0000950124-01-503332.txt : 20011009
0000950124-01-503332.hdr.sgml : 20011009
ACCESSION NUMBER: 0000950124-01-503332
CONFORMED SUBMISSION TYPE: 10KSB
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010928
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: QUANTECH LTD /MN/
CENTRAL INDEX KEY: 0000880354
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
IRS NUMBER: 411709417
STATE OF INCORPORATION: MN
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10KSB
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-19957
FILM NUMBER: 1746814
BUSINESS ADDRESS:
STREET 1: 1419 ENERGY PARK DRIVE
CITY: ST PAUL
STATE: MN
ZIP: 55108
MAIL ADDRESS:
STREET 1: 1419 ENERGY PARK DRIVE
CITY: ST PAUL
STATE: MN
ZIP: 55108
FORMER COMPANY:
FORMER CONFORMED NAME: SPECTRUM DIAGNOSTICS SPA
DATE OF NAME CHANGE: 19930328
10KSB
1
c65162e10ksb.txt
FORM 10-KSB
1
================================================================================
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, 2001
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 contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended June 30, 2001 were $1,101,926.
The aggregate market value of the Issuer's Common Stock held by nonaffiliates
(persons other than officers, directors or holders of more than 5% of the
outstanding stock) as of September 17, 2001, was approximately $ 18,000,000
(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 17, 2001:
18,583,712.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2001 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
----- ----
================================================================================
2
INDEX
Page
----
PART I
Item 1. Description of Business........................................................ 3
Item 2. Description of Property........................................................ 20
Item 3. Legal Proceedings.............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................ 20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................... 20
Item 6. Management's Discussion and Analysis or Plan of Operation...................... 21
Item 7. Financial Statements........................................................... 25
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.............................. 59
Item 10. Executive Compensation......................................................... 60
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 60
Item 12. Certain Relationships and Related Transactions................................. 60
Item 13. Exhibits and Reports on Form 8-K............................................... 60
Signatures........................................................................................ 61
2
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY SUMMARY
GENERAL
Quantech Ltd. is completing development of its FasTraQ(TM) Patient
Treatment Information Platform ("FasTraQ"), a system designed specifically to
increase the productivity, speed and cost effectiveness of the hospital
Emergency Department ("ED") as it tests patients for a number of different
medical conditions. 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 one or more
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 from 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. The FasTraQ system also
incorporates non-SPR technologies for certain tests with all tests run from the
same user interface.
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 takes on average 45 to 90 minutes. 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 on average, and cost
effectively provide test results, especially for patients with critical problems
in emergency departments.
We have filed an application with the United States Food and Drug
Administration (the "FDA") for clearance of our SPR point-of-care instrument and
a test for the pregnancy enzyme hCG, and expect to file an application for the
cardiac enzymes myoglobin, troponin I and CK-MB in the near future. Other tests
and instrument modules are under development and are expected to be added to the
FasTraQ system to provide the various quantitative tests the emergency
department requires on an urgent basis.
Quantech intends to launch the FasTraQ system initially through a
Charter Customer rollout program with approximately five U.S. hospitals. It is
anticipated that Quantech will begin implementation of the rollout program in
the first quarter of 2002 with its SPR instrument module and the hCG and cardiac
panel cartridges. As Quantech completes additional modules and cartridges, they
would be provided to the Charter Customers. Quantech expects to launch sales of
the FasTraQ to customers in various areas of the U.S. after it has received FDA
clearance for its launch menu consisting of six cartridges and related modules
that provide the capability to run most of the tests commonly ordered by the ED.
It is anticipated that launch menu sales will begin approximately nine months
after the initial rollout to Charter Customers.
Quantech also owns 72% of HTS Biosystems, Inc. ("HTS"). HTS is
developing its PROTEOMATRIX(TM) solution, a unique portfolio of innovative,
proprietary detection technologies, chemistries and bioinformatics forming a
matrix of tools that addresses the proteomics market. This portfolio includes
novel label-free detection
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systems as well as advanced fluorescence and chemiluminescent based technologies
supporting all phases of drug discovery and development of unique diagnostics.
HTS was formed by combining technology and intellectual property from its
initial shareholders, Quantech and Applied Biosystems. This technology portfolio
has been expanded, and collaborations with Protein Sciences Corporation,
Ciencia, Inc., Boston Probes, Inc., and Mitsubishi Chemical Corporation have
been formed, positioning the PROTEOMATRIX solution as a powerful tool for the
high-throughput detection of molecular interactions and cellular changes.
PRODUCT DESCRIPTION
General
The Quantech FasTraQ system is a new multi-menu STAT testing system
with real time communication capabilities that is in the final stages of
commercial development. The FasTraQ system consists of the testing 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 personnel. The PrePaQ cartridges can
process one or several tests at a time and the FasTraQ instrument can
simultaneously run up to 20 PrePaQ test cartridges.
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 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 will provide 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 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 sensing component. 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.
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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
The ReaLinQ communications network is an optional, dedicated wireless
LAN with hand held PDA-type individual communicators, employing proprietary
information management software specifically developed for rapid patient
treatment information delivery directly to the selected ED caregivers.
When integrated with the ReaLinQ wireless LAN and hand held PDA-type
communicators, the system will enable the wireless delivery of all test request
input information, as well as all individual patient test results directly to
the selected ED caregivers; anywhere in the ED, in less than 15 minutes without
further ED staff intervention. The bi-directional capability of the ReaLinQ
allows the emergency physician to acknowledge receipt of the test results and
automatically initiate results download to the central lab QC system and
hospital charge billing system. The ReaLinQ system can be installed concurrent
with the FasTraQ instrument, or at any time after installation.
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 FasTraQ system, 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 on average from 45 to 90 minutes 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:
- STAT quantitative test menu (a number instead of qualitative
yes/no)
- User-friendly system, rapid test turnaround time (less than
15 minutes on average)
- Real time monitoring of test information status
- Multi-test, single use disposable
- Cost effective (comparable to central lab STAT test costs,
2x-4x less than STAT lab)
- Remote results receipt acknowledgement; auto-release of test
module
- Throughput of up to 20 PrePaQ cartridges simultaneously
- Concordance with central lab test results
- Whole blood/closed tube (vacutainer) patient sample
capability
- Full-time laboratory information system interface
- Automatic user/patient/test/QC input
- Internet ordering, training and information transfer
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6
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.
STAT tests are required by critical care physicians in areas such as
surgical suites, ICUs/CCUs and EDs because of the time sensitive nature of their
treatment. However, results of STAT tests from the central laboratory take on
average 45 to 90 minutes 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 1,000 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 EDs represent approximately 55% of the ED testing market.
Additionally, the majority of hospitals belong to a small number of buying
groups such as Columbia/HCA and the Voluntary Hospital Association of America
Inc. (VHA). This concentration results in a high level of revenue passing
through a limited number of sites.
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 patients
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 EDs.
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.
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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:
- Cardiac marker panel (CK-MB, troponin I, myoglobin)*
- hCG (Pregnancy)*
- Electrolytes*
- Blood Cell panel (WBC, RBC, Hct, Hgh and 3-part diff.)*
- Coagulation*
- Kidney Panel (Bun/Creatinine)*
- Liver Panel
- Pancreas (Amylase)
- Therapeutic Drug Monitoring (e.g., Digoxin, Theophylline)
- Drugs of Abuse (e.g., Cocaine, Marijuana)
---------------
* Quantech's anticipated initial launch menu. Other tests to be subsequently
introduced.
In 2000 there were 100 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 through its Charter Customer
rollout program with a cardiac panel to test for heart attacks and a
quantitative pregnancy test. The Company expects to provide a number of the
other tests needed by the ED when it launches sales of the system in various
areas of the U.S. Because of the FasTraQ's broad test menu, Quantech believes it
can achieve substantial market penetration. The Company will pay attention to
groupings of tests for particular 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 15 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%
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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.
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 has formed a strategic marketing group. Initially this
marketing group will begin creating awareness of Quantech and its system, and
place the first evaluation systems at Charter Customer sites. Currently Quantech
is evaluating whether to use strategic distribution partners to market its
products in the United States or use a direct sales force. 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
distribution partners. Determination of whether to ultimately market through a
strategic partner will be based upon factors such as size of sales force,
strength of presence in the ED and hospital, pricing and discounts. The benefits
of a strategic partner include lower marketing and sales costs and faster and
higher penetration of the market. The disadvantages of a strategic partner
include significant distributor discounts, and an unknown commitment to the sale
of Quantech products.
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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 direct 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 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. Quantech has signed a distribution agreement
with Mitsubishi Chemical Corporation for the Japanese market, and has begun
identifying potential distribution partners in Europe. The Company will manage
and support international distributors if a strategic distribution partner is
not engaged.
Clients
The purchasing decision for point-of-care (POC) testing equipment is
generally made by a POC committee comprised of ED physicians, laboratory
management and hospital administrators. As a committee member, the laboratory
manager prefers a STAT-testing instrument with the following features:
- Comparable performance to central lab instrument with
concordant results
- One (maximum of two) instruments for entire ED STAT menu
- Full-time, bi-directional laboratory information system
("LIS") interface with information automatically downloaded
to LIS
- Automated user/patient/test/QC information input
- User ID and lockout capability by laboratory
- Minimum user training
- 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. A system that is acceptable to the ED
must provide the following features:
- Comparable performance to central lab instrument with
concordant results
- Rapid turnaround time (less than 15 minutes)
- One (maximum of two) instruments for entire ED STAT menu
- Whole blood, closed collection tube sampling and transfer
- Automatic LIS download
- User friendly - minimum training and time at instrument
- High reliability
- Test menu so all patient testing completed
- Limitation of steps necessary to receive information
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.
To achieve market penetration of the FasTraQ, Quantech's marketing
strategy will be focused on achieving the acceptance of laboratory, ED and
administrative personnel. Testing systems to date have been unable to meet the
needs of all groups because of technology limitations. The FasTraQ is being
designed to meet the requirements of all groups by incorporating the required
features into a single platform.
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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 samples, most of the samples
handled by central laboratories are processed in a continuous running first-in
first-out process. 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/rapid response labs have been established to improve test
turnaround time and reduce interruptions of central lab testing. STAT labs,
however, use much of the same instrumentation found in the central lab. These
central lab systems are generally complex and expensive, incorporating designs
appropriate to the central labs they serve which employ skilled operators who
are expected to perform sample preparation, system calibration and basic
instrument maintenance. Because of the complexity and expense of these systems,
they are not well suited for the STAT lab. In addition, the cost of running STAT
tests in the STAT lab is higher than the central lab because of the inability to
process a large number of samples and the need to maintain skilled technicians
24 hours a day.
There are a significant number of companies serving the central
clinical laboratory market. Abbott Laboratories, Roche Diagnostics, Johnson &
Johnson and Beckman Coulter are large companies that have achieved broad market
penetration by developing several technologies targeted at the central lab and
have penetrated other market segments including limited POC applications. The
FasTraQ will compete with central and STAT laboratory tests to gain market share
and, as a result, Quantech will face competitive reaction from these companies.
However, the Company is not aware of any comprehensive, single instrument
systems by the major players in the IVD market targeted to the ED, which is
capable of delivering the operational, productivity and performance benefits of
the FasTraQ System.
Point-of-Care (POC) testing instruments have been developed in an
attempt to reduce test turnaround time and in some applications the cost of the
STAT lab. Although POC products do reduce test turnaround time for the few tests
they can perform, their limited test menu and lack of central lab features do
not provide an appropriate solution to the ED STAT testing market. The FasTraQ,
however, will not require a skilled technician to operate it, like many POC
instruments. But unlike other POC systems, it will be a hybrid, having the
features and the quality of results of central lab instruments and the ability
to perform a diverse menu of critical ED STAT tests.
There is significant activity in certain areas of the Critical Care
STAT testing segment. Point-of-care companies are addressing limited testing
areas such as coagulation, blood gas and basic chemistry (including
electrolytes). Three such companies, i-STAT Corp. (marketed by
Abbott/Medisense), Diametrics Medical (marketed currently by Agilent
Technologies and soon to be transferred to Philips Medical) and Careside, Inc.
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 broad test menu, especially immunoassays (cardiac, pregnancy,
etc.), and productivity features required by the ED. All three systems are
single patient instruments with no caregiver direct wireless communications
capability.
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 45 to 90 minutes on average. 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 and First Medical have introduced instruments and
tests for heart attacks. Quantech believes that the two systems are not able to
provide the number of tests and other STAT testing requirements expected to be
available on the FasTraQ. Quantech believes that the broad test menu and
productivity improvement features of the FasTraQ system will provide it with a
competitive advantage over other systems.
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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
At the core of Quantech's FasTraQ system 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.
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.
Quantech has also entered into a technology license agreement with
Diametrics Medical, Inc. to provide electrolyte testing capability in the
FasTraQ system. The agreement provides Quantech with a non-exclusive license to
use Diametrics' proprietary technology in the FasTraQ instrument and PrePaQ
cartridges. The Diametrics technology is an electrical based sensor system using
established technology and components.
Quantech is also developing a hematology test that is optically based,
like the SPR tests, but uses a different detection method. All test cartridges,
whether using SPR or other detection methods, make use of Quantech's proprietary
cartridge technology and are run from the same user interface.
MANUFACTURING
Quantech's system is comprised of a modular instrument, disposable
cartridges 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.
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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's SPR cartridge 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. Non-SPR cartridges will consist of plastic carriers, very
similar to those used for SPR cartridges, with various internal sensors
depending on the detection method being used.
Quantech has entered into a non-exclusive OEM supply agreement with
Diametrics Medical, Inc. under which Diametrics will manufacture and supply its
proprietary electrolyte testing components to Quantech for use in the FasTraQ
instrument and PrePaQ cartridge. The agreement calls for minimum annual
purchases of certain components beginning in April 2002.
REGULATORY ENVIRONMENT
Quantech has received clearance from the United States Food and Drug
Administration (the "FDA") to market in the clinical environment its cardiac
tests, myoglobin and CK-MB, and its pregnancy test, hCG. Quantech has also filed
applications for FDA clearance of its point-of-care instrument and test for the
pregnancy enzyme hCG, and expects to file an application for the cardiac enzymes
myoglobin, troponin I and CK-MB in the near future. Additional tests are in
various stages of development and must also be cleared by the FDA.
Quantech 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 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, Quantech 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 Quantech's activities.
Quantech's products could be subject to recall by the FDA or Quantech itself, if
it appears that the products and their use do not conform to regulations.
Generally, medical devices intended for human use that are to be
marketed in the United States are placed in one of three regulatory
classifications depending upon the degree of testing and review to which the
device will be subject. 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.
Quantech 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").
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For new products that are not considered to be "substantially
equivalent" to an existing device, two levels of FDA approval will probably be
required before marketing in the United States can begin. First, the FDA and
participating medical institutions must approve Quantech's application for an
IDE, permitting clinical evaluations of the product utilizing human samples
under controlled experimental conditions. Second, the FDA must grant to Quantech
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. Quantech 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. Quantech 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
Quantech's initial system, introduction of the initial system likely would be
significantly delayed, which could have a material adverse effect on Quantech,
although 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 Quantech 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. Quantech's
products will be manufactured according to ISO 9001 and EN 46001 quality
standards and Quantech expects to be able to apply the CE mark to its products.
In addition, international sales of medical devices manufactured in the U.S. but
not approved by the FDA for distribution in the U.S. are subject to FDA export
requirements. Under these requirements, Quantech must assure that the product is
not in conflict with the laws of the country for which it is intended for
export, in addition to complying with the other requirements of Section 801(e)
of the United States Food, Drug and Cosmetic Act.
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 Quantech'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. Quantech may, but has not yet,
applied for the waiver.
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
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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 Applied Biosystems Agreement
Quantech provided Applied Biosystems ("AB") 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. AB also received two
of Quantech's SPR research breadboards. As part of AB'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 "AB
High Density Technology"). AB granted Quantech an exclusive worldwide license to
the AB High Density Technology for use in FDA medical diagnostics.
Through the optical and chemistry deposition advancements made by AB,
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 AB 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 AB technology. If Quantech does not proceed
to commercialize the SPR based technology licensed from AB, all rights revert
back to AB. The AB technology will not be initially incorporated into the
FasTraQ system.
HTS Biosystems, Inc.
After Quantech and AB 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 AB formed HTS Biosystems, Inc. ("HTS") which is 72% owned
by Quantech and 18% owned by AB. AB 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 AB High Density Technology (the "License"); 3. one of
AB's Quantech SPR breadboard instruments; and 4. the AB breadboard for the AB
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.
HTS will owe to AB: 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 AB
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
AB by HTS for products which incorporate Quantech's SPR technology. In the event
that HTS does not seek to commercialize the SPR or AB High Density Technology,
then the rights revert back to AB. AB 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 AB. 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.
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HTS is developing its PROTEOMATRIX solution, a unique portfolio of
innovative, proprietary detection technologies, chemistries and bioinformatics
forming a matrix of tools that addresses the proteomics market. This portfolio
includes novel label-free (SPR based) detection systems as well as advanced
fluorescence- and chemiluminescence-based technologies supporting all phases of
drug discovery and development of unique diagnostics.
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.
--------------------------------------------------------------------------------------------------------------------------------
PATENT NAME DESCRIPTION U.S. GRANT DATE COUNTRIES GRANTED
--------------------------------------------------------------------------------------------------------------------------------
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 7/1/00 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 N/A 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
--------------------------------------------------------------------------------------------------------------------------------
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 system development, quality control, sales and
marketing, manufacturing and administration.
CAUTIONARY STATEMENTS
MANY OF THE STATEMENTS CONTAINED IN THIS 10-KSB CONSTITUTE "FORWARD LOOKING
STATEMENTS." SUCH STATEMENTS ARE MANAGEMENT'S EXPECTATIONS OR FORECASTS, NOT
HISTORICAL FACTS, AND TYPICALLY RELATE TO PRODUCT DESIGN AND DEVELOPMENT, FDA
APPROVAL, COMMERCIALIZATION, FINANCING NEEDS AND FINANCIAL RESULTS, AMONG
OTHERS. FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY
SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND," "MAY," "COULD,"
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"POSSIBLE," "PLAN," "PROJECT," "WILL," "FORECAST," AND SIMILAR WORDS OR
EXPRESSIONS. SUCH STATEMENTS CANNOT BE GUARANTEED AND INVOLVE RISK AND
UNCERTAINTIES, KNOWN AND UNKNOWN, INCLUDING THOSE IDENTIFIED BELOW AND ELSEWHERE
IN THIS REPORT AND OTHER FILINGS WITH THE SEC. SUCH RISKS MAY CAUSE ACTUAL RISKS
TO DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING
STATEMENTS. QUANTECH UNDERTAKES NO OBLIGATION TO UPDATE FORWARD-LOOKING
STATEMENTS. IT IS NOT POSSIBLE TO FORESEE OR IDENTIFY ALL FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER FROM EXPECTED OR HISTORIC RESULTS. AS SUCH,
INVESTORS SHOULD NOT CONSIDER ANY LIST OF SUCH FACTORS TO BE AN EXHAUSTIVE
STATEMENT OF ALL RISKS, UNCERTAINTIES OR POTENTIALLY INACCURATE ASSUMPTIONS.
