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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 0-935
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MOLECULAR DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4296006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 NORTH ORLEANS STREET, SUITE 510 60610
CHICAGO, IL (Zip Code)
(Address of principal executive offices)
(312) 222-9550
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of November 15, 2002
COMMON STOCK, $0.001 PAR VALUE 29,654,862
(Class)
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MOLECULAR DIAGNOSTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets -- September 30, 2002 and
December 31, 2001...................................... 2
b) Consolidated Statements of Operations -- Nine
months and three months ended September 30,
2002 and September 30, 2001............................ 3
c) Consolidated Statements of Cash Flows -- Nine months
ended September 30, 2002 and September 30, 2001........ 4
d) Notes to Consolidated Financial Statements --
September 30, 2002..................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 19
Item 4. Controls and Procedures................................... 20
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings......................................... 21
Item 2. Changes in Securities and Use of Proceeds................. 21
Item 3. Defaults upon Senior Securities........................... 22
Item 4. Submission of Matters to Vote of Security Holders......... 22
Item 5. Other Information......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 22
SIGNATURES.......................................................... 23
EXHIBIT INDEX....................................................... 26
1
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 2 $ 1,025
Accounts receivable, net allowance for doubtful accounts of $100
and $4 at September 30, 2002 and December 31, 2001, respectively........ 423 463
Inventories ................................................................ 514 533
Refundable taxes ........................................................... 46 116
Due (to) from officer ...................................................... (19) 50
Prepaid expenses and other current assets .................................. 110 141
-------- --------
Total current assets .................................................. 1,076 2,328
Fixed assets, net ............................................................ 743 835
Other assets:
License, patents, and technology, net of amortization ...................... 7,686 8,180
Goodwill ................................................................... 283 283
-------- --------
Total assets .......................................................... $ 9,788 $ 11,626
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................... $ 4,936 $ 2,502
Accrued payroll costs ...................................................... 1,178 868
Accrued expenses ........................................................... 1,639 1,175
Deferred revenue ........................................................... 746 567
Revolving line of credit ................................................... 129 177
Lease obligation ........................................................... 169 87
Notes payable-- related party .............................................. 90 65
Notes payable .............................................................. 3,989 1,359
-------- --------
Total current liabilities ............................................. $ 12,876 $ 6,800
Lease obligation, less current portion ....................................... 122 203
Deferred revenue ............................................................. 135 --
-------- --------
Total liabilities ..................................................... 13,133 7,003
-------- --------
Stockholders' equity (deficit)
Preferred stock, $0.001 par value; shares authorized -- 10,000,000;
shares issued and outstanding -- 3,337,836 and 3,493,078, at
September 30, 2002 and December 31, 2001 ................................ 19,251 21,089
Common stock, $0.001 par value; shares
authorized-- 100,000,000; shares issued and
outstanding-- 27,117,578 and 25,304,883 at September 30,
2002 and December 31, 2001, respectively ................................ 27 26
Additional paid-in capital ................................................. 16,244 12,212
Common stock held in treasury, at cost (192,088 shares) .................... (327) (327)
Deferred compensation ...................................................... (23) (61)
Accumulated deficit ........................................................ (38,384) (28,289)
Accumulated comprehensive loss--
Cumulative translation adjustment ....................................... (133) (27)
-------- --------
Total stockholders' equity (deficit) .................................. (3,807) 4,623
-------- --------
Total liabilities and stockholders' equity ............................ $ 9,788 $ 11,626
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
2
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
2002 2001 2002 2001
---------------- --------------- --------------- ---------------
Net revenues ............................... $ 1,453 $ 871 $ 295 $ 174
Operating expenses
Cost of revenues ......................... 644 596 162 109
Research and development ................. 3,402 2,765 867 827
Selling, general, and administrative
expenses .............................. 6,162 4,006 1,740 1,293
------------ ------------ ------------ ------------
Total operating expenses .............. 10,208 7,367 2,769 2,229
------------ ------------ ------------ ------------
Operating loss ............................. (8,755) (6,496) (2,474) (2,055)
Other income (expense):
Interest expense-- related party ......... (16) (330) (7) (104)
Interest expense ......................... (1,447) (196) (575) (77)
Interest income, related party ........... -- 34 -- 16
Interest income .......................... -- 76 -- 23
Gain on litigation settlement ............ 151 -- -- --
Other, net ............................... -- 3 -- --
------------ ------------ ------------ ------------
Total other income (expense) .......... (1,312) (413) (582) (142)
------------ ------------ ------------ ------------
Loss before income taxes ................... $ (10,067) $ (6,909) $ (3,056) $ (2,197)
Income tax expense ......................... -- -- -- --
------------ ------------ ------------ ------------
Net loss ................................... $ (10,067) $ (6,909) $ (3,056) $ (2,197)
============ ============ ============ ============
Preferred stock dividend ................... (996) (359) (582) (147)
Deemed dividend upon issuance of convertible
preferred stock .......................... -- (1,933) -- --
------------ ------------ ------------ ------------
Total dividends ............................ (996) (2,292) (582) (147)
------------ ------------ ------------ ------------
Net loss available to common stockholders .. $ (11,063) $ (9,201) $ (3,638) $ (2,344)
============ ============ ============ ============
Basic and fully diluted net loss per common
share .................................... $ (0.43) $ (0.30) $ (0.14) $ (0.07)
============ ============ ============ ============
Weighed average number of common shares
outstanding .............................. 25,956,783 31,181,505 26,550,822 32,669,710
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2002 2001
---- -----
(UNAUDITED)
OPERATING ACTIVITIES:
Net Loss ......................................................... $(10,067) $ (6,909)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount .................................. 1,162 368
Depreciation and amortization .................................. 725 340
Stock, warrants, and options issued to non-employees for
Service ...................................................... 677 666
Compensation expense related to stock appreciation
rights, stock options, and restricted stock .................. 87 (3)
Expenses paid with common stock ................................ -- 36
Interest paid with common stock ................................ 116 --
Licensing fees recognized from Ventana contract ................ (298) --
Changes in assets and liabilities:
Accounts receivables, net ................................... 124 195
Inventories ................................................. 4 168
Refundable taxes ............................................ 78 7
Due from stockholder ........................................ 69 --
Prepaid expenses and other assets ........................... (14) 66
Prepaid royalties ........................................... -- 27
Accounts payable ............................................ 2,539 1,367
Deposits .................................................... (28) (47)
Deferred revenue ............................................ 276 (88)
Accrued expenses ............................................ 829 482
-------- --------
Net cash used in operating activities .............................. (3,721) (3,325)
INVESTING ACTIVITIES:
Payments for acquisition ......................................... -- (2,319)
Expenditures for licenses, patents and technology ................ (4) (112)
Capital purchase ................................................. (88) (407)
-------- --------
Net cash used in investing activities .............................. (92) (2,838)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable .............. 2,549 500
Proceeds from issuance of senior debt note payable ............... 650 --
Proceeds from issuance of notes payable, related party ........... 25 760
Net proceeds from issuance of common stock ....................... -- 407
Net proceeds from issuance convertible preferred stock ........... -- 5,840
Payment of notes payable ......................................... (290) --
Payment of notes payable, related party .......................... -- (795)
Payment of revolving line of credit, net ......................... (64) (28)
Deposit received for future purchase of stock .................... -- (500)
-------- --------
Net cash provided by financing activities .......................... 2,870 6,184
-------- --------
Effect of exchange rate changes on cash and cash equivalents........ (80) 8
-------- --------
Net increase (decrease) in cash and cash equivalents ............... (1,023) 29
Cash and cash equivalents at beginning of period ................... 1,025 13
-------- --------
Cash and cash equivalents at end of period ......................... $ 2 $ 42
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................................... $ 19 $ 8
Non-cash transaction during the period:
Deferred financing costs ....................................... $ -- $ 215
Preferred stock converted into common stock .................... $ 613 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
4
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. ORGANIZATION
Molecular Diagnostics, Inc. was incorporated as Ampersand Medical
Corporation ("Ampersand") in Delaware on December 15, 1998, as the successor to
Bell National Corporation ("Bell National"). Bell National was incorporated in
California in 1958. Except where the context otherwise requires, "Molecular
Diagnostics", "MDI", "we", "us" and "our" refers to Molecular Diagnostics Inc.,
its subsidiaries and its predecessors.
On September 25, 2001, we changed our corporate name to Molecular
Diagnostics, Inc. in order to better represent our operations and products. The
name change was effected by a merger of Ampersand with and into its wholly-owned
subsidiary. We retained Ampersand's Certificate of Incorporation, except as
amended to reflect the new name, bylaws and capitalization.
On December 4, 1998, Bell National, then a shell corporation without any
business activity, acquired InPath, LLC, ("InPath") a development-stage company
engaged in the design and development of medical instruments and related tests.
In the acquisition, Bell National issued 4,288,790 shares of common stock and
warrants to purchase 3,175,850 shares of common stock to the members of InPath
in exchange for their membership interests.
