SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000
Commission file number 0-19957
QUANTECH LTD.
(Name of Small Business Issuer in its Charter)
Minnesota 41-1709417
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
815 Northwest Parkway, Suite 100
Eagan, Minnesota 55121
(Address of Principal Executive Offices; Zip Code)
Issuer's Telephone Number Including Area Code: (651) 647-6370
Securities Registered Under Section 12(b) of the Act: None
Securities Registered Under Section 12(g) of the Act: Common Stock, no par value
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be con tained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended June 30, 2000 were $150,000.
The aggregate market value of the Issuer's Common Stock held by non affiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of September 18, 2000, was approxi mately $ 14,000,000
(based on the closing sale price of the Issuer's Common Stock on such date).
Shares of Common Stock, no par value, outstanding on September 18, 2000:
6,218,524.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes No X
<PAGE>
INDEX
PART I Page
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Item 1. Description of Business........................................ 3
Item 2. Description of Property........................................19
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.......19
Item 6. Management's Discussion and Analysis or Plan of Operation......20
Item 7. Financial Statements...........................................23
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............52
Item 10. Executive Compensation.........................................53
Item 11. Security Ownership of Certain Beneficial Owners and Management.53
Item 12. Certain Relationships and Related Transactions.................53
Item 13. Exhibits and Reports on Form 8-K...............................53
Signatures....................................................................54
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Summary
General
Quantech Ltd. is completing development of a system that is expected
to run tests for a number of different medical conditions. We call our system
the FasTraQ(TM). The FasTraQ consists of an instrument that sits on the top of a
counter or cart and reads PrePaQ(TM) disposable test cartridges developed by
Quantech. Each Quantech PrePaQ test cartridge will contain from one to four
different medical tests such as those for a heart attack or pregnancy. Hand-held
communication devices called ReaLinQ(TM) communicators provide real time test
results directly from the FasTraQ instrument to the medical staff members
treating a patient.
The FasTraQ produces test results in a manner different than other
testing systems because it uses Quantech's proprietary technology based on the
quantum physics phenomenon known as surface plasmon resonance ("SPR"), which
involves the interaction of light with the electrons of metal. Quantech's
technology creates SPR in a controlled environment which enables the FasTraQ to
detect and transmit information concerning the presence and quantity of certain
native and foreign molecules in blood, urine or other fluids which may be
associated with specific diseases or medical conditions.
Excluding tests that can be conducted in the home, the overall world
wide diagnostic market is more than $20 billion. Routine and "STAT" (from the
Latin statim meaning urgent) laboratory tests currently account for the majority
of this market. Routine tests required in the hospital are conducted on testing
systems located in either the hospital's central laboratory or sent to a
laboratory that is not within the hospital. STAT tests are conducted by a
hospital's central laboratories or a smaller, more conveniently located, version
of the central laboratories called STAT labs. Obtaining test results from
central laboratories can take a minimum of 45 minutes and up to three hours.
This delay negatively affects patient treatment and increases costs. Although
STAT labs have been established to reduce the time delay, test costs are higher
in STAT labs than central laboratories and turnaround time for tests is not
always reduced. We are designing the FasTraQ to address what we believe is a
pressing need for a test system that can quickly, in less than 15 minutes, and
cost effectively provide test results, especially for patients with critical
problems in emergency departments.
The FasTraQ will be launched with at least a panel of three heart
attack tests and a single test for pregnancy. Other tests are under development
and are expected to be added to the FasTraQ system to provide the number of
different quantitative tests the emergency department requires on an urgent
basis. We have received clearance from the U.S. Food and Drug Administration to
market for clinical use our tests for the cardiac enzymes Myoglobin and CK-MB
and the pregnancy enzyme hCG.
Quantech also owns 73% of HTS BioSystems, Inc. ("HTS"). HTS was formed
around a combination of SPR technologies and intellectual property from both
Quantech and PE Biosystems (NYSE:PEB). This technology supports the accelerated
development of label-free, cost effective detection systems, initially for the
scientific research market. HTS intends to become the definitive source of
analytical systems and chemistry for the high-speed detection of molecular and
cellular interactions in the fields of functional genomics, proteomics and drug
discovery.
Product Description
General
The Quantech FasTraQ Patient Treatment Information Platform is a new
multi-menu STAT testing system with real time communication capabilities that is
in the final stages of commercial development. The FasTraQ consists of the
reading instrument, PrePaQ disposable test cartridges and ReaLinQ communication
units. It will combine accuracy with simplicity of use and automatically
transfer information to the appropriate Emergency Department ("ED") personnel.
The PrePaQ cartridges can process up to four tests at a time and the FasTraQ
instrument can simultaneously run up to 20 PrePaQ test cartridges.
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The FasTraQ Testing Instrument
The Quantech FasTraQ testing instrument is designed to fill the needs
of the ED. Most importantly, the FasTraQ instrument is designed to be compatible
with new PrePraQ 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 FasTraQ instrument consists of a communication module and up to
five testing modules. It will be of a size capable of sitting on a bench top or
cart. The communication module will contain a microprocessor, a computer touch
screen, barcode readers, interfaces for hospital information systems and
Quantech testing modules and systems to communicate with the Quantech ReaLinQ
communicators. Each test module will be able to run up to four PrePaQ test
disposables and contain a white light source and a number of optical components.
The light is split into a number of channels, providing for quality controls and
multiple tests per disposable. When the PrePaQ is inserted into a port of the
test module an internal bar-code reader identifies the type of tests to be run.
A touch screen and/or an external barcode reader on the communication
module and/or a barcode reader in the ReaLinQ communicator will enable the user
to enter both a user number and the patient or specimen ID number. The
instrument's computer screen and a screen on each test module will display test
results. The data or results produced by the instrument will also be stored on
an internal hard drive, downloaded to the hospital information system, and may
be provided on a hard copy through use of a printer or sent to the ED staff via
the Quantech ReaLinQ communicators.
The module configuration of the instrument allows it to run up to 20
PrePaQ test cartridges simultaneously. This provides flexibility to meet the
necessary test throughput capability for a given institution. The instrument
size allows it to be located in the ED or associated STAT or rapid response lab.
Quantech intends to offer several industry standard reagent rental programs
whereby the FasTraQ instrument will be provided to the hospital and it may
retain the FasTraQ without cost as long as a specified number of PrePaQ test
disposables are purchased. The ability of Quantech's biosensor FasTraQ to
convert biological data into digital signals should also permit designs that
capitalize on future advances in microcomputer and microfluidic technology.
The PrePaQ Disposable Test Cartridge
Quantech's PrePaQ disposable test cartridge 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 PrePaQ will be the ability
to attach a standard vacutainer-type tube, complete with its top intact, to the
PrePaQ disposable so that it is easy to use and the user has minimal exposure to
the patient sample. One or more separate tests may be performed on a single
disposable providing Quantech the capability to develop clinically related
panels of tests by simply adding the appropriate reagents. Future PrePaQ
disposables for certain tests may also be configured to handle samples of urine
and other body fluids.
A further advantage of Quantech's PrePaQ test disposable will be that
an operator will not be required to add reagents. This simplicity translates
into ease of use and immediacy of results. PrePaQ disposables will be configured
to provide single or multiple clinically-related tests. Additional development
of the PrePaQ 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.
The ReaLinQ Wireless Communicator
At the option of the user, the FasTraQ may include the ReaLinQ wireless
communication capability to input all emergency test information directly into
the FasTraQ from, and automatically provide the appropriate ED staff members
with test results at, "patient-side". The LAN transmission unit will be located
in the instruments' communication module. Hand held receivers or communicators
similar to pagers will be provided to the ED staff. When the patient arrives in
the ED the appropriate ED staff member can input necessary information. When the
ED staff member begins the test process at the FasTraQ instrument, the
instrument will be directed to send the results to the ED team for the
particular patient. When the results are completed they are provided to the
ReaLinQ communicators and the receiving parties acknowledge receipt of the
information.
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The receipt of test information through the ReaLinQs will speed results
by eliminating the need for the ED staff to go back to the instrument or printer
multiple times to determine if the tests are finished. Also, because the
treatment team may be scattered throughout the ED, it will no longer be
necessary to track down individual team members to provide them with the
results. The ReaLinQ communicators will also have the ability to receive other
patient information such as hospital records if made available.
Comparison of Product Technologies
A number of basic methods, whether performed manually or by automated
instruments, are utilized in diagnostic testing including immunoassays, DNA
probes, electrochemistry, coagulation and chemical reactions. Each of these
testing methodologies requires a separate system and the performance of a series
of operations by a skilled technologist. These operations consist of sample
preparation, addition of reagents, further method-specific manipulations, and
reading and interpretation of raw data. Central and STAT laboratory automated
systems have mechanized, rather than eliminated many of these steps and have
been unable to combine a number of different methodologies or technologies into
a single system. Quantech's digital SPR technology, in contrast, can be used for
many basic testing methods within a single instrument, but without complicated
processing by the operator.
Central labs provide quality results on a menu of tests, however, STAT
test results take from 45 minutes to 3 hours to be returned to the ED.
Additionally STAT tests disrupt the batch testing of central labs. Although STAT
labs have quicker turnaround time with the quality advantages of the central
lab, personnel and equipment requirements of STAT labs result in high test
costs. Point-of-care instruments have reduced turnaround time, and in some
instances have lower test costs than STAT labs, but fail to meet laboratory
quality and ED needs due to lack of interface to the laboratory information
system, manipulation of patient sample, nonconcordance with central lab results
and lack of quantitative results. Most importantly, their limited test menu
keeps them from eliminating the testing time for tests they cannot perform thus
making the treatment process only as fast and efficient as the slowest test from
the lab. Quantech's FasTraQ system expects to address these shortcomings of the
current testing environment and products by combining the advantages of central
lab and point-of-care testing into a system with the following anticipated
features:
o STAT quantitative test menu (a number instead of qualitative yes/no)
o User-friendly system, rapid test turnaround time (less than 15 minutes)
o Real time monitoring of test information status
o Multi-test, single use disposable (up to four tests per PrePaQ)
o Cost effective (comparable to central lab STAT test costs, 2x-4x less
than STAT lab)
o Remote results receipt acknowledgement; auto-release of test module
o Throughput of up to 20 PrePaQ cartridges simultaneously
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
o Internet ordering, training and information transfer
The Market
General Discussion
Excluding home diagnostics, the overall worldwide in-vitro diagnostic
market ("IVD") is approximately $20 billion. Commercial, hospital central and
hospital STAT/rapid response laboratories currently account for the majority of
this market with testing divided between non-urgent and urgent (STAT) tests. We
are focused on the ED STAT testing portion of this market.
<PAGE>
STAT tests are required by critical care physicians in areas such as
surgical suites, ICUs/CCUs and emergency departments because of the time
sensitive nature of their treatment. However, results of STAT tests from the
central laboratory can take a minimum of 45 minutes and up to three hours for
the physician to receive the results. This delay affects patient treatment and
increases costs. Although STAT laboratories have been established to reduce this
time delay, test costs are often 2-4 times that of the central lab and reduced
test time turnaround has not been effectively achieved.
The United States ED testing market is highly concentrated. There are
approximately 1,032 EDs in the United States that each see more than 30,000
patients per year with the average ED in this group seeing 50,000 patients
annually. These ED's represent approximately 55% of the ED testing market.
Additionally, the majority of hospitals belong to a small number of buying
groups such as Columbia/HCA and the Voluntary Hospital Association of America
Inc. (VHA). This concentration results in a high level of revenue passing
through a limited number of sites.
Pressure has increased to reduce the length of patient stay and provide
a greater portion of services in outpatient settings. Because the cost of
providing care in the ED far exceeds those of general medical or surgical units,
a primary goal of the ED is to determine the appropriate care path for a patient
so 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 test results that are efficiently delivered to
the care provider. For this reason, STAT labs were established to reduce test
turnaround time, but their high test cost and still often lengthy turnaround
time have limited their effectiveness in reducing patient treatment costs.
Point-of-care ("POC") testing represents a growing segment of the IVD market and
a response to rising costs of health care that have produced changes in hospital
reimbursement. POC instruments have tried to fill the gap left by STAT labs, but
lack of central and STAT lab features and true increases in efficiencies have
limited their penetration of the ED testing market.
The strategic direction chosen by Quantech is to exploit the inherent
technological advantages of its SPR technology and current information
technologies, which allows it to address the shortfalls of the central and STAT
labs and POC instruments. As such, Quantech will focus on the STAT testing and
information delivery needs of hospital ED's.
The Emergency Department
Critical Care Units include Intensive Care Units, Surgical Suites and
Emergency Departments. The FasTraQ will first be marketed to EDs. EDs must
respond to critical patient conditions and conduct tests on an as needed basis
in order to support the health care team when a patient's condition is life
threatening. Most tests conducted in the ED are required STAT (urgent) and are
processed 24 hours a day.
Tests processed in a STAT manner significantly increase cost as they
require the hospital central or STAT laboratory to remain open at times when
they are not otherwise busy. Further, STAT testing in the central lab interrupts
batch testing and thus negatively affects cost while STAT labs costs are high
because of the inability to spread operating and capital costs across a larger
number of tests. The solution to this difficulty and expense is to bring a
system designed for STAT testing to the patient site in a manner that will
provide cost-effective test results promptly, accurately and with the requisite
throughput.
Because of space limitations in the ED, and a desire not to train
personnel on a number of different instruments, a single instrument for the ED
STAT test menu is desirable. Such ED STAT test menu includes:
o Cardiac marker panel (CK-MB, troponin I, myoglobin)
o hCG (Pregnancy)
o Blood Cell panel (WBC, RBC, Hct and Hgh)
o Coagulation
o Electrolytes
o Kidney Panel (Bun/Creatinine)
o Pancreas Panel
o Therapeutic Drug Monitoring (Digoxin, Theophylline)
o Drugs of Abuse (e.g., Cocaine, Marijuana)
o Amylase
o Liver Panel
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In 1998 there were 98 million patient visits to 4,200 EDs in the United
States of which 2,000 EDs saw 76% of the patients. Approximately 60% of these
patients received tests. Europe and Japan represent a similar number and
concentration of ED patient testing. Quantech estimates the worldwide ED STAT
testing market to be more than $6 billion. As a result, a limited number of
sites produce a significant amount of STAT testing revenue.