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 Quantech'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
capital stock.
"GOING CONCERN" STATEMENT IN AUDITOR'S REPORT MAY MAKE IT DIFFICULT TO RAISE NEW
CAPITAL.
Quantech has not had any significant revenues to date. As of June 30,
2000 and 2001 we had accumulated deficits of $31,900,252 and $45,955,513,
respectively. The report of the independent auditors on Quantech's financial
statements for the year ended June 30, 2001, includes an explanatory paragraph
relating to the uncertainty of Quantech's ability to continue as a going
concern. The above factors 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.
DEVELOPMENT OF TEST MENU IS NOT COMPLETE AND FURTHER TESTS ARE EXPECTED TO BE
NECESSARY FOR PRODUCT LAUNCH.
Quantech has developed tests for cardiac markers and pregnancy using
its SPR technology. Although once FDA approval is obtained these will be salable
products, we do not believe that these tests are sufficient to launch a
successful product. Additional tests for the FasTraQ System are under
development, some of which incorporate
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analytical methods other than SPR. There can be no assurance that Quantech will
develop in a timely manner the additional tests we believe are required to
launch the FasTraQ System.
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 they currently receive 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/distributor 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 only entered into one agreement with
such outside vendors for the supply of electrolyte test components. While we
have been working with various vendors during the development work, there can be
no assurance that we can engage additional vendors for our manufacturing needs.
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.
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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.
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 system will be subject to the Clinical Laboratory
Improvement Act of 1988. This regulation governs the qualifications of persons
supervising a laboratory test and the persons performing the laboratory test. We
have based our marketing plan on the belief that our system will be classified
as a test of moderate complexity. However, we have not sought the necessary
regulatory approval of this classification. In practical terms, performing a
test of moderate complexity means that the individual supervising the test must
be well educated and well trained, but the individual operating the system
requires no formal laboratory education and only task-specific training. If our
system were not classified as a test of moderate complexity, we would not have a
user-friendly operation advantage, which could have an adverse effect on sales.
THE FASTRAQ WILL INITIALLY BE QUANTECH'S ONLY PRODUCT MAKING US VULNERABLE TO
TECHNOLOGICAL OBSOLESCENCE.
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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.
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 EMPLOYEES, THE LOSS OF WHICH 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.
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
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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.
QUANTECH OWNERSHIP OF HTS BIOSYSTEMS WILL BE DILUTED AND THE VALUE OF THIS ASSET
COULD DECREASE.
We own 72% of the Preferred Stock of HTS Biosystems. A decrease in the
market value of HTS would result in a decrease in the value of this asset to
Quantech. In addition, HTS must raise capital to continue its operations. It is
anticipated that this capital will come from the sale of equity securities. This
sale would result in Quantech's ownership in HTS going down and if the value of
HTS does not rise the value of this asset to Quantech would be less.
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 capital stock are eligible
to be sold in the public market along with almost all shares that may be
obtained upon exercise of outstanding options and warrants. 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.
OUR STOCK PRICE HAS BEEN, AND IS EXPECTED TO CONTINUE TO BE, VOLATILE.
We believe that factors such as announcements of developments by us or
our competitors, general conditions in the health care or medical diagnostic
markets and conditions in the financial markets could cause the price of our
Capital Stock to fluctuate substantially. In addition, the stock market has
recently experienced extreme price and volume fluctuations which have affected
the market prices for many emerging growth companies and which have often been
unrelated to the operating performance of the specific companies. These market
fluctuations may adversely affect the price of our capital stock.
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 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quantech'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.
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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 17, 2001 was $1.43 per share.
HIGH LOW
------------- -------------
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
Fiscal 2001
First Quarter $ 3.75 $ 2.63
Second Quarter $ 3.41 $ 1.81
Third Quarter $ 2.84 $ 1.47
Fourth Quarter $ 2.05 $ 1.03
As of September 17, 2001, Quantech had approximately 700 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 any of its capital 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.
UNREGISTERED SALES OF STOCK
In May 2001, Quantech granted warrants to certain directors as
compensation for participating as co-borrowers in establishing a bank credit
facility of up to a maximum of $2.5 million. The directors were granted warrants
to purchase Quantech common stock for $1.03 per share (market value at date of
credit facility) in the aggregate amount of 500,000 shares. In addition,
Quantech pledged to the directors as collateral 3.2 million shares of HTS common
stock owned by Quantech. The credit facility expires on December 1, 2001. As of
September 17, 2001, $1,924,871 was outstanding on this credit facility.
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 test cartridges and wireless handheld
communication devices to quickly provide test information.
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Quantech's consolidated financial statements include the results of its
majority owned subsidiary, HTS Biosystems ("HTS") of which Quantech currently
has 72% ownership. The HTS PROTEOMATRIX(TM) solution is a unique portfolio of
innovative, proprietary detection technologies, chemistries and bioinformatics
forming a matrix of tools that addresses the proteomics market. This portfolio
includes novel label-free detection systems as well as advanced fluorescence and
chemiluminescent based technologies supporting all phases of drug discovery and
development of unique diagnostics. HTS Biosystems was formed by combining
technology and intellectual property from its initial shareholders Quantech and
Applied Biosystems. This technology portfolio has been expanded, and
collaborations with Protein Sciences Corporation, Ciencia, Inc., Boston Probes,
Inc., and Mitsubishi Chemical Corporation have been formed, positioning the
PROTEOMATRIX solution as a powerful tool for the high-throughput detection of
molecular interactions and cellular changes.
Quantech is a development stage company which has suffered losses from
operations since inception. The Company will require additional financing to
complete development of its FasTraQ system, obtain FDA clearance and
commercialize, market and sell its product in order to attain profitable
operations. While management is actively seeking additional funding, Quantech
does not have any commitments for any such funding and there can be no assurance
that Quantech will be able to obtain such funding when needed. Accordingly,
these factors raise substantial doubt about the Company's ability to continue as
a going concern.
RESULTS OF OPERATIONS
Quantech has incurred a net loss of $39,836,085 from September 30, 1991
(date of inception) through June 30, 2001 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 that revenue increased during the year ended June 30,
2001 to $1,101,926 from $150,000 for the year ended June 30, 2000. The increase
was due to higher sales of evaluation systems and licensing revenue to
Mitsubishi Chemical Corporation, Quantech's distribution partner in Asia. During
fiscal year 2002 we expect to earn additional licensing revenue, but do not
expect significant sales of instruments or cartridges.
General and administration expenses increased to $2,993,702 for the
year ended June 30, 2001 from $1,876,930 for the year ended June 30, 2000. 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 complete development of their systems, prepare for
market launch and begin to manufacture and distribute their products.
Marketing expenses decreased slightly to $1,031,981 for the year ended
June 30, 2001 from $1,059,063 for the year ended June 30, 2000 due to lower
outside market research expenses offset by expenses related to establishing an
internal marketing function. We expect marketing expenses to increase in the
future as Quantech and HTS prepare for market launch and begin to distribute
their products.
Research and development costs increased to $9,022,385 during the year
ended June 30, 2001 from $3,269,590 for the year ended June 30, 2000. The
increase was primarily due to increased internal and outside development work at
Quantech, including expenses to conduct clinical trials, and the initial
development work at HTS. We expect research and development spending to
significantly increase as Quantech and HTS complete the commercial development
of their systems and begin to establish higher volume manufacturing
capabilities.
There was no minimum royalty expense in fiscal 2001 compared to $75,000
in fiscal 2000 due to the final minimum royalty payment made to Ares-Serono in
January 2000. In the future, we expect to incur additional royalty expense when
royalties based on revenues exceed minimum payments.
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For the year ended June 30, 2001 Quantech had interest income of
$128,070 compared to $27,562 for the 2000 fiscal year as a result of more cash
on hand from the proceeds of offerings for Quantech and HTS.
Interest expense increased to $47,211 during the year ended June 30,
2001 from $42,509 during the year ended June 30, 2000 as a result of increased
debt. Interest expense is expected to increase during fiscal year 2002 due to
higher average debt outstanding.
During fiscal year 2001 the expense credit for minority interest
increased to $398,915 compared to $122,677 in fiscal 2000 due to the higher net
loss at HTS.
For the year ended June 30, 2001, Quantech had a loss of $11,466,368 as
compared to $6,022,853 for the same period ended June 30, 2000. The increased
loss was primarily a result of higher general and administrative and research
and development expenses during fiscal year 2001, partially offset by higher
revenue and the larger expense credit for the minority interest in the
subsidiary. Excluding the results of HTS Biosystems, Quantech had a loss for the
year ended June 30, 2001 of $9,009,153 as compared to $5,568,494 for the same
period ended June 30, 2000.
Quantech's earnings per share figures for fiscal years 2001 and 2000
reflect large non-cash charges resulting from the sale of convertible
securities. These "beneficial conversion feature of preferred stock" and
"preferred stock accretion" charges were due to the accounting treatment of
equity sales and had no effect on cash flow.
LIQUIDITY AND CAPITAL RESOURCES
From inception to June 30, 2001, Quantech has raised approximately
$34.7 million through a combination of public stock sales and private sales of
stock and debt obligations. In May 2001, Quantech established a bank credit
facility of up to a maximum of $2.5 million, in which certain of the directors
participated as co-borrowers. Quantech compensated the directors for their
participation by granting each of them warrants to purchase Quantech common
stock for $1.03 per share (market value at date of credit facility) in the
aggregate amount of 500,000 shares. In addition, Quantech pledged to the
directors as collateral 3.2 million shares of HTS common stock owned by
Quantech. The credit facility expires on December 1, 2001. As of September 17,
2001, $1,924,871 was outstanding on this credit facility.
In July 2001, Quantech implemented a company-wide plan to conserve cash
while pursuing additional funding for system commercialization. The cash
conservation plan included a 20% reduction in workforce and temporary salary
reductions by senior personnel.
In August 2001, Quantech raised bridge financing with net proceeds of
$958,960 through the sale of convertible promissory notes. The notes have an
interest rate of 10% per year paid semi-annually and are due upon demand after
one year. The Company pledged as collateral 1,388,800 shares of HTS common stock
owned by Quantech. The notes may be converted into shares of the equity security
(the "Next Financing Shares") sold by Quantech in its next equity financing of
at least $5 million (the "Next Financing"). Noteholders will have the option of
converting their notes at a price equal to the lesser of 80% of the per share
price of the Next Financing Shares or 80% of the applicable conversion price of
such shares. If the Next Financing does not occur within one year from the
issuance date of the notes, the noteholders may, at their option, convert the
notes into shares of Quantech common stock at $1.00 per share. The noteholders
also received a five-year warrant to purchase one Next Financing Share for each
Next Financing Share into which such investor's note is convertible. The warrant
exercise price shall be the lesser of 80% of the purchase price per share of the
Next Financing Shares or 80% of the applicable conversion price of such shares.
If the Next Financing does not occur within one year from the issuance date of
the warrant, the warrant becomes exercisable to purchase, at $1.00 per share,
the number of shares of common stock into which the note is then convertible.
Quantech anticipates that its cash on hand and bank credit facility
will allow it to maintain its current level of operations into November 2001.
Quantech is actively pursuing additional bridge financing through the issuance
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of additional convertible promissory notes as described above, and has signed a
non-binding term sheet to raise approximately $1.5 million through the issuance
of promissory notes. Quantech is in the process of negotiating the terms of the
notes. Such financing will allow Quantech to continue its current level of
operations into the first quarter of 2002. If such financing cannot be raised,
Quantech will have to scale back its operations.
Additional financing of approximately $10 to $12 million will be needed
to develop and submit to the FDA additional tests, complete customer evaluations
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 does not anticipate receiving any
significant funding from commercial lenders other than the $2.5 million credit
facility mentioned above. In addition, HTS Biosystems anticipates raising
additional capital. An equity financing by HTS would result in a dilution of
Quantech ownership of HTS. Although HTS is consolidated with Quantech for
financial reporting purposes, HTS funds its own operations and does not receive
funds from Quantech.
Quantech incurred capital expenditures of approximately $1.2 million in
fiscal 2001 primarily for automated cartridge production equipment and office
systems and equipment. We anticipate significantly higher capital expenditures
in the future for laboratory and production equipment and facility expansion as
Quantech and HTS near product introduction. The timing and amount of such
expenditures will be governed by our development and market introduction
schedules, which are subject to change due to a number of factors including
development delays, FDA approval and availability of future financing.
As of September 17, 2001 Quantech had 18,583,712 shares of Common Stock
outstanding. It also had options and warrants outstanding to purchase an
additional 8,638,064 shares plus convertible notes and warrants issued in August
2001, as described above, for a presently indeterminable number of shares.
NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION: The staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue
Recognition in Financial Statements." SAB No. 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
related to revenue recognition. The Company adopted SAB No. 101 in the first
quarter of the fiscal year ending June 30, 2001. The adoption of SAB No. 101 did
not have a significant effect 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 ended 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.
PRONOUNCEMENTS ISSUED NOT YET ADOPTED: In July, 2001, the Financial
Accounting Standards Board issued two statements - Statement 141, Business
Combinations, and Statement 142, Goodwill and Other Intangible Assets, which
will potentially impact the Company's accounting for its reported intangible
assets. The standards generally are required to be implemented by the Company in
its 2002 financial statements. The adoption of these standards is not expected
to have a material impact on the Company's financial statements.
In September 2001, the FASB issued Statement 143, Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligation associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Statement will be effective for the
Company's fiscal year
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ending June 30, 2003. Management expects the adoption of this standard will not
have a material impact on the financial statements.
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as
follows:
Page
----
Financial Statements for Fiscal Years 2001 and 2000
Independent Auditors Report................................................................... 26
Balance Sheets as of June 30, 2001 and 2000................................................... 27-28
Statements of Operations For the Period from Inception (September 30, 1991)
through June 30, 2001 and for the Years Ended June 30, 2001 and 2000........................ 29
Statements of Stockholders' Equity (Deficit) For the Period from Inception
(September 30, 1991) through June 30, 2001.................................................. 30-37
Statement of Cash Flows For the Period from Inception (September 30, 1991)
through June 30, 2001 and for the Years Ended June 30, 2001 and 2000........................ 38-41
Notes to Financial Statements................................................................. 42-58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, 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, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
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 /s/ McGladrey & Pullen, LLP
September 12, 2001
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QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
ASSETS 2001 2000
------ ----------- -----------
Current Assets
Cash and cash equivalents $ 2,162,479 $ 1,328,797
8% demand note receivable from officer 151,963 141,000
Prepaid expenses 29,376 44,261
----------- -----------
TOTAL CURRENT ASSETS 2,343,818 1,514,058
----------- -----------
Property and Equipment
Equipment 2,350,964 1,193,898
Leasehold improvements 72,059 28,634
----------- -----------
2,423,023 1,222,532
Less accumulated depreciation 619,183 278,088
----------- -----------
1,803,840 944,444
----------- -----------
Other Assets
License agreement, at cost, less accumulated amortization (Note 4) 1,755,924 2,082,553
Patents 128,115 25,816
Deposits 37,793 79,457
----------- -----------
1,921,832 2,187,826
----------- -----------
$ 6,069,490 $ 4,646,328
=========== ===========
See Notes to Consolidated Financial Statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2001 2000
---------------------------------------------- ----------- -----------
Current Liabilities
Short-term debt (Note 3) $ 1,931,871 $ 750,000
Current portion of capital lease obligation (Note 5) -- 57,770
Accounts payable 871,699 614,592
Accrued expenses 203,234 142,513
Deferred revenue (Note 4) 1,038,412 --
----------- -----------
TOTAL CURRENT LIABILITIES 4,045,216 1,564,876
----------- -----------
Capital lease obligation, net of current portion (Note 5) -- 46,009
----------- -----------
Deferred revenue (Note 4) 3,212,157 --
----------- -----------
Redeemable Series A Preferred Stock, converted to common stock in
2001 (Note 6) -- 4,495,245
----------- -----------
Minority Interest in Subsidiary -- 339,685
----------- -----------
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity (Deficit) (Notes 2, 3, 4, 6, and 7)
Common stock, no par value; authorized 59,913,000 shares; issued and
outstanding 18,583,712 and 6,204,416 shares at June 30, 2001 and 2000,
respectively 33,479,786 19,959,765
Series B Preferred Stock, converted to common stock in 2001 -- 1,874,073
Series C Preferred Stock, converted to common stock in 2001 -- 973,100
Stock subscription receivable (9,782) (20,000)
Additional paid-in capital 11,297,626 7,313,828
Deficit accumulated during the development stage (45,955,513) (31,900,252)
----------- -----------
(1,187,883) (1,799,486)
----------- -----------
$ 6,069,490 $ 4,646,328
=========== ===========
28
29
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
September 30,
Years Ended June 30 1991 (Date of
--------------------------------- Inception) to
2001 2000 June 30, 2001
------------- ----------- --------------
Net revenue (Note 2):
Product sales $ 952,495 $ 150,000 $ 1,102,495
Licensing revenue 149,431 -- 149,431
------------- ----------- ------------
TOTAL 1,101,926 150,000 1,251,926
------------- ----------- ------------
Expenses:
General and administrative 2,993,702 1,876,930 15,199,785
Marketing 1,031,981 1,059,063 2,517,126
Research and development 9,022,385 3,269,590 20,361,768
Minimum royalty expense (Note 4) -- 75,000 1,300,000
Minority interest (398,915) (122,677) (521,592)
Other -- -- 488,978
------------- ----------- ------------
12,649,153 6,157,906 39,346,065
------------- ----------- ------------
LOSS FROM OPERATIONS (11,547,227) (6,007,906) (38,094,139)
Other:
Interest income 128,070 27,562 340,734
Interest expense (47,211) (42,509) (2,040,085)
------------- ----------- ------------
LOSS BEFORE INCOME TAXES (11,466,368) (6,022,853) (39,793,490)
Income taxes (Note 8) -- -- 42,595
------------- ----------- ------------
NET LOSS $ (11,466,368) $(6,022,853) $(39,836,085)
============= =========== ============
Net loss attributable to common stockholders:
Net loss $ (11,466,368) $(6,022,853)
Preferred stock accretion (118,249) (410,445)
Beneficial conversion feature of preferred stock (2,470,644) (2,742,670)
------------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (14,055,261) $(9,175,968)
============= ===========
Loss per basic and diluted common share $ (0.91) $ (2.12)
============= ===========
Weighted-average common shares outstanding $ 15,362,555 $ 4,335,846
============= ===========
See Notes to Consolidated Financial Statements.