Based upon the terms of the acquisition agreement for financial reporting
and accounting purposes, the InPath acquisition was accounted for as a reverse
acquisition whereby InPath was deemed to have acquired Bell National. However,
Bell National was the continuing legal entity and registrant for both Securities
and Exchange Commission ("SEC") filing purposes and income tax filing purposes,
until its merger into Ampersand in May 1999.
On September 17, 2001, we completed the acquisition of AccuMed
International, Inc. ("AccuMed") whereby AccuMed was merged into one of our
wholly-owned subsidiaries. The value of the transaction was approximately
$14,178. Accordingly, the consolidated financial statements presented hereunder
include the operations of InPath from March 16, 1998 (inception), the operations
of Molecular Diagnostics (including its predecessors Bell National and
Ampersand) from December 4, 1998 and the operations of AccuMed from September
17, 2001.
We are focused on the design, development and marketing of the InPath
System. The InPath System and related products are intended to detect cancer and
cancer related diseases. These products may be used in a laboratory, clinic or
doctor's office.
We acquired all of the assets of Samba Technologies, SARL ("Samba") in
January 1999 from Unilog Regions, SA. Samba designs, develops and markets
web-enabled software based systems for image analysis, image capture, and image
transmission and management for clinical and industrial applications. Samba is
also developing software used in the InPath System.
We incurred significant operating losses since our inception. Management
expects that significant ongoing operating expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market our
products. These circumstances raise substantial doubt about our ability to
continue as a going concern. Implementation of these plans and our ability to
continue as a going concern depend upon our ability to secure substantial
additional financing. Our plans include substantial efforts to obtain additional
capital. If we are unable to obtain adequate additional financing or generate
profitable sales revenues, we may be required to curtail our product development
and other activities and we may be forced to cease operations.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
us without audit according to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant to
such rules and regulations. The financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
and results of operations as
5
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of and for the periods indicated. The results of operations for the nine months
ended September 30, 2002 are not necessarily indicative of the results to be
expected for the full year or for any other period. The consolidated financial
statements include Molecular Diagnostics and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
These financial statements should be read in conjunction with the audited
financial statements and the accompanying notes included in our 2001 Annual
Report on Form 10-K/A.
NOTE 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("Opinion 30"), for the disposal of a segment
of a business (as previously defined in that Opinion). SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, SFAS No. 144 does not provide guidance on
impairment of goodwill. Rather, goodwill is evaluated for impairment under SFAS
No. 142, Goodwill and Other Intangible Assets. MDI adopted SFAS No. 144 on
January 1, 2002, and there was no impact to the results of operations or its
financial position upon adoption.
NOTE 4. ACQUISITION
On September 17, 2001, we acquired AccuMed by issuing 3,911,245 shares of
our common stock to holders of AccuMed's outstanding common stock, and 218,438
shares of our Series A convertible preferred stock to holders of AccuMed's
outstanding Series A convertible preferred stock.
As a result of the acquisition, we (1) assumed AccuMed's outstanding stock
options and warrants, (2) forgave a note receivable due from AccuMed, (3)
wrote-off unamortized license fees and prepaid royalties previously paid under a
licensing agreement with AccuMed and, (4) received 192,088 shares of our common
stock that was held by AccuMed.
The value of the transaction was approximately $14,178 and was determined
based on the market price of our common stock over the period of a few days
before and after February 7, 2001, the date the merger was agreed to and
announced. The acquisition was recorded as a purchase business combination in
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations. Accordingly, the excess of the purchase price over the fair value
of identifiable assets (including identifiable intangible assets) was allocated
to goodwill and other intangible assets. The consolidated financial statements
include the operating results of the business from the respective date of
acquisition. Acquired technology license agreements are being amortized over the
remaining life of the respective agreements which is seventeen years for our
license agreement and two years for the Dianon license agreement.
The following selected pro forma consolidated results of operations are
presented as if the AccuMed acquisition had occurred on January 1, 2001. This
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results that would have been achieved if the
acquisition had been completed as of January 1, 2001, nor are they necessarily
indicative of the future operating results of Molecular Diagnostics. The pro
forma data does not give effect to any cost savings or restructuring and
integration costs that might result.
6
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pro forma results for the nine and three months ended September 30:
PRO FORMA
---------------------------------------------
----------------------- ---------------------
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
Revenues...................................... $ 1,453 $ 1,678 $ 295 $ 321
Net loss available to common stockholders..... (11,005) (10,557) (3,580) (2,677)
Basic and fully diluted net loss per share.... $ (0.42) $ (0.31) $ (0.13) $ (0.08)
NOTE 5. NOTE RECEIVABLE (PAYABLE) -- RELATED PARTY
A note receivable (payable), due from an officer of MDI was outstanding for
approximately ($19) and $50 at September 30, 2002 and December 31, 2001,
respectively. The note is not interest bearing, and is payable on demand.
NOTE 6. LICENSES, PATENTS, AND TECHNOLOGY
Licenses, patents, and technology include the following at September 30,
2002:
Licenses.................................................. $ 1,027
Patent costs.............................................. 133
MDI Technology Agreement.................................. 7,230
Dianon Technology Agreement............................... 260
--------
Subtotal.................................................. 8,650
Less accumulated amortization............................. (964)
--------
Total................................................... $ 7,686
========
Effective January 1, 2002, we adopted a change in accounting principle to
comply with the specific provisions and guidance of SFAS 141 and SFAS 142. We
estimate that our adoption of SFAS 142 will result in a $7 decrease in
amortization expense and $7 increase in net income during 2002 related to
goodwill. We have completed the transitional intangible asset impairment test
required under SFAS 142 and, based on the results of the test, concluded that no
impairment of goodwill or other indefinite lived intangible assets has occurred.
Therefore, no impairment loss will be recorded in connection with our adoption
of the statement.
Our definite lived intangible assets of $8,650, net of accumulated
amortization of $964, continue to be amortized over their useful lives.
7
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Amortization expense for intangible assets during the three and nine months
ended September 30, 2002 was $164 and $328, respectively. Estimated amortization
expense for the remainder of 2002 and the five succeeding fiscal years is as
follows:
ESTIMATED
AMORTIZATION
EXPENSE
------------
2002 (remainder)........................................... $ 164
2003....................................................... $ 612
2004....................................................... $ 526
2005....................................................... $ 526
2006....................................................... $ 526
2007....................................................... $ 526
NOTE 7. ACCRUED PAYROLL TAXES
We are delinquent in paying federal and state 2000 and 2001 employee and
employer payroll taxes. Employee and employer payroll taxes have been paid for
the nine months ended September 30, 2002. As of September 30, 2002, we owed $632
in past-due payroll taxes, including $206 in estimated statutory penalties and
interest. We have retained legal representation who is working with the Internal
Revenue Service to attempt to reach an agreement on the total due, settlement
term and basis for payment. At this time, we believe it is not possible to
determine the impact, if any, upon our financial condition. Past-due payroll
taxes, assessed penalties and interest were included in accrued payroll costs in
the September 30, 2002 and December 31, 2001 consolidated balance sheets. We are
also delinquent in filing federal and state income tax returns for 1999 and
2000, and we are actively attempting to remedy this matter.
NOTE 8. NOTES PAYABLE -- RELATED PARTIES
Debt from related parties at September 30, 2002 consists of:
2002
----
Northlea Partners, Ltd., $25 Promissory Note issued August
6, 2001; interest rate 15% per annum; matures September
22, 2001; note in default; interest rate increases to 18%
per annum upon default............................................. $ 25
Northlea Partners, Ltd., $15 Convertible Promissory Note
issued September 20, 2001; interest rate 9% per annum;
matures December 18, 2001; note in arrears......................... 15
Northlea Partners, Ltd., $25 Bridge Note issued May 28,
2002; interest rate 7% per annum, matures December 31, 2002;
25,000 warrants at an exercise price of $0.25...................... 25
Robert Shaw, $25 Convertible Promissory Note issued September 20,
2001; interest rate 9% per annual; matures December 18, 2001;
note in arrears.................................................... 25
-----
$ 90
=====
It was not practicable to estimate the fair values of amounts due to/from
an affiliate as timing of future cash flows is uncertain and/or the debtors'
ability to borrow with similar terms from an unrelated party cannot be
determined.
8
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DEFAULTS ON NOTES FROM RELATED PARTIES
All related party notes that are in default, have no default remedies in the
note agreements. We are currently discussing default resolutions with holders of
these default notes.