Quantech will introduce the FasTraQ with a cardiac panel to test for
heart attacks and a quantitative pregnancy test, and expects to provide a number
of the other tests performed in the ED. The combination of these tests provides
a significant market. Because of the FasTraQ's initial test menu, and additional
tests to be provided, Quantech believes it can achieve substantial market
penetration. The Company will pay attention to groupings of tests for particle
needs so that all tests necessary for a particular patient can be run on the
FasTraQ. 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 fifteen 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. The FasTraQ will provide emergency personnel with the ability to receive
quantitative results for a heart attack in less than 20 minutes.
An estimated 6 million patients are evaluated for chest pain annually
in the United States with approximately 3 million admitted to an Intensive Care
Unit for further evaluation. Of those admitted, only 30% subsequently "rule-in"
for acute AMI. Assuming an average cost of $3,000 per admission, this represents
a total expenditure of $6 billion annually on patients who do not have AMI. This
also does not take into account that 2-8% of patients with acute chest pain that
are released from the ED without treatment subsequently fulfill criteria for AMI
resulting in deaths and complications that represent greater than 20% of the
malpractice dollars awarded in the field of emergency medicine.
Not only are costs of admission and malpractice claims an important
issue, making a rapid definitive diagnosis of chest pain has become more
important. In the past when a patient was in the early stages of a heart
attack/AMI, there was little treatment available. In the last 10 years,
substantial progress has been made in thrombolytic therapy. If the therapy is
started within four to six hours of the onset of a heart attack, it can dissolve
the blood clot, clear arteries and save heart muscle tissue. Because these
therapies are expensive and present undesirable side effects (allergic
reactions, bleeding) if the patient has not suffered an AMI, rapid accurate
testing for an AMI is very important.
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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 FasTraQ will have a whole blood quantitative test for the pregnancy
marker hCG. Whole blood is an advantage in the ED as it is the preferred method
of sample collection as compared to urine and may be obtained from a patient
that is unconscious.
A rapid quantitative pregnancy test is also important for treatment of
ectopic pregnancies (gestation outside of uterus, often in fallopian tube).
Ectopic pregnancy is a leading cause of abdomen pain for women presenting to the
ED. Determination of an ectopic pregnancy is made through the quantitative
testing of hCG. The ability of the Quantech system to perform pregnancy and
other tests will show its advantage as a quantitative multi-test platform.
Patient Treatment Information
In order for a physician to diagnose a patient he or she requires
information. The FasTraQ will provide the most critical piece of information,
test results. Other information such as patient records, x-rays, etc. are also
important. Because the FasTraQ is expected to communicate with the hospital
computer information system, it will be able to deliver available non-diagnostic
information.
The ability to converge many pieces of information is the next step for
the practice of medicine. Technology is providing many avenues to make this
information convergence complete. Quantech is taking advantage of these
technologies by providing not just a diagnostic system, but a complete patient
treatment information platform.
Sales and Marketing
General
Quantech will form a strategic marketing group. Initially this
marketing group will begin creating awareness of Quantech and its system.
Currently Quantech is evaluating strategic distribution partners 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 monitor the market for future products. If
Quantech establishes a direct sales force the marketing group will initiate that
effort.
Quantech is currently in discussions with a number of potential
partners. Determination of whether to ultimately market through a strategic
partner will be based upon factors such as size of sales force, presence in
hospital, pricing and discounts. The benefits of a strategic partner of lowering
marketing and sales cost and penetration of the market will be weighed against
distribution discounts, commitment to the sale of the Quantech product and
Quantech's ability to cost effectively rollout its product.
If an appropriate distribution partner cannot be engaged, the marketing
group will focus on sales of the system to the highest volume emergency
departments. Because of the small number of emergency departments in the United
States, and the large amount of revenue that can be provided by each one, the
Company believes that a small focused sales effort will enable it to effectively
penetrate the ED market.
International
Shortly after the launch of the FasTraQ 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
distribution partner is not engaged. Quantech has completed its international
marketing research and has begun identifying potential distribution partners.
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Clients
The purchasing decision for diagnostic testing equipment is made by the
laboratory manager, although the end user of the FasTraQ will be ED personnel.
Under the Clinical Laboratory Improvement Act of 1988 ("CLIA") regulation, the
laboratory is responsible for training, instrument calibration and quality
assurance of testing systems. As such, the laboratory manager prefers a
STAT-testing instrument with the following features:
o Comparable performance to central lab instrument with concordant results
o One (maximum of two) instruments for entire ED STAT menu
o Full-time, bi-directional laboratory information system ("LIS")
interface with information automatically downloaded to LIS
o Automated user/patient/test/QC information input
o User ID and lockout capability by laboratory
o Minimum user training
o Costs comparable to central lab STAT tests - less than STAT lab
As the ultimate users ED personnel must also accept any system that
will be used for their STAT testing needs. Although they cannot buy a testing
system without laboratory approval, they are capable of preventing a system from
being purchased. A system that is acceptable to the ED must provide the
following features:
o Comparable performance to central lab instrument with concordant results
o Rapid turnaround time (less than 15 minutes)
o One (maximum of two) instruments for entire ED STAT menu
o Whole blood, closed collection tube sampling and transfer
o Automatic LIS download
o User friendly - minimum training and time at instrument
o High reliability
o Test menu so all patient testing completed
o Limitation of steps necessary to receive information
To achieve market penetration of the FasTraQ, 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. The FasTraQ is being designed to meet
the requirements of both groups by trying to incorporate all of the required
features into a single platform.
Although the laboratory and ED are important customers, the FasTraQ
will also appeal to hospital administration. Quantech believes that the
FasTraQ's ability to simplify and improve the ED treatment process can be shown
to facilitate the growth and profitability of the ED. Because more patients can
be seen with the same fixed cost resources, the FasTraQ should provide
significant incremental revenue to the hospital, while the variable cost of the
test will be comparable to current costs.
Competition
The majority of in-vitro medical diagnostic testing is conducted in
hospital and commercial reference laboratories. These facilities are
particularly suited for efficiently processing a large number of patient
samples. While most hospital laboratories must maintain the capability to
perform certain STAT tests on single patient sample, most of the samples handled
by central laboratories are processed so that one type of test, such as
pregnancy tests, are all run at one time or in batches. The competitors for this
market have addressed these laboratories' needs for high-test throughput, low
reagent cost and low labor cost by developing automated systems. STAT labs have
been developed to address the needs of STAT testing and generally use the same
instrumentation found in the central laboratory. These laboratory systems are
generally complex and expensive, incorporating designs appropriate to the
central laboratories they serve which employ skilled operators who are expected
to perform sample preparation, system calibration and basic instrument
maintenance.
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Both the health care providers and their suppliers are heavily
committed to the current central/STAT laboratory testing system model. The
laboratories are constrained by their organization structure, their substantial
capital investment in instrumentation and the task of processing a large number
of routine non-STAT tests. The suppliers' corporate infrastructures, marketing
and sales organizations, research and development activities and production
capabilities are committed to this market. As a result, hospitals may maintain
their established means of having testing performed.
There 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 initially on the central laboratory and increasingly on
point-of-care. The FasTraQ in general must compete with central and /or STAT
laboratory testing systems to gain market share and, as a result, Quantech will
meet with competition from these companies in both sales of the FasTraQ system
and the individual tests to be provided on the FasTraQ.
There is significant new product activity in certain areas of critical
care STAT testing. Point of care testing systems are addressing limited testing
areas such as coagulation, blood gas and basic chemistry including electrolytes.
Three such point of care systems, i-STAT Corp. (in conjunction with Abbott
Laboratories), Diametrics Medical (in conjunction with Agilent Technologies) and
Careside, Inc., which market point of care testing instruments have become
recognized point of care testing systems. Quantech does not believe current
products of i-STAT, Diametrics or Careside are capable, however, of providing
the breadth of tests and features required by the emergency department.
With respect to testing for cardiac markers to diagnose a heart attack,
most testing is done in the hospital central and STAT labs with test result
turnaround times of more than 45 minutes. Quantech is aware of only a limited
number of companies that provide rapid testing for heart attacks. Of such
companies, Spectral Diagnostics Limited, a Canadian company, markets a manual
method available for certain heart attack tests. Roche Diagnostics markets a
manual test for the heart attack marker troponin I. As configured Spectral's and
Roche's heart attack tests can provide only yes/no results instead of
quantitative results such as those provided by central laboratory systems.
Biosite Diagnostics has introduced an instrument and tests for heart attacks.
Quantech believes that Biosite's system is not able to provide the number of
tests and other STAT testing requirements expected to be available on the
FasTraQ. Limitation of the tests that competitors' system can perform is
believed by Quantech to provide it a competitive advantage because the FasTraQ
is expected to provide a large number of different tests.
All of the industry leaders, and many of the other companies
participating in the diagnostic testing market, have substantially greater
resources than those available to Quantech, including, but not limited to,
financial resources and skilled personnel. However, Quantech believes the
FasTraQ provides a product that is currently lacking for the critical care STAT
testing market. There can be no assurance that current or future companies will
not invent systems that will have broad testing capabilities and features like
those expected in the FasTraQ. If Quantech is able to launch its system, no
assurance exists that competitive pressures will not negatively affect its
pricing of both the FasTraQ instrument and the individual test cartridges.
The Technology
The FasTraQ is a biosensor which incorporates Quantech's proprietary
method of using surface plasmon resonance ("SPR") to detect certain chemical
conditions. A biosensor is an analytical device that combines a biological
sensing or detection element with a suitable transducer that converts
biochemical activity into a measurable form of energy. A biosensor's input is a
specific biological event. Its output is a measurable signal that corresponds to
the input.
Surface plasmon resonance is an optical-electrical phenomenon involving
the interaction of light with the electrons of a metal. The optical-electrical
basis of surface plasmon resonance 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 proprietary method of using SPR consists of a disposable cartridge
composed of a plastic base with a fine grating molded into its surface. The
grating is coated with a very thin layer of gold. Gold is used because it does
not oxidize like other metals which can affect chemistry binding. The gold is
subsequently coated with binding molecules. The binding molecules may be
antibodies, DNA probes, enzymes or other reagents chosen because they react
exclusively with a specific analyte. The analyte is the substance being
measured, such as a heart attack marker, and defines the test to be done.
<PAGE>
The coated metal surface interacts with light at a characteristic
resonant wavelength that depends upon the molecular composition at the metal's
surface. When the coated metal is exposed to a sample that contains the analyte
being tested, the analyte becomes bound to the metal through its specific
interaction with the binding molecules. As an analyte is bound, the composition
at the surface changes and consequently the resonant wavelength shifts. The
magnitude of the change in the resonant wavelength is proportional to the amount
of binding that takes place, which is proportional to the concentration of the
analyte in the sample.
Quantech's SPR based technology combines the strengths of biology and
physics into a single entity. Other applications of technology using SPR that
have been reported in the scientific literature or explored by Quantech include
immunoassays for cardiac markers, hormones, drugs, viruses and bacteria,
quantitation of anesthetic gases, and DNA binding assays. Quantech's SPR based
technology thus represents a simple, unified platform that is capable of
performing a wide range of diagnostic tests. Quantech's SPR based technology is
also a valuable research tool that allows Quantech to develop further tests for
its system.
Manufacturing
Quantech's system is comprised of a modular instrument, disposable
tests and communicators. The instrument consists of electronics and optics, most
of which are off the shelf parts, and does not require complicated assembly
procedures. The ReaLinQ communicators are based upon current handheld data
transfer devices. Production of the FasTraQ instrument and ReaLinQ communicators
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 and communicators, perform final quality
inspection and inventory the units 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.
Regulatory Environment
The Company has received clearance from the FDA to market in the
clinical environment its cardiac tests, myoglobin and CK-MB, and its pregnancy
test, hCG. Each test for the FasTraQ must obtain FDA approval. The Company must
also submit its instrument to the FDA for approval. The instrument will be
provided to the FDA for such approval after its commercial development is
completed.
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 1990
Safe Medical Device 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 design, 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.
<PAGE>
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
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. 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.
<PAGE>
Significant Agreements
Ares-Serono License
Quantech has acquired from Ares-Serono at a total cost of $3.4 million
a worldwide exclusive license to certain patents, proprietary information and
associated hardware (e.g. molds, test rigs, prototypes) related to Quantech's
SPR based technology. The Ares Serono license calls for an ongoing royalty of 6
percent on all products utilizing the SPR based technology which are sold by
Quantech. In addition, if Quantech sublicenses the technology, Quantech will pay
a royalty of 15 percent of all revenues received by Quantech under any
sublicense. To date, Quantech has paid $1,300,000 of cumulative royalty
payments. This amount satisfies the requirements of the license agreement until
royalty accruals based on revenues exceed such minimum payment amount. The
obligations of Quantech to pay royalties terminate when the total royalty
payments reach a gross amount of $18 million. After such total payments,
Quantech's rights in the licensed SPR based technology continues 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. Quantech believes that such limitation does not materially
impact the value of the Ares Serono license given Quantech's current plan of
commercialization. In addition, the Ares Serono license is subject to the
contingent right of PA Technology, a U.K. corporation, to request a grant of a
non-exclusive royalty-free license to exploit certain rights in the SPR
biosensor technology for applications outside the field of the commercial
interests of Quantech.
The PE Corp. Agreement
Quantech provided PE Corp. ("PE") with exclusive worldwide rights to
the SPR technology licensed from Ares-Serono for products other than those
regulated by the FDA or products sold outside the United States if they would be
regulated by the FDA if sold in the United States. PE also received two of
Quantech's SPR research breadboards. As part of PE's research and development
efforts, it applied certain of its technology to develop a large density,
high-throughput diagnostic breadboard using Quantech's SPR technology (the "PE
High Density Technology"). PE granted Quantech an exclusive worldwide license to
the PE High Density Technology for use in FDA medical diagnostics.
Through the optical and chemistry deposition advancements made by PE,
the system can read up to 10,000 test areas on a single 1 cm by 1 cm slide.
Quantech believes such two dimensional array capability, as now used in genomic
screening research, should allow Quantech to expand the FasTraQ upstream from
the critical care area to the central laboratory. Vertical expansion to
intensive care units, surgical suites, doctor offices and home testing should
also be possible. Future generations of Quantech's current FasTraQ system are
also expected to benefit from the PE technology by reducing the number of unique
test cartridges needed to perform the same number of tests which reduces
inventory requirements and manufacturing costs.
The royalty to be paid by Quantech will be 8% of gross sales of
Quantech products which include the Perkin-Elmer technology. If Quantech does
not proceed to commercialize the SPR based technology licensed from PE, all
rights revert back to PE. The PE technology will not be initially incorporated
into the FasTraQ system.