29
30
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
JUNE 30, 2001 AND 2000
Series B Preferred Stock Series C Preferred Stock Series D Preferred Stock
------------------------ ------------------------ -------------------------
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance, at inception - $ - - $ - - $ -
Net loss - - - - - -
Common stock transactions:
Common stock issued, October 1991 - - - - - -
Common stock issued, November 1991 - - - - - -
Common stock issuance costs - - - - - -
Cumulative translation adjustment - - - - - -
---------------------------------------------------------------------------------
Balance, December 31, 1991 - - - - - -
Net loss - - - - - -
Common stock transactions:
Common stock issued, September 1992 - - - - - -
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 - - - - - -
Net loss - - - - - -
Common stock transactions:
Common stock issued, January 1993 - - - - - -
Common stock issued, April 1993 - - - - - -
Change in common stock par value
resulting from merger - - - - - -
Repayments - - - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1993 - - - - - -
Net loss - - - - - -
12,000 shares of common stock to be issued - - - - - -
Repayments - - - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1994 - - - - - -
Net loss - - - - - -
Common stock issued, June 1995 - - - - - -
Warrants issued for services - - - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1995 - - - - - -
Net loss - - - - - -
Common stock issued, net of issuance costs of
$848,877:
July 1995 - - - - - -
August 1995 - - - - - -
September 1995 - - - - - -
November 1995 - - - - - -
December 1995 - - - - - -
May 1996 - - - - - -
June 1996 - - - - - -
Payment received on subscription receivable - - - - - -
Compensation expense recorded on stock options - - - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1996 - - - - - -
Net loss - - - - - -
Stock offering costs - - - - - -
Common stock issued upon exercise of options
and warrants:
September 1996 - - - - - -
October 1996 - - - - - -
November 1996 - - - - - -
December 1996 - - - - - -
January 1997 - - - - - -
February 1997 - - - - - -
March 1997 - - - - - -
Payments received on subscription receivable - - - - - -
Compensation expense recorded on stock options - - - - - -
Common stock issued, June 1997 - - - - - -
Warrants issued with notes payable - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
(Continued)
30
31
Common Stock Additional Common Stock
-------------------------- Paid-In Paid for, but
Shares Issued Amount Capital Not Issued
-------------------------------------------------------------------------------------------------------------
Balance, at inception - $ - $ - $ -
Net loss - - - -
Common stock transactions:
Common stock issued, October 1991 160,000 3,154,574 - -
Common stock issued, November 1991 30,000 611,746 1,788,254 -
Common stock issuance costs - - (889,849) -
Cumulative translation adjustment - - - -
----------------------------------------------------------
Balance, December 31, 1991 190,000 3,766,320 898,405 -
Net loss - - - -
Common stock transactions:
Common stock issued, September 1992 35,000 699,033 875,967 -
Common stock issuance costs - - (312,755) -
8,000 shares of common stock to be issued - - - 120,000
Officer advances, net - - - -
Cumulative translation adjustment - - - -
Elimination of cumulative translation - - - -
adjustment
----------------------------------------------------------
Balance, December 31, 1992 225,000 4,465,353 1,461,617 120,000
Net loss - - - -
Common stock transactions:
Common stock issued, January 1993 8,000 1,600 118,400 (120,000)
Common stock issued, April 1993 1,500 300 11,700 -
Change in common stock par value
resulting from merger - (4,420,353) 4,420,353 -
Repayments - - - -
----------------------------------------------------------
Balance, June 30, 1993 234,500 46,900 6,012,070 -
Net loss - - - -
12,000 shares of common stock to be issued - - - 30,000
Repayments - - - -
----------------------------------------------------------
Balance, June 30, 1994 234,500 46,900 6,012,070 30,000
Net loss - - - -
Common stock issued, June 1995 107,500 21,500 276,068 (30,000)
Warrants issued for services - - 40,200 -
----------------------------------------------------------
Balance, June 30, 1995 342,000 68,400 6,328,338 -
Net loss - - - -
Common stock issued, net of issuance costs of
$848,877:
July 1995 308,000 61,600 1,304,450 -
August 1995 35,880 7,176 161,460 -
September 1995 690,364 138,073 2,370,389 -
November 1995 94,892 18,978 425,482 -
December 1995 560,857 112,172 1,292,473 -
May 1996 313,750 62,750 3,300,422 -
June 1996 252 51 3,650 -
Payment received on subscription receivable (960) (192) (14,808) -
Compensation expense recorded on stock options - - 125,000 -
----------------------------------------------------------
Balance, June 30, 1996 2,345,035 469,008 15,296,856 -
Net loss - - - -
Stock offering costs - - (12,310) -
Common stock issued upon exercise of options
and warrants:
September 1996 500 100 2,400 -
October 1996 8,500 1,700 40,800 -
November 1996 750 150 3,600 -
December 1996 13,500 2,700 64,800 -
January 1997 1,000 200 4,800 -
February 1997 7,500 1,500 17,250 -
March 1997 7,000 1,400 33,600 -
Payments received on subscription receivable - - - -
Compensation expense recorded on stock options - - 48,000 -
Common stock issued, June 1997 18,250 3,650 105,850 -
Warrants issued with notes payable - - 371 -
-------------------------------------------------------------------------------------------------------------
31
32
Deficit
Accumulated Accumulated
During the Other
Subscriptions Due From Development Comprehensive
Receivable Officers Stage Income
--------------------------------------------------- -----------------------------------------------------------
Balance, at inception $ - $ - $ - $ -
Net loss - - (594,620) -
Common stock transactions:
Common stock issued, October 1991 - - - -
Common stock issued, November 1991 - - - -
Common stock issuance costs - - - -
Cumulative translation adjustment - - - 387,754
-----------------------------------------------------------
Balance, December 31, 1991 - - (594,620) 387,754
Net loss - - (2,880,988) -
Common stock transactions:
Common stock issued, September 1992 (53,689) - - -
Common stock issuance costs - - - -
8,000 shares of common stock to be issued - - - -
Officer advances, net - (27,433) - -
Cumulative translation adjustment - - - (209,099)
Elimination of cumulative translation - - - (178,655)
adjustment
-----------------------------------------------------------
Balance, December 31, 1992 (53,689) (27,433) (3,475,608) -
Net loss - - (996,089) -
Common stock transactions:
Common stock issued, January 1993 - - - -
Common stock issued, April 1993 - - - -
Change in common stock par value
resulting from merger - - - -
Repayments - 5,137 - -
-----------------------------------------------------------
Balance, June 30, 1993 (53,689) (22,296) (4,471,697) -
Net loss - - (1,543,888) -
12,000 shares of common stock to be issued - - - -
Repayments 53,689 22,296 - -
-----------------------------------------------------------
Balance, June 30, 1994 - - (6,015,585) -
Net loss - - (2,070,292) -
Common stock issued, June 1995 (20,000) - - -
Warrants issued for services - - - -
-----------------------------------------------------------
Balance, June 30, 1995 (20,000) - (8,085,877) -
Net loss - - (2,396,963) -
Common stock issued, net of issuance costs of
$848,877:
July 1995 - - - -
August 1995 - - - -
September 1995 - - - -
November 1995 - - - -
December 1995 - - - -
May 1996 - - - -
June 1996 - - - -
Payment received on subscription receivable 20,000 - - -
Compensation expense recorded on stock options - - - -
-----------------------------------------------------------
Balance, June 30, 1996 - - (10,482,840) -
Net loss - - (3,925,460) -
Stock offering costs - - - -
Common stock issued upon exercise of options
and warrants:
September 1996 - - - -
October 1996 - - - -
November 1996 - - - -
December 1996 (57,500) - - -
January 1997 - - - -
February 1997 - - - -
March 1997 - - - -
Payments received on subscription receivable 57,500 - - -
Compensation expense recorded on stock options - - - -
Common stock issued, June 1997 - - - -
Warrants issued with notes payable - - - -
--------------------------------------------------- -----------------------------------------------------------
32
33
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
JUNE 30, 2001 AND 2000
Series B Preferred Stock Series C Preferred Stock Series D Preferred Stock
------------------------ ------------------------ -------------------------
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 - - - - - -
Net loss - - - - - -
Conversion of common stock from par value to
no par value - - - - - -
Common stock issued for license agreement:
September 1997 - - - - - -
Common stock issued for equipment and services
received:
March 1998 - - - - - -
Warrants issued for services received:
March 1998 - - - - - -
April 1998 - - - - - -
Warrants issued with notes payable - - - - - -
Amount attributable to value of debt conversion
feature - - - - - -
Warrants issued for license agreement:
December 1997 - - - - - -
Compensation expense recorded on stock options - - - - - -
Adjustment of fractional shares due to 1-for-20
reverse stock - - - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1998 - - - - - -
Net loss - - - - - -
Warrants issued with notes payable - - - - - -
Common stock issued upon conversion of notes
payable:
July 1998 - - - - - -
September 1998 - - - - - -
October 1998 - - - - - -
Common stock issued upon exercise of warrant:
August 1998 - - - - - -
Common stock issued for equipment and services
received:
July 1998 - - - - - -
August 1998 - - - - - -
September 1998 - - - - - -
December 1998 - - - - - -
Stock options issued for services:
October 1998 - - - - - -
Common stock issued upon conversion of
preferred stock:
November 1998 - - - - - -
January 1999 - - - - - -
March 1999 - - - - - -
April 1999 - - - - - -
Warrants issued for acquisition of engineering
development agreement:
November 1998 - - - - - -
Compensation expense recorded on stock options - - - - - -
Warrants issued in conjunction with Series A
Preferred Stock - - - - - -
Accretion to redemption value of Series A
redeemable Preferred Stock - - - - - -
Issuance of Series B Preferred Stock 623,334 891,500 - - - -
---------------------------------------------------------------------------------
Balance, June 30, 1999 623,334 891,500 - - - -
Net loss - - - - - -
Common stock issued February 2000 - - - - - -
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 - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
(Continued)
33
34
Common Stock Additional Common Stock Common Stock
-------------------------- Paid-In Paid for, but Subscriptions
Shares Issued Amount Capital Not Issued Receivable
-----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 2,402,035 480,408 15,606,017 - -
Net loss - - - - -
Conversion of common stock from par value to
no par value - 15,392,446 (15,392,446) - -
Common stock issued for license agreement:
September 1997 150,000 390,000 - - -
Common stock issued for equipment and services
received:
March 1998 13,078 45,584 - - -
Warrants issued for services received:
March 1998 - - 15,215 - -
April 1998 - - 500 - -
Warrants issued with notes payable - - 939 - -
Amount attributable to value of debt conversion
feature - - 988,444 - -
Warrants issued for license agreement:
December 1997 - - 230,000 - -
Compensation expense recorded on stock options - - 28,000 - -
Adjustment of fractional shares due to 1-for-20
reverse stock (73) - - - -
--------------------------------------------------------------------------
Balance, June 30, 1998 2,565,040 16,308,438 1,476,669 - -
Net loss - - - - -
Warrants issued with notes payable - - 76 - -
Common stock issued upon conversion of notes
payable:
July 1998 2,000 7,060 - - -
September 1998 3,400 12,002 - - -
October 1998 25,000 18,750 - - -
Common stock issued upon exercise of warrant:
August 1998 2,045 5,114 - - -
Common stock issued for equipment and services
received:
July 1998 5,714 20,000 - - -
August 1998 9,196 27,589 - - -
September 1998 12,557 11,318 - - -
December 1998 6,078 5,688 - - -
Stock options issued for services:
October 1998 - - 42,000 - -
Common stock issued upon conversion of
preferred stock:
November 1998 74,052 55,539 - - -
January 1999 15,952 11,964 - - -
March 1999 500 375 - - -
April 1999 20,000 15,000 - - -
Warrants issued for acquisition of engineering
development agreement:
November 1998 - - 554,000 - -
Compensation expense recorded on stock options - - 43,000 - -
Warrants issued in conjunction with Series A
Preferred Stock - - 227,000 - -
Accretion to redemption value of Series A
redeemable Preferred Stock - - - - -
Issuance of Series B Preferred Stock - - - - (60,000)
--------------------------------------------------------------------------
Balance, June 30, 1999 2,741,534 16,498,837 2,342,745 - (60,000)
Net loss - - - - -
Common stock issued February 2000 125,000 187,500 - - (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 - -
-----------------------------------------------------------------------------------------------------------------------------
34
35
Deficit
Accumulated Accumulated
During the Other
Due From Development Comprehensive
Officers Stage Income
--------------------------------------------------- -------------------------------------------
Balance, June 30, 1997 - (14,408,300) -
Net loss - (3,648,748) -
Conversion of common stock from par value to
no par value - - -
Common stock issued for license agreement:
September 1997 - - -
Common stock issued for equipment and services
received:
March 1998 - - -
Warrants issued for services received:
March 1998 - - -
April 1998 - - -
Warrants issued with notes payable - - -
Amount attributable to value of debt conversion
feature - - -
Warrants issued for license agreement:
December 1997 - - -
Compensation expense recorded on stock options - - -
Adjustment of fractional shares due to 1-for-20
reverse stock - - -
-------------------------------------------
Balance, June 30, 1998 - (18,057,048) -
Net loss - (4,289,816) -
Warrants issued with notes payable - - -
Common stock issued upon conversion of notes
payable:
July 1998 - - -
September 1998 - - -
October 1998 - - -
Common stock issued upon exercise of warrant:
August 1998 - - -
Common stock issued for equipment and services
received:
July 1998 - - -
August 1998 - - -
September 1998 - - -
December 1998 - - -
Stock options issued for services:
October 1998 - - -
Common stock issued upon conversion of
preferred stock:
November 1998 - - -
January 1999 - - -
March 1999 - - -
April 1999 - - -
Warrants issued for acquisition of engineering
development agreement:
November 1998 - - -
Compensation expense recorded on stock options - - -
Warrants issued in conjunction with Series A
Preferred Stock - - -
Accretion to redemption value of Series A
redeemable Preferred Stock - (377,420) -
Issuance of Series B Preferred Stock - - -
-------------------------------------------
Balance, June 30, 1999 - (22,724,284) -
Net loss - - -
Common stock issued February 2000 - - -
Series B Preferred Stock issued:
July 1999 - - -
August 1999 - - -
September 1999 - - -
October 1999 - adjust price to $1.00 (Note 6) - - -
November 1999 - - -
December 1999 - - -
January 2000 - - -
February 2000 - - -
Beneficial conversion expense on Series B
Preferred Stock - (1,769,570) -
--------------------------------------------------- -------------------------------------------
35
36
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
JUNE 30, 2001 AND 2000
Series B Preferred Stock Series C Preferred Stock Series D Preferred Stock
------------------------ ------------------------ -------------------------
Shares Issued Amount Shares Issued Amount Shares Issued Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (continued)
Common stock issued upon conversion of
preferred stock:
July 1999 - - - - - -
August 1999 (33,333) (50,000) - - - -
September 1999 - - - - - -
October 1999 - - - - - -
December 1999 - - - - - -
January 2000 (880,000) (880,000) - - - -
February 2000 - - - - - -
March 2000 (75,000) (72,500) - - - -
April 2000 (180,000) (177,000)
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 - - - - - -
November 1999 - - - - - -
January 2000 - - - - - -
February 2000 - - - - - -
March 2000 - - - - - -
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 - - 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 - -
Net Loss - - - - - -
Series D Preferred Stock issued:
August 2000 - - - - 1,462,400 2,817,482
September 2000 - - - - 533,600 1,123,817
October 2000 - - - - 933,800 1,613,840
Common stock issued upon conversion of
preferred stock:
September 2000 (25,000) (22,500) - - - -
October 2000 (2,719,667) (1,851,573) (1,000,000) (973,100) (2,929,800) (5,555,139)
Common stock issued upon exercise of
warrants:
October 2000 - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
(Continued)
36
37
Common Stock Additional Common Stock
-------------------------- Paid-In Paid for, but
Shares Issued Amount Capital Not Issued
--------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (continued)
Common stock issued upon conversion of - $ - $ - $ -
preferred stock:
July 1999 32,000 24,000 - -
August 1999 179,121 159,341 - -
September 1999 80,852 60,639 - -
October 1999 50,000 37,500 - -
December 1999 13,252 9,939 - -
January 2000 890,000 887,500 - -
February 2000 866,664 649,998 - -
March 2000 89,000 83,000 - -
April 2000 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 - - 10,000 -
November 1999 - - 15,000 -
January 2000 - - 152,000 -
February 2000 - - 469,000 -
March 2000 - - 25 -
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
Beneficial conversion expense on Series C - -
Preferred Stock - - 973,100 -
Compensation recorded on stock options - - 332,300 -
Subsidiary stock issued - - 1,250,088 -
Payments received on subscriptions receivable - - - -
Accretion to redemption value of Series A
redeemable Preferred Stock - - - -
-----------------------------------------------------------
Balance June 30, 2000 6,204,416 19,959,765 7,313,828 -
Net Loss - - - -
Series D Preferred Stock issued:
August 2000 14,108 10,581 - -
September 2000 25,000 22,500 - -
October 2000 - - - -
Common stock issued upon conversion of
preferred stock:
September 2000 - - - -
October 2000 12,055,063 12,982,725 - -
Common stock issued upon exercise of
warrants:
October 2000 1,125 844 - -
--------------------------------------------------------------------------------------------------------------
37
38
Deficit
Accumulated Accumulated
Common Stock During the Other
Subscriptions Due From Development Comprehensive
Receivable Officers Stage Income
-------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (continued)
Common stock issued upon conversion of $ - $ - $ - $ -
preferred stock:
July 1999 - - - -
August 1999 - - - -
September 1999 - - - -
October 1999 - - - -
December 1999 - - - -
January 2000 - - - -
February 2000 - - - -
March 2000 - - - -
April 2000
May 2000
June 2000
Common stock issued upon exercise of warrants:
September 1999 - - - -
February 2000 - - - -
March 2000 - - - -
May 2000
June 2000
Warrants issued:
September 1999 (10,000) - - -
November 1999 (15,000) - - -
January 2000 - - - -
February 2000 - - - -
March 2000 - - - -
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) -
Compensation recorded on stock options - - - -
Subsidiary stock issued - - - -
Payments received on subscriptions receivable 89,500 - - -
Accretion to redemption value of Series A
redeemable Preferred Stock - - (410,445) -
----------------------------------------------------------
Balance June 30, 2000 (20,000) - (31,900,252) -
Net Loss - - (11,466,368) -
Series D Preferred Stock issued:
August 2000 - - - -
September 2000 - - - -
October 2000 - - - -
Common stock issued upon conversion of
preferred stock:
September 2000 - - - -
October 2000 - - - -
Common stock issued upon exercise of
warrants:
October 2000 - - - -
-------------------------------------------------------------------------------------------------------------
38
39
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
JUNE 30, 2001 AND 2000
Series B Preferred Stock Series C Preferred Stock Series D Preferred Stock
------------------------ ------------------------ -------------------------
Shares Issued Amount Shares Issued Amount Shares Issued Amount
----------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 (continued)
Warrants issued:
August 2000 - - - - - -
September 2000 - - - - - -
October 2000 - - - - - -
November 2000 - - - - - -
December 2000 - - - - - -
April 2001 - - - - - -
Common stock issued
October 2000 - - - - - -
November 2000 - - - - - -
December 2000 - - - - - -
Beneficial conversion expense on
Series D Preferred Stock - - - - - -
Compensation recorded on stock options - - - - - -
Subsidiary stock and warrant issued - - - - - -
Payments received on subscriptions receivable - - - - - -
Accretion to redemption value of
Series A redeemable
Preferred Stock - - - - - -
-----------------------------------------------------------------------------
Balance June 30, 2001 - $ - - $ - - $ -
=============================================================================
See Notes to Consolidated Financial Statements.