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2002 consists of:
2002
----
Monsun, AS, $500 Promissory Note issued November 1, 2000; interest rate 15%
per annum; beneficial conversion feature valued at $125; extension of
maturity date for issuance of 100,000 warrants at an exercise price of
$0.60 per share and 200,000 warrants at $0.30 per share; matures July 31,
2002; note in default ........................................................... $ 532
NeoMed Innovations III, $500 Promissory Note issued May 15,
2001; interest rate 7% per annum, matures December 31, 2002; 560,000
warrants with an exercise price of $0.25 per share .............................. 500
Xillix Technologies Corporation, $361 Promissory Note issued
June 26, 1998; interest rate Canadian Prime plus 6% per
annum, due on demand; represents debt of AccuMed International .................. 35
Western Economic Diversification, $221 Promissory Note
issued June 1989; no interest, due on demand .................................... 181
Round Valley Capital, LLC, $650 Senior Debt Promissory Note issued August
30, 2002; as amended, interest rate 36% per annum, issued 711,364 shares
of common stock valued at $363 and a one-year warrant to purchase 681,818
shares of common stock for $0.20 per share with a value of $156, and paid
$131 in loan origination fees, final payment is due November 25, 2002;
note in default ................................................................. 650
Round Valley Capital, LLC, $650 Senior Debt Promissory Note debt discount
comprised of $87 deferred loan fees, and $362, value of unamortized warrants
and shares issued with Note...................................................... (549)
Bridge Notes issued for $2,600 between March 19, 2002 and
June 28, 2002; interest rate of 7% per annum, matures
December 31, 2002; 2,600,000 warrants at an exercise price of $0.25 ............. 2,600
Trek Diagnostic Systems, Inc. $40 promissory note issued
July 31, 2002; non-interest bearing; matures December 1, 2002 ................... 40
-------
..................................................................................... $ 3,989
=======
It was not practicable to estimate the fair values of Notes Payable as
timing of future cash flows is uncertain and/or the debtors' ability to borrow
with similar terms cannot be determined.
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued new convertible promissory notes ("Bridge
Notes") and 2,625,000 warrants ("Bridge Warrants"). The Bridge Notes bear
interest at 7% per annum and matured on July 30, 2002. The Bridge Notes are
convertible at any time at the option of the holder or automatically when we
receive an equity infusion of at least $7,000. The conversion price of the
Bridge Notes is equal to a 25% discount to the market price of the common stock
at the date of conversion, but will not be less than $0.50 per share nor greater
than $1.00 per share. Each of the Bridge Warrants is exercisable into one share
of common stock at an exercise price of $0.65 per share for a period of five
years. Upon conversion, the Bridge Notes holder will be entitled to receive an
additional number of warrants ("Private Warrants") equal to 25% of the number of
common shares issued in conversion of the Bridge Notes. These Private Warrants
will be exercisable into one share of our common stock at a price equal to 150%
of the conversion price of the Bridge Notes. In August 2002, the Bridge Notes
were amended to extend the maturity date to December 31, 2002 and to eliminate
the $0.50 per share floor conversion price. The Bridge Warrants were also
amended to reduce the exercise price to $0.25 per share.
9
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Using the effective interest method, we determined the fair value of the
Bridge Warrants issued to be $112 as of September 30, 2002. Of this amount, $37
was charged to interest expense during the quarter ended September 30, 2002. The
value of the beneficial conversion feature of total Bridge Notes was determined
to be $1,042 at September 30, 2002 based on a closing price of our common stock
of $0.39. This beneficial conversion feature was accounted for as debt discount.
Interest expense of $378 was recorded during the quarter ended September 30,
2002 for accretion of this debt discount. As the conversion terms of these notes
are not fixed at September 30, 2002 the ultimate amount of the debt discount
will vary based on the market price of common stock. Changes in the underlying
value of this beneficial conversion feature will be recorded in future periods.
On August 30, 2002, we issued a $650 promissory note to Round Valley
Capital, LLC ("RVC"). The face value of the note includes $175 in unearned
interest. The note bears interest at the annual rate of 36%, requires monthly
interest payments and matures June 1, 2003. The promissory note is senior to all
other borrowings and trade payables and is secured by all the tangible and
intangible assets of MDI. The note is also secured by a personal guarantee of
our Chief Executive Officer, and is collateralized by his personal residences.
We also issued 5,750,000 shares of common stock to RVC to be held as collateral
for the transaction. The proceeds from this transaction are net of fees totaling
$131 and will be amortized over the term of the loan. The deferred loan fee
balance of $87 at September 30, 2002 is reported as a reduction to notes
payable. We also issued to RVC 711,364 shares of common stock and a warrant to
purchase 681,818 shares of common stock for $0.20 per share as additional loan
fees. The warrant was exercisable when the loan was funded and expires September
2003. In lieu of additional cash fees requested by RVC, the exercise price of
the warrant is discounted from the current market price of our common stock. The
warrant is valued at $156 using the Black-Scholes valuation model. The 711,364
shares of common stock are valued at $363 based on the $0.51 per share closing
price of the common stock on the transaction date. The September 30, 2002
unamortized value of the warrants and stock is $462 and is reported on the
balance sheet as a reduction to notes payable. The payment terms require a $19
payment on the first of each month commencing October 2002 and ending May 2003,
with a final payment of $669 due on June 1, 2003. We did not pay the October 1,
2002 interest payment and are in default on the note. Through November 14, 2002,
we paid $350 principal on the note, $60 in interest payments, $16 in legal fees,
and $12 in late fees. Due to the default status of the note, RVC has amended the
note terms to require $53 in additional late fees and accelerated the note
maturity date to November 25, 2002. The note will remain in default until all
payments are received by RVC.
On July 31, 2002, MDI reached a settlement with Trek Diagnostic Systems,
Inc. ("Trek") with respect to Trek's allegations of certain breaches of
representations and warranties made in connection with the sale of a division of
AccuMed to Trek in November 1998. Under the terms of the settlement, MDI issued
Trek a promissory note in which it agreed to pay Trek $80 in two equal
installments, the first installment of $40 due September 1, 2002 and the second
installment of $40 due December 1, 2002. In consideration of MDI's promissory
note, Trek agreed to release MDI and its affiliates from any claims Trek may
have against the parties relating to and arising out of the sale of the business
division by AccuMed. The first $40 installment was paid August 30, 2002.
DEFAULTS ON NOTES PAYABLE
All notes that are in default have no default remedies in the note
agreements with the exception of the note to RVC as described above. We are
currently discussing default resolutions with those holders of notes in default.
In August 2002 the Bridge Notes were amended to extend the maturity date to
December 31, 2002.
NOTE 10. STOCKHOLDERS' EQUITY
BASIC AND FULLY-DILUTED COMMON STOCK
Basic net loss per share is based upon net loss and the weighted-average
number of shares of common stock outstanding during the period. Diluted net loss
per common share adjusts for the effect of common stock equivalents such as
stock options and stock warrants, only in the periods presented in which such
effect would have been dilutive. Diluted net loss per share is not presented
separately, as the effect of the common stock equivalents is anti-dilutive for
each of the periods presented. Accordingly, diluted net loss per share is the
same as basic net loss per share.
10
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fully-diluted shares of common stock are calculated by assuming MDI's
warrants, stock appreciation rights and employee stock options to purchase
common stock, convertible notes payable and convertible preferred stock have
been converted and exchanged for MDI's common stock. MDI's basic and
fully-diluted common stock for the period ended September 30, 2002 are
summarized below:
FULLY-DILUTED
INSTRUMENT BASIC COMMON COMMON
---------- -------------- -------------
Common stock......................................................... 27,117,578 27,117,578
Warrants, options, SARs and convertible notes........................ -- 32,895,938
Convertible preferred stock.......................................... -- 27,977,950
-------------- -------------
TOTAL COMMON STOCK................................................. 27,117,578 87,991,465
============== ==============
Summary of MDI's preferred stock capital table as of September 30, 2002 is
as follows:
SHARES ISSUED &
OFFERING SHARES AUTHORIZED OUTSTANDING
-------- ----------------------------------
Series A convertible................................................... 590,197 118,093
Series B convertible, 10% cumulative................................... 1,500,000 1,324,856
Series C convertible, 10% cumulative................................... 1,666,666 1,285,499
Series D convertible, 10% cumulative................................... 300,000 175,000
Series E convertible, 10% cumulative................................... 800,000 434,388
---------- ----------
TOTAL PREFERRED STOCK................................................ 4,856,863 3,337,836
========== ==========
SUMMARY OF PREFERRED STOCK TERMS
SERIES A CONVERTIBLE PREFERRED STOCK
Liquidation Value: $4.50 per share
Conversion Price: $10.3034 per share
Conversion Rate: 0.4368 -- Liquidation Value divided by
Conversion Price ($4.50/$10.3034)
Voting Rights: None
Dividends: None
Conversion Period: Any time -- 3 years
SERIES B CONVERTIBLE PREFERRED STOCK
Liquidation Value: $4.00 per share
Conversion Price: $1.00 per share
Conversion Rate: 4.00 -- Liquidation Value divided by
Conversion Price ($4.00/$1.00)
Voting Rights: None
Dividends: 10% -- Quarterly -- Commencing
September 30, 2001
Conversion Period: Any time
Cumulative dividends in arrears at September 30, 2002 were $849
SERIES C CONVERTIBLE PREFERRED STOCK
Liquidation Value: $3.00 per share
Conversion Price: $0.60 per share
Conversion Rate: 5.00 -- Liquidation Value divided by
Conversion Price ($3.00/$0.60)
Voting Rights: None
Dividends: 10% -- Quarterly -- Commencing
September 30, 2002
Conversion Period: Any time
Cumulative dividends in arrears at September 30, 2002 were $353
11
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SERIES D CONVERTIBLE PREFERRED STOCK
Liquidation Value: $10.00 per share
Conversion Price: $1.00 per share
Conversion Rate: 10.00 -- Liquidation Value divided by
Conversion Price ($10.00/$1.00)
Voting Rights: None
Dividends: 10% -- Quarterly -- Commencing April 30, 2002
Conversion Period: After April 1, 2002
Cumulative dividends in arrears at September 30, 2002 were $160
SERIES E CONVERTIBLE PREFERRED STOCK
Liquidation Value: $22.00 per share
Conversion Price: $0.80 per share
Conversion Rate: 27.50 -- Liquidation Value divided by
Conversion Price ($22.00/$0.80)
Voting Rights: Equal in all respects to holders of common
shares
Dividends: 10% -- Quarterly -- Commencing May 31, 2002
Conversion Period: After December 1, 2002
Cumulative dividends in arrears at September 30, 2002 were $725
ISSUANCE OF RESTRICTED SHARES FOR SERVICES
Beginning in 1999, we have, at various times, issued restricted shares of
common stock to non-employee consultants for services. Some of the shares issued
were made for past services and their value was fixed. Other issuances were made
as partial consideration for services to be performed under three-year
consulting agreements and vest over the life of the agreements. The measurement
date of these shares has not been determined as of September 30, 2002. Therefore
the value of these shares will be based on the market value of the common stock
at the end of each interim period until the measurement date is determined. A
fair value of these shares of $39 and $152 was calculated using the
Black-Scholes valuation model for September 30, 2002 and September 30, 2001,
respectively. We recorded $31 as reduction of expense during the quarter ended
September 30, 2002.
ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
Beginning in 1999, we have, at various times, granted options to purchase
shares of our common stock to non-employee consultants. We issued the options as
partial consideration for services to be performed under three-year consulting
agreements and vest over the life of the agreements. The measurement date of
these options has not been determined as of September 30, 2002. Therefore the
value of these shares will be based on the market value of the common stock at
the end of each interim period until the measurement date is determined. A fair
value of $42 and $401 was calculated for these options at September 30, 2002 and
September 30, 2001, respectively, using the Black-Scholes valuation model. This
value is charged to expense over the term of the consulting agreements. The
amount of expense to be ultimately recognized will vary depending on the market
value of the common stock at the end of each interim period. We recorded $57 as
a reduction of expense and $2 as expense related to these options during the
quarter ended September 30, 2002 and 2001, respectively.
ISSUANCE OF WARRANTS FOR SERVICES
During the first quarter 2002, we issued warrants to purchase 750,000 shares
of common stock at $0.01 per share in exchange for services to a law firm. Using
the Black-Scholes valuation model, the fair value of these warrants was
calculated to be $675. In 2000 and 2001, we issued warrants to purchase common
stock to non-employees as compensation for financial services. The warrants vest
in equal amounts each month over the service period. We may terminate the
agreements upon thirty days written notice, and any unvested warrants as of the
date of termination would be cancelled. For those warrants where the measurement
date has not been determined, fair values of $32 and $535 were calculated at
September 30, 2002 and September 30, 2001, respectively, using the Black-Scholes
valuation model. The amount of expense to be ultimately recognized will vary
depending on the market value of the common stock at the end of each period. We
recorded $31 as a reduction of expense and $107 as expense related to these
warrants during the quarter ended September 30, 2002 and 2001, respectively.
12
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CELL SOLUTIONS INVESTMENT
On October 11, 2001, we made a 30% investment in Cell Solutions, LLC. ("Cell
Solutions"), a company formed for the purpose of developing and improving slide
preparation systems. As consideration, we issued Cell Solutions five-year
warrants to purchase 172,120 shares of common stock with an exercise price of
$0.82. These warrants were valued using Black-Scholes and determined to have a
value of $127 which was included as an investment at December 31, 2001. We also
determined the fair value of the investment to be impaired at December 31, 2001
and consequently the investment was written down to zero as a result of the
uncertainty of future benefit or revenue stream. We are contractually committed
to issue a total of 1,549,086 additional warrants with the same terms based upon
delivery of certain products by Cell Solutions. As of September 30, 2002, Cell
Solutions had not delivered these products and we were not bound to issue
additional warrants.
STOCK APPRECIATION RIGHTS
At September 30, 2002 and September 30, 2001, we had 450,000 stock
appreciation rights ("SARs") outstanding. Issued in 1989, these SARs have an
exercise price of $0.30 and were deemed automatically exercised on November 20,
2001. In general, each SAR entitles the holder to receive upon exercise an
amount equal to the excess, if any, of the market value per share of common
stock at the date of exercise over the exercise price of the SAR, plus any
dividends or distributions per share made by us prior to the exercise date. In
lieu of making cash payments, we may, and intend to, elect to issue shares of
common stock on a one share for one SAR basis. Since the SARs were deemed
exercised on November 20, 2001, no compensation expense was recorded for the
three or nine month periods ended September 30, 2002. We recorded compensation
expense in the amount of $92 for the nine-months ended September 30, 2001 to
reflect the difference between the closing market price of our common stock at
September 30, 2001 and December 31, 2000 and the exercise price of the SARs.
APPLICATION OF BLACK-SCHOLES VALUATION MODEL
In applying the Black-Scholes valuation model, we have used an expected
dividend yield of zero, a risk-free interest rate of 6% and a volatility factor
of 90% for the three months ended September 30, 2002 and 2001, and a fair value
of the underlying common shares of closing market price on the date of the
grant. The expected life equaled the term of the warrants, options, or
restricted shares.
NOTE 11. SUBSEQUENT EVENTS
STOCK PURCHASE AGREEMENT
On May 9, 2002, we entered into a stock purchase agreement with a placement
agent ("Purchase Agreement") that was amended May 16, 2002 and June 24, 2002. In
accordance with the terms of the Purchase Agreement, we are to deliver
21,428,000 shares of restricted common stock in exchange for $15,000 upon
closing of the Purchase Agreement. We also delivered to an escrow agent 740,000
restricted shares of Series E convertible preferred shares as collateral for the
Purchase Agreement. As of November 18, 2002 we had not received the $15,000 and,
accordingly, we closed the escrow account and cancelled the stock certificates.
LICENSE AGREEMENT -- LETTER OF INTENT
On July 12, 2002, we entered into letter of intent ("LOI") with Ventana
Medical Systems, Inc. ("Ventana") for exclusive use and distribution license
rights to certain MDI processes, systems and technologies with respect to HPV
tests for use in Ventana's slide-based technology platform. The LOI requires
Ventana to deliver a $100 deposit upon execution of the LOI, $200 upon our
delivery of certain license and development agreements, and $400 upon completion
of specific technology validations. We also received $300 for prepaid expenses
and prepaid royalties in July 2002 and recorded these amounts as deferred
revenue as of September 30, 2002.
13
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LICENSE AGREEMENT -- NOTICE OF TERMINATION
On November 1, 2002 we received from Ventana a notice to terminate the
Amended License and Development Agreement dated October 31, 2001 for breach of
contract. According to the amended agreement we have 60 days to cure the breach.
MDI disagrees with Ventana on the cause for termination and has notified Ventana
that we desire to resolve this dispute without termination of the agreement.
NOTE 12. LEGAL PROCEEDINGS
LITIGATION CONTINGENCIES
From time to time, we have been a party to routine pending or threatened
legal proceedings and arbitrations. We insure some, but not all, of our exposure
with respect to such proceedings. Based upon information presently available,
and in light of legal and other defenses available to us, management does not
consider the liability from any threatened or pending litigation to be material
nor have we experienced any significant environmental problems.
14
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements presented in Part I, Item 1 of this quarterly report and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part I, Item 7 of our Annual Report on Form 10-K/A for the year
ended December 31, 2001.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this discussion and analysis of financial
condition and results of operations that are not related to historical results
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements that are predictive, that depend upon
or refer to future events or conditions, or that include words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," "hopes,"
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, or possible
future actions by us are also forward-looking statements.
These forward-looking statements are based on beliefs of our management as
well as current expectations, projections and assumptions currently available to
the Company and are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those
anticipated. Should one or more of those risks or uncertainties materialize or
should underlying expectations, projections and assumptions prove incorrect,
actual results may vary materially from those described. Those events and
uncertainties are difficult to predict accurately and many are beyond our
control. We assume no obligation to update these forward-looking statements to
reflect events or circumstances that occur after the date of these statements.
