such holder, the Redemption Date, the Redemption Price,
the place at which payment may be obtained, and the date on which such
holder's conversion rights (as set forth in paragraph 5 above) as to
such shares terminate, and calling upon such holder to surrender to the
corporation, in the manner and at the place designated, the certificate
or certificates representing the shares to be redeemed (the "Redemption
Notice"). On or after the Redemption Date, each holder of Series A
Stock to be redeemed shall surrender to the corporation the certificate
or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption
Price of such shares shall be payable to the order of the person whose
name appears on such certificate or certificates as the owner thereof
and each surrendered certificate shall be canceled. In the event less
than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
c. From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the
holders of Series A Stock, as holders of such shares (except the right
to receive the Redemption Price without interest upon surrender of
their certificate or certificates) shall cease with respect to such
shares which such holders elected to have redeemed, and such shares
shall not thereafter be transferred on the books of the corporation or
be deemed to be outstanding for any purpose whatsoever. If the funds of
the corporation legally available for redemption of shares of Series A
Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series A Stock to be redeemed on such date, those
funds that are legally available will be used to redeem shares of
Series A Stock such that each holder of Series A Stock receives the
same percentage of the aggregate Series A Stock Redemption Price, as
applicable, as such holder would otherwise receive if the corporation
could legally redeem all of the shares put for redemption on such date.
The shares of Series A Stock not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein. At any time
thereafter when additional funds of the corporation are legally
available for the redemption of shares of Series A Stock, such funds
will immediately be used to redeem the balance of the shares that the
corporation has become obligated to redeem on any Redemption Date but
that it has not redeemed.
d. On or prior to the Redemption Date, the corporation shall
deposit the Redemption Price of all shares of Series A Stock designated
for redemption in the Redemption Notice, and not yet redeemed or
converted, with a bank or trust corporation having aggregate capital
and surplus in excess of $100,000,000 as a trust fund for the benefit
of the respective holders of the shares designated by holders of Series
A Stock for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to publish
the notice of redemption thereof and pay the Redemption Price for such
shares to their respective holders on or after the Redemption Date,
upon receipt of notification from the corporation that such holder has
surrendered its share certificate to the corporation pursuant to
subparagraph 7(b) above. As of the date of such deposit, the deposit
shall constitute full payment of the shares to their holders, and from
<PAGE>
and after the date of the deposit the shares so called for redemption
shall be redeemed and shall be deemed to be no longer outstanding, and
the holders thereof shall cease to be shareholders with respect to such
shares and shall have no rights with respect thereto except the rights
to receive from the bank or trust corporation payment of the Redemption
Price of the shares, without interest, upon surrender of their
certificates therefor, and the right to convert such shares as provided
in paragraph 5 above. Such instructions shall also provide that any
moneys deposited by the corporation pursuant to this subparagraph 7(d)
for the redemption of shares thereafter converted into shares of the
corporation's Common Stock pursuant to paragraph 6 above prior to the
Redemption Date shall be returned to the corporation forthwith upon
such conversion. The balance of any moneys deposited by the corporation
pursuant to this subparagraph 7(d) remaining unclaimed at the
expiration of two (2) years following the Redemption Date shall
thereafter be returned to the corporation upon its request expressed in
a resolution of its Board of Directors.
8. Status of Converted or Redeemed Stock. In the event any shares of
Series A Stock shall be converted or redeemed by the corporation, the shares so
converted or redeemed shall not be reissuable by the corporation as Series A
Stock but shall be designated authorized shares of Common Stock and available
for issuance by the corporation as Common Stock. At such time as all outstanding
shares of Series A Stock have been converted or redeemed, (i) any theretofore
authorized but unissued shares of such series shall return to the status of
undesignated shares of the corporation, (ii) this Statement of Designation shall
be deemed amended to eliminate all authorized Series A Stock and the terms and
provisions thereof, and (iii) the Board of Directors and officers of the
corporation are authorized to take such action and execute and file such
instruments as may be necessary or appropriate to effect such amendment.
FREDRIKSON & BYRON, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
Telephone: (612) 347-7000
Facsimile: (612) 347-7077
January 12, 1999
Quantech Ltd.
1419 Energy Park Drive
St. Paul, Minnesota 55108
RE: Registration Statement on Form SB-2 - Exhibit 5.1
Gentlemen/Ladies:
We have acted as counsel for Quantech Ltd. (the "Company") in
connection with the Company's filing of a Registration Statement on Form SB-2
(the "Registration Statement") relating to the registration under the Securities
Act of 1933 (the "Act") of an offering of 8,507,349 shares of Common Stock of
the Company by persons who are currently holders of Common Stock of the Company
(the "Shares") or who may become such holders upon conversion of outstanding
Series A Preferred Stock (the "Preferred Stock") or upon exercise of outstanding
warrants (the "Warrants").
In connection with rendering this opinion, we have reviewed the
following:
1. The Company's Articles of Incorporation;
2. The Company's Bylaws; and
3. Certain corporate resolutions, including resolutions of the
Company's Board of Directors pertaining to the issuance by the
Company of the Preferred Stock, the Warrants and the Shares.
Based upon the foregoing and upon representations and information
provided by the Company, we hereby advise you that in our opinion:
1. The Company's Articles of Incorporation validly authorize the
issuance of the Shares registered pursuant to the Registration
Statement.
2. The Shares to be sold by the selling shareholders named in the
Registration Statement are validly issued, fully paid and
nonassessable.
3. Upon conversion of the Preferred Stock or exercise of the
Warrants in accordance with the terms and conditions of the
Preferred Stock and the Warrants, the shares received and to
be sold by the selling shareholders named in the Registration
Statement will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Melodie R. Rose
Melodie R. Rose, Vice President
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2
of our report, dated August 3, 1998, which includes an emphasis paragraph
relating to an uncertainty as to the Company's ability to contrinue as a going
concern, on the financial statements of Quantech, LTD. We also consent to the
reference to our Firm under the captions "Experts" and "Selected Financial Data"
in the Prospectus.
January 11, 1999
/s/ McGladrey & Pullen, L.L.P.