39
40
Common Stock Additional Common Stock
------------------------------ Paid-In Paid for, but
Shares Issued Amount Capital Not Issued
------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 (continued)
Warrants issued:
August 2000 - - 576,000 -
September 2000 - - 206,000 -
October 2000 - - 401,868 -
November 2000 - - 34,225 -
December 2000 - - 40,850 -
April 2001 - - 75,000 -
Common stock issued
October 2000 56,000 65,371 - -
November 2000 178,000 366,300 - -
December 2000 50,000 71,700 - -
Beneficial conversion expense on
Series D Preferred Stock - - 2,470,644 -
Compensation recorded on stock options - - 22,441 -
Subsidiary stock and warrant issued - - 156,770 -
Payments received on subscriptions receivable - - - -
Accretion to redemption value of
Series A redeemable
Preferred Stock - - - -
-------------------------------------------------------------
Balance June 30, 2001 18,583,712 $33,479,786 $11,297,626 $ -
=============================================================
40
41
Deficit
Accumulated Accumulated
Common Stock During the Other
Subscriptions Due From Development Comprehensive
Receivable Officers Stage Income
----------------------------------------------- -------------------------------------------------------
Balance June 30, 2000 (continued)
Warrants issued:
August 2000 - - - -
September 2000 - - - -
October 2000 - - - -
November 2000 - - - -
December 2000 - - - -
April 2001 - - - -
Common stock issued
October 2000 - - - -
November 2000 - - - -
December 2000 - - - -
Beneficial conversion expense on
Series D Preferred Stock - - (2,470,644) -
Compensation recorded on stock options - - - -
Subsidiary stock and warrant issued - - - -
Payments received on subscriptions receivable 10,218 - - -
Accretion to redemption value of
Series A redeemable
Preferred Stock - - (118,249) -
-------------------------------------------------------
Balance June 30, 2001 $ (9,782) $ - $ (45,955,513) $ -
=======================================================
41
42
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2001 AND 2000
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2001 2000 June 30, 2001
---- ---- -------------
Cash Flows From Operating Activities
Net loss (11,466,368) (6,022,853) (39,836,085)
Adjustments to reconcile net loss to net cash used in
operating activities:
Elimination of cumulative translation adjustment - - (178,655)
Depreciation 345,817 96,081 764,547
Amortization 326,629 328,166 2,832,766
Gain on disposal of property and equipment (1,777) - (1,777)
Noncash compensation, services, and interest 1,356,384 1,266,260 5,375,590
Minority interest in subsidiary (339,685) 339,685 -
Deferred revenue 5,352,495 - 5,352,495
Amortization of deferred revenue (1,101,926) - (1,101,926)
Other - - 623,650
Changes in assets and liabilities:
Increase in prepaid expenses 14,885 49,276 112,215
Increase (decrease) in accounts payable 177,107 247,389 528,131
Increase (decrease) in accrued expenses 60,721 (55,887) 477,358
---------- ---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,275,718) (3,751,883) (25,051,691)
---------- ---------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment (1,125,836) (486,020) (2,111,122)
Proceeds on disposition of property and equipment 2,400 - 39,775
Organization expenses - - (97,547)
Patent expenses (102,299) (14,310) (129,654)
Deposits (21,635) (79,457) (101,092)
Officer advances, net - - (109,462)
Note receivable from officer (10,963) (141,000) (151,963)
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 (1,258,333) (720,787) (6,462,505)
========== ========== ===========
(Continued)
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QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
JUNE 30, 2001 AND 2000
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2001 2000 June 30, 2001
---- ---- -------------
Cash Flows From Financing Activities
Net proceeds from the sale of common stock
and warrants 504,215 965,150 14,325,137
Net proceeds from sale of Series A Preferred Stock - - 1,523,909
Net proceeds from sale of Series B Preferred Stock - 2,162,073 2,993,573
Net proceeds from sale of Series C Preferred Stock - 973,100 973,100
Net proceeds from sale of Series D Preferred Stock 5,555,139 - 5,555,139
Net proceeds from sale of common stock of
subsidiary 156,770 1,250,088 1,406,858
Proceeds from debt obligations 1,181,871 4,000 7,232,956
Payments received on stock subscriptions receivable 10,218 40,000 55,218
Payments on debt obligations (40,480) (29,167) (592,457)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,367,733 5,365,244 33,473,433
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash - - 203,242
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 833,682 892,574 2,162,479
Cash and Cash Equivalents
Beginning 1,328,797 436,223 -
------------ ------------ ------------
Ending $ 2,162,479 $ 1,328,797 $ 2,162,479
============ ============ ============
Cash Payments for Interest $ 50,961 $ 41,859 $ 300,085
============ ============ ============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of debt obligations for services, accounts
payable, and accrued interest $ - $ - $ 259,000
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 - - 527
Guarantee of debt 38,000 53,716
Acquisition of engineering development agreement - - 554,000
(Continued)
43
44
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
JUNE 30, 2001 AND 2000
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2001 2000 June 30, 2001
---- ---- -------------
Supplemental Schedule of Noncash Investing
and Financing Activities (Continued)
Series A Preferred Stock sales and exchange for debt - - 227,000
Amount attributable to value of beneficial debt
conversion feature - - 1,535,346
Amount attributable to value of beneficial
conversion feature of preferred stock 2,470,644 2,742,670 5,213,314
Capital expenditures included in accounts payable 80,000 255,346 342,013
Fixed assets acquired under capital lease - 132,946 -
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 1,160,528
Series A Preferred Stock issued for debt obligations
and accrued interest - - 3,521,692
Accretion to redemption value of Series A
redeemable Preferred Stock 118,249 410,445 906,114
Common stock issued for:
Services, equipment, and interest - 312,960 697,189
Exercise of warrants 844 740,898 746,856
Exercise of options - 11,727 11,727
Acquisition of license agreement - - 390,000
Subscriptions receivable - - 5,000
Debt obligations - - 2,355,937
Accounts payable - - 40,000
Accrued expenses - - 360,394
Series A Preferred Stock 4,613,494 1,028,343 5,724,715
Series B Preferred Stock 1,874,073 1,179,500 3,053,573
Series C Preferred Stock 973,100 - 973,100
Series D Preferred Stock 5,555,139 - 5,555,139
Deposits applied to long-term debt 63,299 - 63,299
========= ========= =========
(Continued)
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45
QUANTECH LTD. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
JUNE 30, 2001 AND 2000
September 30,
1991 (Date of
Years Ended June 30 Inception) to
2001 2000 June 30, 2001
---- ---- -------------
Supplemental Schedule of Noncash Investing
and Financing Activities (Continued)
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
=== === ===========
See Notes to Consolidated Financial Statements.
45
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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 Applied Biosystems, Inc. (AB) formed HTS
Biosystems, Inc. (HTS), which is 72 percent owned by the Company as of June 30,
2001. HTS will focus on promoting the nonmedical use of the SPR technology. In
conjunction with this formation, AB provided HTS with:
- a sub-license to all of its rights to the Company's SPR nonmedical
technology (see Note 4),
- a license for nonmedical use of the AB High Density Technology,
- one of AB's SPR prototype instruments, and
- the AB prototype for the AB 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 AB:
- 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,
- a 4 percent royalty on products using only the AB High Density Technology,
and
- 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:
- 15 percent of any royalties paid to AB by HTS for products which
incorporates the Company's SPR technology, and
- 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 AB High Density
Technology, the rights revert back to AB. AB 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 AB.
46
47
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 (HTS). 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 exceeded the estimated fair value at June 30, 2000 by approximately
$1,627,000, assuming a 13.5 percent interest rate and a redemption date of
November 2003. During the year ended June 30, 2001 all outstanding Series A
Preferred Stock was converted to common stock.
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.
47
48
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 $118,249 and $410,445 for the
years ended June 30, 2001 and 2000, respectively. In addition, loss per share
has been adjusted for the beneficial conversion feature of preferred stock,
which totaled $2,470,644 and $2,742,670 for the years ended June 30, 2001 and
2000, respectively. As described in Notes 6 and 7, the Company has options and
warrants outstanding to purchase shares of 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 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: The staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB No. 101), Revenue Recognition in
Financial Statements. SAB No. 101 summarizes some of the staff's interpretations
of the application of generally accepted accounting principles related to
revenue recognition. The Company adopted SAB No. 101 during the fiscal year
ending June 30, 2001. The adoption of SAB No. 101 did not have a significant
effect on the Company's financial statements.
48
49
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 adopted 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 did not have a
significant effect on the Company's financial statements.
PRONOUNCEMENTS ISSUED NOT YET ADOPTED: In July, 2001, the Financial Accounting
Standards Board issued two statements - Statement 141, Business Combinations,
and Statement 142, Goodwill and Other Intangible Assets, which will potentially
impact the Company's accounting for its reported intangible assets. The
standards generally are required to be implemented by the Company in its 2002
financial statements. The adoption of these standards is not expected to have a
material impact on the Company's financial statements.
In September 2001, the FASB issued Statement 143, Asset Retirement Obligations.
This Statement addresses financial accounting and reporting for obligation
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Statement will be effective for the Company's fiscal
year ending June 30, 2003. Management expects the adoption of this standard will
not have a material impact on the 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 certain product sales and licensing revenue, but 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.
49
50
NOTE 2. BASIS OF PRESENTATION (CONTINUED)
In July 2001, the Company implemented a plan to conserve cash while pursuing
additional funding for system commercialization. The cash conservation plan
included a 20% reduction in workforce and temporary salary reductions by senior
personnel.
In September 2001, the Company raised net proceeds of $958,960 through the sale
of convertible promissory notes. The notes have an interest rate of 10% per year
paid semi-annually and are due upon demand after one year. The Company pledged
as collateral 1,388,800 shares of HTS common stock. The notes may be converted
into shares of the equity security sold by the Company in its next equity
financing of at least $5 million (the "Next Financing"). Noteholders will have
the option of converting their notes at a price equal to the lesser of 80% of
the per share price of the Next Financing Shares or 80% of the applicable
conversion price of such shares. If the Next Financing does not occur within one
year from the issuance date of the notes, the noteholders may, at their option,
convert the notes into shares of Quantech common stock at $1.00 per share. The
noteholders will also receive a five-year warrant to purchase one Next Financing
Share for each Next Financing Share into which such investor's note is
convertible. The warrant exercise price shall be the lesser of the purchase
price per share of the Next Financing Shares or the applicable conversion price
of such shares.
The Company anticipates that its cash on hand and bank credit facility will
allow it to maintain its current level of operations into November 2001.
Additional bridge financing through the issuance of additional convertible
promissory notes is being pursued and the Company signed a non-binding term
sheet to raise approximately $1.5 million through the issuance of promissory
notes. Such financing will allow the Company to continue its current level of
operations into the first quarter of 2002. If such financing cannot be raised,
operations will have to be scaled back.
Additional financing of approximately $10 to $12 million will be needed to
develop and submit to the FDA additional tests, complete customer evaluations of
the system, establish manufacturing capabilities and prepare for sales of the
system. The Company is currently reviewing multiple avenues of future funding
including private sale of equity or debt with equity features or arrangements
with strategic partners. The Company does not have any commitments for any such
financing and there can be no assurance that the Company will obtain additional
capital when needed or that additional capital will not have a dilutive effect
on current stockholders. Quantech does not anticipate receiving any significant
funding from commercial lenders other than the $2.5 million credit facility
(Note 3). In addition, HTS Biosystems anticipates raising additional capital. An
equity financing by HTS would result in a dilution of Quantech ownership of HTS.
Although HTS is consolidated with Quantech for financial reporting purposes, HTS
funds its own operations and does not receive funds from Quantech.
NOTE 3. SHORT-TERM DEBT OBLIGATIONS
The Company has an unsecured $2,500,000 revolving credit note with a bank.
Advances under the loan bear interest at the prime rate plus 1 percent (7.75
percent at June 30, 2001). The note expires December 1, 2001, unless renewed.
Certain directors have participated as co-borrowers and the Company has pledged
3,200,000 of its shares of HTS to the directors.
50
51
The Company compensated the directors for their participation by granting
warrants to purchase Quantech common stock for $1.03 in the aggregate amount of
500,000 shares. The warrants were valued at $75,000 based on the fair value of
the guarantee provided.
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. The Company has paid the
$1,300,000 of minimum royalties required by agreement.
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.
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 Applied
BioSystems, Inc. (AB), 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
51
52
commercialize the licensed technology, all rights will revert back to the
licensor, and future minimum annual royalty obligations will be canceled.
TECHNOLOGY LICENSE AND DISTRIBUTION AGREEMENTS: In January 2001 both Quantech
and HTS entered into a sublicense agreement with Mitsubishi Chemical Corporation
(MCC) whereby MCC will license certain patented technology from the Companies,
and will purchase instruments from the Company for evaluation purposes. In
addition a distribution agreement was entered into whereby MCC will receive the
NOTE 4. AGREEMENTS (CONTINUED)
rights to distribute and sell Quantech products in Japan for use in the medical
diagnostics field and HTS products in Japan for research applications. Quantech
and HTS received payments of $762,495 and $490,000, respectively, for evaluation
systems, $900,000 and $1,350,000, respectively, for license agreements and
$350,000 and $1,500,000, respectively for the distribution rights. The payments
have been recorded as deferred revenue and are recognized when the systems are
shipped to Mitsubishi, the patent licensing revenue is being recognized over the
remaining life of the patents of approximately 9 years and the distribution
rights are being recognized over the term of the agreement, approximately 5
years. MCC will also be required to pay royalties of up to 7 percent of sales to
the Companies.
SUPPLY AGREEMENT: Quantech has entered into a non-exclusive OEM supply agreement
with Diametrics Medical, Inc. under which Diametrics will manufacture and supply
its proprietary electrolyte testing components to Quantech. The agreement calls
for minimum annual purchases of certain components beginning in April 2002.
ROYALTIES: In addition to the agreements discussed above, the Companies have
licensed various technology rights from third parties. Royalties will be paid
based on actual sales of products containing the licensed technology.
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
severance if they are terminated without cause.
NOTE 5. LEASES
OPERATING LEASES: The Company leases office space under agreements which expire
at various dates through April 2007. Approximate minimum aggregate rental
commitments under these leases are as follows:
Years ending June 30:
2002 $ 192,000
2003 248,000
2004 251,000
2005 266,000
2006 266,000
Thereafter 184,000
-----------
$ 1,407,000
===========
52
53
In addition, there are monthly payments required for common area maintenance and
other related expenses.
Rental expense for the years ended June 30, 2001 and 2000 was approximately
$283,000 and $96,000 respectively.
NOTE 5. LEASES (CONTINUED)
CAPITAL LEASES: In 2000 the Company began leasing equipment under a capital
lease. During the year ended June 30, 2001 the lease obligation was paid in full
and the equipment was retained.
NOTE 6. STOCKHOLDERS' EQUITY
CAPITAL STOCK: The number of authorized shares is 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 had no par value and a liquidation
value of $3 per share. Each share of Series A Stock was convertible into, and
had voting rights equal to, four shares of common stock. The Series A Stock was
not redeemable until November 5, 2003. Series A Stock was automatically
convertible into shares of common stock if (i) the Company closed 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
was being accreted, using the interest method, over the period until the first
redemption date of November 5, 2003.
As of June 30, 2001 all Series A Stock has been converted to common stock due to
an equity offering of greater than $5,000,000.
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54
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
Following is a detail of the Series A Preferred Stock:
Shares
Issued Amount
------------------------------------------------------------------------------------------
Balance June 30, 1999 1,697,706 $ 5,113,143
Shares converted to common stock (342,780) (1,028,343)
Accretion to redemption value - 410,445
--------------------------------
Balance June 30, 2000 1,354,926 4,495,245
Shares converted to common stock (1,354,926) (4,613,494)
Accretion to redemption value - 118,249
--------------------------------
Balance June 30, 2001 - $ -
================================
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). In January 2000, the Board of Directors designated an
additional 913,333 shares of previously undesignated shares as Series B Stock.
The shares had no par value and a liquidation value of $1.00 per share. Each
share of Series B Stock was convertible into, and had voting rights equal to,
one share of common stock. Series B Stock was automatically convertible into
shares of common stock if (i) the Company closed 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.
As of June 30, 2001 all Series B Stock has been converted to common stock due to
an equity offering of greater than $5,000,000.
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 had no par value and
a liquidation value of $1.00 per share. Each share was convertible into, and had
voting rights equal to, one share of common stock. Series C Stock was
automatically convertible 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.