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Molecular Diagnostics recognizes revenue upon shipment
of product or license to customers and no remaining obligations or contingencies
exist, or in the case of sales of software by our wholly owned subsidiary Samba,
upon shipment if persuasive evidence of an arrangement exists, sufficient
vendor-specific objective evidence exists to support allocating the total fee to
all elements of the arrangement, fee is fixed or determinable, and collection is
probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, generally twelve months. Revenue from training
services and professional services is recognized when the service is completed.
Revenue from implementation and installation services is recognized using the
percentage of completion method. Samba calculates percentage of completion based
on the estimated total number of hours of service required to complete an
implementation project and the actual number of hours of service rendered.
Implementation and installation services are generally completed within 120
days.
License, Patents, and Technology. License, patents, and purchased technology
are recorded at their acquisition cost. Costs to prepare patent filings are
capitalized when incurred. Costs related to abandoned or denied patent
applications are written off at the time of abandonment or denial. Amortization
is commenced as of the date of acquisition or upon the grant of the final
patent. Costs are amortized over the asset's useful life, which ranges from two
to seventeen years. We assess licenses, patents, and technology annually for
impairment unless an event has occurred which would indicate a possible
impairment.
Stock Compensation. As permitted by the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Molecular
Diagnostics uses the intrinsic value method to account for stock options as set
forth in Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees (APB 25).
Application of Black-Scholes Valuation Model. In applying the Black-Scholes
valuation model, we have used an expected dividend yield of zero, a risk-free
interest rate of 6% for 2002 and 2001, a volatility factor of 90% for 2002 and
216% for 2001, and the closing market price of the underlying common stock on
the date of the grant. The expected life equaled the term of the warrants,
options, or restricted shares.
15
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
OVERVIEW OF MOLECULAR DIAGNOSTICS
The science of medical diagnostics has advanced significantly during the
past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology and
the human body. Our goal is to utilize this research as a base to develop
screening and diagnostic testing products for cancer and cancer-related
diseases. We believe that the success of these products will improve patient
care through more accurate test performance, wider availability and cost
effective service delivery. We are developing an initial series of products to
address these criteria including sample collection devices, chemical and
biological tests, and analytical instruments and related software.
Our strategy is to develop products through internal development processes,
strategic partnerships, licenses and acquisitions of companies. This strategy
has required and will continue to require additional capital. As a result, we
will incur substantial operating losses until we are able to successfully market
some, or all, of our products.
RESULTS OF OPERATIONS
REVENUE
Our revenue for the nine-month period ended September 30, 2002 totaled
$1,453, representing an increase of $582, or 66.8%, over revenue of $871 for the
nine-month period ended September 30, 2001. The 2002 revenue increase resulted
primarily from the first quarter revenue recognition of $298 for providing
Ventana with a three-year irrevocable, world-wide, royalty-free license for full
access to Samba's image analysis software and development tools. The remaining
increase represents gains in new customer AcCell instrument sales and
installations.
Revenue of $295 for the three months ended September 30, 2002 represented an
increase of $121, or 69.5%, over revenue for the same period in 2001. This
resulted from a $193 increase in revenues primarily from $123 in sales of AcCell
instruments and $55 in clinical slide processing fees.
OPERATING EXPENSES
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2002 totaled $644,
an increase of $48, or 8.0%, from the same period in 2001. This increase for the
nine month ended September 30, 2002 is disproportionate to the net increase in
revenues over the same period last year due to, firstly, costs attributable to
the Ventana license sale were expensed as incurred in prior years, and secondly,
increases in software sales and products with higher gross margins also
contributed to the decline in cost of sales over the same period in the previous
year.
Cost of revenues for the three months ended September 30, 2002 totaled $162,
an increase of $53, or 48.6%, from the same period in 2001. Increases in
software sales and AcCell instrument deliveries with higher gross margins
resulted in the increase in cost of sales over the same period in the previous
year.
Research and Development
We devote a substantial amount of our resources to research and development
("R&D") related to new products, including markers, tests, instruments and
software applications, as well as modifications and refinements of our existing
products.
R&D expenses increased $637 and $40 for the nine month and three month
periods ended September 30, 2002 to $3,402 and $867, an increase of 23.0% and
4.8%, respectively, over the comparable prior year periods. R&D expenses consist
of costs related to specific development programs with scientists and
researchers at universities and hospitals; full scale device development
contracts begun during 1999 with industrial design and manufacturing companies
covering the disposable and instrument components of the InPath System; payments
to medical and
16
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
engineering consultants for advice related to the design and development of our
products and their potential uses in the medical technology marketplace;
instrumentation, disposables, clinical consumables, clinical supplies and
regulatory costs to develop clinical trial reference laboratories and to recruit
and test patients in support of our various Food and Drug Administration ("FDA")
clinical trials, and payroll-related costs for in-house engineering, scientific,
laboratory, and software development activities; and research management staff.
The increase in expenses for the three and nine-month periods in 2002 compared
with the same periods in 2001 stems primarily from increased product development
costs for the Cocktail CVX and In-Cell HPV assays, the next version of AcCell,
the AcCell 2500, and the patient participation fees of our world-wide Cocktail
CVX clinical trials.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") increased $2,156 and
$447 for the nine-month and three-month periods ended September 30, 2002 to
$6,162 and $1,740, an increase of 53.8% and 34.6% over the same periods ended
September 30, 2001, respectively. This increase is primarily due to an increase
of approximately $760 in professional services fees as a result of increased
investor and shareholder base and expanded operations pursuant to the AccuMed
merger; an approximate $435 increase in infrastructure payroll and related
payroll costs and other operating expenses resulting from the integration of the
recently acquired AccuMed's operations; and increased litigation costs and
contingency payments related to the SpectRx settlement, which totaled $675, in
the form of warrants.
Significant components of SG&A are compensation costs for executive, sales
and administrative personnel, professional fees primarily related to legal and
accounting and consulting services, travel costs, printing costs, fees for
public and/or investor relations services, insurance premiums, facilities and
office expenses, marketing related costs, and amortization/depreciation charges.
OTHER INCOME AND EXPENSE
Interest Expense
Interest expenses, including interest expense to related parties, increased
$937 and $401 for the nine-month and three-month periods ended September 30,
2002 to $1,463 and $582, an increase of 178.1% and 221.6% over the same periods
ended September 30, 2001, respectively. Substantially all of the three-month and
nine-month increases relates to a non-cash interest charge for the value of a
beneficial conversion feature charged to interest expense during the period. See
further discussion in the preceding Notes To Consolidated Financial Statements
- -- Note 9. Also, interest expense resulting from related party convertible notes
payable is included in interest expense -- related party.
Other Income and Expense, Net
For the nine months ended September 30, 2002, we recorded a $150 gain from
the settlement of the SpectRx litigation during the first quarter 2002. Related
SpectRx settlement legal expenses are included in selling, general and
administrative expenses for the period ended September 30, 2002.
NET LOSS
The net loss for the nine and three month period ended September 30, 2002
before preferred dividends totaled $10,067 and $3,056 compared with $6,909 and
$2,197 for the same periods in 2001, an increase of $3,158 and $859 or a 45.7%
and a 39.1% increase, respectively. The increases resulted from increases in R&D
expenses, SG&A and interest expenses as described previously. In addition,
cumulative dividends on the outstanding Series B convertible preferred stock
through Series E convertible preferred stock totaled $996 and $582 for the nine
and three months periods ended September 30, 2002 compared with $359 and $147
for the same periods in 2001, respectively, and $1,933 of deemed dividends on
the Series B convertible preferred stock during first quarter 2001 due to a
conversion feature on the Series B convertible preferred stock that was less
than market, resulting in a net loss available to common stockholders for the
nine and three months ended September 30, 2002 of $11,063 and $3,638, or $0.43
and $0.14 per share, on 25,956,783 and 25,550,822 weighted average common shares
outstanding, respectively,
17
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
compared with the net loss and net loss available to common stockholders for the
nine and three month periods ended September 30, 2001 of $9,201 and $2,344, or
$0.30 and $0.07 per share, on 31,181,505 and 32,669,710 weighted average common
shares outstanding.
For the nine months ended September 30, 2002, cumulative dividends on the
outstanding Series B convertible preferred stock, Series C convertible preferred
stock, Series D convertible preferred stock and Series E convertible preferred
stock totaled $2,087.
The weighted average shares outstanding as of September 30, 2002 reflect a
10,859,688 reduction in common stock as a result of the exchange of common stock
for shares of Series E convertible preferred stock in December 2001 and offset
by the issuance of approximately 3,900,000 shares of common stock on September
17, 2001 for the AccuMed acquisition.