HTS BioSystems, Inc.
After Quantech and PE significantly advanced the state-of-the-art in
the SPR technology, they agreed that a separate company, which could be focused
on promoting the non-medical use of the SPR technology, would be most effective
in bringing products to market without affecting mainstream activities of either
company. Quantech and PE formed HTS BioSystems, Inc. ("HTS") which is 73% owned
by Quantech and 18% owned by PE. PE provided HTS: 1. a sub-license to all of its
rights to the Quantech SPR technology (the "Sublicense"); 2. a license for
non-medical use of the PE High Density Technology (the "License"); 3. one of
PE's Quantech SPR breadboard instruments; and 4. the PE breadboard for the PE
High Density Technology. Quantech is required to provide HTS with office space,
management support, technical assistance and any other needs required by HTS
until HTS is funded in a manner adequate to support its own operations.
<PAGE>
HTS will owe to PE: 1. a 4% royalty on products using only SPR other
than those for use in the food and beverages, chemical and industrial and
environmental testing markets; 2. a 4% royalty on products using only the PE
High Density Technology; and 3. a 6% royalty on products using both
technologies. No minimum royalties, or royalties on the first $3 million of
sales, are required to be paid. Quantech receives 15% of any royalties paid to
PE by HTS for products which incorporate Quantech's SPR technology. In the event
that HTS does not seek to commercialize the SPR or PE High Density Technology,
then the rights revert back to PE. PE also has a five-year right of first
negotiation in the event that HTS wishes to license or sell any of its
technology licensed from PE. Quantech is entitled to an 8% royalty on products
using its SPR technology sold to the food and beverages, chemical and industrial
and environmental testing markets.
The combination of technology and intellectual property from both PE
and Quantech provided to HTS is expected to support the accelerated development
of label-free, cost effective detection systems for the pharmaceutical and
genomics research markets. In addition to label free systems, HTS intends to
become the source of various other high-throughput systems and chemistries for
the detection of molecular and cellular changes and interactions for the fields
of functional genomics, proteomics and drug discovery.
Patents and Proprietary Rights
The Ares-Serono license covers a total of eight patents. Some of these
patents relate to the optics, mirrors, light refraction and calibration of the
SPR based instrument. The remaining patents are on the grating, optics
enhancement of the disposals, sensitivity of the chemistry on the disposable,
attachment of the assay reagents to the disposal grating and features of the
prototype instrument. The chart below provides a listing of the patents and
their status.
<TABLE>
<CAPTION>
PATENT NAME DESCRIPTION U.S. GRANT DATE COUNTRIES GRANTED
<S> <C> <C> <C>
Merlin I Patent for grating coupled SPR 06/05/90 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in FasTraQ System JP, LU, NL, NO, SE, WO
Merlin II Patent for grating coupled SPR 21/11/89 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
biosensor. Used in FasTraQ System JP, LU, NL, NO, SE, WO
Cellulose Nitrate Films Patent for grating coupled SPR 12/02/91 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
biosensor. Used in FasTraQ System GR, IL, IT, JP, LU, NL, SE
Calibration Notches Not used in FasTraQ 09/05/89 AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
GR, IL, IT, JP, LU, NL, SE
Enhanced SPR biosensor Not used in FasTraQ Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
assay GR, IL, IT, JP, LU, NL, SE
Sensor Using Photoresist Not used in FasTraQ 09/03/88 AT, AU, BE, CA, CH, DE, EP, FR, GB, IT,
LU, NL, NO, SE, WO
Waveguide Sensor Not used in FasTraQ Pending AT, AU, BE, CA, CH, DE, EP, ES, FR, GB,
IT, JP, LU, NL, NO, SE, WO
Restrahlen Effect Sensor Not used in FasTraQ N/A GB ONLY
</TABLE>
All developments by Quantech pursuant to the Ares-Serono license,
either proprietary or patentable in nature, are the property of Quantech. We
have made a number of advances that may be patentable and we are reviewing
registration of additional patents.
Employees
Quantech employs 32 people on a full and part-time basis and engages
consultants and independent contractors to provide services related to the
development of the FasTraQ system and marketing. Quantech expects to hire other
personnel as necessary for chemistry development, quality control, sales and
marketing, manufacturing and administration.
<PAGE>
CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-KSB and other written and
oral statements made from time to time by Quantech do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. Quantech's forward-looking statements generally relate to its
growth strategy, financial results, product approvals, development programs and
marketing efforts. One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be affected by inaccurate assumptions, including,
among others, those discussed herein. Consequently, no forward-looking statement
can be guaranteed and actual results may vary materially. Quantech notes these
factors as permitted by the Private Securities Litigation Reform Act of 1995.
Quantech wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect its actual
operations and cause such operations to differ materially from those anticipated
in forward-looking statements made in this document and elsewhere by or on
behalf of Quantech.
We expect to incur losses in the future and we need additional financing to
achieve sales necessary to reach a break-even cash flow.
We have incurred net losses in each year since inception. We expect to
increase significantly our research and development, sales and marketing,
manufacturing and general and administrative expenses in the future. We will
spend these amounts before we receive any incremental revenue from these
efforts. Further financing will be necessary to complete the Company's menu of
tests, establish sales and marketing and manufacturing capacity and achieve the
sales level required to achieve a break-even cash flow. Additional financing
through investment capital, funding by strategic partner(s) or licensing
revenues will be needed to operate until revenues can be generated in an amount
sufficient to support operations. Quantech does not have any commitments for any
such additional financing and does not anticipate receiving any additional
significant funding from commercial lenders until product sales commence. There
can be no assurance that any such additional financing can be obtained on
favorable terms, if at all. Any additional equity financing may result in
dilution to Quantech stockholders and could depress the market price of our
common stock.
"Going concern" statement in auditor's report may make it difficult to raise new
capital.
Quantech has not had any significant revenues to date. As of June 30,
1999 and 2000 we had accumulated deficits of $22,727,284 and $31,900,252,
respectively. The report of the independent auditors on Quantech's financial
statements for the year ended June 30, 2000, includes an explanatory paragraph
relating to the uncertainty of Quantech's ability to continue as a going
concern, which may make it more difficult for Quantech to raise additional
capital.
Development of the FasTraQ is not complete and may not be completed on the
current timetable and budget.
Components of the FasTraQ system are under various stages of
development. Until the FasTraQ development is completed and cleared through the
FDA, there can be no assurance that the FasTraQ system will be finished
according to our current development timetable and budget. Failure to timely
finish on budget will require Quantech to seek funding greater than currently
anticipated, thus intensifying the risks described in "We expect to incur losses
in the future and we need additional financing to achieve sales necessary to
obtain break-even cash flow" above. Additionally, the final price that we will
need to charge to cover the costs of the FasTraQ instrument and the PrePaQ test
cartridges cannot be determined until development is complete and FDA clearances
have been obtained. If Quantech cannot receive FDA approval and offer the
FasTraQ system with certain required features and tests at a cost acceptable to
potential customers, it will be impossible for Quantech to continue operations.
Failures in any of these areas will disappoint investors and could result in a
decline in our stock price thus causing investors to lose substantial money.
<PAGE>
We may not succeed in persuading potential buyers to replace existing equipment
and facilities with our system or in convincing the medical community and
third-party payers of the reliability, faster speed and lower cost of tests
conducted on the FasTraQ.
In general, the commercial success of the FasTraQ will depend upon its
acceptance by the medical community and third-party payers as a reliable and
economical product. The approval of the purchase of diagnostic test systems by a
hospital is generally controlled by its central laboratory. We expect that there
will be resistance by some central laboratories to a new system until it is
proven to have a level of accuracy and precision comparable to current hospital
tests. Finally, the system must provide to emergency department doctors results
of STAT tests quicker than current hospital tests.
We have not established a distribution system and may not have the resources to
effectively market our product.
We have had no experience in marketing our system. We intend to market
our system in the United States through either a direct sales force or through a
strategic partner with an established distribution system, and in foreign
markets through a distributor(s) and/or strategic partner(s), but no assurance
can be given that such arrangements can be made. Establishing sales and
marketing capability sufficient to support the level of sales necessary for us
to attain profitability will require substantial efforts and significant
management and financial resources. There can be no assurance that we will be
able to recruit and retain direct sales and marketing personnel, engage
distributors or have our marketing efforts be successful.
Sales through distributors could be less profitable than direct sales.
Sales of our products through multiple channels could also confuse customers and
cause the sale of our products to decline. We will not control our distribution
partners. Our partners could sell competing products and may devote insufficient
sales efforts to our products. We may not be able to have our distributors
purchase minimum quantities. As a result, even if we are dissatisfied with the
performance of our partners, we may be unable to terminate our agreements with
these partners or enter into alternative arrangements.
We have very limited manufacturing and production experience and have not yet
contracted with third party manufacturers.
To be successful, we must timely manufacture sufficient quantities of
the FasTraQ instrument, PrePaQ test cartridges and ReaLinQ communicators in
compliance with regulatory requirements, such as the FDA's Good Manufacturing
Practices, while maintaining product quality and acceptable manufacturing costs.
The instrument, communicators and many components of the test cartridges will be
manufactured by outside vendors. We have not entered into agreements with any of
these vendors. There can be no assurance that we can engage such vendors.
Further, if engaged, the limited control we have over any third party
manufacturers as to timeliness of production, delivery and other factors could
affect our ability to supply products on a timely basis.
We ultimately intend to chemically coat and assemble test cartridges
ourselves. We have never operated a manufacturing/assembly business. We have
only one manufacturing facility, which must be registered with the FDA. If we
fail to produce enough products at our manufacturing facility or at a
third-party manufacturing facility we may be unable to deliver products to our
customers on a timely basis. Our failure to deliver products on a timely basis
could lead to customer dissatisfaction and damage our reputation.
Our ability to market and sell our products and generate revenue depends upon
receipt of domestic and foreign regulatory approval for our products and
manufacturing operations.
The FasTraQ instrument and PrePaQ test cartridges are human diagnostic
medical devices subject to regulation by the United States FDA and agencies of
foreign countries. The FDA regulates the system as a medical device that
requires clearance before sales can be made in the United States. We believe
that such pre-market clearance can be obtained for our instrument and
substantially all of our test cartridges through submissions of a 510(k)
pre-market notification demonstrating the particular product's substantial
equivalence to another device legally marketed under a similar clearance. There
can be no assurance that the FDA or other government regulators will approve the
instrument and test cartridges in a timely manner or at all. Delay in approvals,
or failure to achieve approvals, would increase the capital necessary to
maintain operations and make it more difficult to raise required funds.
<PAGE>
The FDA also requires us to adhere to current Good Manufacturing
Practices regulations, which include production design controls, testing,
quality control, storage and documentation procedures. The FDA may at any time
inspect our facilities to determine whether adequate compliance has been
achieved. Compliance with current Good Manufacturing Practices regulations for
medical devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products. Sales of our products outside the United
States are subject to foreign regulatory requirements that vary from country to
country. The time required to obtain approvals from foreign countries may be
longer or shorter than that required for FDA approval, and requirements for
foreign licensing may differ from FDA requirements. The Federal, state and
foreign laws and regulations regarding the manufacture and sale of our products
are subject to future changes, as are administrative interpretations of
regulatory agencies. If we fail to comply with applicable federal, state or
foreign laws or regulations, we could be subject to enforcement actions,
including product seizures, recalls, withdrawal of clearances or approvals and
civil and criminal penalties.
We may not succeed in marketing our product against multiple levels of
competition, including from manufacturers of central and STAT laboratory testing
equipment and point-of-care testing products.
The medical testing market is highly competitive. We expect that
manufacturers of central and STAT laboratory testing equipment will compete to
maintain their market shares. Also, point-of-care testing products exist and
additional products are likely to be introduced to compete with certain tests to
be performed on the FasTraQ. All of the industry leaders and many of the other
companies participating in this market have substantially greater resources than
the resources available to us, including, but not limited to, financial
resources and skilled personnel. Current central lab systems are also well
accepted and entrenched so that sale of our system may require a significant
sales effort to gain market share. If the features and costs of our system are
not compelling it will not successfully compete in its market.
The FasTraQ must comply with regulations governing the qualifications of persons
operating it and high qualification requirements could adversely affect sales.
Use of the FasTraQ will be subject to the Clinical Laboratory
Improvement Act of 1988. This regulation governs the qualifications of persons
supervising a laboratory test and the persons performing the laboratory test. We
have based our marketing plan on the belief that our system will be classified
as a test of moderate complexity. However, we have not sought the necessary
regulatory approval of this classification. In practical terms, performing a
test of moderate complexity means that the individual supervising the test must
be well educated and well trained, but the individual operating the system
requires no formal laboratory education and only task-specific training. If our
system were not classified as a test of moderate complexity, we would not have a
user-friendly operation advantage, which could have an adverse effect on sales.
The FasTraQ will initially be Quantech's only product making us vulnerable to
technological obsolescence.
The FasTraQ will be Quantech's only initial product and is based upon a
single set of core technologies. We operate in a market characterized by rapid
and significant technological change. While we are not aware of any developments
in the medical industry that would render our current or planned product less
competitive or obsolete, there can be no assurance that future technological
changes or the development of new or competitive products by others will not do
so. To remain competitive, we will need continually to make substantial
expenditures for development of both equipment and additional tests.
<PAGE>
Failure to maintain patent protection of our system would put Quantech at
substantial risk.
No assurance can be given that we will be able to protect our
proprietary technology. We are not aware of any issued patents that would
prohibit the use of any technology we currently have under development. However,
patents may exist or be issued in the future to other companies covering
elements of our system. The existence or issuance of such patents may require us
to make costly significant changes in the design of the FasTraQ or operational
plans. We have not conducted an independent patent search or evaluation with
respect to our technology. Ares-Serono, the company licensing certain technology
to us made no warranties as to the enforceability of any of the patents or the
commercial potential of the technology. Although Ares-Serono may defend the
patents they have licensed to us, we will be responsible for the defense of any
patents Ares-Serono elects not to defend and all of those issued to us. The cost
of patent litigation can be very substantial.
We are dependent upon our few employees and the loss of our CEO, CFO/COO or
Executive VP of R&D could leave Quantech without sufficient management expertise
to continue operations successfully.
We have a small number of employees. Although we believe we maintain a
core group sufficient for us to effectively conduct our operations, the loss of
any of our personnel could, to varying degrees, have an adverse effect on our
operations and system development. The loss of Robert Case, our CEO, Greg
Freitag, our COO and CFO or Thomas Witty, our Executive V.P. of R&D, would have
a material adverse effect on Quantech.