As of June 30, 2001 all Series C Stock has been converted to common stock due to
an equity offering of greater than $5,000,000.
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 had no par value and
a liquidation value of $2.50 per share. Each share was convertible into, and had
voting rights equal to, one share of common stock. Series D stock was
automatically convertible into shares of common stock if (i) the Company closed
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.
54
55
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
In August through October 2000 the Company sold 2,929,800 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 748,550 shares of common
stock at an exercise price of $3.50, which were valued at $720,000 using the
Black-Scholes model. In conjunction with this transaction, the Company paid
commissions and expenses of $726,361 and issued warrants to purchase 276,980
shares of common stock to the selling agents, which were valued at $323,000
using the Black-Scholes model.
As of June 30, 2001, all Series D Stock has been converted to common stock as
the offering was greater than $5,000,000.
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. 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, 2001 and 2000.
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.
55
56
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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:
June 30
-------------------------------
2001 2000
---- ----
Net loss attributable to common stockholders, as reported $(14,055,261) $(9,175,968)
Net loss attributable to common stockholders, pro forma (14,832,561) (9,661,526)
Net loss per basic and diluted common share, as reported (0.91) (2.12)
Net loss per basic and diluted common share, pro forma (0.91) (2.23)
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 2001 and 2000:
June 30
--------------------------
2001 2000
---- ----
Expected dividend yield $ - $ -
Expected stock price volatility 61.6% 67.2%
Risk-free interest rate 6.0% 6.0%
Expected life of options (years) 3 3
56
57
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
QUANTECH: Transactions involving Quantech 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 532,900 506,845 1.52
Exercised (586,091) (9,201) 1.26
Expired (1,550,291) (26,291) 1.58
---------------------------------------------------------
Balance, June 30, 2000 3,202,499 2,565,317 1.67
Granted 1,700,930 1,652,756 2.61
Exercised (1,125) - 0.75
Expired (312,214) (166,639) 5.14
---------------------------------------------------------
Balance, June 30, 2001 4,590,090 4,051,434 $ 1.77
=========================================================
The fair value of warrants granted during 2001 and 2000 was $0.78 and $1.21 per
warrant, respectively.
The fair value of stock options granted for goods and services during 2001 and
2000 was $0.74 and $0.93 per equity instrument, respectively.
57
58
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following tables summarize information about Quantech stock options and
warrants outstanding as of June 30, 2001:
OPTIONS AND WARRANTS OUTSTANDING (QUANTECH)
Number of Remaining Weighted-
Range of Units Contractual Average
Exercise Price Outstanding Life--Years Exercise Price
-------------------------------------------------------------------------------------------------------------------
$0.75 1,739,107 2.1 $ 0.75
$1.00 - $1.39 2,914,398 3.1 1.11
$1.50 676,000 2.8 1.50
$1.63 - $2.44 761,015 4.6 2.14
$2.50 - $2.88 536,621 4.2 2.59
$3.00 - $3.06 375,008 1.3 3.00
$3.22 - $3.75 1,622,165 4.2 3.40
$4.22 - $5.00 17,200 1.2 4.76
------------------- -------------------
8,641,514 $ 1.77
=================== ===================
OPTIONS AND WARRANTS EXERCISABLE (QUANTECH)
Number of Weighted-
Units Average
Exercisable Exercise Price
-------------------------------------------------------------------------------------------------------------------
$0.75 1,739,107 $ 0.75
$1.00 - $1.39 2,854,900 1.10
$1.50 500,672 1.50
$1.63 - $2.44 208,890 2.12
$2.50 - $2.88 443,047 2.57
$3.00 - $3.06 343,750 3.00
$3.22 - $3.75 1,106,450 3.45
$4.22 - $5.00 14,068 4.90
--------------------------------------
7,210,884 $ 1.62
======================================
The number of options and warrants exercisable at June 30, 2000, was 5,304,419
with a weighted-average exercise price of $1.55.
58
59
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
HTS: Transactions involving HTS stock options and warrants are summarized as
follows:
Weighted-
Stock Average Exercise
Warrants Options Price Per Share
-------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 - - $ -
Granted 139,800 713,000 2.37
---------------------------------------------------------
Balance, June 30, 2000 139,800 713,000 2.37
Granted 100,000 809,250 2.50
---------------------------------------------------------
Balance, June 30, 2001 239,800 1,522,250 $ 2.44
=========================================================
The fair value of warrants granted during 2001 and 2000 was $0.41 and $1.09 per
warrant, respectively.
The fair value of stock options granted for goods and services during 2001 and
2000 was $0.13 and $0.41 per equity instrument, respectively.
The following tables summarize information about HTS stock options and warrants
outstanding as of June 30, 2001:
OPTIONS AND WARRANTS OUTSTANDING (HTS)
Weighted-
Average
Number of Remaining Weighted-
Range of Units Contractual Average
Exercise Price Outstanding Life--Years Exercise Price
-------------------------------------------------------------------------------------------------------------------
$1.00 75,000 3.7 $ 1.00
$2.50 1,687,050 4.2 2.50
------------------- -------------------
1,762,050 $ 2.44
=================== ===================
59
60
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
OPTIONS AND WARRANTS EXERCISABLE (HTS)
Number of Weighted-
Units Average
Exercisable Exercise Price
-------------------------------------------------------------------------------------------------------------------
$1.00 75,000 $ 1.00
$2.50 726,803 2.50
--------------------------------------
801,803 $ 2.36
======================================
The number of options and warrants exercisable at June 30, 2000, was 439,135
with a weighted-average exercise price of $2.24.
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
$30,444,000 in operating loss carryforwards and $1,059,000 in research and
development credits at June 30, 2001, 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, 2001, the
annual net operating loss carryforward limitation due to Section 382 was
approximately $2,200,000 per year. 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.
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NOTE 8. INCOME TAXES (CONTINUED)
Loss carryforwards and credits for tax purposes, reduced by the Section 382
limitation discussed above, as of June 30, 2001, 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
2021 10,020,000 432,000
----------- -----------
$30,444,000 $ 1,059,000
=========== ===========
The tax effects of principal temporary differences at an assumed effective
annual rate of 34 percent are shown in the following table:
June 30
----------------------------
2001 2000
------------ ------------
Deferred tax assets:
Loss carryforwards $ 10,351,000 $ 6,944,000
Research and development credits and deductions 1,059,000 832,000
Guarantee of Spectrum Diagnostics, Inc. debt 115,000 115,000
Compensation expense 422,000 324,000
Other accruals 56,000 47,000
------------ ------------
12,003,000 8,262,000
Valuation allowance for deferred tax assets (12,003,000) (8,262,000)
------------ ------------
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, 2001 and 2000, due to the valuation allowance recorded against deferred
tax assets.
61
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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.
June 30, 2001
--------------------------------------------
Quantech HTS Total
------------ ------------ ------------
Net revenue $ 817,082 $ 284,844 $ 1,101,926
Interest income 69,395 58,675 128,070
Interest expense 47,211 - 47,211
Depreciation and amortization 665,348 7,098 672,446
Purchases of equipment and leasehold
improvements 836,315 369,521 1,205,836
Segment loss (9,009,153) (2,457,215) (11,466,368)
Total assets 3,908,905 2,160,585 6,069,490
============ ============ ============
June 30, 2000
--------------------------------------------
Quantech HTS Total
------------ ------------ ------------
Net revenue $ 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
Purchases of equipment and leasehold
improvements 864,515 9,797 874,312
Segment loss (5,568,494) (454,359) (6,022,853)
Total assets 3,373,398 1,272,930 4,646,328
============ ============ ============
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63
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 57 Chief Executive Officer and Director
Edward L. Zeman 46 Chief Financial Officer
Thomas R. Witty 54 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. Mr. Case founded Case +
Associates, Inc., 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. Mr. Case has served as Chairman of the Industrial
Designers Society of America, and was a member of its national board of
directors. 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.
EDWARD L. ZEMAN has been Chief Financial Officer of Quantech since
March 2001. Prior to joining Quantech, Mr. Zeman was Executive Vice President
and Chief Financial Officer of Integrity Life Insurance Company/ARM Finance
Group of Louisville, KY. This company had $10 billion in assets under
management. Mr. Zeman's responsibilities included corporate accounting and SEC
reporting, treasury/cash management, sourcing capital, investor relations,
internal audit, taxes, risk management and rating agency coordination. He spent
13 years in the public accounting sector with Deloitte & Touche in Minneapolis,
MN, where he provided audit and consulting services to both public and private
companies. He is a CPA and received his Bachelor of Science degree in Business
from the University of Minnesota.
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 2001 Annual Meeting of Shareholders.
63
64
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 2001 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 2001 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 2001 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, 2001.
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65
SIGNATURES
In accordance with the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUANTECH LTD.
("Registrant")
Dated: September 28, 2001 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 EDWARD L. ZEMAN as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
--------- ----- ----
/s/ Robert Case Chief Executive Officer, and Director September 28, 2001
------------------------------ (Principal Executive Officer)
Robert Case
/s/ Edward L. Zeman Chief Financial Officer (Chief Financial and September 28, 2001
------------------------------ Accounting Officer)
Edward L. Zeman
/s/ Gregory G. Freitag Director September 28, 2001
------------------------------
Gregory G. Freitag
/s/ Robert W. Gaines, Jr., MD Director September 28, 2001
------------------------------
Robert W. Gaines, Jr., MD
/s/ James F. Lyons Chairman September 28, 2001
------------------------------
James F. Lyons
/s/ Richard W. Perkins Director September 28, 2001
------------------------------
Richard W. Perkins
/s/ Edward E. Strickland Director September 28, 2001
------------------------------
Edward E. Strickland
65
66
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
QUANTECH LTD.
For The Fiscal Year Ended June 30, 2001
Commission File Number: 0-19957
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation of Quantech Ltd., as amended to date (incorporated
by reference to Exhibit 3.1 of the Registrant's Form 10-KSB for the Year
Ended June 30, 2000).
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 Robert Case (incorporated by reference to Exhibit
10.2 of the Registrant's Form 10-Q for the Quarter Ended March 31, 1998).
10.5 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).
10.6 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).
10.7 Research and Development Services Agreement, dated November 13, 1998, with
Millennium Medical Systems, LLC (incorporated by reference to Exhibit A to
Schedule 13D filed by Robert Gaines and Millennium Medical Systems, LLC on
November 23, 1998, File No. 0-19957).
10.8* 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).
10.9 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.)
10.10 License and Sublicense Agreement between Quantech Ltd. and Mitsubishi
Chemical Corporation dated January 18, 2001 (incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.11 Option Agreement between Quantech Ltd. and Mitsubishi Chemical Corporation
dated January 18, 2001 (incorporated by reference to Exhibit 10.2 of the
Registrant's Form 10-Q for Quarter Ended March 31, 2001).
66
67
10.12 Supply/Purchase Agreement between Quantech Ltd. and Mitsubishi Chemical
Corporation dated January 18, 2001 (incorporated by reference to Exhibit 10.3
of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.13 License and Sublicense Agreement between HTS Biosystems, Inc. and Mitsubishi
Chemical Corporation dated January 18, 2001 (incorporated by reference to
Exhibit 10.4 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.14 Option Agreement between HTS Biosystems, Inc. and Mitsubishi Chemical
Corporation dated January 18, 2001 (incorporated by reference to Exhibit
10.5 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.15 Supply/Purchase Agreement between HTS Biosystems, Inc. and Mitsubishi
Chemical Corporation dated January 18, 2001 (incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.16 Distributorship Agreement between HTS Biosystems, Inc. and Mitsubishi
Chemical Corporation dated January 18, 2001 (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.17 Distributorship Agreement between Quantech Ltd. and Mitsubishi Chemical
Corporation dated January 18, 2001 (incorporated by reference to Exhibit
10.8 of the Registrant's Form 10-Q for Quarter Ended March 31, 2001).
10.18* Employment Agreement with Edward L. Zeman (incorporated by reference to
Exhibit 10.9 of the Registrant's Form 10-Q for the Quarter Ended March 31,
2001).
10.19** OEM Development, Manufacture and Supply Agreement between Quantech Ltd. and
Diametrics Medical Incorporated dated May 23, 2001.
21 Subsidiary of the Registrant: HTS Biosystems, Inc., a Minnesota corporation.
23 Accountant's Consent
24 Power of Attorney (included on signature page)
---------------
* Management contract or compensatory plan or arrangement.
** Portions of this document have been deleted, and a confidentiality request
regarding such portions has been filed with the SEC.
67
EX-10.19
3
c65162ex10-19.txt
OEM DEVELOPMENT, MANUFACTURE AND SUPPLY AGREEMENT
1
EXHIBIT 10.19
OEM DEVELOPMENT,
MANUFACTURE AND SUPPLY AGREEMENT
THIS OEM DEVELOPMENT, MANUFACTURE AND SUPPLY AGREEMENT (the
"Agreement") is made as of this 23nd day of May, 2001 (the "Effective Date"), by
and between Diametrics Medical Incorporated, a Minnesota corporation having its
principal place of business at 2658 Patton Road, St. Paul, Minnesota 55113
("Diametrics") and Quantech Ltd. a Minnesota corporation, having its principal
place of business at 815 Northwest Parkway, Eagan, Minnesota 55121 ("Quantech").
RECITALS
WHEREAS, Diametrics develops, manufactures (or has manufactured), sells
and distributes certain point of care medical diagnostic products for
measurement of electrolytes marketed as IRMA SL Blood Analysis System (the "IRMA
System"), principally for use in hospital intensive and critical care units; as
well as related hardware and accessories;
WHEREAS, Quantech is developing a proprietary instrument known as the
FasTraQ(TM) Hospital Emergency Department Patient Treatment Information
Platform, which is intended to perform rapid blood analyses through the use of
proprietary surface plasmon resonance ("SPR") biosensor technology, principally
for use in hospital emergency departments;
WHEREAS, Quantech seeks to incorporate an electrolyte panel into its
FasTraQ Product using proprietary IRMA components manufactured and supplied by
Diametrics; and Diametrics desires to manufacture and supply such components for
use with the FasTraQ Product;
WHEREAS, the parties desire to modify certain of the IRMA components to
work with the FasTraQ Product as provided herein;
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and subject to the terms and conditions set forth herein below,
Quantech and Diametrics agree as follows:
ARTICLE 1. DEFINITIONS
The following terms, when used herein with initial capital letters,
shall have the following respective meanings:
1.1 Boards. Circuit boards incorporating the IRMA Software as modified
hereunder, for use in electrolyte testing and incorporated into the FasTraQ
Product, the specifications for which will be mutually agreed by the parties.
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1.2 Cards. Temperature verification cartridges for use in performing
quality control checks of the Boards, the specifications for which will be
mutually agreed by the parties.
1.3 Cartridges. Single use cartridges, designed to measure sodium,
potassium and chloride, to be incorporated into the FasTraQ Disposables and for
use with the Board, the specifications for which will be mutually agreed by the
parties.
1.4 Commercialization Date. The earlier of (a) the shipment and invoice
date of the first commercial sale by Quantech of the FasTraQ Product or (b) *.
1.5 Component. A Board, Card, Cartridge, Connector or Fluid
(collectively, "Components").
1.6 Confidential Information. Information of any kind and form, whether
technical or business, that a party hereto holds in confidence and regards as
valuable, but only when treated by the parties as set forth in Section 12.2.
1.7 Connectors. Edge type connector assemblies for use with the
Cartridges and Boards and incorporated into the FasTraQ Product, the
specifications for which will be mutually agreed by the parties.
1.8 Development Program. The program for the development of the
Components hereunder, as mutually agreed to by the parties, the estimated
timelines, tasks and deliverables of which are set forth in Exhibit A.
1.9 Diametrics Technology.
(a) Any United States and foreign patents (including all
reissues, extensions, substitutions, re-examinations, supplementary protection
certificates and the like, and patents of addition) and/or patent applications
(including, without limitation, all continuations, continuations-in-part and
divisions thereof) owned or controlled by Diametrics during the term of this
Agreement that cover the manufacture, use or sale of any of the Components, the
IRMA Software or any other Diametrics product;
(b) any copyrightable works owned or controlled by Diametrics
that are incorporated into any of the Components, the IRMA Software or any other
Diametrics product; and
(c) any and all know-how, including, without limitation, tangible
materials, proprietary information and trade secrets, that is relevant to the
design, manufacture or use of the Components, the IRMA Software or any other
Diametrics product.
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* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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1.10 FasTraQ Disposables. Single use disposable cartridges that
integrate the Cartridges such that the sodium, potassium and chloride
measurements may be made on the FasTraQ Product.
1.11 FasTraQ Product. The product to be marketed as the FasTraQ(R)
Hospital Emergency Department Patient Treatment Information System that is
modified to include the Board, Card and Connector, and to use the FasTraQ
Disposables as contemplated herein. Specifications for the FasTraQ Product will
be defined by Quantech and reviewed by Diametrics.
1.12 FasTraQ Software. That proprietary Quantech software incorporated
into the FasTraQ Product. The FasTraq Software does not include the IRMA
Software.
1.13 Field. Intermittent point of care measurement of sodium, potassium
and chloride in human whole blood in hospital emergency departments or in STAT
or central laboratories for use in support of hospital emergency departments.
1.14 Fluids. Calibration fluids for use in the FasTraQ Disposable, the
specifications for which will be mutually agreed by the parties.
1.15 IRMA Software. That proprietary software incorporated into the
Boards, the specifications for which will be mutually agreed by the parties.
1.16 Quantech Technology.
(a) Any United States and foreign patents (including all
reissues, extensions, substitutions, re-examinations, supplementary protection
certificates and the like, and patents of addition) and/or patent applications
(including, without limitation, all continuations, continuations-in-part and
divisions thereof) owned or controlled by Quantech during the term of this
Agreement that relate to the FasTraQ Product or FasTraQ Disposables (excluding
the Components and the IRMA Software);
(b) any copyrightable works owned or controlled by Quantech that
are incorporated into the FasTraQ Product or FasTraQ Disposables (excluding the
Components and the IRMA Software); and
(c) any and all know-how, including, without limitation, tangible
materials, proprietary information and trade secrets, that is relevant to the
design, manufacture or use of the FasTraQ Product or the FasTraQ Disposables
(excluding the Components and the IRMA Software).
1.17 Regulatory Approvals. Applications for permission and permissions
or approvals from local and national governments, if required in any country or
jurisdiction, to market, use, and dispose of FasTraQ Product and FasTraQ
Disposables.