LIQUIDITY AND CAPITAL RESOURCES
R&D, clinical trials and other studies of the components of our InPath
System, conversions from designs and prototypes into product manufacturing,
initial sales and marketing efforts, medical consultants and advisors, and
research, administrative, and executive personnel are and will continue to be
the principal basis for our cash requirements. We have provided operating funds
for the business since its inception through private offerings of debt and
equity to U.S. and foreign accredited investors. We will be required to make
additional offerings in the future to support the operations of the business
until some or all of our products are introduced into the market. We used $3,721
and $3,325 for the nine months ended September 30, 2002 and 2001, respectively,
in operating activities.
At the end of September 30, 2002 we had cash on hand of $2, a decrease of
$1,023 compared to the $1,025 cash on hand at December 31, 2001. This decrease
resulted from delays associated with our private equity financing.
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued Bridge Notes and 2,625,000 Bridge
Warrants. The Bridge Notes bear interest at 7% per annum and matured on July 30,
2002. The Bridge Notes are convertible at any time at the option of the holder
or automatically when we receive an equity infusion of at least $7,000. The
conversion price of the Bridge Notes is equal to a 25% discount to the market
price of the common stock at the date of conversion, but will not be less than
$0.50 per share nor greater than $1.00 per share. Each of the Bridge Warrants is
exercisable into one share of common stock at an exercise price of $0.65 per
share for a period of five years. Upon conversion, the Bridge Notes holder will
be entitled to receive an additional number of warrants ("Private Warrants")
equal to 25% of the number of common shares issued in conversion of the Bridge
Notes. These Private Warrants will be exercisable into one share of our common
stock at a price equal to 150% of the conversion price of the Bridge Notes. In
August 2002, the Bridge Notes were amended to extend the maturity date to
December 31, 2002 and to eliminate the $0.50 per share floor conversion price.
The Bridge Warrants were also amended to reduce the exercise price to $0.25 per
share.
These Bridge Notes are convertible into shares of common stock at a
conversion price that is less than market. This beneficial conversion feature
totals $1,042 at September 30, 2002, of which $378 was charged to interest
expense for the period.
Using the fair value interest rate method, we determined the fair value of
the Bridge Warrants issued to be $112 as of September 30, 2002. Of this amount,
$37 was charged to interest expense during the quarter ended September 30, 2002.
The value of the beneficial conversion feature of total Bridge Notes was
determined to be $1,042 at September 30, 2002 based on a closing price of our
common stock of $0.39. This beneficial conversion feature was accounted for as
debt discount. Interest expense of $378 was recorded during the quarter ended
September 30, 2002 for accretion of this debt discount. As the conversion terms
of these notes are not fixed at September 30, 2002 the ultimate amount of the
debt discount will vary based on the market price of common stock. Changes in
the underlying value of this beneficial conversion feature will be recorded in
future periods.
18
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
On August 30, 2002, we issued a $650 promissory note to Round Valley
Capital, LLC ("RVC"). The face value of the note includes $175 in unearned
interest. The note bears interest at the annual rate of 36%, requires monthly
interest payments and matures June 1, 2003. The promissory note is senior to all
other borrowings and trade payables and is secured by all the tangible and
intangible assets of MDI. The note is also secured by a personal guarantee of
our Chief Executive Officer, and is collateralized by his personal residences.
We also issued 5,750,000 shares of common stock to RVC to be held as collateral
for the transaction. The proceeds from this transaction are net of fees totaling
$131 and will be amortized over the term of the loan. The deferred loan fee
balance of $87 at September 30, 2002 is reported as a reduction to notes
payable. We also issued to RVC 711,364 shares of common stock and a warrant to
purchase 681,818 shares of common stock for $0.20 per share as additional loan
fees. The warrant was exercisable when the loan was funded and expires September
2003. In lieu of additional cash fees requested by RVC, the exercise price of
the warrant is discounted from the current market price of our common stock. The
warrant is valued at $156 using the Black-Scholes valuation model. The 711,364
shares of common stock are valued at $363 based on the $0.51 per share closing
price of the common stock on the transaction date. The September 30, 2002
unamortized value of the warrants and stock is $462 and is reported on the
balance sheet as a reduction to notes payable. The payment terms require a $19
payment on the first of each month commencing October 2002 and ending May 2003,
with a final payment of $669 due on June 1, 2003. We did not pay the October 1,
2002 interest payment and are in default on the note. Through November 14, 2002,
we paid $350 principal on the note, $60 in interest payments, $16 in legal fees,
and $12 in late fees. Due to the default status of the note, RVC has amended the
note terms to require $53 in additional late fees and accelerated the note
maturity date to November 25, 2002. The note will remain in default until all
payments are received by RVC.
MDI is currently discussing default resolutions with holders of those notes
in default.
Our capital expenditures were approximately $88 for the nine months ended
September 30, 2002, a reduction of $319, or 78.4% from the prior year period's
$407. Capital expenditures are defined as disbursements for laboratory
equipment, leasehold improvements, software, and furniture/fixtures with a
purchase price in excess of $1 per item and useful life in excess of one year.
The decrease in 2002 capital expenditures resulted from a reduction of
laboratory and computer equipment and software purchases in support of our
product development and research efforts in order to conserve cash through our
private placement and bridge financings.
Our operations have been, and will continue to be, dependent upon
management's ability to raise operating capital in the form of debt or equity.
We have incurred significant operating losses since the inception of our
business. We expect that significant ongoing operating expenditures will be
necessary to successfully implement our business plan and develop, manufacture
and market our products. These circumstances raise substantial doubt about our
ability to continue as a going concern. There can be no assurance that we will
be able to obtain additional capital to meet our current operating needs or to
complete pending or contemplated licenses or acquisitions of technologies. If we
are unable to raise sufficient adequate additional capital or generate
profitable sales revenues, we may be forced to substantially curtail product
research and development, clinical trials and other activities and may be forced
to cease operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A market risk inherent in our financial statements is the potential loss in
fair value arising from adverse changes in interest rates. We do not engage in
any hedge transactions or use derivative financial instruments to reduce our
exposure to interest rate changes since all of our indebtedness is at fixed
interest rates. It was not practicable to estimate the fair values of Notes
Payable as timing of future cash flows is uncertain and/or the debtors' ability
to borrow with similar terms cannot be determined. A 10% change in the rate of
interest would not have a material effect on our financial position, results of
operation or cash flows. In addition, as of September 30, 2002, we were not
exposed to any material foreign-currency, equity-price or other type of market
or price risk. Samba conducts the majority of its operations in Europe using the
Euro and other local European currencies. Since changes in translation risk are
reported as adjustments to stockholders' equity, a 10% change in the foreign
exchange rate would not have a material effect on our financial position,
results of operation or cash flows. For the nine months ended September 30,
2002, we recorded a negative cumulative translation adjustment of $80,
reflecting the valuation, using the period ended currency exchange rates, of our
investment in Samba.
19
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
ITEM 4. CONTROLS AND PROCEDURES
MDI maintains disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in our filings
under the Security Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Our principal executive and financial officers
have evaluated our disclosure controls and procedures within 90 days prior to
filing of this Quarterly Report on form 10-Q and have determined that such
disclosure controls and procedures are effective.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal control,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
20
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
PART II. OTHER INFORMATION
(In thousands, except share and per share amounts)
ITEM 1. LEGAL PROCEEDINGS
On August 15, 2002, LK Search, Inc. a placement firm filed a complaint in
the Circuit court of cook county claiming fees of approximately $31 for finding
and placing an employee, David Groll, with MDI.
MDI entered into a settlement agreement with David M. Anderson, an
independent contractor, who filed a complaint against MDI claiming unpaid
invoices of approximately $38 and non-delivery of 16,666 shares of common stock.
MDI settled by agreeing to make four payments of $4 over four months, commencing
August 2002.
On October 17, 2002, MDI reached a settlement with Merrill Corporation
("Merrill") with respect to unpaid trade payables incurred by AccuMed. Under the
terms of the settlement, MDI will pay Merrill $145 due on November 15, 2002 and
extended until December 9, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued Bridge Notes and 2,625,000 Bridge
Warrants. We utilized these debt proceeds for working capital purposes during
the three months ended June 30, 2002. Bathgate Capital Group acted as our
placement agent and is due $73 in fees at September 30, 2002.
On March 19, 2002, we agreed to amend a previously outstanding $500
promissory note (Original Note) issued to NeoMed that was originally due on May
15, 2002. The terms of conversion of the Original Note were changed to reflect
the conversion terms of the new $500 Bridge Note issued to NeoMed as described
in Notes to Consolidated Financial Statements - Note 9 and the maturity date was
extended to July 30, 2002. NeoMed also received an additional 560,000 Bridge
Warrants and will be entitled to receive Private Warrants on the same terms as
those described above. We utilized these debt proceeds for working capital
purposes.
In August 2002, the Bridge Notes were amended to extend the maturity date to
December 31, 2002 and to eliminate the $0.50 per share floor conversion price.
The Bridge Warrants were also amended to reduce the exercise price to $0.25 per
share.
During the nine months ended September 30, 2002, we made principal payments
to Monsun AS, Schwarz, Cooper, Greenberger and Krauss and Trek Diagnostics
Systems, Inc. totaling $290.