If we do not attract and retain skilled personnel, we will not be able to expand
our business.
Our products are based on chemical, electrical and optical
technologies. Accordingly, we require skilled personnel to develop, manufacture,
sell and support our products. Our future success will depend largely on our
ability to continue to hire, train, retain and motivate additional skilled
personnel. We continue to experience difficulty in recruiting and retaining
skilled personnel because the pool of experienced persons is small and we
compete for personnel with other companies, many of which have greater resources
than we do. Consequently, if we are not able to attract and retain skilled
personnel, we will not be able to meet our development and product launch
timetable or budgets.
Failure of users of the FasTraQ to obtain adequate reimbursement from
third-party payors could limit market acceptance of the FasTraQ, which could
prevent us from achieving market acceptance and profitability.
The FasTraQ will be marketed to hospitals who bill various third-party
payors, such as managed care organizations, government health programs, private
health insurance plans and other similar programs, for the health care products
and services provided to their patients. Failure by hospitals and other users of
the FasTraQ to obtain adequate reimbursement from third-party payors, or any
reduction in the reimbursement by third-party payors to hospitals and other
users as a result of using the FasTraQ could limit market acceptance of the
FasTraQ, which could prevent us from achieving profitability.
We could be exposed to product liability claims once the FasTraQ is launched,
which could adversely affect our cash position and our ability to obtain and
maintain insurance coverage at satisfactory rates.
The manufacture and sale of our products will expose us to product
liability claims and product recalls, including those which may arise from
misuse or malfunction of, or design flaws in, our products. Product liability
claims or product recalls, regardless of their ultimate outcome, could require
us to spend significant time and money in litigation or to pay significant
damages. We currently do not maintain insurance; however, prior to marketing our
product we intend to obtain product liability insurance coverage in an amount
which we deem, appropriate. There can be no assurance that such insurance will
be available on commercially reasonable terms or that if obtained it will be
adequate to cover the costs of any product liability claims made against us.
<PAGE>
Shares eligible for future sale could depress the market price of Quantech's
Common Stock and make it more difficult for Quantech to raise the funds it needs
to survive.
Nearly all shares of Quantech's outstanding common stock are eligible
to be sold in the public market along with almost all shares that may be
obtained upon exercise of outstanding options, warrants or conversion of Series
A, B, C and D Convertible Preferred Stock. The sale of a large number of shares
could adversely affect the market price and liquidity of Quantech's securities.
Such potential adverse effects on price and liquidity, or the concern over these
issues, could make it more difficult for Quantech to raise required future
funds.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Quantech leases offices (comprised of approximately 20,900 sq. ft.) at
815 Northwest Blvd., Eagan, Minnesota at a base monthly rent of approximately
$16,000 pursuant to a lease arrangement which expires April 2007. Thereafter
Quantech has an option to extend the lease for an additional five years.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the local over-the-counter and
the OTC Bulletin Board under the symbol QQQQ. Although trading in Quantech's
common stock does occur on a consistent basis, the volume of shares traded has
been sporadic. There can be no assurance that an established trading market will
develop, the current market will be maintained or a liquid market for Quantech's
common stock will be available in the future. Investors should not rely on
historical stock price performance as an indication of future price performance.
The following table summarizes the quarterly high and low sale prices
of Quantech's common stock for the last two fiscal years. The closing price of
Quantech's common stock on September 18, 2000 was $3.44 per share.
High Low
------- -------
Fiscal 1999
First Quarter $ 3.88 $ 0.94
Second Quarter $ 2.56 $ 0.53
Third Quarter $ 2.00 $ 1.38
Fourth Quarter $ 1.81 $ 1.38
Fiscal 2000
First Quarter $ 1.69 $ 1.06
Second Quarter $ 1.50 $ 0.88
Third Quarter $ 5.00 $ 1.09
Fourth Quarter $ 4.13 $ 2.50
As of September 18, 2000, the Company had approximately 500 holders of
record of its common stock, excluding stockholders whose stock is held either in
nominee name or street name brokerage accounts. Based on information obtained
from Quantech's transfer agent, as of such date, there were approximately 3,800
stockholders of Quantech's common stock whose stock is held in either nominee
name or street name brokerage accounts.
DIVIDEND POLICY
Quantech has never paid a cash dividend on its common stock or Series
A, B, C or D Convertible Preferred Stock. Payment of dividends is at the
discretion of the board of directors. The board of directors plans to retain
earnings, if any, for operations and does not intend to pay dividends in the
near future.
<PAGE>
UNREGISTERED SALES OF STOCK
During April through June 2000, Quantech issued 338,568 shares of
common stock pursuant to conversion of preferred stock. The sale of such shares
was deemed to be exempt from registration under Section 3(a)(9) of the 1933 Act.
The purchasers acquired these securities for their own accounts and not with a
view to any distribution thereof to the public.
During May and June 2000, Quantech issued 47,029 shares of common stock
pursuant to the exercise of warrants by accredited investors. The sale of such
shares was deemed to be exempt from registration under Section 4(2) of the 1933
Act. The purchasers acquired these securities for their own accounts and not
with a view to any distribution thereof to the public.
During August and September 2000, Quantech issued 1,996,000 shares of
Series D preferred stock and warrants to purchase 499,000 shares of common stock
at $3.50 per share. Each share of Series D preferred stock is convertible into
one share of common stock. The sale of such shares was deemed to be exempt from
registration under Section 4(2) of the 1933 Act and rule 506 promulgated
thereunder. Quantech paid commissions and accountable expenses in the aggregate
amount of $467,880 to registered investment banks for acting as selling agents,
and issued the investment banks warrants to purchase up to 183,600 shares of
common stock as additional compensation. The purchasers acquired these
securities for their own accounts and not with a view to any distribution
thereof to the public.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
History
Quantech was formed under the laws of Minnesota for the purpose of
effecting the change of domicile of Spectrum Diagnostics S.p.A ("SDS") from
Italy to the state of Minnesota through the merger with SDS on April 14, 1993.
Quantech had no operations prior to the merger and is continuing the business of
SDS to commercialize Surface Plasmon Resonance ("SPR") technology licensed from
Ares-Serono. SPR is the core technology of Quantech's proposed FasTraQ(TM)
system. The FasTraQ system will first be marketed to hospital emergency
departments ("ED") and is expected to provide a single, simple and economical
system providing the rapid, quantitative STAT test menu EDs require. The
Quantech system configuration will consist of a bench top modular instrument, a
series of disposable tests with one or up to three tests per disposable and
wireless handheld communication devices to quickly provide test information.
Quantech's consolidated financial statements include the results of HTS
BioSystems ("HTS") of which Quantech currently has 73% ownership. HTS was formed
around a combination of SPR technologies and intellectual property from both
Quantech and PE Biosystems (NYSE:PEB). This technology supports the accelerated
development of label-free, cost effective detection systems, initially for the
scientific research market. HTS intends to become the definitive source of
analytical systems and chemistry for the high-speed detection of molecular and
cellular interactions in the fields of functional genomics, proteomics and drug
discovery. HTS expects its first product, the FLEX CHIP Kinetic Analysis System,
to be available next year.
Quantech is a development stage company, which has suffered losses from
operations, and will require additional financing to complete development,
obtain FDA approval and commercialize its product. Our product development must
be completed, FDA approval obtained, the product introduced to the market and
ultimately Quantech will need to successfully attain profitable operations.
These factors raise substantial doubt about our ability to continue as a going
concern.
<PAGE>
Results of Operations
Quantech has incurred a net loss of $28,369,717 from September 30, 1991
(date of inception) through June 30, 2000 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.
Quantech reported its first revenue during the year ended June 30, 2000
of $150,000 from the sale of an evaluation system. During fiscal year 2001 we
expect additional revenue from evaluation systems, but do not expect significant
revenue from the sale of commercial systems.
For the year ended June 30, 2000 Quantech had interest income of
$27,562 compared to $1,886 for the 1999 fiscal year as a result of more cash on
hand from the proceeds of offerings for Quantech and its HTS BioSystems
subsidiary.
General and administration expenses increased to $1,876,930 for the
year ended June 30, 2000 from $1,470,359 for the year ended June 30, 1999. The
increase in general and administration expenses was primarily due to start up
costs for the HTS BioSystems subsidiary and expenses related to Quantech
expansion. We expect general and administrative expenses to increase in the
future as Quantech and HTS BioSystems complete development of their systems,
prepare for market launch and begin to manufacture and distribute their
products.
Marketing expenses increased to $1,059,063 for the year ended June 30,
2000 from $123,092 for the year ended June 30, 1999 due to higher market
research expenses including fees paid to consultants and research firms,
non-cash option expenses for advisors, and costs to attend industry trade shows.
We expect marketing expenses to increase in the future as Quantech and HTS
BioSystems prepare for market launch and begin to distribute their products.
Research and development costs increased to $3,269,590 during the year
ended June 30, 2000 from $1,815,727 for the year ended June 30, 1999. The
increase was primarily due to increased internal and outside development work at
Quantech, and the initial development work at HTS BioSystems. We expect R&D
spending to significantly increase as Quantech and HTS BioSystems complete the
commercial development of their systems and begin to establish higher volume
manufacturing capabilities.
Minimum royalty expense decreased to $75,000 in fiscal 2000 compared to
$150,000 in fiscal 1999 due to the final minimum royalty payment made in January
2000. In the future we expect to incur additional royalty expense when royalties
based on revenues exceed minimum payments.
Interest expense decreased to $42,509 during the year ended June 30,
2000 from $732,524 during the year ended June 30, 1999 as a result of reduced
debt. Interest expense is expected to remain lower in fiscal year 2001 as
Quantech does not anticipate any debt other than borrowing up to $1,000,000 from
its bank credit facility and $125,000 of capital lease obligations.
During fiscal year 2000, Quantech recorded an expense credit of
$122,677 for the minority interest in the net loss of its HTS BioSystems
subsidiary. We expect to record a larger minority interest credit in fiscal year
2001 due to increased spending at HTS.
For the year ended June 30, 2000, Quantech had a loss of $6,022,853 as
compared to $4,289,816 for the same period ended June 30, 1999. This increased
loss was primarily a result of higher general and administrative, marketing and
research and development expenses in fiscal year 2000, partially offset by
higher revenue, lower interest expense and the expense credit for the minority
interest in the subsidiary.
Quantech's earnings per share figures reflect large non-cash charges
resulting from the timing of convertible securities sales. A rapid increase in
the price of Quantech's common stock occurred after Quantech had negotiated
pricing terms for its Series B and Series C preferred stock, resulting in large
beneficial conversion feature charges for the difference between the conversion
price of the preferred stock and the market price of the common stock. These
charges were due to the timing of equity sales and had no effect on cash flow.
<PAGE>
Liquidity and Capital Resources
From inception to June 30, 2000, Quantech has raised approximately
$27,000,000 through a combination of public stock sales and private sales of
stock and debt obligations. In June 2000 Quantech began offering for sale a
minimum of $2,500,000 and a maximum of $5,000,000 of its Series D preferred
stock to accredited investors. The units are priced at $10.00 per unit
consisting of 4 shares of Series D preferred stock and a warrant to purchase one
share of common stock. Each share is convertible into one share of common stock,
and the warrant has an exercise price of $3.50 per share. During August and
September 2000, Quantech raised net proceeds of $4,523,000 from the sale of
499,000 units.
Quantech anticipates that its cash on hand, bank credit facility, and
completion of Quantech's Series D convertible preferred stock offering for up to
an additional $2.5 million will allow it to maintain operations through February
2001. Additional financing of approximately $15 million will be needed to
develop and submit to the FDA additional tests, complete clinical evaluation of
the system, establish manufacturing capabilities and prepare for sales of the
system. Quantech is currently reviewing multiple avenues of future funding
including private sale of equity or debt with equity features or arrangements
with strategic partners. Quantech does not have any commitments for any such
financing and there can be no assurance that Quantech will obtain additional
capital when needed or that additional capital will not have a dilutive effect
on current stockholders. See "Cautionary Statements -- We expect to incur losses
in the future and we need additional financing to achieve sales necessary to
reach a break-even cash flow." Quantech has a limited lending arrangement with
its bank to a maximum of $1,000,000 which expires at the end of calendar 2000.
Quantech does not anticipate renewing this credit line or receiving any
additional significant funding from commercial lenders. In addition, HTS
BioSystems anticipates raising up to $15 million for its operations either
through strategic partners or the sale of securities. An equity sale would
result in a dilution of Quantech ownership of HTS.
Quantech incurred capital expenditures of approximately $874,000 in
fiscal 2000 primarily for automated production equipment and office systems and
equipment. We anticipate significantly higher capital expenditures in the near
future for laboratory and production equipment and office expansion as Quantech
and HTS BioSystems near product introduction. The timing and amount of such
expenditures will be governed by our development and market introduction
schedules, which are subject to change due to a number of factors including
development delays, FDA approval and availability of future financing.
As of September 18, 2000 Quantech had 6,218,524 shares of Common Stock
outstanding. It also had options and warrants outstanding to purchase an
additional 6,889,218 shares, and Series A, B, C and D Preferred Stock
convertible into 11,146,263 shares of Common Stock.
New Accounting Pronouncements
Revenue recognition: In December 1999, the staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue
Recognition in Financial Statements". SAB No. 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
related to revenue recognition. The Company will adopt SAB No. 101 in the first
quarter of the fiscal year ending June 30, 2001. Management believes the
adoption of SAB No. 101 will not have a significant affect on its financial
statements.