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ARTICLE 2. DEVELOPMENT
2.1 Development of Components. The parties acknowledge that certain of
the Components will need to be modified as provided herein, in order to be
incorporated into the FasTraQ Product. The parties covenant and agree to
exercise commercially reasonable and diligent efforts to modify and develop the
Components in accordance with the Development Program set forth in Exhibit A.
The parties acknowledge that the timelines, tasks and deliverables set forth on
Exhibit A are subject to change and agree that each party's representative under
Section 2.6 shall have the necessary authority to make such changes on behalf of
such party, provided that nothing in this sentence shall relieve the parties
from their obligations in the immediately preceding sentence. Quantech's
development obligations under such Development Program shall include, without
limitation, (i) modifying all FasTraQ hardware, and all FasTraQ and IRMA
Software, as necessary to cause the Components to function properly as
integrated components of FasTraQ, and (ii) incorporating the Cartridges and
Fluids into a design compatible with the FasTraQ Product. Diametrics'
development obligations under such Development Program shall include, without
limitation, designing (i) the Connectors, (ii) manufacturing processes for all
of the Components, and (iii) a revised replacement for the current IRMA
microprocessor that, when available, will be integrated into the Boards.
2.2 Development Costs. Each party shall bear its own costs incurred in
connection with the performance of its development obligations under this
Article 2; provided, however, that Quantech shall pay Diametrics * for certain
development activities that are set forth in Exhibit A. Payment of such amount
will be as follows: * on the Effective Date, * upon completion of the design
validation to specifications of the FasTraQ Product and the FasTraQ Disposables,
and * upon completion of the design validation to specifications of the revised
replacement for the current IRMA microprocessor that, when available, will be
integrated into the Boards.
2.3 Modification of IRMA Software.
(a) Pursuant to the Development Program, Quantech shall provide
and manage the programming resources for modifying the IRMA Software with the
technical direction, support and approval of Diametrics personnel to the extent
necessary to make such Software interface properly with the FasTraQ Software.
Diametrics hereby grants to Quantech a limited, non-exclusive, non-transferable
and non-sublicenseable license to use the source code version of the IRMA
Software for the sole purpose of modifying such Software to be compatible with
the FasTraQ Software. Quantech shall not disclose or provide the source code
version to any person except for those persons having a need to access the IRMA
Software for the purposes of modifying it as contemplated herein. In no event
shall Diametrics be required to disclose to Quantech its proprietary algorithms
for the IRMA Software, except as set forth in Section 2.3(c).
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* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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(b) Diametrics shall reasonably assist Quantech in the
performance of its software development obligations hereunder, including,
without limitation, providing to Quantech technical assistance, access to
Diametrics' development tools, and office space located near Diametrics'
software development personnel.
(c) If Quantech desires to provide a longer shelf life for the
Cartridges, which shelf life requires a change to the proprietary algorithms for
the IRMA Software, the parties shall exercise good faith efforts to agree on
terms on which Diametrics will facilitate such algorithm changes which may
include, at Diametrics' option, making such changes itself or licensing Quantech
the algorithms for such purposes, on terms to be mutually agreed.
2.4 Integration of Cartridges.
(a) Pursuant to the Development Program, Quantech shall be
responsible for integrating the Cartridges into the FasTraQ Disposable to make
such Cartridges function in the FasTraQ Product. The parties acknowledge that
the goal of such integration shall be that the performance of the sodium,
potassium and chloride analytes in the FasTraQ Product and FasTraQ Disposables
shall be substantially equivalent to the published product performance claims
for these parameters in the IRMA System.
(b) In connection with the integration of the Cartridges prior to
the Commercialization Date, Quantech shall purchase, and Diametrics shall
manufacture and sell, the quantities of Cartridges set forth on Exhibit B. Such
Cartridges will be supplied in accordance with Section 4.5 and the schedule set
forth in Exhibit B, at the prices set forth in Exhibit C. Quantech shall notify
Diametrics in writing at the time of placing an order hereunder whether the
Cartridges and Fluids will be used as development or production parts. All
Cartridges purchased under this Section 2.4(b) shall be credited against the
first year minimum purchase requirements set forth in Exhibit D.
(c) Diametrics also shall reasonably assist Quantech in the
performance of its Cartridge development obligations hereunder, including,
without limitation, providing to Quantech reasonable technical assistance.
2.5 Integration of Boards.
(a) Pursuant to the Development Program, Quantech shall be
responsible for integrating the Boards, Connectors and Cards into the FasTraQ
Product.
(b) In connection with the integration of the Boards, Quantech
shall purchase, and Diametrics shall manufacture and sell, the quantities of
Boards, Connectors and Cards set forth on Exhibit B. Such Components will be
supplied in accordance with Section 4.5 and the schedule set forth in Exhibit B,
at the prices set forth in Exhibit C. Quantech shall notify Diametrics in
writing at the time of placing an order hereunder whether such Components will
be used as development or production parts.
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(c) Diametrics also shall reasonably assist Quantech in the
performance of its development obligations relating to the Boards, Connectors
and Cards hereunder, including, without limitation, providing to Quantech
reasonable technical assistance.
2.6 Development Assistance, Meetings; Reports. To the extent necessary
to permit each party to meet its development obligations hereunder, the other
party promptly shall (a) respond to such party's inquiries and requests for
advice, and (b) subject to the terms of this Agreement, make available to such
other party its proprietary information. Within thirty (30) days after the
Effective Date, each party shall appoint an individual, reasonably acceptable to
the other party, to facilitate communications between the parties relating to
the development of the Components, FasTraQ Product and FasTraQ Disposables and
the relationship contemplated herein. The parties shall use good faith efforts
to meet monthly during the first year of this Agreement and quarterly thereafter
to discuss the development, manufacture and supply of the Components
contemplated hereunder. In addition, each party shall use good faith efforts to
provide the other party, within thirty (30) days after the end of each calendar
month, a summary report of its activities under the Development Program during
such calendar month, with the content of such report to be mutually agreed.
2.7 Development of Other Custom Cartridges. If Quantech notifies
Diametrics that it desires to develop, using Diametrics Technology, a custom
single use analyte cartridge other than the Cartridge for commercialization in
the Field, Diametrics shall, subject to the consent of any third parties that
may have superior rights with respect to such development, including, without
limitation, Agilent Technologies (or its assignees), enter into good faith
negotiations of an agreement for the development and supply or license of such
custom cartridge provided that it does not compete with Diametrics' then
existing or proposed fields of application. With respect to any such request by
Quantech, Diametrics may elect either to develop and supply such custom
cartridge to Quantech or to license the relevant rights to Quantech for a
license fee or royalty. Diametrics shall have no obligation to develop any
cartridges for, or license any of the Diametrics Technology to, Quantech for any
purpose other than distribution or use in the Field.
2.8 Cross License of FasTraQ Technology to Diametrics. Quantech and
Diametrics acknowledge that Diametrics may desire to utilize Quantech Technology
for use in connection with IRMA System or other Diametrics products. If
Diametrics notifies Quantech that it desires to so utilize the Quantech
Technology, Quantech shall enter into good faith negotiations with Diametrics of
an agreement for the products to be developed, manufactured and distributed by
Diametrics in specific fields of application that do not compete with Quantech's
then existing or proposed fields of application. With respect to any such
request by Diametrics, Quantech may elect to develop the products for sale to
Diametrics or license it to Diametrics for a license fee or royalty.
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ARTICLE 3. OEM LICENSE
3.1 OEM License to Quantech. Subject to the terms and conditions of this
Agreement, Diametrics hereby grants to Quantech a non-exclusive,
non-transferable license (a) to use and incorporate the Boards, Cards and
Connectors into the FasTraQ Product and to market and distribute such FasTraQ
Product in the Field, and (b) to incorporate the Cartridges and Fluids into the
FasTraQ Disposable and to market and distribute such FasTraQ Disposable in the
Field. Quantech shall not market, distribute or sell (a) the Boards, Cards or
Connectors separately (except as replacement parts) or as a component of any
other products; (b) the Cartridges or Fluids except as incorporated into the
FasTraQ Disposable or (c) the FasTraQ Product or FasTraQ Disposables outside the
Field. Quantech shall be entitled to distribute the FasTraQ Product and FasTraQ
Disposables under such trademarks as it may deem appropriate.
3.2 Sublicenses. The rights granted to Quantech under Section 3.1 may
not be sublicensed, transferred or assigned to any third party except with the
prior written consent of Diametrics, provided that Quantech may sublicense,
transfer or assign such rights to Quantech's distribution partners for the
purpose of marketing, distributing and selling the FasTraQ Product and the
FasTraQ Disposables in accordance with the terms, covenants, conditions and
limitations set forth in this Agreement.
3.3 Software Licenses. Notwithstanding any other provisions of this
Agreement, the parties agree that any software portion of the Components
(including without limitation the IRMA Software) may be sublicensed by Quantech
to its end user customers for use in the FasTraQ Product, pursuant to Quantech's
customary software license terms, reasonably acceptable to Diametrics, and that
such sublicense shall in no way constitute a sale of such IRMA Software.
ARTICLE 4. COMPONENT MANUFACTURE AND SUPPLY
4.1 Manufacture and Supply. Diametrics shall manufacture and supply the
Components to Quantech in accordance with the specifications and the terms of
this Agreement.
4.2 Minimum Purchase Requirements. During each quarter of the twelve
month period commencing on the Commercialization Date and during such twelve
month period, Quantech shall purchase, and Diametrics shall manufacture and
sell, (a) at least sixty percent (60%) of the minimum quantity of Components for
the applicable quarter, and (b) one hundred percent of the aggregate minimum
quantity of Components for such twelve month period, respectively, as set forth
in Exhibit D. During the two subsequent twelve (12) month periods hereunder,
Quantech shall purchase, and Diametrics shall manufacture and sell, a minimum
quantity of Components having an aggregate purchase price equal to * of the
aggregate purchase price of the actual purchases of Components during the
preceding twelve (12) month period, provided, however, that in any event, the
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* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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minimum purchase requirement for a subsequent twelve (12) month period will be
no less than * of the previous twelve (12) month's minimum purchase requirement
(measured in terms of aggregate purchase price). During such subsequent twelve
month periods, Quantech shall purchase, and Diametrics shall manufacture and
sell, Components with an aggregate purchase price of at least * of the minimum
purchase requirement for any such twelve month period in each quarter of such 12
month period, and * of the minimum purchase requirement for such twelve month
period. All such purchases shall be at the pricing set forth on Exhibit C. If
Quantech fails to meet any of the minimum purchase requirements established
pursuant to this Agreement in any such quarter or 12 month period, Diametrics
shall have the right (a) with respect to finished Components or
work-in-progress, to recover from Quantech, and Quantech shall pay to Diametrics
within twenty (20) days of receipt of written notice from Diametrics, cash
payments equal to the total purchase price of the Components constituting such
shortfall, whereupon Diametrics shall finish and deliver such Components to
Quantech, and (b) with respect to any portion of such shortfall not then
represented by finished Components or work-in-progress, to recover from Quantech
a sum equal to fifty percent (50%) of the total purchase price of such portion
of the shortfall. The foregoing rights shall be in addition to Diametrics'
rights to terminate this Agreement pursuant to Section 11.2.
4.3 Forecasts and Subsequent Purchase Orders.
(a) With respect to the time period commencing on the
Commercialization Date, at least sixty (60) days before the beginning of each
calendar quarter, Quantech shall issue to Diametrics a written twelve (12) month
forecast of its purchases of each of the Components, (i) the first quarter
forecast of which shall be binding on both parties as a purchase and sale
agreement (subject to Section 13.4), (ii) the second quarter forecast of which
shall be partially binding on both parties to the extent that actual purchases
and sales which the parties are required to transact during such second quarter
shall not deviate from the quantities, on a Component by Component basis,
forecasted for such second quarter by more than plus or minus ten percent (10%)
in the case of Boards, Cards and Connectors and by more than plus or minus the
following percentages in the case of Cartridges and Fluids: twenty percent (20%)
for the first twelve months after the Commercialization Date and ten percent
(10%) thereafter, and (iii) the last two (2) quarters of which shall be for
Diametrics' planning purposes and shall be Quantech's non-binding good faith
estimate of its purchases during such period. Forecasts submitted pursuant to
the foregoing provisions of this Section 4.3 shall state the overall quantities
of each Component to be purchased by Quantech during each calendar month. In
addition, the requirements of this Section 4.3(a) shall not alter Quantech's
obligation to meet the minimum purchase requirements set forth in Section 4.2.
Quantech's binding forecast of purchases for the development phase prior to the
Commercialization Date is set forth in Exhibit B. For planning and informational
purposes only, Quantech's long-term forecasts as of the Effective Date are set
forth in Exhibit E.
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* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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(b) Quantech shall issue written purchase orders for the
Components at least sixty (60) days prior to the proposed shipping date.
Quantech may, from time to time, issue additional purchase orders for amounts in
excess of its binding forecast submitted pursuant to Section 4.3(a), but any
such additional purchase orders shall be subject to Diametrics' acceptance;
provided, however, that Diametrics will use commercially reasonable efforts to
meet such requests.
4.4 Allocation of Components. Diametrics will use commercially
reasonable and diligent efforts to fulfill Quantech's properly forecasted orders
for Components in a timely fashion. If Diametrics fails to fulfill a properly
forecasted and timely placed order within thirty (30) days of the designated
shipping date, which failure is not excused pursuant to Section 13.4, Quantech
may, at its option, elect to (a) receive shipment of the delayed quantities, in
which case the purchase price for such delayed quantities shall be discounted by
five percent (5%) from the applicable purchase price, or (b) decline to receive
shipment of such delayed quantities, in which case the delayed quantities shall
be deducted from the binding forecast and minimum purchase requirements for the
then-current quarter and the then current twelve month period. In the event of a
shortage of any of components of the Components, Diametrics shall allocate
available units of such Component on a pro rata basis among its other customers
and Quantech. The parties hereby stipulate and agree that the remedy of specific
performance is an appropriate remedy for a breach of Diametrics' obligation to
allocate components on a pro rata basis in the event of such a shortage in
accordance with the foregoing provision of this Section 4.4, it being
acknowledged that the Components are essential to the operation of the FasTraQ
Product and are unique, non-fungible goods which are not available from any
source other than Diametrics.
4.5 Purchase Order Forms. Quantech shall be entitled to use its standard
purchase order for purchases of the Components hereunder. In the event of a
conflict between the terms of any such purchase order and the terms of this
Agreement, the terms of this Agreement shall govern. Additional or contrary
terms will be subject to mutual prior written agreement.
4.6 Delivery. All Component deliveries shall be made by Diametrics
F.O.B. Diametrics' manufacturing facility. Title and risk of loss shall pass to
Quantech at the time of tender by Diametrics at Diametrics' facility to the
carrier designated by Quantech. Upon delivery to Quantech's designated carrier,
Quantech shall assume title and risk of loss and shall be responsible to export
Components from the country of manufacture. The pricing for the Components set
forth in Exhibit C excludes, and Quantech shall pay, all shipping costs for the
Components after delivery to the F.O.B. point.
4.7 Process Testing.
(a) Initially, Diametrics shall be responsible for performing a
final test process on the FasTraQ Disposables after Quantech has packaged them.
The final test process will test performance and determine the parameters
similar to the calibration code that is used on current cartridges for the IRMA
System. Diametrics will train Quantech
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personnel to perform the final test process so that it may be transitioned to
Quantech as soon as reasonably possible but no later than one year after the
first commercial sale of the FasTraQ Product. Quantech and Diametrics shall
coordinate the delivery of the Cartridges and Fluids to Quantech and the
delivery of a sample of packaged FasTraQ Disposables back to Diametrics for
execution of the final test process. After this process is performed, Diametrics
will transfer to Quantech the parameters and Quantech will include these
parameters with the FasTraQ Disposables prior to shipment to customers.
Diametrics shall also provide a certificate of conformance to specifications for
the Cartridges at the time of shipment and for the FasTraQ Disposables at the
time of transfer to Quantech of the parameters.
(b) Prior to shipment to Quantech, Diametrics shall calibrate the
analog electronics and the temperature control incorporated on the Boards.
Quantech is responsible for performing a verification process to assure that it
has properly installed the Boards into the FasTraQ Product. Diametrics will
provide this verification process to Quantech. Diametrics shall also provide a
certificate of conformance to specifications for the Boards, Connectors, Cards
and Fluids at the time of shipment.
4.8 QSR. Diametrics will comply with the quality system requirements of
the FDA and the EU as applicable to the manufacture and supply of the Components
hereunder.
ARTICLE 5. COMPONENT PURCHASES AND PAYMENTS
5.1 Component Prices. The prices of the Components are set forth in
Exhibit C. Diametrics represents and covenants that the prices set forth in
Exhibit C are and shall be no less favorable than those offered by Diametrics to
other similarly situated customers for similar products being purchased at
similar volumes. The parties acknowledge and agree that, except as otherwise
expressly provided herein (e.g., Section 2.2) and subject to Quantech's minimum
purchase obligations under Section 4.2, the sole consideration to be received by
Diametrics for the license set forth in Section 3.1 shall be embodied in
purchase price of the Components supplied by Diametrics to Quantech hereunder
and that no additional licensing fees or royalties shall be payable by Quantech
to Diametrics hereunder.
5.2 Terms of Payment. All payments for Components shall be due and
payable within (30) days of the invoice date; provided that the parties may
mutually agree in writing to other payment terms. Quantech shall make all
payments by standard payment methods (e.g., electronic or wire transfer, or
check) in available funds at the location designated by Diametrics from time to
time. A late fee shall be paid by Quantech on any amount not received by
Diametrics when due at a rate of one and one half percent (1.5%) per month on
all unpaid amounts, or the maximum rate permitted by law, whichever is less. As
between the parties, Quantech shall be responsible for all taxes relating to
Components (except for taxes on Diametrics' net income).
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ARTICLE 6. REGULATORY MATTERS
6.1 Regulatory Approvals. Quantech will be responsible for obtaining all
Regulatory Approvals for the FasTraQ Product and FasTraQ Disposables; provided
that Diametrics will grant Quantech a right of reference to its regulatory
submissions and technical files relating to the Components. Upon request from
Quantech, Diametrics will provide Quantech with reasonable assistance relating
to such regulatory approvals.