We issued the notes and warrants pursuant to exemptions under Section 4(2)
of the Securities Act of 1933, as amended.
On August 30, 2002, we issued a $650 promissory note to Round Valley
Capital, LLC ("RVC"). The face value of the note includes $175 in unearned
interest. The note bears interest at the annual rate of 36%, requires monthly
interest payments and matures June 1, 2003. The promissory note is senior to all
other borrowings and trade payables and is secured by all the tangible and
intangible assets of MDI. The note is also secured by a personal guarantee of
our Chief Executive Officer, and is collateralized by his personal residences.
We also issued 5,750,000 shares of common stock to RVC to be held as collateral
for the transaction. The proceeds from this transaction are net of fees totaling
$131 and will be amortized over the term of the loan. The deferred loan fee
balance of $87 at September 30, 2002 is reported as a reduction to notes
payable. We also issued to RVC 711,364 shares of common stock and a warrant to
purchase 681,818 shares of common stock for $0.20 per share as additional loan
fees. The warrant was exercisable when the loan was funded and expires September
2003. In lieu of additional cash fees requested by RVC, the exercise price of
the warrant is discounted from the current market price of our common stock. The
warrant is valued at $156 using the Black-Scholes valuation model. The 711,364
shares of common stock are valued at $363 based on the
21
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
$0.51 per share closing price of the common stock on the transaction date. The
September 30, 2002 unamortized value of the warrants and stock is $462 and is
reported on the balance sheet as a reduction to notes payable. The payment terms
require a $19 payment on the first of each month commencing October 2002 and
ending May 2003, with a final payment of $669 due on June 1, 2003. We did not
pay the October 1, 2002 interest payment and are in default on the note. Through
November 14, 2002, we paid $350 principal on the note, $60 in interest payments,
$16 in legal fees, and $12 in late fees. Due to the default status of the note,
RVC has amended the note terms to require $53 in additional late fees and
accelerated the note maturity date to November 25, 2002. The note will remain in
default until all payments are received by RVC.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2002, we are in default on the RVC $650 Promissory Note.
The Senior Debtor has not waived the default provisions and remedies of this
Promissory Note and has provided us with optional payment arrangements which we
are currently pursuing with the Senior Debtor. As of November 18, 2002, we owe
$300 in principal on this Promissory Note. Default provisions and remedies on
subordinated debt securities are discussed further in Notes to Consolidated
Financial Statements - Note 8 and Note 9.
ITEM 4. SUBMISSION OF MATTERS TO VOTES OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None.
22
MOLECULAR DIAGNOSTICS, INC.
SEPTEMBER 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR DIAGNOSTICS, INC.
/s/ PETER P. GOMBRICH
-----------------------
PETER P. GOMBRICH
Chairman of the Board
Chief Executive Officer
/s/ MICHAEL A. BRODEUR
------------------
Michael A. Brodeur
Chief Financial Officer
Principal Accounting Officer
Date: November 18, 2002
23
MOLECULAR DIAGNOSTICS, INC.
CERTIFICATION
I, Peter P. Gombrich, certify that:
1. I have reviewed this quarterly report on Form 1O-Q of Molecular
Diagnostics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 18, 2002
/s/ PETER P. GOMBRICH
-------------------------
Peter P. Gombrich
Chief Executive Officer
24
MOLECULAR DIAGNOSTICS, INC.
CERTIFICATION
I, Michael A. Brodeur, certify that:
1. I have reviewed this quarterly report on Form 1O-Q of Molecular
Diagnostics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 18, 2002
/s/ MICHAEL A. BRODEUR
-------------------
Michael A. Brodeur
Chief Financial Officer
25
MOLECULAR DIAGNOSTICS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Bell National
Corporation Annual Report on Form 10-K for the period from August
20, 1985 to December 31, 1985 and for the years ended December
31, 1986 and 1987.)*
2.2 Exchange Agreement dated December 4, 1998 among the Company,
InPath, and the InPath Members. (Incorporated herein by reference
to Appendix A to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
2.3 Agreement and Plan of Merger of Bell National Corporation and the
Company. (Incorporated herein by reference to Appendix C to the
Bell National Corporation Definitive Proxy Statement on Schedule
14A, filed on April 30, 1999.)*
2.4 Agreement and Plan of Merger by and among AccuMed International,
Inc., AccuMed Acquisition Corp. and Ampersand Medical
Corporation, dated as of February 7, 2001. (Incorporated herein
by reference to Appendix I to Registration Statement No.
333-61666.)
2.5 Amendment No. 1, dated May 14, 2001 to the Agreement and Plan of
Merger by and among AccuMed International, Inc., AccuMed
Acquisition Corp. and Ampersand Medical Corporation, dated
February 7, 2001. (Incorporated herein by reference to Appendix I
to Registration Statement No. 333-61666.)
3.1 Restated Articles of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 of the Bell National Corporation Annual
Report on Form 10-K for the fiscal year ended December 31,
1988.)*
3.2 Bylaws of Bell National Corporation. (Incorporated herein by
reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989.)*
3.3 Certificate of Incorporation of the Company as amended.
(Incorporated herein by reference to Appendix D to the Bell
National Corporation Definitive Proxy Statement on Schedule 14A,
filed on April 30, 1999.)*
3.4 By-laws of the Company. (Incorporated herein by reference to
Appendix E to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
3.5 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of Ampersand Medical Corporation.
(Incorporated herein by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)
3.6 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of Ampersand Medical Corporation.
(Incorporated herein by reference to Exhibit 3.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)
3.7 Certificate of Incorporation of Molecular Diagnostics, Inc., as
amended. (Incorporated herein by reference to the Company's
Current Report on Form 8-K dated September 26, 2001.)
3.8 Section 6 of Article VII of the By-laws of the Company as
amended. (Incorporated herein by reference to Exhibit 3.3 to the
Company's S-4 Registration Statement, File No. 333-61666, filed
August 24, 2001.)
3.9 Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock of Molecular Diagnostics, Inc.
(Incorporated herein by reference to Exhibit 3.4 to the Company's
S-2 Registration Statement, File, No. 333083578 filed February
28, 2002)
3.10 Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 3.5 to the Company's
S-2 Registration Statement, File, No. 333083578 filed February
28, 2002)
3.11 Certificate of Amendment of Amended Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 3.6 to the Company's
S-2 Registration Statement, File, No. 333083578 filed February
28, 2002)
26
MOLECULAR DIAGNOSTICS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.12 Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock. (Incorporated herein by reference to
Exhibit 3.7 to the Company's S-2 Registration Statement, File,
No. 333083578 filed February 28, 2002)
3.13 Certificate of Designation, Preferences and Rights of Series E
Convertible Preferred Stock. (Incorporated herein by reference to
Exhibit 3.8 to the Company's S-2 Registration Statement, File,
No. 333083578 filed February 28, 2002)
4.1 Form of Common Stock Purchase Warrant, as executed by Bell
National Corporation on December 4, 1998 with respect to each of
Mr. Gombrich, Theodore L. Koenig, William J. Ritger, Fred H.
Pearson, Walter Herbst, AccuMed International, Inc., Northlea
Partners Ltd., and Monroe Investments, Inc. (collectively, the
"InPath Members"). (Incorporated herein by reference to Exhibit 3
of the Schedule 13D filed jointly by the InPath Members on
December 14, 1998.)*
4.2 Stockholders Agreement dated December 4, 1998 among the Company,
Winchester National, Inc., the InPath Members, and Mr. Milley,
Mr. Shaw, Cadmus, and MMI (collectively, the "Claimants").
(Incorporated herein by reference to Exhibit 2 to the Schedule
13D filed jointly by the InPath Members on December 14, 1998.)*
4.3 Form of Common Stock Purchase Warrant issued to Holleb & Coff on
July 4, 1999 representing the right to purchase 250,000 shares of
Common Stock of the Company in connection with legal services
rendered. (Incorporated herein by reference to Exhibit 4.3 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)*
4.4 Form of Common Stock Purchase Warrant issued to The Research
Works on October 11, 1999 representing the right to purchase
70,000 shares of Common Stock of the Company in connection with
the preparation of an investment research report. (Incorporated
herein by reference to Exhibit 4.4 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.)*
4.5 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 10, 1999 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Convertible Promissory Note
issued on the same date. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)*
4.6 Form of Common Stock Purchase Warrant issued to Richard Doermer
on January 3, 2000 representing the right to purchase 96,250
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.7 Form of Common Stock Purchase Warrant issued to Richard Doermer
on January 3, 2000 representing the right to purchase 75,759
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by reference
to Exhibit 4.7 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.8 Form of Common Stock Purchase Warrant issued to Richard Doermer
on January 3, 2000 representing the right to purchase 121,313
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by reference
to Exhibit 4.8 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.9 Form of Common Stock Purchase Warrant issued to Richard Doermer
on January 3, 2000 representing the right to purchase 94,697
shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by reference
to Exhibit 4.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.10 Form of Common Stock Purchase Warrant issued to William J. Ritger
on May 24, 2000 representing the right to purchase 531,614 shares
of Common Stock of the Company in connection with financial
advisory services rendered. (Incorporated by reference to Exhibit
4.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*
27
MOLECULAR DIAGNOSTICS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.11 Form of Common Stock Purchase Warrant issued to Denis M.