Derivatives: The FASB has issued SFAS No. 133, Accounting for Derivative
instruments and Hedging Activities, which the Company will be required to adopt
in the fiscal year ending June 30, 2001. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires than an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS No. 133 is not expected to have a significant effect on the Company's
financial statements.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as
follows:
Page
-----
Financial Statements for Fiscal Years 2000 and 1999
Independent Auditors Report................................................24
Statements of Operations For the Period from Inception (September 30, 1991)
through June 30, 2000 and for the Years Ended June 30, 2000 and 1999.......25
Balance Sheets as of June 30, 2000 and 1999................................26-27
Statements of Stockholders' Equity (Deficit) For the Period from Inception
(September 30, 1991) through June 30, 2000................................28-35
Statement of Cash Flows For the Period from Inception (September 30, 1991)
through June 30, 2000 and for the Years Ended June 30, 2000 and 1999......36-38
Notes to Financial Statements..............................................39-51
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and the Board of Directors
Quantech Ltd. and Subsidiary
Eagan, Minnesota
We have audited the accompanying consolidated balance sheets of Quantech Ltd.
and Subsidiary (A Development Stage Company) as of June 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended and the period from September
30, 1991 (date of inception) to June 30, 2000. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quantech Ltd. and
Subsidiary (A Development Stage Company) as of June 30, 2000 and 1999, and the
results of its operations and its cash flows for the years then ended and for
the period from September 30, 1991 (date of inception) to June 30, 2000, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company is a development stage company
which has suffered significant losses from operations, requires significant
additional financing, and ultimately needs to continue development of its
product, obtain FDA approval, generate significant revenues, and successfully
attain profitable operations to realize the value of its license agreement and
to 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 described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Minneapolis, Minnesota
August 18, 2000, except for the last paragraph of Note 6
as to which the date is September 20, 2000
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 2000
<TABLE>
<CAPTION>
ASSETS (Note 3) 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,328,797 $ 436,223
8% demand note receivable from officer 141,000 --
Prepaid expenses:
Product development expense -- 57,500
Other 44,261 36,037
---------- ----------
Total current assets 1,514,058 529,760
---------- ----------
Property and Equipment
Equipment 1,193,898 427,508
Leasehold improvements 28,634 15,000
---------- ----------
1,222,532 442,508
Less accumulated depreciation 278,088 276,295
---------- ----------
944,444 166,213
---------- ----------
Other Assets
License agreement, at cost, less accumulated
amortization (Note 4) 2,082,553 2,409,180
Patents 25,816 13,045
Deposits 79,457 --
---------- ----------
2,187,826 2,422,225
---------- ----------
$4,646,328 $3,118,198
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Short-term debt (Note 3) $ 750,000 $ 746,000
Current portion of long-term debt (Note 5) 57,770 --
Accounts payable 614,592 111,857
Accrued expenses:
Minimum royalty commitment (Note 4) -- 75,000
Payroll and vacation 138,763 120,300
Interest 3,750 3,100
------------ ------------
Total current liabilities 1,564,875 1,056,257
------------ ------------
Long-term debt, net of current portion (Note 5) 46,009 --
Redeemable Series A Preferred Stock, authorized 2,129,593 shares;
issued and outstanding 1,354,926 and 1,697,706 shares at
June 30, 2000 and 1999, respectively reedeemable after
November 5, 2003, at $4,852,640 (Note 6) 4,495,245 5,113,143
Minority Interest in Subsidiary 339,685 --
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity (Deficit) (Notes 2, 3, 6, and 7)
Common stock, no par value; authorized 51,538,740 shares;
issued and outstanding 6,204,416 and 2,741,534 shares at
June 30, 1998 and 1999, respectively 19,959,765 16,498,837
Series B Preferred Stock, no par value; authorized 2,744,667
shares; issued and outstanding 2,744,667 and 623,334 shares at
June 30, 2000 and 1999, respectively 1,874,073 891,500
Series C Preferred Stock, no par value; authorized 1,000,000
shares; issued and outstanding 1,000,000 shares at June 30, 2000 973,100 --
Stock subscription receivable for Series B and C Preferred Stock (20,000) (60,000)
Additional paid-in capital 7,313,828 2,342,745
Deficit accumulated during the development stage (31,900,252) (22,724,284)
------------ ------------
(1,799,486) (3,051,202)
------------ ------------
$ 4,646,328 3,118,198
============ ============
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2000 1999 June 30, 2000
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 150,000 $ -- $ 150,000
------------ ------------ ------------
Expenses:
General and administrative 1,876,930 1,470,359 12,206,083
Marketing 1,059,063 123,092 1,485,145
Research and development 3,269,590 1,815,727 11,339,383
Minimum royalty expense (Note 4) 75,000 150,000 1,300,000
Minority interest (122,677) -- (122,677)
Other -- -- 488,978
------------ ------------ ------------
6,157,906 3,559,178 26,696,912
------------ ------------ ------------
Loss from operations (6,007,906) (3,559,178) (26,546,912)
Other:
Interest income 27,562 1,886 212,664
Interest expense (42,509) (732,524) (1,992,874)
------------ ------------ ------------
Loss before income taxes (6,022,853) (4,289,816) (28,327,122)
------------ ------------ ------------
Income taxes (Note 8) -- -- 42,595
------------ ------------ ------------
Net loss $ (6,022,853) $ (4,289,816) $(28,369,717)
============ ============ ============
Net loss attributable to common stockholders:
Net loss $ (6,022,853) $ (4,289,816)
Preferred stock accretion (410,445) (377,420)
Beneficial conversion feature of preferred stock (2,742,670) --
------------ ------------
Net loss attributable to common
stockholders $ (9,175,968) $ (4,667,236)
Loss per basic and diluted common share $ (2.12) $ (1.75)
Weighted-average common shares outstanding 4,335,846 2,673,812
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at inception $-- $-- $-- $-- $ -- $ --
Net loss -- -- -- -- -- --
Common stock transactions:
Common stock issued, October 1991 -- -- -- -- 160,000 3,154,574
Common stock issued, November 1991 -- -- -- -- 30,000 611,746
Common stock issuance costs -- -- -- -- -- --
Cumulative translation adjustment -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1991 -- -- -- -- 190,000 3,766,320
Net loss -- -- -- -- -- --
Common stock transactions:
Common stock issued, September 1992 -- -- -- -- 35,000 699,033
Common stock issuance costs -- -- -- -- -- --
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
Net loss -- -- -- -- -- --
Common stock transactions:
Common stock issued, January 1993 -- -- -- -- 8,000 1,600
Common stock issued, April 1993 -- -- -- -- 1,500 300
Change in common stock par value resulting
from merger -- -- -- -- -- (4,420,353)
Repayments -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, June 30, 1993 -- -- -- -- 234,500 46,900
Net loss -- -- -- -- -- --
12,000 shares of common stock to be issued -- -- -- -- -- --
Repayments -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, June 30, 1994 -- -- -- -- 234,500 46,900
Net loss -- -- -- -- -- --
Common stock issued, June 1995 -- -- -- -- 107,500 21,500
Warrants issued for services -- -- -- -- -- --
------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 1,788,254 -- -- -- -- --
Common stock issuance costs (889,849) -- -- -- -- --
Cumulative translation adjustment -- -- -- -- -- 387,754
---------------------------------------------------------------------------------
Balance, December 31, 1991 898,405 -- -- -- (594,620) 387,754
Net loss -- -- -- -- (2,880,988) --
Common stock transactions:
Common stock issued, September 1992 875,967 -- (53,689) -- -- --
Common stock issuance costs (312,755) -- -- -- -- --
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 adjustmen -- -- -- -- -- (178,655)
---------------------------------------------------------------------------------
Balance, December 31, 1992 1,461,617 120,000 (53,689) (27,433) (3,475,608) --
Net loss -- -- -- -- (996,089) --
Common stock transactions:
Common stock issued, January 1993 118,400 (120,000) -- -- -- --
Common stock issued, April 1993 11,700 -- -- -- -- --
Change in common stock par value resulting
from merger 4,420,353 -- -- -- -- --
Repayments -- -- -- 5,137 -- --
---------------------------------------------------------------------------------
Balance, June 30, 1993 6,012,070 -- (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 6,012,070 30,000 -- -- (6,015,585) --
Net loss -- -- -- -- (2,070,292) --
Common stock issued, June 1995 276,068 (30,000) (20,000) -- -- --
Warrants issued for services 40,200 -- -- -- -- --
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -- -- -- -- 342,000 68,400
Net loss -- -- -- -- -- --
Common stock issued, net of issuance costs of
$848,877:
July 1995 -- -- -- -- 308,000 61,600
August 1995 -- -- -- -- 35,880 7,176
September 1995 -- -- -- -- 690,364 138,073
November 1995 -- -- -- -- 94,892 18,978
December 1995 -- -- -- -- 560,857 112,172
May 1996 -- -- -- -- 313,750 62,750
June 1996 -- -- -- -- 252 51
Payment received on subscription receivable -- -- -- -- (960) (192)
Compensation expense recorded on stock options -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1996 -- -- -- -- 2,345,035 469,008
Net loss -- -- -- -- -- --
Stock offering costs -- -- -- -- -- --
Common stock issued upon exercise of options
and warrants:
September 1996 -- -- -- -- 500 100
October 1996 -- -- -- -- 8,500 1,700
November 1996 -- -- -- -- 750 150
December 1996 -- -- -- -- 13,500 2,700
January 1997 -- -- -- -- 1,000 200
February 1997 -- -- -- -- 7,500 1,500
March 1997 -- -- -- -- 7,000 1,400
Payments received on subscription receivable -- -- -- -- -- --
Compensation expense recorded on stock options -- -- -- -- -- --
Common stock issued, June 1997 -- -- -- -- 18,250 3,650
Warrants issued with notes payable -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1997 -- -- -- -- 2,402,035 480,408
Net loss -- -- -- -- -- --
Conversion of common stock from par value to
no par value -- -- -- -- -- 15,392,446
</TABLE>
(Continued)
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 6,328,338 -- (20,000) -- (8,085,877) --
Net loss -- -- -- -- (2,396,963) --
Common stock issued, net of issuance costs of
$848,877:
July 1995 1,304,450 -- -- -- -- --
August 1995 161,460 -- -- -- -- --
September 1995 2,370,389 -- -- -- -- --
November 1995 425,482 -- -- -- -- --
December 1995 1,292,473 -- -- -- -- --
May 1996 3,300,422 -- -- -- -- --
June 1996 3,650 -- -- -- -- --
Payment received on subscription receivable (14,808) -- 20,000 -- -- --
Compensation expense recorded on stock options 125,000 -- -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1996 15,296,856 -- -- -- (10,482,840) --
Net loss -- -- -- -- (3,925,460) --
Stock offering costs (12,310) -- -- -- -- --
Common stock issued upon exercise of options
and warrants:
September 1996 2,400 -- -- -- -- --
October 1996 40,800 -- -- -- -- --
November 1996 3,600 -- -- -- -- --
December 1996 64,800 -- (57,500) -- -- --
January 1997 4,800 -- -- -- -- --
February 1997 17,250 -- -- -- -- --
March 1997 33,600 -- -- -- -- --
Payments received on subscription receivable -- -- 57,500 -- -- --
Compensation expense recorded on stock options 48,000 -- -- -- -- --
Common stock issued, June 1997 105,850 -- -- -- -- --
Warrants issued with notes payable 371 -- -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1997 15,606,017 -- -- -- (14,408,300) --
Net loss -- -- -- -- (3,648,748) --
Conversion of common stock from par value to
no par value (15,392,446) -- -- -- -- --
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 (Continued)
Common stock issued for license agreement:
September 1997 -- -- -- -- 150,000 390,000
Common stock issued for equipment and services
received:
March 1998 -- -- -- -- 13,078 45,584
Warrants issued for services received:
March 1998 -- -- -- -- -- --
April 1998 -- -- -- -- -- --
Warrants issued with notes payable -- -- -- -- -- --
Amount attributable to value of debt conversion
feature -- -- -- -- -- --
Warrants issued for license agreement:
December 1997 -- -- -- -- -- --
Compensation expense recorded on stock options -- -- -- -- -- --
Adjustment of fractional shares due to 1-for-20
reverse stock split -- -- -- -- (73) --
---------------------------------------------------------------------------------
Balance, June 30, 1998 -- -- -- -- 2,565,040 16,308,438
Net loss -- -- -- -- -- --
Warrants issued with notes payable -- -- -- -- -- --
Common stock issued upon conversion of notes
payable:
July 1998 -- -- -- -- 2,000 7,060
September 1998 -- -- -- -- 3,400 12,002
October 1998 -- -- -- -- 25,000 18,750
Common stock issued upon exercise of warrant:
August 1998 -- -- -- -- 2,045 5,114
Common stock issued for equipment and services
received:
July 1998 -- -- -- -- 5,714 20,000
August 1998 -- -- -- -- 9,196 27,589
September 1998 -- -- -- -- 12,557 11,318
December 1998 -- -- -- -- 6,078 5,688
</TABLE>
(Continued)
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 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 -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1998 1,476,669 -- -- -- (18,057,048) --
Net loss -- -- -- -- (4,289,816) --
Warrants issued with notes payable 76 -- -- -- -- --
Common stock issued upon conversion of notes
payable:
July 1998 -- -- -- -- -- --
September 1998 -- -- -- -- -- --
October 1998 -- -- -- -- -- --
Common stock issued upon exercise of warrant:
August 1998 -- -- -- -- -- --
Common stock issued for equipment and services
received:
July 1998 -- -- -- -- -- --
August 1998 -- -- -- -- -- --
September 1998 -- -- -- -- -- --
December 1998 -- -- -- -- -- --
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 (Continued)
Stock options issued for services:
October 1998 -- -- -- -- -- --
Common stock issued upon conversion of preferred
stock:
November 1998 -- -- -- -- 74,052 55,539
January 1999 -- -- -- -- 15,952 11,964
March 1999 -- -- -- -- 500 375
April 1999 -- -- -- -- 20,000 15,000
Warrants issued for acquisition of engineering
development agreement:
November 1998 -- -- -- -- -- --
Compensation expense recorded on stock options -- -- -- -- -- --
Warrants issued in conjunction with Series A
Preferred Stock -- -- -- -- -- --
Accretion to redemption value of Series A
redeemable Preferred Stock -- -- -- -- -- --
Issuance of Series B Preferred Stock 623,334 891,500 -- -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1999 623,334 891,500 -- -- 2,741,534 16,498,837
Net loss -- -- -- -- -- --
Common stock issued February 2000 -- -- -- -- 125,000 187,500
Series B Preferred Stock issued
July 1999 216,666 291,829 -- -- -- --
August 1999 86,667 116,989 -- -- -- --
September 1999 16,667 22,500 -- -- -- --
October 1999 - adjust price to $1.00 (Note 6) 471,666 -- -- -- -- --
November 1999 100,000 100,000 -- -- -- --
December 1999 480,000 472,500 -- -- -- --
January 2000 600,000 425,500 -- -- -- --
February 2000 1,318,000 732,755 -- -- -- --
Beneficial conversion expense on Series B
Preferred Stock -- -- -- -- -- --
Common stock issued upon conversion of preferred
stock
July 1999 -- -- -- -- 32,000 24,000
August 1999 (33,333) (50,000) -- -- 179,121 159,341
September 1999 -- -- -- -- 80,852 60,639
October 1999 -- -- -- -- 50,000 37,500
December 1999 -- -- -- -- 13,252 9,939
</TABLE>
(Continued)
<PAGE>
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 (Continued)
Stock options issued for services:
October 1998 42,000 -- -- -- -- --
Common stock issued upon conversion of preferred
stock:
November 1998 -- -- -- -- -- --
January 1999 -- -- -- -- -- --
March 1999 -- -- -- -- -- --
April 1999 -- -- -- -- -- --
Warrants issued for acquisition of engineering
development agreement:
November 1998 554,000 -- -- -- -- --