6.2 Component Labeling. Quantech shall develop, and be responsible for
the text and regulatory compliance of, all package labels and inserts used in
connection with the FasTraQ Product and FasTraQ Disposables, including without
limitation, all sales and promotional literature, subject to compliance with
approved claims. Diametrics shall have the opportunity to review and comment on
labeling relating to the Components. For purposes of this Agreement, the terms
"label" and "labeling" shall have the meanings set forth in Sections 201(k) and
201(m) respectively of the. Federal Food, Drug and Cosmetics Act.
6.3 Component Tracking. Diametrics and Quantech shall each maintain
their own quality systems for handling complaints, failure investigations and
MDR and vigilance reporting requirements as required by law. Quantech shall
cooperate with Diametrics in connection with its obligations under this Section
6.3 and provide to Diametrics, on a timely basis to permit Diametrics to fulfill
its regulatory obligations, the necessary reports relating to complaints and
product performance issues relating to the Components. Likewise, Diametrics
shall provide to Quantech, on a timely basis to permit Quantech to fulfill its
regulatory obligations, reports relating to complaints and product performance
issues relating to the IRMA System to the extent that such complaints or issues
may be relevant to the Components. In addition, Quantech shall maintain a
tracking system for the Components to enable Quantech to identify the specific
FasTraQ Product in which a Board or Connector has been installed, and Quantech
shall provide such information to Diametrics upon reasonable request. In
addition, at least thirty (30) days prior to the Commercialization Date, the
parties shall establish an appropriate notification, consultation and escalation
procedure for adverse events (e.g., patient death) relating to the Components,
which procedure will permit either party to take actions consistent with its own
regulatory guidelines and criteria, if the parties can not mutually agree on a
course of action or if the notifying party is unable to contact the appropriate
senior management of the other party through the notification process within
seventy-two (72) hours of its initial attempt to notify the other party.
Quantech and Diametrics shall each be responsible for bearing their own costs
associated with all product tracking, complaint analyses and related
evaluations.
6.4 Recalls. At least thirty (30) days prior to the Commercialization
Date, the parties shall establish a mutually agreeable procedure for
communicating and consulting with each other with respect to any recall issues
with respect to the FasTraQ Product or FasTraQ Disposables. If either party
believes that a recall of the FasTraQ Product or FasTraQ Disposables caused by
any of the Components is desirable or required by law, it shall promptly notify
the other party. The parties shall then discuss reasonably and in
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good faith whether such recall is appropriate or required and the manner in
which any mutually agreed recall will be handled. This Section 6.4 shall not
limit the obligations of either party under law with respect to recall of
FasTraQ Product, FasTraQ Disposables or Components required by law or properly
mandated by governmental authority. Voluntary recalls shall be conducted by
mutual agreement (with such agreement not to be unreasonably withheld). The
parties shall cooperate fully with each other in effecting any recall of the
FasTraQ Product or FasTraQ Disposables caused by any of the Components pursuant
to this Section 6.4, including communications with any customers or to the
public. Diametrics shall bear the substantiated, incremental, out-of-pocket
costs (e.g., employee overtime costs, the salary costs of additional employees
hired to implement the recall) of any recall of the FasTraQ Product or FasTraQ
Disposables to the extent caused by manufacturing defects in the Components or
failure of the Components to conform to specifications. Quantech shall exercise
commercially reasonable efforts to mitigate the costs associated with any recall
for which Diametrics may be responsible hereunder, taking into account the need
to maintain Quantech's good will and reputation for service excellence.
ARTICLE 7. COMPONENT WARRANTY
7.1 Component Warranty. Diametrics warrants the Components to Quantech
at the time of their shipment by Diametrics to Quantech in accordance with the
applicable warranty set forth in Exhibit F. If a Component does not meet the
applicable warranty, Diametrics shall promptly, at Diametrics' option, replace,
repair or make a purchase price (as was paid by Quantech to Diametrics) refund
for any of such Components which are non-conforming, provided that written
notice and reasonable documented evidence of each warranty claim and the fact
that the failure occurred during the warranty period is received by Diametrics
within thirty (30) days after the expiration thereof. Diametrics shall have the
right to verify such non-conformance. Such replacement, repair or refund shall
be Quantech's sole remedy hereunder. Unless otherwise agreed by the parties, the
warranty period under this Section 7.1 for (a) any Cartridge shall be a mutually
agreed shelf life, but not less than twelve (12) weeks from shipment to
Quantech; and (b) any Board, Card or Connector shall expire on the date fifteen
(15) months after the date of shipment of such Component to Quantech. Diametrics
shall exercise commercially reasonable efforts to achieve up to a twenty (20)
week shelf life warranty for the Cartridges within one (1) year of the Effective
Date, and shall issue quarterly reports to Quantech concerning Diametrics'
progress with respect to such endeavor. The IRMA Software is provided to
Quantech hereunder on an AS IS basis, without warranties of any kind. If
requested by Diametrics, Quantech shall return the non-conforming Component(s)
to Diametrics at the time of submission of the warranty claim therefor.
7.2 Warranty Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN SECTIONS 7.1
and 8.1, Diametrics MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESSED OR
IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT.
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7.3 Customer Warranties. Quantech shall be entitled to warrant the
Components to its customers on terms it deems appropriate; provided that
Quantech shall bear any expenses it may incur with respect to such warranties,
to the extent that such warranties exceed the scope or term of the express
warranties made by Diametrics hereunder.
7.4 Warranty and Repair Service. Diametrics shall provide warranty and
out of warranty repair service for the Components on the terms set forth in
Exhibit F, which terms shall be substantially the same as those offered to other
similarly situated customers for similar products.
ARTICLE 8: REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties. Each party represents and warrants
that: (a) it is a company duly organized, validly existing and in good standing
under the laws of Minnesota; (b) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary corporate action on the
part of such party, do not violate its Articles of Incorporation or By-laws or
applicable law and do not, and with the passage of time will not, materially
conflict with or constitute a breach under any other agreement, judgment or
instrument to which it is a party or by which it is bound, including in the case
of Diametrics, that certain Distribution Agreement by and between Diametrics and
Agilent Technologies, dated as of June 6, 1999; and (c) it will not enter into
an agreement that is inconsistent with the performance of its obligations
hereunder.
ARTICLE 9: INTELLECTUAL PROPERTY
9.1 Ownership of Pre-Existing Intellectual Property. Each party shall
retain all rights to any technology existing on the Effective Date or developed
or acquired by such party outside the scope of this Agreement.
9.2 Ownership of Diametrics Technology. Except as provided in Section
9.5, the Diametrics Technology and any and all inventions made, conceived or
acquired by Diametrics during the course of its performance hereunder, and all
intellectual property related thereto, shall be the exclusive property of
Diametrics. Diametrics shall pay all expenses relating to the securing and
maintaining of appropriate intellectual property protection with respect to such
inventions.
9.3 Ownership of Quantech Technology. Except as provided in Section 9.5,
the Quantech Technology and any and all inventions made, conceived or acquired
by Quantech during the course of its performance hereunder, and all intellectual
property related thereto, shall be the exclusive property of Quantech. Quantech
shall pay all expenses relating to the securing and maintaining of appropriate
intellectual property protection with respect to such inventions.
9.4 Ownership of Joint Technology. Except as provided in Section 9.5, in
the event that personnel of Diametrics and Quantech jointly participate in an
invention, such
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invention, and the intellectual property related thereto shall be owned jointly
by the parties. Determination of inventorship shall be made in accordance with
U.S. patent laws. The parties shall jointly share in the expenses of obtaining
intellectual property protection of any joint invention.
9.5 Ownership of Technology Relating to Components, IRMA Software,
FasTraQ Product and FasTraQ Disposables. Sections 9.2 through 9.4
notwithstanding, (i) any and all inventions made, conceived or acquired by
Quantech during the course of its performance hereunder, or jointly by Quantech
and Diametrics during the course of their performance hereunder, shall be the
exclusive property of Diametrics to the extent that such inventions relate to
the Components or the IRMA Software, including without limitation any software
or hardware improvements to the Diametrics Technology, and (ii) any and all
inventions made, conceived or acquired by Diametrics during the course of its
performance hereunder, or jointly by Diametrics and Quantech during the course
of their performance hereunder, shall be the exclusive property of Quantech to
the extent that such inventions relate to FasTraQ Product and FasTraQ
Disposables (excluding the Components and IRMA Software), including without
limitation any software or hardware improvements to the Quantech Technology. The
party owning any invention described in this Section 9.5 shall pay all expenses
relating to the securing and maintaining of appropriate intellectual property
protection with respect to such invention.
9.6 Sales of Components. Quantech agrees that Diametrics may market,
distribute or sell any of the Components to any customer other than Quantech.
The parties agree, however, to develop and implement a method to prevent another
party from developing a disposable, utilizing the Cartridge, that can be used in
the FasTraQ Product.
9.7 Further Actions. Each party agrees to cooperate reasonably and in
good faith to protect and preserve the other party's intellectual property
rights and to take whatever steps are reasonably necessary, including, without
limitation, execution of assignments, to secure and enforce such rights on the
behalf of the other party.
ARTICLE 10: INDEMNIFICATION
10.1 Indemnification by Diametrics. Diametrics shall defend, indemnify
and hold Quantech harmless from liability to the extent it is based upon a third
party claim that any of the Components, in the form supplied by Diametrics to
Quantech and used as intended by Diametrics (excluding the IRMA Software as
modified by Quantech hereunder), infringes any patent or other intellectual
property right of any third party. In the event that a Component is held to so
infringe any patent or other intellectual property right of any third party,
Diametrics shall either (i) obtain for Quantech a license to such right, (ii)
modify such Component so that it no longer infringes, or (iii) replace such
Component with a non-infringing Component that performs the same functions as
the infringing Component, or, if Diametrics is unable to effect any of the
foregoing remedies, Diametrics shall refund to Quantech the relevant purchase
price actually paid by Quantech for such Component. This Section 10.1 states
Diametrics' entire liability for infringement of intellectual property rights
and is in lieu of all other warranties, express
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or implied. Quantech shall cease distribution of any Component in any country in
which Diametrics reasonably requests Quantech to do so due to a challenge in
that country based upon the patent rights of a third party with respect to such
Component (provided that if Diametrics is selling the same Component in such
country, such request shall be deemed to be reasonable if Diametrics also ceases
distribution of such Component in such country and the then applicable minimum
purchase requirements under this Agreement shall be adjusted accordingly).
Diametrics shall have no obligation under this Section 10.1 if and to the extent
that such claim arises from, (i) modification of a Component other than by
Diametrics or as expressly authorized by Diametrics or (ii) combination of a
Component with components other than those supplied by Diametrics, and the
alleged infringement or misappropriation relates to such compliance,
modification or combination. Diametrics shall not have any obligation with
respect to a claim if it has provided Quantech with changes that would have
avoided the problem and the changes are not fully implemented (at Diametrics'
cost) within a reasonable time frame, provided that the changes do not
materially adversely affect functionality or performance and that Quantech is
notified of the problem the changes avoid.
10.2 Indemnification by Quantech. Quantech shall defend, indemnify and
hold Diametrics harmless from liability to the extent it is based upon a third
party claim that (a) results from the sale or other distribution of FasTraQ
Product and FasTraQ Disposables by Quantech (other than claims covered by
Section 10.1); (b) results from any representation made or warranty given by
Quantech with respect to the FasTraQ Product and FasTraQ Disposables (other than
the warranty provided in Section 7.1), or (c) results from any action or
omission of its distributors with respect to the Components or this Agreement.
In addition, Quantech shall defend, indemnify and hold Diametrics harmless from
liability to the extent it is based upon a third party claim that the FasTraQ
Product, FasTraQ Disposables, or the modifications to IRMA Software (excluding
the Components in the form supplied by Diametrics to Quantech and used as
intended by Diametrics) infringe any patent or other intellectual property right
of any third party.
10.3 Indemnification Procedures. The party seeking indemnification under
this Article 10 shall promptly notify the other party (the "indemnifying party")
in writing of the pendency of such claim within fifteen (15) days of becoming
aware of such claim, shall thereafter reasonably cooperate with the indemnifying
party in the defense of such claim, but at the expense of indemnifying party,
and shall permit the indemnifying party to assume control over the defense
and/or settlement of such claim.
ARTICLE 11. TERM AND TERMINATION
11.1 Term. This Agreement shall become effective upon the Effective Date
hereof and, unless terminated earlier pursuant to this Article 11, shall expire
on the third anniversary of the Commercialization Date (the "Term").
11.2 Termination. Subject to the terms of Sections 11.3 and 11.4 below,
this Agreement and all rights granted hereunder may be terminated by either
party (i) in the event of a material default by the other party of a material
obligation hereunder to which
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such party was entitled, including, without limitation, failure to meet the
minimum purchase requirements in accordance with this Agreement for two (2)
consecutive quarters or any twelve month period, failure to pay any material
moneys due from one party to the other party (including failure to pay moneys
due under Section 4.2 but excepting amounts as to which there is a legitimate
dispute), and failure to deliver Components in accordance with the conforming
purchase orders as provided herein (excepting purchase orders as to which there
is a legitimate dispute), upon written notice to the defaulting party, which
termination shall be effective ninety (90) days (except that with respect to any
payment amount that is not subject to a good faith dispute, termination shall be
effective if such amount is not paid within ten (10) days of notice thereof
given after the payment due date) after such notice of default is given, unless
the default shall be cured by the defaulting party within such ninety (90) day
period, or (ii) if the other party is unable to pay its debts generally as they
come due, becomes insolvent, makes an assignment for the benefit of creditors,
goes into liquidation or receivership, has a receiver or custodian appointed for
such other party, is declared bankrupt, files or has filed against it a petition
of any type as to its bankruptcy (which petition, if involuntary, is not
dismissed within sixty (60) days) or ceases to function as a going concern.
11.3 Effect of Termination or Expiration. Termination or expiration of
this Agreement for any reason shall be without prejudice to Diametrics' right to
receive all payments accrued and unpaid on the effective date of termination and
shall not release either party hereto from any liability which at such time has
already accrued or which thereafter accrues from a breach or default prior to
such expiration or termination. In addition, Quantech shall pay Diametrics for
all inventory, work-in-progress and any other non-cancelable commitments for the
Components reasonably ordered in reliance on Quantech's quarterly and annual
purchase obligations, the first three quarters of a twelve month forecast for
Boards and Connectors, the first two quarters of a twelve month forecast for all
other Components, and orders under Sections 4.2 and 4.3(a), and other purchases
or commitments mutually agreed to in writing by both parties. Upon receipt of
such payment, Diametrics shall deliver to Quantech the inventory,
work-in-progress, and other goods covered by non-cancelable commitments made by
Diametrics, for which payment was made. Except as expressly provided herein, all
of the parties' rights and remedies hereunder are cumulative and non-exclusive.
11.4 Surviving Obligations. No termination or expiration of this
Agreement shall affect or discharge any obligations, rights, disclaimers,
conditions or limitations of either party that arose prior to the effective date
of such termination. In addition, Sections 5.2, 6.3, 6.4, 7.1, 7.2, 7.3, 11.3
and 11.4 and Articles 9 (Intellectual Property), 10 (Indemnification), 12
(Confidentiality) and 13 (Miscellaneous) and any Sections necessary to give
effect to this Section 11.4 shall survive any termination or expiration of this
Agreement.
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ARTICLE 12: CONFIDENTIALITY
12.1 Non-Use and Non-Disclosure. Each party acknowledges and agrees that
all the other party's Confidential Information is confidential and proprietary
to such other party. Each party shall not use or disclose to any third party the
other party's Confidential Information without the other party's prior written
consent for any purpose other than as permitted or required hereunder. Each
party shall take the same reasonable measures necessary to prevent any
disclosure by its employees, agents, contractors, or consultants of the other
party's Confidential Information as it applies to the protection of its own
Confidential Information.
12.2 Marking. To be entitled to protection as Confidential Information,
all Diametrics or Quantech documents containing that party's Confidential
Information shall be appropriately and clearly marked as "Proprietary,"
"Secret," "Confidential," or other words to similar effect. If disclosure of
information is made orally, as in a meeting, such information shall be presumed
to be Confidential Information and such information shall not be used or
disclosed by the receiving party without the other party's written permission.
12.3 Exclusions. Information shall not be considered Confidential
Information hereunder if it:
(a) was already in the possession of the receiving party prior to
its receipt from the disclosing party, as shown by the receiving party's books
and records;
(b) is, or becomes, part of the public knowledge or literature
through no fault, act or omission of the receiving party; provided, however,
that information shall not be deemed to have entered the public domain by reason
of its having been filed with any regulatory authority;
(c) is, or becomes, available to the receiving party from a
source other than the disclosing party, which source has rightfully obtained the
same information and has no obligation of confidentiality to the disclosing
party with respect to it; or
(d) is required to be revealed pursuant to law, provided,
however, the receiving party which is under any such requirement of law shall
give reasonable notice to the disclosing party of such requirement and shall
cooperate with the disclosing party, at the disclosing party's expense in
reasonable legal efforts to limit or mitigate any such revelation so as to
preserve the proprietary nature of any Confidential Information contained
therein.
12.4 Duration; Surviving Obligation. Each party's obligations of non-use
and non-disclosure of the other party's Confidential Information shall apply
during the term of this Agreement and survive after its termination for any
reason.
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12.5 Confidentiality of this Agreement. The terms of this Agreement
itself shall be deemed to be Confidential Information hereunder. In the event
that a party is required to disclose the content of this Agreement pursuant SEC
requirements, such party shall use its reasonable efforts to obtain confidential
treatment of at least the following portions of the Agreement: (i) financial
terms (such as all dollar amounts and price terms), (ii) quantities (such as
minimum purchase requirements) and (iii) time periods (such as times relating to
term).
ARTICLE 13. MISCELLANEOUS
13.1 Compliance with Laws. The parties agree to comply with all
applicable statutes, laws, ordinances, rules and regulations relating to their
respective obligations hereunder, including without limitation, the Foreign
Corrupt Practices Act and export control laws.
13.2 Disclaimer of Consequential Damages. EXCEPT AS OTHERWISE PROVIDED
BELOW, AND NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER
PARTY SHALL BE LIABLE OR OBLIGATED UNDER ANY SECTION OF THIS AGREEMENT OR UNDER
CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR
ANY INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, SPECIAL OR PUNITIVE DAMAGES. THE
LIMITATIONS IN THIS SECTION 13.2 SHALL NOT APPLY TO BREACHES OF ARTICLE 11
(CONFIDENTIALITY).
13.3 Status. No agency, partnership or joint venture is hereby
established. Neither Diametrics nor Quantech shall enter into, or incur, or hold
itself out to third parties as having authority to enter into or to incur on
behalf of any other party any contractual obligations, expenses or liabilities
whatsoever.