Compensation expense recorded on stock options 43,000 -- -- -- -- --
Warrants issued in conjunction with Series A
Preferred Stock 227,000 -- -- -- -- --
Accretion to redemption value of Series A
redeemable Preferred Stock -- -- -- -- (377,420) --
Issuance of Series B Preferred Stock -- -- (60,000) -- -- --
---------------------------------------------------------------------------------
Balance, June 30, 1999 2,342,745 -- (60,000) -- (22,724,284) --
Net loss -- -- -- -- (6,022,853) --
Common stock issued February 2000 -- -- (4,500) -- -- --
Series B Preferred Stock issued
July 1999 -- -- -- -- -- --
August 1999 -- -- -- -- -- --
September 1999 -- -- -- -- -- --
October 1999 - adjust price to $1.00 (Note 6) -- -- -- -- -- --
November 1999 -- -- -- -- -- --
December 1999 -- -- (20,000) -- -- --
January 2000 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
Beneficial conversion expense on Series B
Preferred Stock 1,769,570 -- -- -- (1,769,570) --
Common stock issued upon conversion of preferred
stock
July 1999 -- -- -- -- -- --
August 1999 -- -- -- -- -- --
September 1999 -- -- -- -- -- --
October 1999 -- -- -- -- -- --
December 1999 -- -- -- -- -- --
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (continued)
Common stock issued upon converstion of preferred (continued)
<S> <C> <C> <C> <C> <C> <C>
January 2000 (880,000) (880,000) -- -- 890,000 887,500
February 2000 -- -- -- -- 866,664 649,998
March 2000 (75,000) (72,500) -- -- 89,000 83,000
April 2000 (180,000) (177,000) 226,880 212,160
May 2000 68,864 51,648
June 2000 42,824 32,118
Common stock issued upon exercise of warrants:
September 1999 -- -- -- -- 454,545 500,000
February 2000 -- -- -- -- 24,256 18,192
March 2000 -- -- -- -- 60,263 147,835
May 2000 39,708 67,318
June 2000 7,321 7,553
Warrants issued:
September 1999 -- -- -- -- -- --
November 1999 -- -- -- -- -- --
January 2000 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
March 2000 -- -- -- -- -- --
Common stock issued upon exercise of options:
January 2000 -- -- -- -- 2,000 2,750
February 2000 -- -- -- -- 200 226
June 2000 7,001 8,751
Common stock issued for equipment and services
received:
January 2000 -- -- -- -- 2,275 2,276
February 2000 -- -- -- -- 200,856 310,684
Series C Preferred Stock issued:
February 2000 -- -- 1,000,000 973,100 -- --
Beneficial conversion expense on Series C
Preferred Stock -- -- -- -- -- --
Compensation recorded on stock options -- -- -- -- -- --
Subsidiary stock issued -- -- -- -- -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Accretion to redemption value of Series A redeemable
Preferred Stock -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance June 30, 2000 $2,744,667 $1,874,073 $1,000,000 $973,100 $6,204,416 $19,959,765
=================================================================================
</TABLE>
(Continued)
<PAGE>
(Contnued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Common Stock During the Other
Paid-In Paid for, but Subscriptions Due From Development Comprehensive
Capital Not Issued Receivable Officers Stage Income
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 (continued)
Common stock issued upon converstion of preferred (continued)
January 2000 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
March 2000 -- -- -- -- -- --
April 2000
May 2000
June 2000
Common stock issued upon exercise of warrants:
September 1999 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
March 2000 -- -- -- -- -- --
May 2000
June 2000
Warrants issued:
September 1999 10,000 -- (10,000) -- -- --
November 1999 15,000 -- (15,000) -- -- --
January 2000 152,000 -- -- -- -- --
February 2000 469,000 -- -- -- -- --
March 2000 25 -- -- -- -- --
Common stock issued upon exercise of options:
January 2000 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
June 2000
Common stock issued for equipment and services
received:
January 2000 -- -- -- -- -- --
February 2000 -- -- -- -- -- --
Series C Preferred Stock issued:
February 2000
Beneficial conversion expense on Series C
Preferred Stock 973,100 -- -- -- (973,100) --
Compensation recorded on stock options 332,300 -- -- -- -- --
Subsidiary stock issued 1,250,088 -- -- -- -- --
Payments received on subscriptions receivable -- -- 89,500 -- -- --
Accretion to redemption value of Series A
redeemable Preferred Stock -- -- -- -- (410,445) --
---------------------------------------------------------------------------------
Balance June 30, 2000 $7,313,828 $-- $ (20,000) $-- $(31,900,252) $--
=================================================================================
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2000 1999 June 30, 2000
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (6,022,853) $ (4,289,816) $(28,369,717)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment -- -- (178,655)
Depreciation 96,081 74,094 418,730
Amortization 328,166 441,627 2,506,137
Noncash compensation, services, and interest 1,266,260 1,403,241 4,019,205
Minority interest in subsidiary 339,685 -- 339,685
Other -- -- 623,650
Changes in assets and liabilities:
Decrease in prepaid expenses 49,276 6,007 97,331
Increase (decrease) in accounts payable 247,389 14,524 351,024
Increase (decrease) in accrued expenses (55,887) (48,197) 416,637
-------------------------------------------------
Net cash used in operating activities (3,751,883) (2,398,520) (19,775,973)
-------------------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (486,020) (61,015) (985,286)
Proceeds on disposition of property -- -- 37,375
Organization expenses -- -- (97,547)
Patent expenses (14,310) (4,016) (27,355)
Deposits (79,457) -- (79,457)
Officer advances, net -- -- (109,462)
Note receivable from officer (141,000) -- (141,000)
Purchase of investment -- -- (225,000)
Purchase of license agreement -- -- (1,950,000)
Advances to Spectrum Diagnostics, Inc. -- -- (320,297)
Prepaid securities issuance costs -- -- (101,643)
Purchase of Spectrum Diagnostics, Inc., net of cash
and cash equivalents acquired -- -- (1,204,500)
-------------------------------------------------
Net cash used in investing activities (720,787) (65,031) (5,204,172)
-------------------------------------------------
</TABLE>
(Continued)
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2000 1999 June 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net proceeds from the sale of common stock
and warrants 965,150 -- 13,820,922
Net proceeds from sale of Series A Preferred Stock -- 1,523,909 1,523,909
Net proceeds from sale of Series B Preferred Stock 2,162,073 831,500 2,993,573
Net proceeds from sale of Series C Preferred Stock 973,100 -- 973,100
Net proceeds from sale of common stock of
subsidiary 1,250,088 -- 1,250,088
Proceeds from debt obligations 4,000 498,230 6,051,085
Payments received on stock subscriptions receivable 40,000 -- 45,000
Payments on debt obligations (29,167) -- (551,977)
-----------------------------------------------
Net cash provided by financing
activities 5,365,244 2,853,639 26,105,700
-----------------------------------------------
Effect of Exchange Rate Changes on Cash -- -- 203,242
-----------------------------------------------
Net increase in cash and cash
equivalents 892,574 390,088 1,328,797
Cash and Cash Equivalents
Beginning 436,223 46,135 --
-----------------------------------------------
Ending $ 1,328,797 $ 436,223 $ 1,328,797
===============================================
Cash Payments for Interest $ 41,859 $ 46,795 $ 249,124
===============================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of debt obligations for services, accounts
payable, and accrued interest $ -- $ -- $ 259,500
Issuance of debt for acquisition of license -- -- 550,000
Issuance of warrants in connection with:
Product development -- -- 230,000
Acquisition of sublicense agreement -- -- 165
Issuance of convertible debt -- 76 527
Guarantee of debt 38,000 -- 53,716
</TABLE>
(Continued)
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2000 1999 June 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities (Continued)
Acquisition of engineering development agreement -- 554,000 554,000
Series A Preferred Stock sales and exchange for
debt -- 227,000 227,000
Amount attributable to value of beneficial debt
conversion feature -- 546,902 1,535,346
Amount attributable to value of beneficial
conversion feature of preferred stock 2,742,670 -- 2,742,670
Capital expenditures included in accounts payable 255,346 -- 262,013
Fixed assets acquired under capital lease 132,946 -- 0
Advances to Spectrum Diagnostics, Inc. -- -- 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 940,325 85,000 1,160,528
Series A Preferred Stock issued for debt obligations
and accrued interest -- 3,521,692 3,521,692
Accretion to redemption value of Series A
redeemable Preferred Stock $ 410,445 $ 377,420 $ 787,865
=============================================
</TABLE>
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2000 1999 June 30, 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities (Continued)
Common stock issued for:
Services, equipment, and interest $ 312,960 $ 64,595 $ 697,189
Exercise of warrants 740,898 5,114 746,012
Exercise of options 11,727 -- 11,727
Acquisition of license agreement -- -- 390,000
Subscriptions receivable -- -- 5,000
Debt obligations -- 37,812 2,355,937
Accounts payable -- -- 40,000
Accrued expenses -- -- 360,394
Series A Preferred Stock 1,028,343 82,878 1,111,221
Series B Preferred Stock 1,179,500 -- 1,179,500
=============================================
Acquisition of Spectrum Diagnostics, Inc.
Fair value of other assets acquired, principally
the license agreement $ -- $ -- $ 1,489,500
Liabilities assumed -- -- (285,000)
---------------------------------------------
Cash purchase price paid, less $5,199
cash acquired $ -- $ -- $ 1,204,500
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Quantech Ltd. (Quantech or the Company) was formed under the
laws of the state of Minnesota for the purpose of effecting the change in
domicile of Spectrum Diagnostics S.p.A (SDS) from Italy to the state of
Minnesota through a merger with SDS on April 14, 1993. The merger was accounted
for as if it were a pooling of interests.
The Company had no operations prior to the merger and is continuing the business
of SDS to commercialize the Surface Plasmon Resonance (SPR) technology.
Commercialization will consist of developing and introducing an instrument which
will run various tests capable of diagnosing various human health conditions and
which the Company intends to market to the world medical diagnostic industry.
On December 7, 1999, the Company and PE Corp (PE) formed HTS BioSystems, Inc.
(HTS), which is 73 percent owned by the Company. HTS will focus on promoting the
nonmedical use of the SPR technology. In conjunction with this formation, PE
provided HTS with:
o a sub-license to all of its rights to the Company's SPR nonmedical
technology (see Note 4),
o a license for nonmedical use of the PE High Density Technology,
o one of PE's SPR prototype instruments, and
o the PE prototype for the PE High Density Technology.
The Company is required to provide HTS with office space, management support,
technical assistance and any other needs required by HTS until HTS is funded in
a manner adequate to support its own operations.
HTS will owe to PE:
o a 4 percent royalty on products using only SPR other than those for use
in the food and beverages, chemical and industrial and environmental
testing markets,
o a 4 percent royalty on products using only the PE High Density
Technology, and
o a 6 percent royalty on products using both technologies.
No minimum royalties, or royalties on the first $3,000,000 of sales, are
required to be paid.
HTS will owe the Company:
o 15 percent of any royalties paid to PE by HTS for products which
incorporates the Company's SPR technology, and
o 8 percent royalty on products using its SPR technology sold to the food
and beverages, chemical and industrial and environmental testing
markets.
In the event that HTS does not seek to commercialize the SPR or PE High Density
Technology, the rights revert back to PE. PE also has a five-year right of first
negotiation in the event that HTS wishes to license or sell any of the
technology it licensed from PE.
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiary. All significant intercompany
transactions and accounts have been eliminated in consolidation.
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 and long-term debt: The fair value of the Company's short and long-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 and long-term debt approximates its
fair value.
Redeemable Series A Preferred Stock: The fair value of the Company's Redeemable
Series A Preferred Stock is estimated based on the estimated interest rate the
Company would have to pay for debt financing with similar terms. The recorded
value exceeds the estimated fair value by approximately $1,627,000, assuming a
13.5 percent interest rate and a redemption date of November 2003.
Prepaid product development expense: Prepaid product development expense arose
from the valuation of warrants issued to a licensee in return for technical
assistance to be rendered to the Company by the licensee over a period of
approximately two years via a technology and development agreement. The expense
was being recognized over this period (see Note 4).
Other assets: The license agreement is being amortized using the straight-line
method over the remaining life of the underlying patents of 15 years (see Note
4). Costs of obtaining additional patents are capitalized and will be amortized
over their useful lives.
The Company reviews its intangible assets periodically to determine potential
impairment by comparing the carrying value of the intangibles with expected
future net cash flows. Though the Company has had no significant 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.
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Property and equipment: Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over five years, or the life of the
related lease, whichever is less.
Income taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Research and development: The Company contracts with certain outside parties for
the design and development of its products in addition to conducting its own
research and development. Research and development costs are charged to expense
as incurred.
Basic and diluted net loss per share: Basic per share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
Loss per share has been adjusted for accretion on the Company's mandatory
redeemable Series A Preferred Stock, which totaled $410,445 and $377,420 for the
years ended June 30, 2000 and 1999, respectively. In addition, loss per share
has been adjusted for the beneficial conversion feature of preferred stock,
which totaled $2,742,670 for the year ended June 30, 2000. As described in Notes
6 and 7, the Company has options and warrants outstanding to purchase shares of
common stock, and the Series A, B, and C Preferred Stock is convertible into
common stock. However, because the Company has incurred losses in all periods
presented, the inclusion of those potential common shares in the calculation of
diluted loss per share would have an antidilutive effect. Therefore, basic and
diluted loss per share amounts are the same in each period presented.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition: In December 1999, the staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue
Recognition in Financial Statements". SAB No. 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
related to revenue recognition. The Company will adopt SAB No. 101 in the first
quarter of the fiscal year ending June 30, 2001. Management believes the
adoption of SAB No. 101 will not have a significant affect on its financial
statements.
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Derivatives: The FASB has issued SFAS No. 133, Accounting for Derivative
instruments and Hedging Activities, which the Company will be required to adopt
in the fiscal year ending June 30, 2001. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires than an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS No. 133 is not expected to have a significant effect on the Company's
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.
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 significant sales. In 2000, the Company had a sale of $150,000 of an
evaluation system and planned principal operations have not commenced.
The Company is a development stage company which has suffered significant losses
from operations, requires significant additional financing, and ultimately needs
to continue development of its product, obtain FDA approval, generate
significant 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 intangible asset. These financial statements do not reflect any
adjustments which might be necessary should the Company not remain a going
concern.
The Company does not have sufficient funds to complete commercial development or
commence production and sales of its system. The Company anticipates that its
cash on hand, bank credit facility, and the completion of its Series D
convertible Preferred Stock offering (see Note 6) for up to an additional $7.5
million will allow it to maintain operations through part of fiscal year 2001.
Additional financing of at least $15 million of investment capital, funding by
strategic partners, or licensing revenues will be needed for the following: to
develop and submit additional tests to the FDA, to complete clinical evaluation
of the system, to establish manufacturing capabilities, and to prepare for sales
of the system. The Company does not have any commitments for any such additional
financing and does not anticipate receiving any additional significant funding
from commercial lenders. There can be no assurance that any such additional
equity or debt financing can be obtained on favorable terms, if at all.
Note 3. Short-Term Debt Obligations
The Company has a $1,000,000 revolving credit note with a bank. Advances under
the loan bear interest at the prime rate (9.5 percent at June 30, 2000) and are
guaranteed by a shareholder. The note expires December 31, 2000, unless renewed.
Amounts due under the note were $750,000 and $746,000 at June 30, 2000 and 1999,
respectively.
<PAGE>
Note 3. Short-Term Debt Obligations (Continued)
During the fiscal year ended June 30, 1999, the Company completed an offering of
secured promissory notes. The investors received warrants to purchase 37,835
shares of common stock. In conjunction with this offering, the selling agent
received warrants to purchase 3,314 shares of common stock. These warrants were
valued at $76. This fair value was based upon management's determination that
the effective interest rate of the debt approximated the market rate of similar
debt instruments with similar risk. Also, the value assigned to the warrants was
not materially different than the value computed using the Black-Scholes pricing
model.
As of June 30, 1999, all of the secured promissory notes and related accrued
interest had been converted to 30,400 shares of common stock and 1,173,902
shares of redeemable Series A Preferred Stock (see Note 6).
Note 4. Agreements
License agreements: 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 failed 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 had 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,
2000, the Company has paid $1,300,000 of the cumulative payment.
The obligation of the Company to pay royalties terminates when the total royalty
payments reach a gross amount of $18,000,000. After such date, the Company's
rights in the licensed SPR technology continue in perpetuity with no further
royalty obligations.
On March 3, 1994, the Company entered into an agreement with an investor group,
which included a shareholder of the Company, that granted them rights for a
sublicense of the research portion of the original license. This agreement had
no expiration date. The investor group received this sublicense in exchange for
a promise to purchase 10 percent of the aggregate number of shares offered in
the next public offering by the Company, not to exceed an aggregate amount of
$500,000. The investor group did not purchase any shares under the agreement.
<PAGE>
Note 4. Agreements (Continued)
In September 1997, the Company entered into an agreement to purchase certain
sublicense rights that had previously been granted to the investor group. In
return for these sublicense rights, the Company issued 150,000 shares of the
Company's common stock, convertible secured promissory notes totaling $550,000,
and warrants to purchase 82,500 shares of the Company's common stock, and
canceled the requirement to purchase shares in the next public offering. The
purchase of the sublicense rights was expected to provide the Company with
future benefits as the Company was subsequently able to sign an exclusive
sublicense agreement for nonmedical markets. This agreement provides the Company
with a possibility of receiving a future royalty stream from the sale of
products under this new sublicense agreement. Therefore, the Company capitalized
the sublicense rights at $940,165, the amount that approximates the fair market
price of the equity and debt instruments issued as of the date of the agreement.
The value assigned to the common stock was based on the quoted market value. The
values of the convertible debt instrument and the detachable warrants were based
on similar instruments previously placed by the Company. The value assigned to
the warrants was not materially different than the value computed using the
Black-Scholes pricing model.
In March 2000 HTS BioSystems, Inc. entered into a license agreement for certain
patents and proprietary information. The license calls for royalties of one to
four percent on sales of products containing the licensed technology. 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. In consideration of this agreement, the Company granted the licensor
a warrant to purchase 75,000 shares of common stock for $1.00, which was valued
at approximately $125,000 using the Black-Scholes model.
Technology and development agreement: During the year ended June 30, 1998, the
Company entered into a technology and development agreement with PE Corp. (PE),
a leading supplier of life science systems and analytical instruments, which
provides exclusive license rights to certain of the Company's technology for use
outside of medical diagnostics, and co-exclusive rights to nucleic acid medical
diagnostics. The licensee, pursuant to the agreement, is providing technical
assistance related to the Company's medical diagnostic system and will be
required to pay future royalty payments of 8 percent of gross sales if the
licensee sells products containing the Company's technology. Minimum annual
royalties to be paid by the licensee will be $500,000 beginning December 2000,
expiring in conjunction with the related patents. Should the licensee fail to
commercialize the licensed technology, all rights will revert back to the
Company.
The licensee also received a warrant to purchase 1,400,000 shares of common
stock. The warrant was valued at $230,000, based on the fair value of technical
assistance expected to be received by the Company over the term of the
technology and development agreement. As the technical assistance was received,
the prepaid asset resulting from this transaction was reduced, and research and
development expense was charged. On December 7, 1999 this warrant was canceled
pursuant to the formation of HTS BioSystems, Inc. (see Note 1).
In conjunction with the above technology and development agreement, the Company
entered into a license for certain portions of this technology. The Company will
be required to pay royalties at 8 percent of its sales on products featuring the
technology. Minimum annual royalties of $500,000 begin in December 2000,
expiring in conjunction with the related patents. Should the Company fail to
commercialize the licensed technology, all rights will revert back to the
licensor, and future minimum annual royalty obligations will be canceled.
<PAGE>
Note 4. Agreements (Continued)
Research and development agreement: In November 1998, a warrant to purchase
1,800,000 shares of common stock was issued in conjunction with a research and
development services agreement. The warrant is nonforfeitable, fully vested, and
exercisable immediately at $1.10 per share and was valued at approximately
$518,000 using the Black-Scholes model as of the contract date, which is the
measurement date. Since all of the services under this agreement have been
rendered, the value has been expensed. In September 1999, the Company issued
454,545 shares of common stock as a result of a partial exercise of this
warrant. In conjunction with this agreement, warrants to purchase 144,000 shares
of common stock were issued, and $190,000 in cash was paid to the investment
banking firm that arranged the transaction. These warrants were valued at
$36,000 using the Black-Scholes model.
Employment agreements: The Company has at-will employment agreements with its
Chief Executive Officer, Chief Financial Officer, Vice President of Research and
Development and the Executive Vice President of Business Development of HTS. The
agreements require the payment of one year's salary (for the chief financial
officer and executive vice president of business development), $150,000 (for the
chief executive officer), or six-months' salary (for the vice president of
research and development) 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 and Vice President of Research and Development are entitled to
six months' salary if they are terminated without cause.
Note 5. Leases
Operating leases: The Company leases its office space under an agreement which
expires April 2007. Approximate minimum aggregate rental commitments under this
lease are as follows:
Years ending June 30:
2001 $ 192,000
2002 192,000
2003 192,000
2004 195,000
2005 210,000
Thereafter 385,000
==========
$1,366,000
==========
In addition, there are monthly payments required for common area maintenance and
other related expenses.
Rental expense for the years ended June 30, 2000 and 1999 was approximately
$96,000 and $79,000 respectively.
Capital leases: In 2000 the Company began leasing equipment under a capital
lease. At June 30, 2000, equipment with a cost of $132,946 and accumulated
depreciation of $5,136 has been recorded.
<PAGE>
Note 5. Leases (Continued)
The following is a schedule by year of the future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of June 30, 2000:
Years ending June 30:
2001 $ 75,000
2002 50,000
--------
125,000
Less the amount representing interest 21,000
--------
Present value of minumum debt payments reflected as long-term debt $104,000
========
Note 6. Stockholders' Equity
Capital stock: In December 1998, the Company amended its Articles of
Incorporation to increase the number of authorized shares 75,000,000. The Board
of Directors has designated the authorized shares as common, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D
Preferred Stock with the remaining authorized shares as undesignated. As shares
of Series A, B, C and D Preferred Stock are converted to common stock, the
number of authorized shares of preferred stock decreases and the number of
authorized shares for common stock increases.
Reverse stock split: On June 2, 1998, the Company reduced the number of shares
outstanding in a 1-for-20 reverse stock split. All share and per share amounts
presented have been retroactively adjusted to reflect the reverse split.
Par value of stock: In March 1998, the Company amended its Articles of
Incorporation to change the par value of common stock from $0.01 per share to no
par value. The cumulative amount paid in excess of the previously stated par
value has been reclassed from additional paid-in capital to common stock on the
statement of stockholders' equity (deficit).
Redeemable Series A Preferred Stock: In November 1998, the Company established
and designated 2,500,000 shares of previously undesignated shares as Series A
Preferred Stock (Series A Stock). The shares have no par value and a liquidation
value of $3 per share. Each share of Series A Stock is convertible into, and has
voting rights equal to, four shares of common stock. The Series A Stock is not
redeemable until November 5, 2003. If any time after November 5, 2003, the
Company receives a written request from the holders of at least 50 percent of
the outstanding share of Series A Stock, the Company will redeem all of the
outstanding shares by paying in cash an amount equal to the sum of the original
purchase price plus a 10 percent return per annum. Series A Stock is
automatically converted into shares of common stock if (i) the Company closes on
an equity offering of at least $5,000,000 or (ii) at least 50 percent of the
number of shares of Series A Stock that were outstanding as of November 30,
1998, have been converted or redeemed. The excess of redemption value over
carrying value is being accreted, using the interest method, over the period
until the first redemption date of November 5, 2003.
<PAGE>
Note 6. Stockholders' Equity (Continued)
In November and December 1998, the Company sold 551,431 shares of its Series A
Stock to accredited investors at $3.00 per share and issued 1,173,902 shares of
Series A Stock pursuant to conversion of promissory notes and the related
accrued interest at a conversion price of $3.00 per share. The holders of the
promissory notes also received warrants to purchase 728,957 shares of common
stock at an exercise price of $0.75. The receipt of these warrants canceled the
detachable warrants issued in conjunction with the promissory notes. The new
warrants were valued at $162,000 using the Black-Scholes model. In conjunction
with these transactions, the Company paid commissions and expenses of $125,700
and issued warrants to purchase 176,420 shares of common stock to the selling
agents, which were valued at approximately $65,000 using the Black-Scholes
model.
In November 1998 through June 2000, 1,481,628 shares of common stock were issued
pursuant to conversion of Series A Stock.
Following is a detail of the Series A Preferred Stock:
Shares
Issued Amount
--------- -----------
Balance, July 1, 1998 -- $ --
Shares issued 600,616 1,444,464
Notes converted to preferred 1,124,716 3,374,138
Conversion of notes payable (27,626) (82,879)
Accretion to redemption value -- 377,420
--------- -----------
Balance June 30, 1999 1,697,706 5,113,143
Shares converted to common stock (342,781) (1,028,343)
Accretion to redemption value -- 410,445
--------- -----------
Balance June 30, 2000 1,354,925 $ 4,495,245
========= ===========
Series B Preferred Stock: In May 1999, the Company established and designated
3,000,000 shares of previously undesignated shares as Series B Preferred Stock
(Series B Stock). The shares have no par value and a liquidation value of $1.00
per share. Each share of Series B Stock is convertible into, and has voting
rights equal to, one share of common stock. Series B Stock is automatically
converted into shares of common stock if (i) the Company closes on an equity
offering of at least $5,000,000 or (ii) at least 50 percent of the number of
shares of Series B Stock that were outstanding have been converted. In the event
the next sale of securities by the Company results in a price or conversion
price lower than $1.00 per share, the number of shares of common stock into
which the shares may be converted will be adjusted to a number equal to the per
share liquidation preference divided by such sale or conversion price.
Through September 1999, the Company sold 943,334 shares of its Series B Stock to
accredited investors at $1.50 per share. In conjunction with this transaction,
the Company paid commissions and expenses of $92,182.
In October 1999, the price of the Series B Stock was adjusted to $1.00 from an
initial price of $1.50. In conjunction with this adjustment previous purchasers
received 471,666 additional shares of Series B Stock.
<PAGE>
Note 6. Stockholders' Equity (Continued)
In November and December 1999, 580,000 shares of Series B Stock were sold at
$1.00 per share, net of commissions of $7,500.
In January 2000, the Board of Directors designated an additional 913,333 shares
of previously undesignated shares as Series B Stock.
In January and February 2000, the Company sold an additional 1,918,000 shares of
Series B Stock for $1.00 per share. In conjunction with this transaction, the
Company paid commissions and accountable expenses in the amount of $762,400 and
issued warrants to purchase 282,900 shares of common stock to the selling
agents, which were valued at $621,000 using the Black-Scholes model.
From August 1999 to June 2000, 1,168,333 shares of common stock were issued
pursuant to conversion of Series B Stock.
Series C Preferred Stock: In February 2000, the Board of Directors designated
1,000,000 shares of previously undesignated authorized shares as Series C
Preferred Stock (Series C Stock). Shares of Series C Stock have no par value and
a liquidation value of $1.00 per share. Each share is convertible into, and has
voting rights equal to, one share of common stock. Series C 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 C Stock that were outstanding have been converted. In
the event the next sale of securities by the Company results in a price or
conversion price lower than $1.00 per share, the number of shares of common
stock into which the shares may be converted will be adjusted to a number equal
to the per share liquidation preference divided by such sale or conversion
price.
The Company sold 1,000,000 shares of Series C stock to an accredited investor at
a price of $1.00 per share, net of commissions of $26,900.
Series D Preferred Stock: In June 2000, the Board of Directors designated
2,500,000 shares of previously undesignated authorized shares as Series D
Preferred Stock (Series D stock). Shares of Series D stock have no par value and
a liquidation value of $2.50 per share. Each share is convertible into, and has
voting rights equal to, one share of common stock. Series D 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 D stock that were outstanding have been converted. In
the event the next sale of securities by the Company results in a price or
conversion price lower than $2.50 per share, the number of shares of common
stock into which the share may be converted will be adjusted to a number equal
to the per share liquidation preference divided by such sale or conversion
price.