13.4 Excused Delay. The untimely performance of any obligations arising
hereunder by any party will be excused, and such delay of performance shall not
constitute breach, or grounds for termination or prejudice of any rights
hereunder, if the delay of performance is a result of circumstances or
occurrences beyond the reasonable control of the party whose performance is
excused hereunder ("Force Majeure"), provided that such party (i) shall
immediately notify the other of any such anticipated delay and its expected
duration and (ii) shall immediately resume performance after the cause of delay
is removed, and (iii) shall during such delay be reasonably diligent in avoiding
further delay. Without limiting the generality of circumstances or occurrences
beyond the reasonable control of a party, examples of such circumstances or
occurrences are strikes, shortages of power, materials or transportation, acts
of government or of God, sabotage or insurrection. Notwithstanding the above,
any actual and material delay greater than one hundred eighty (180) days (or any
material delay which is reasonably expected to exceed two hundred seventy (270)
days) shall be grounds for termination (without cause or penalty) by the other
party.
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13.5 Notices. All notices, reports or demands to be given by either
party to the other under the provision of this Agreement shall be forwarded,
charges prepaid, by express mail or reputable overnight courier service, or may
be transmitted by facsimile, properly addressed to the respective parties as
follows:
If to Quantech:
Quantech Ltd.
815 Northwest Parkway
Eagan, Minnesota 55121
Attention: Chief Executive Officer
With copies to:
Burke, Warren, MacKay & Serritella, P.C.
Attorneys at Law
22nd Floor IBM Plaza
330 North Wabash Avenue
Chicago, Illinois 60611-3607
Attention: Jeffrey D. Warren, Esq.
If to Diametrics:
Diametrics Medical Incorporated
2658 Patton Road
St. Paul, Minnesota 55113
Attention: Chairman of the Board and CEO
With copies to:
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
Attention: Kenneth L. Cutler, Esq.
or to such address or addresses the parties hereto may designate for such
purposes during the term hereof. Notices given hereunder if actually received
shall be deemed given upon the tenth day after mailing and on the day after
dispatch if given by facsimile transmission.
13.6 Binding Effect and Assignment. During the term of this Agreement,
the rights of either party under this Agreement shall not be assigned nor shall
the performance of either party's duties hereunder be delegated, without the
other party's written consent (which shall not be unreasonably withheld) except
that, without the other party's consent, either party may assign this Agreement
in connection with a merger, consolidation, reorganization or sale of (i)
substantially all of its assets or (ii) those assets
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that are related to the subject matter of this Agreement; provided the surviving
or purchasing entity in such transaction agrees to assume and be bound by such
party's obligations hereunder following such transaction.
13.7 Dispute Resolution.
(a) For any dispute or claim arising out of or relating to this
Agreement, of breach hereof, the parties, prior to filing any action as provided
herein, shall in good faith first negotiate towards a written resolution of such
dispute or claim for a period not to exceed twenty (20) days from the date of
receipt of a party's request for such negotiation. Such negotiations shall be
conducted by managers of each party who have full authorization to finally
resolve any such dispute or claim.
(b) Notwithstanding Section 13.7(a), each party expressly
reserves the right to seek immediate judicial relief from a court of competent
jurisdiction if the other party is or appears to be in violation of such other
party's obligations of non-use and non-disclosure under Article 11 above,
including, without limitation, any injunction or other preliminary relief.
(c) All actions arising as a result or consequence of this
Agreement shall be instituted and litigated only in courts having their situs in
the City of Minneapolis, Minnesota, and the parties hereby consent to the
exclusive jurisdiction and venue of any state or federal court having its situs
in said city, and waive any objection based on forum non conveniens.
13.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, excluding its choice of law
rules.
13.9 Severability. If any provision or provisions of this Agreement
shall be determined to be unenforceable, then the parties shall in good faith
negotiate for a substitute provision addressing the same subject matter as the
unenforceable provision(s) as may then be considered to be enforceable,
provided, however, if no substitute provision can be formulated which shall be
accepted by the parties as enforceable, this Agreement shall nonetheless
continue in full force and effect with the unenforceable provision(s) stricken
here from. In such case the applicable law shall apply with regard to
unenforceable and / or void provisions.
13.10 Headings. The Article headings set forth in this Agreement are
intended only as a convenience and shall not be given any effect to interpret
the provisions of this Agreement.
13.11 Waiver. The failure of delay of either party to enforce at any
time any provision hereof shall not be construed to be a waiver of such
provision or of the right thereafter to enforce each and every provision. No
waiver by either party to this Agreement, either express or implied, of any
breach of any term, condition, or obligation of this Agreement, shall be
construed as a waiver of any subsequent term, condition, or
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obligation of this Agreement. Nor shall the performance of any act of
mitigation, such as allocation of Components, or adjustment of milestones be
deemed a waiver of any prior or subsequent breach of this Agreement. In the
event of a breach of any provision of this Agreement, the facts and
circumstances of said breach shall be considered in determining whether said
breach and provision are material. No waiver shall be effective unless it is
made in writing, executed by both parties, and refers expressly to this section.
13.12 Dollar Denomination. Unless otherwise specified all amounts stated
in this Agreement as payable in U.S. Dollars shall not be subject to currency
exchange adjustments.
13.13 Entire Agreement and Modification. This Agreement, including all
Exhibits hereto, sets forth the entire agreement between parties with respect to
the subject matter hereof and as such, supersedes all prior and contemporaneous
negotiations, agreements, representations, understandings and commitments with
respect thereto and shall take precedence over all terms, conditions and
provisions on any purchase order form, or order acknowledgment, or order release
purporting to address the same subject matter. This Agreement shall not be
released, discharged, changed or modified in any manner except by a writing
signed by the duly authorized officers of each party hereto, which writing shall
make specific reference to this Agreement and shall express the plan or
intention to modify same.
13.14 Authority. Each of the signatories below expressly represents that
he has the authority to sign this Agreement on behalf of his company and to bind
his company to all of the terms and conditions of this Agreement.
13.15 Publicity. Neither party hereto shall originate any publicity,
news release, or other announcement, written or oral, whether to the public
press, the trade, Quantech's or Diametrics' customers or otherwise, relating to
this Agreement, or to performance hereunder or the existence of an arrangement
between the parties without the prior written approval of the other party
hereto, not to be unreasonably withheld, or as provided in Sections 12.3(d ) and
12.5.
IN WITNESS WHEREOF, Quantech and Diametrics have executed this Agreement
by their respective duly authorized officers or representatives as of the day
first above written.
Diametrics MEDICAL INCORPORATEDQuantech LTD.
By: By:
------------------------------------ -----------------------------------
Title: Title:
--------------------------------- ---------------------------------
Date: Date:
---------------------------------- ---------------------------------
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Schedule of Exhibits:
Exhibit A: Development Program
Exhibit B: Initial Forecast
Exhibit C: Prices
Exhibit D: Minimum Annual Purchases
Exhibit E: Long-Term Forecasts
Exhibit F: Product Warranty and Repair Services
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------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT A: DEVELOPMENT PROGRAM
------------------------------------------------------------------------------------------------------------------------------------
*
ID Task Name Resource Names
-- --------- --------------
1 Agreement of Heads Case, Giddlings [Graphical depiction of the start and completion dates for the listed
------ ----------------------------------- ------------------- tasks. A request for confidential treatment with respect to such
2 Form Project Team Q,DMI information has been filed with the SEC, and the information has
------ ----------------------------------- ------------------- been omitted pursuant thereto.]
3 PDR Q,DMI
------ ----------------------------------- -------------------
4 Order * Board Sets Q
------ ----------------------------------- -------------------
5 Final Agreement Q,DMI
------ ----------------------------------- -------------------
6 Deliver * Board Sets DMI
------ ----------------------------------- -------------------
7 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
8 Select New CPU DMI
------ ----------------------------------- -------------------
9 Design/Layout New CPU Board DMI
------ ----------------------------------- -------------------
10 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
11 Molded Cartridge Q
------ ----------------------------------- -------------------
12 Purchase * IRMA's Q
------ ----------------------------------- -------------------
13 Redesign Connector Q,DMI
------ ----------------------------------- -------------------
14 Obtain modified connector Q
------ ----------------------------------- -------------------
15 Design SW Interface Q,DMI
------ ----------------------------------- -------------------
16 Modify SW Q
------ ----------------------------------- -------------------
17 Layout for FasTraQ Q
------ ----------------------------------- -------------------
18 Design CHU Q
------ ----------------------------------- -------------------
19 Build * CHU's Q
------ ----------------------------------- -------------------
20 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
21 Instruments Assembled (*) Q,Oak River
------ ----------------------------------- -------------------
22 Instrument Functional Q
------ ----------------------------------- -------------------
23 Deliver * Board Sets DMI
------ ----------------------------------- -------------------
24 Build * Instruments Oak River
------ ----------------------------------- -------------------
25 Order Old CPUs for 2002 DMI
------ ----------------------------------- -------------------
26 Forecast 1&2Q 2002 Q
------ ----------------------------------- -------------------
27 Install FasTraQ at DMI Q
------ ----------------------------------- -------------------
28 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
29 Hard Molded Cartridges Q
------ ----------------------------------- -------------------
30 Verify New Board DMI,Q
------ ----------------------------------- -------------------
--------------------------------------------------------------------------------
Page 1
--------------------------------------------------------------------------------
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT A: DEVELOPMENT PROGRAM
------------------------------------------------------------------------------------------------------------------------------------
*
ID Task Name Resource Names
31 Deliver * E3 Cart DMI [Graphical depiction of the start and completion dates for the listed
------ ----------------------------------- ------------------- tasks. A request for confidential treatment with respect to such
32 Validate System Q information has been filed with the SEC, and the information has
------ ----------------------------------- ------------------- been omitted pursuant thereto.]
33 2nd Development Milestone Payment Q
------ ----------------------------------- -------------------
34 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
35 Complete QSR DMI
------ ----------------------------------- -------------------
36 Submit 510(k) Q
------ ----------------------------------- -------------------
37 Validate New CPU Board DMI,Q
------ ----------------------------------- -------------------
38 Deliver New CPU Board DMI
------ ----------------------------------- -------------------
39 Final Development Milestone Q
Payment
------ ----------------------------------- -------------------
40 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
41 Product Launch (ACEP) Q
------ ----------------------------------- -------------------
42 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
43 Deliver * Board Sets DMI
------ ----------------------------------- -------------------
44 Build * Instruments Oak River
------ ----------------------------------- -------------------
45 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
46 Marketing Evaluation Q
------ ----------------------------------- -------------------
47 Deliver * Board Sets DMI
------ ----------------------------------- -------------------
48 Build * Instruments Oak River
------ ----------------------------------- -------------------
49 FDA Clearance Q
------ ----------------------------------- -------------------
50 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
51 Product Availability Q
------ ----------------------------------- -------------------
52 Opinion Leader Evaluations Q
------ ----------------------------------- -------------------
53 Deliver * E3 Cart DMI
------ ----------------------------------- -------------------
54 Deliver * board sets DMI
------ ----------------------------------- -------------------
55 Full Commercialization Q
------ ----------------------------------- -------------------
Page 2
--------------------------------------------------------------------------------
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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Exhibit B
Initial Forecast for Development Period
Boards, Connectors and Cards
------------------- -----------------------------------------------
Quantity Date Needed
------------------- -----------------------------------------------
------------------- -----------------------------------------------
* 2nd Quarter 2001
------------------- -----------------------------------------------
* 3rd Quarter 2001
------------------- -----------------------------------------------
* 4th Quarter 2001
------------------- -----------------------------------------------
* 1st Quarter 2002
------------------- -----------------------------------------------
Delivery of any specific order shall be within 45 days of the shipment dates
designated in that order.
Cartridges (Fluids shall be purchased in quantities appropriate for number of
Cartridges purchased.)
------------------- -----------------------------------------------
Quantity** Date Needed
------------------- -----------------------------------------------
* May 2001
------------------- -----------------------------------------------
* June 2001
------------------- -----------------------------------------------
* July 2001
------------------- -----------------------------------------------
* August 2001
------------------- -----------------------------------------------
* September 2001
------------------- -----------------------------------------------
* October 2001
------------------- -----------------------------------------------
* November 2001
------------------- -----------------------------------------------
* December 2001
------------------- -----------------------------------------------
* January 2002
------------------- -----------------------------------------------
* February 2002
------------------- -----------------------------------------------
* March 2002
------------------- -----------------------------------------------
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
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Exhibit C
Prices
Prices for Cartridges
The pricing for the Cartridges will be established at the beginning of an
applicable 12 month period (with the first 12 month period commencing on the
Commercialization Date) based on Quantech's initial forecast for such 12 month
period. If, after six months of such 12 month period, Quantech's actual
purchases during such 12 month period exceed or are substantially less than the
forecasted amount, Diametrics shall be entitled to apply a revised price on a
retroactive and prospective basis. At the end of the 12 month period, Diametrics
shall calculate the applicable pricing based on actual purchases during the
period, and shall either invoice or credit Quantech for the difference between
the amount actually paid and the amount payable during such period.
------------------------------ ----------------------
Annual Volume Price per
Cartridge
------------------------------ ----------------------
< 1 million *
------------------------------ ----------------------
1-3 million *
------------------------------ ----------------------
3-5 million *
------------------------------ ----------------------
5-10 million *
------------------------------ ----------------------
10-15 million *
------------------------------ ----------------------
Price of Boards, Connectors and Cards
* per unit. A unit is defined as a Board, a Connector and a Card.
Price of Fluid
------------------------------ ----------------------
4 liters *
------------------------------ ----------------------
8 liters *
------------------------------ ----------------------
20 liters *
------------------------------ ----------------------
All of the above prices shall be subject to increase on each of the first and
second anniversaries of the Commercialization Date, by an amount not to exceed
any percentage increase in the U.S. Medical Care Component of the Consumer Price
Index over the applicable period.
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
26
27
Exhibit D
Minimum Purchases
Minimum Purchases for the 12 month period following Commercialization Date (the
earlier of the date of the first commercial sale of the FasTraQ Products or *):
Cartridges
1st 12 Months *
Q1 *
Q2 *
Q3 *
Q4 *
Boards, Connectors and Cards
A unit is defined as a Board, a Connector and a Card.
1st 12 Months *
Q1 *
Q2 *
Q3 *
Q4 *
Minimum annual purchases for subsequent 12 month periods hereunder shall be
determined in accordance with Section 4.2 of the Agreement. Quantech will make
reasonable efforts to order Components in a manner that will provide Diametrics
an orderly production flow and ramp during the calendar quarters within 12 month
periods.
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
27
28
Exhibit E
Long Term Forecasts
Quantech Cartridge Forecast
2nd 12 months after *
Commercialization Date
3rd 12 months *
Quantech Boards, Connectors and Cards Forecast
* units during 2nd 12 months after Commercialization Date.
* units during 3rd 12 months.
A unit is defined as a Board, a Connector and a Card.
----------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
28
29
Exhibit F
WARRANTY AND OUT OF WARRANTY SERVICE
TERMS AND CONDITIONS
1. WARRANTY
Diametrics warrants that each Component will be free from defects in material
and workmanship under normal use and service and will perform within established
performance specifications for the periods set forth in Section 7.1 of the
Agreement. Diametrics will at its cost repair, replace or refund Quantech in
accordance with Section 7.1 of the Agreement for those Components that do not
meet performance specifications, provided that such Component was used and
serviced in accordance with Diametrics' instructions, and inspection by
Diametrics verifies that the Component is not functioning within performance
specifications. Service shall be considered complete when Diametrics
demonstrates, by an appropriate test procedure, that the Component is operating
in accordance with its performance specifications. If service performed is not
satisfactory, service will be repeated until satisfactory Component performance
per specifications is achieved. Diametrics will provide to Quantech a copy of a
Service Report detailing the work performed by Diametrics. Diametrics shall be
released from all warranty obligations under this Agreement in the event repairs
or modifications are made to Components by persons other than its own service
personnel, unless such repairs by others are made with the written consent of
Diametrics.
2. EXCLUSIONS
Component malfunctions resulting from operating conditions other than as
recommended by Diametrics are excluded from this Agreement. In addition,
malfunctions resulting from the following are excluded:
a) Damage caused by customer misuse or abuse or operation outside
of conditions prescribed by the Component's user instructions.
b) Acts of God including flood, earthquake, tornado, hurricanes,
and other natural or man made disasters,
c) Acts of war, vandalism, sabotage, arson and civil commotion;
d) Electrical surge and sprinkler damage.
Service made by Diametrics to correct Component malfunctions resulting from
causes excluded as provided above shall be invoiced by Diametrics to Quantech at
Out of Warranty Repair Service rates.
3. COMPONENTS RETROFIT
Diametrics may make changes in the design or construction of Diametrics'
Components without incurring any obligation hereunder to make such changes to
the customer's Components covered by this Agreement. However, Quantech shall
allow Diametrics, at Diametrics' option and expense, to retrofit Components or
make design changes which improve Components reliability, but that do not
adversely affect Components performance characteristics.
29
30
4. OUT OF WARRANTY REPAIR SERVICE
Diametrics shall provide out of warranty repair service for Components that are
not covered under warranty at the expense of Quantech. Prices for such service
are per the following table and are subject to change upon 90 days written
notice.
Out of Warranty Repair Prices
Part Number Item Description Unit Price
----------- ---------------- ----------
465400 Temp Test Card *
465100 Edge Connector Assembly (External) *
465500 Edge Connector Flex Assembly (Internal) *
424900 CPU Microprocessor Module *
446900 PCB Assembly CPU *
410701 IR Probe Thermocouple Assembly *
501800 Clip, Cardio *
416900 PCB, Assembly *
422001 Lithium Battery *
Labor Rates:
Out of Warranty Labor Rates are * per hour with a minimum charge of one hour.
--------
* Indicates that material has been omitted pursuant to a request for
confidential treatment. Such material has been filed separately with the SEC.
30
EX-23
4
c65162ex23.txt
ACCOUNTANT'S CONSENT
1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report on the consolidated
financial statements of Quantech, Ltd., dated September 12, 2001, which contains
an emphasis paragraph relating to an uncertainty as to the Company's ability to
continue as a going concern and is included in this Form 10-KSB, into the
previously filed Registration Statements of Quantech, Ltd., on Form S-8 (No.
333-46914, No. 333-70499, and No. 333-11475), and on the related Prospectuses.
/s/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
September 28, 2001