No shares of Series D Preferred Stock were issued as of June 30, 2000. In August
and September 2000 the Company sold 1,996,000 shares of its Series D Stock to
accredited investors at $2.50 per share. Holders of the Series D Preferred Stock
also received warrants to purchase 499,000 shares of common stock at an exercise
price of $3.50, which were valued at $490,000 using the Black-Scholes Model. In
conjunction with this transaction, the Company paid commissions and expenses of
$467,880 and issued warrants to purchase 183,600 shares of common stock to the
selling agents, which were valued at $211,000 using the Black-Scholes model.
<PAGE>
Note 6. Stockholders' Equity (Continued)
Beneficial conversion feature: In conjunction with the issuance of the Series B,
C, and D convertible Preferred Stock, the Company recognized a beneficial
conversion feature. The beneficial conversion feature was calculated as the
difference between the conversion price and the fair value of the common stock
into which the preferred stock is convertible. The beneficial conversion feature
was allocated to additional-paid-in capital and since the stock was immediately
convertible, the preferred stock was accreted to its redemption value in a
manner similar to a dividend.
Note 7. Stock Options and Warrants
Options--employee grants: The Company and its subsidiary regularly grant options
to employees, some of which are granted under the Company's 1998 Stock Option
Plan (the Plan). The Plan may grant options for up to 4,000,000 shares, of which
2,482,018 were outstanding at June 30, 2000. If any of the options granted under
the Plan expire or are terminated prior to being exercised in full, the
unexercised portion of such options will once again be available for additional
option grants. The options granted will have a maximum term of ten years and an
exercise price not less than the market price on the date of grant. Vesting of
options granted to employees is determined on a discretionary basis. One-third
of the options granted to directors are exercisable immediately, with one-third
becoming exercisable on each of the first and second anniversaries of the date
of grant.
As permitted under generally accepted accounting principles, these grants are
accounted for following APB Opinion No. 25 and related interpretations.
Accordingly, compensation cost has been recognized for those grants whose
exercise price is less than the fair market value of the stock on the date of
grant. There was no compensation expense recorded for employee grants for the
years ended June 30, 2000 and 1999.
Options and warrants--nonemployee grants: The Company and its subsidiary also
grant options and warrants to nonemployees for goods, services, and in
conjunction with certain agreements. These grants are accounted for under FASB
Statement No. 123 based on the grant date fair values.
Options and warrants--pro forma information: Had compensation cost for all of
the stock-based compensation grants and warrants issued been determined based on
the grant date fair values of awards, reported net loss attributable to common
stockholders and net loss per common share would have been increased to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
June 30
2000 1999
------------ ------------
<S> <C> <C>
Net loss attributable to common stockholders, as reported $ (9,175,968) $ (4,667,236)
Net loss attributable to common stockholders, pro forma (9,661,526) (5,073,371)
Net loss per basic and diluted common share, as reported (2.12) (1.75)
Net loss per basic and diluted common share, pro forma (2.23) (1.90)
</TABLE>
<PAGE>
Note 7. Stock Options and Warrants (Continued)
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net loss for future years because
options vest over several years and additional awards generally are made each
year. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000 and 1999:
June 30
2000 1999
------- ------
Expected dividend yield $ -- $ --
Expected stock price volatility 67.2% 68.7%
Risk-free interest rate 6.0% 6.0%
Expected life of options (years) 3 3
Transactions involving stock options and warrants are summarized as follows:
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
Expired (187,828) (243,009) 7.26
------------------------------------------
Balance, June 30, 1998 2,671,715 493,500 3.58
Granted 2,156,766 1,650,604 1.10
Exercised (22,500) -- 2.50
Expired -- (50,140) 3.47
------------------------------------------
Balance, June 30, 1999 4,805,981 2,093,964 1.59
Granted 672,700 1,219,845 1.88
Exercised (586,091) (9,201) 1.26
Expired (1,550,291) (26,291) 1.58
------------------------------------------
Balance, June 30, 2000 3,342,299 3,278,317 $ 1.67
==========================================
The fair value of warrants granted during 2000 and 1999 was $1.19 and $0.27 per
warrant, respectively.
The fair value of stock options granted for goods and services during 2000 and
1999 was $0.63 and $0.34 per equity instrument, respectively.
<PAGE>
Note 7. Stock Options and Warrants (Continued)
The following tables summarize information about stock options and warrants
outstanding as of June 30, 2000:
OPTIONS AND WARRANTS OUTSTANDING
Weighted-
Average
Number of Remaining Weighted-
Range of Units Contractual Average
Exercise Price Outstanding Life - Years Exercise Price
--------------------------------------------------------------------------------
$0.75 1,740,232 3.1 $ 0.75
$1.00-$1.32 2,311,781 3.7 1.11
$1.50 851,000 3.9 1.50
$1.63 - $2.78 806,616 4.4 2.47
$3.00 - $3.06 373,500 2.8 3.00
$3.38 - $4.38 148,873 4.7 3.57
$5.00 353,739 0.3 5.00
$12.00 5,000 0.8 12.00
$14.40 29,875 0.8 14.40
========== ========
6,620,616 $ 1.67
========== ========
OPTIONS AND WARRANTS EXERCISABLE
Number of Weighted-
Units Average
Exercisable Exercise Price
---------------------------------------------------------------------------
$0.75 1,707,316 $ 0.75
$1.00-$1.32 2,203,240 1.11
$1.50 627,338 1.50
$1.63 - $2.78 374,958 2.48
$3.00 - $3.06 368,750 3.00
$3.38 - $4.38 73,338 3.47
$5.00 353,739 5.00
$12.00 5,000 12.00
$14.40 29,875 14.40
======================================
5,743,554 $ 1.60
======================================
The number of options and warrants exercisable at June 30, 1999 was 5,983,401
with a weighted-average exercise price of $1.65.
<PAGE>
Note 7. Stock Options and Warrants (Continued)
The Company sold the following warrants to purchase shares of common stock to
accredited investors.
Number of Exercise Expiration Selling
Date Shares Price Date Price
--------------------------------------------------------------------------------
September 1999 175,000 $ 1.25 September 9, 2004 $ 10,000
November 1999 75,000 1.06 November 16, 2004 15,000
Note 8. Income Taxes
The Company's income tax expense consisted solely of a franchise tax in Italy
during the year ended December 31, 1992, since the Company has incurred no
United States income taxes. For United States income tax purposes, under
provisions of the Internal Revenue Code, the Company has approximately
$20,424,000 in operating loss carryforwards and $627,000 in research and
development credits at June 30, 2000, which may be used to offset otherwise
future taxable income. These carryforwards are subject to certain limitations
under the provisions of the Internal Revenue Code, Section 382, which relate to
a 50 percent change in control over a three-year period. At June 30, 2000, the
annual net operating loss carryforward limitation due to Section 382 was
approximately $200,000 per year, which reduced the carryforward by $2,800,000.
Further changes of control, including those discussed in Note 6, may result in
additional limitations and expiration of additional amounts of the net operating
loss carryforwards. Usage of the net operating loss carryforwards is also
dependent upon the Company attaining profitable operations in the future.
Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 2000, 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
2019 3,397,000 108,000
2020 5,107,000 203,000
------------------------------
$20,424,000 $ 627,000
==============================
<PAGE>
Note 8. Income Taxes (Continued)
The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
June 30
2000 1999
---------------------------
Deferred tax assets:
Loss carryforwards $ 6,944,000 $ 5,208,000
Royalties - 26,000
Research and development credits and deductions 832,000 629,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 324,000 295,000
Other accruals 47,000 35,000
---------------------------
8,262,000 6,308,000
Valuation allowance for deferred tax assets (8,262,000) (6,308,000)
---------------------------
Net deferred tax assets $ - $ -
===========================
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
June 30, 2000 and 1999, due to the valuation allowance recorded against deferred
tax assets.
Note 9. Segments
The Company has two reportable segments: Quantech Ltd. (Quantech) and HTS
BioSystems, Inc. (HTS). Quantech is completing development of a system that is
expected to run tests for a number of different medical conditions utilizing
their proprietary technology, surface plasmon resonance (SPR). HTS is focused on
developing and marketing the non-medical use of the SPR technology. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Quantech HTS Total
------------------------------------------------------------------------------
Net Sales $ 150,000 $ - $ 150,000
Interest Income 12,990 14,572 27,562
Interest Expense 42,509 - 42,509
Depreciation and amortization 423,728 519 424,247
Segment loss (5,568,494) (454,359) (6,022,853)
Total assets 3,373,398 1,272,930 4,646,328
===============================================
No segment information is presented for the year ended June 30, 1999 as HTS was
not formed until December 1999.
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
Robert Case 56 Chief Executive Officer and Director
Gregory G. Freitag 38 Chief Financial Officer, Chief
Operating Officer and Director
Thomas Witty 53 Executive Vice President Research and
Development
Robert Case has been Chief Executive Officer of Quantech since June
1997 and a director of Quantech 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. Mr. Case is also a director of HTS.
Gregory G. Freitag has been Chief Operating Officer of Quantech since
June 1997 and Chief Financial Officer and Secretary of Quantech since December
1995. From 1987 until joining Quantech, Mr. Freitag was a lawyer with the
Minneapolis, Minnesota law firm of Fredrikson & Byron, P.A. As a stockholder
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. Mr.
Freitag is also President and a director of HTS.
Thomas R. Witty, Ph.D. was an Organizational and Program Management
Consultant to Quantech Ltd. from August 1997 until October 1997 when he joined
Quantech as Vice President of Research and Development. Dr. Witty has been
Executive Vice President of Research and Development since September 1999. Dr.
Witty has over 24 years of experience in the field of medical diagnostics. Dr.
Witty has had senior program management responsibilities for clinical instrument
systems while at Rohm and Haas, Becton Dickinson, Sanofi and ICN
Pharmaceuticals. In addition, he was a key contributor to the development of a
near patient diagnostic system at Biocircuits and was on the Board of Directors
of SeaLite Sciences, a small biotechnology company. In these roles, Dr. Witty
has led over 20 products to market through clinical trials and the FDA. Dr.
Witty received his Doctor of Philosophy in Medicinal Chemistry from Purdue
University and his Bachelor of Arts degree with honors in chemistry from
Macalester College in St. Paul, Minnesota. Further academic training was
completed under an NIH Fellowship at the University of Illinois and as a
Professor at Colorado State University.
The information required by Item 9 relating to directors and compliance
with Section 16 of the Exchange Act is incorporated herein by reference to the
sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" which appear in the Company's definitive proxy
statement for its 2000 Annual Meeting of Shareholders.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Executive Management" which appears in the Company's definitive Proxy Statement
for its 2000 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference
to the section entitled "Executive Compensation -- Certain Transactions" in the
Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the fourth quarter ended June 30, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 of the Se
curities Exchange Act of 1934, the Registrant caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANTECH LTD.
("Registrant")
Dated: September 28, 2000 By: /s/ Robert Case
Robert Case,
CEO
In accordance with the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
ROBERT CASE and GREGORY G. FREITAG as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in per
son, hereby ratifying and confirming all said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert Case Chief Executive Officer, and Director September 28, 2000
Robert Case (Principal Executive Officer)
/s/ Gregory G. Freitag Chief Financial Officer, COO, Secretary and September 28, 2000
Gregory G. Freitag Treasurer (Chief Financial and Accounting
Officer)
/s/ Robert W. Gaines, Jr., MD Director September 28, 2000
Robert W. Gaines, Jr., MD
/s/ James F. Lyons Chairman September 28, 2000
James F. Lyons
/s/ Richard W. Perkins Director September 28, 2000
Richard W. Perkins
Director September , 2000
Edward E. Strickland
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
QUANTECH LTD.
For The Fiscal Year Ended June 30, 2000
Commission File Number: 0-19957
Exhibit Description
Number
3.1 Articles of Incorporation of Quantech Ltd., as amended to date.
3.2 Bylaws of Quantech Ltd. (incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.1 Form of Stock Certificate (incorporated by reference to Exhibit 4.1 of
the Registrant's Registration Statement on Form S-4; Reg. No.
33-55356).
4.2 Form of Private Placement Warrant (incorporated by reference to Exhibit
4.2 of the Registrant's Registration Statement on Form SB-2; Reg. No.
333-6809).
10.1* 1998 Stock Option Plan and Forms of Incentive and Nonqualified Stock
Option Agreements used in connection therewith as amended to date
(incorporated by reference to Exhibit 10.9 of the Registrant's Form
10-KSB for the year ended June 30, 1999).
10.2 Option Agreement with Ares-Serono, as amended (including license)
assigned to Quantech Ltd. pursuant to the Merger (incorporated by
reference to Exhibit 10.2 of the Registrant's Registration Statement on
Form S-4; Reg. No. 33-55356).
10.3 Letter of Amendment to Ares-Serono License (incorporated by reference
to Exhibit 10.6 of the Registrant's Form 10-KSB for the Year Ended June
30, 1995).
10.4* Employment Agreement with Gregory G. Freitag (incorporated by reference
to Exhibit 10.1 of the Registrant's Form 10-Q for the Quarter Ended
March 31, 1998).
10.5* Employment Agreement with Robert Case (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q for the Quarter Ended March
31, 1998).
10.6 Technology and Development License Agreement dated December 16, 1997
(incorporated by reference to Exhibit 1 of Schedule 13D filed by The
Perkin-Elmer Corporation on December 23, 1997, File No. 0-19957).
10.7 Perkin Elmer/Quantech License Agreement dated June 29, 1998
(incorporated by reference to Exhibit 10.7 of the Registrant's Form
10-KSB for the year ended June 30, 1998).
10.8 Research and Development Servies Agreement, dated November 13, 1998,
with Millennium Medical Systems, LLC (incorporated by reference to
Exhibit A to Schedule 13D filed by Robert Gaines and Millennium Medical
Systems, LLC on November 23, 1998, File No. 0-19957).
10.9* Employment agreement with Thomas R. Witty, Ph.D (incorporated by
reference to Exhibit 10.10 of the Registrant's Registration Statement
on Form SB-2; Reg No. 333-70487).
10.10 Lease agreement for space at 815 Northwest Parkway, Eagan MN 55121
(incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q for the quarter ended December 31, 1999.)
21 Subsidiary of the Registrant: HTS BioSystems, Inc., a Minnesota
corporation.
23 Accountant's Consent
24 Power of Attorney (included on signature page)
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