O'Donnell on May 24, 2000 representing the right to purchase
784,901 shares of Common Stock of the Company in connection with
financial advisory services rendered. (Incorporated by reference
to Exhibit 4.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
4.12 Form of Common Stock Purchase Warrant issued to Prospektiva, SA
on May 23, 2000 representing the right to purchase 48,333 shares
of Common Stock of the Company in connection with financial
advisory services rendered. (Incorporated by reference to Exhibit
4.12 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*
4.13 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 150,000 shares of Common Stock of the Company as
additional consideration for the achievement of product
development milestones under a License and Development Agreement
for Specific Medical Technology for the Detection of Oncogenic
HPV Virus. (Incorporated by reference to Exhibit 4.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.14 Form of Common Stock Purchase Warrant issued to Dr. Bruce
Patterson, on September 12, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company as
consideration for an Addendum to a License and Development
Agreement for Specific Medical Technology for the Detection of
Oncogenic HPV Virus. (Incorporated by reference to Exhibit 4.14
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
4.15 Form of Common Stock Purchase Warrant issued to Osprey Partners,
on November 22, 2000 representing the right to purchase 100,000
shares of Common Stock of the Company in connection with
financial advisory services to be rendered over twelve months.
(Incorporated by reference to Exhibit 4.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)*
4.16 Form of Common Stock Purchase Warrant issued to Univest
Management, Inc. on November 22, 2000 representing the right to
purchase 100,000 shares of Common Stock of the Company in
connection with financial advisory services to be rendered over
twelve months. (Incorporated by reference to Exhibit 4.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.17 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 1, 2000 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Promissory Note issued on
December 4, 2000. (Incorporated by reference to Exhibit 4.17 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
4.18 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 8, 2000 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for a 15% Promissory Note issued on
December 11, 2000 in connection with the proposed acquisition of
AccuMed International, Inc. by the Company. (Incorporated by
reference to Exhibit 4.18 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)*
4.19 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on February 7, 2001 representing the right to
purchase 1,000,000 shares of Common Stock of the Company as
additional consideration for two 15% Promissory notes issued on
February 1, 2001 and February 7, 2001 in connection with the
proposed acquisition of AccuMed International, Inc. by the
Company. (Incorporated by reference to Exhibit 4.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.20 Common Stock Purchase Warrant issued to Azimuth Corporation on
August 6, 2001 representing the right to purchase 250,000 shares
of common stock of the Company as additional consideration for a
15% promissory note. (Incorporated by reference to Exhibit 4.24
to the Company's S-4 Registration Statement File No. 333-61666
filed August 24, 2001.)
4.21 Common Stock Purchase Warrant issued to Cadmus Corporation on
August 6, 2001 representing the right to purchase 250,000 shares
of common stock of the Company as additional consideration for a
15% promissory note. (Incorporated by reference to Exhibit 4.23
to the Company's S-4 Registration Statement File No. 333-61666
filed August 24, 2001.)
4.22 Common Stock Purchase Warrant issued to Northlea Partners, Ltd.
on August 6, 2001 representing the right to
28
MOLECULAR DIAGNOSTICS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
purchase 62,500 shares of common stock of the Company as
additional consideration for a 15% promissory note. (Incorporated
by reference to Exhibit 4.27 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.23 Common Stock Purchase Warrant issued to Azimuth Corporation on
July 26, 2001 representing the right to purchase 500,000 shares
of common stock of the Company as consideration of Azimuth's
waiver of the conversion feature of its $500,000 convertible
promissory note issued September 22, 2000. (Incorporated by
reference to Exhibit 4.25 to the Company's S-4 Registration
Statement File No. 333-61666 filed August 24, 2001.)
4.24 Common Stock Purchase Warrant issued to Azimuth Corporation on
August 17, 2001 representing the right to purchase 25,000 shares
of common stock of the Company. (Incorporated by reference to
Exhibit 4.26 to the Company's S-4 Registration Statement File No.
333-61666, filed August 24, 2001.)
4.25 Common Stock Purchase Warrant issued to Tucker Anthony
Incorporated on July 10, 2001 representing the right to purchase
150,000 shares of common stock of the Company. (Incorporated by
reference to Exhibit 4.28 to the Company's S-2 Registration
Statement, File No. 333-83578 filed February 28, 2002).
4.26 Common Stock Purchase Warrant issued to Ventana Medical Systems,
Inc. on November 2, 2001 representing the right to purchase
1,750,000 shares of common stock of the Company. (Incorporated by
reference to Exhibit 4.29 to the Company's S-2 Registration
Statement, File No. 333-83578 filed February 28, 2002).
4.27 Form of Confidential $5,000,000 Common Stock Private Offering
Memorandum dated January 2000. (Incorporated by reference to
Exhibit 4.20 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
4.28 Form of Confidential $5,000,000 Series B Convertible Preferred
Stock Private Offering memorandum dated November 2000 and amended
January 30, 2001. (Incorporated by reference to Exhibit 4.21 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
4.29 Amendment No. 1 to Stockholders Agreement dated July 25, 2000
among the Company, the InPath Members, Mr. Milley, Mr. Shaw, MMI,
Cadmus Corporation, and Winchester National, Inc. (Incorporated
by reference to Exhibit 4.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
4.30 Common Stock Purchase Warrant issued to Schwartz, Cooper,
Greenberger & Krauss, Chartered on February 13, 2002 representing
the right to purchase 750,000 shares of common stock.
(Incorporated by reference to Exhibit 4.30 to the Company's S-2
Registration Statement, File No. 333-83578 filed June 28, 2002.)
4.31 Common Stock Purchase Warrant issued to Monsun AS on April 1,
2002 representing the right to purchase 200,000 shares of common
stock. (Incorporated by reference to Exhibit 4.31 to the
Company's S-2 Registration Statement, File No. 333-83578 filed
June 28, 2002.)
4.32 Form of Common Stock Purchase Warrant issued to Cell Solutions,
LLC on October 11, 2001 representing the right to purchase
172,120 shares of common stock. (Incorporated by reference to
Exhibit 4.32 to the Company's S-2 Registration Statement, File
No. 333-83578 filed June 28, 2002.)
4.33 Form of Common Stock Purchase Warrant issued in connection with
the Bridge Financing in June 2002. (Incorporated by reference to
Exhibit 4.33 to the Company's S-2 Registration Statement, File
No. 333-83578 filed June 28, 2002.)
10.1 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Raymond O'S. Kelly. (Incorporated herein
by reference to Exhibit 10.5 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.)*
10.2 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Nicholas E. Toussaint. (Incorporated
herein by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989.)*
10.3 Stock Appreciation Rights Agreement dated as of November 20, 1989
between the Company and Nicholas E. Toussaint.
29
MOLECULAR DIAGNOSTICS, INC.
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(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.)*
10.4 SAR Agreement Extension dated November 15, 1995 between the
Company and Raymond O'S. Kelly. (Incorporated herein by reference
to Exhibit 10.20 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.)*
10.5 SAR Agreement Extension dated November 15, 1995 between the
Company and Nicholas E. Toussaint. (Incorporated herein by
reference to Exhibit 10.21 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.)*
10.6 Employment Agreement dated May 1, 1998 between Mr. Gombrich and
InPath, LLC, as amended on December 4, 1998. (Incorporated herein
by reference to Exhibit 10.6 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.)*
10.7 Claims Agreement dated December 4, 1998 among the Company, the
Claimants, and Liberty Associates Limited Partnership.
(Incorporated herein by reference to Exhibit 4 to the Schedule
13D filed jointly by the InPath Members on December 14, 1998.)*
10.8 Ampersand Medical Corporation Equity Incentive Plan established
as of June 1, 1999. (Incorporated herein by reference to Appendix
F to the Bell National Corporation Definitive Proxy Statement on
Schedule 14A, as filed on April 30, 1999.)*
10.9 Ampersand Medical Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to Appendix G to the Bell
National Corporation Definitive Proxy statement on Schedule 14A,
as filed on April 30, 1999.)*
10.10 Form of Promissory Note issued in connection with the Bridge
Financing in June 2002. (Incorporated by reference to Exhibit
10.10 to the Company's S-2 Registration Statement, File No.
333-83578 filed June 28, 2002.)
10.11 Lease Agreement between the Company and O.P., L.L.C. dated
September 1, 1999 pertaining to the premises located at Suite
305, 414 N. Orleans, Chicago, IL 60610. (Incorporated herein by
reference to Exhibit 10.12 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.)*
10.12 Amendment to Lease Agreement between the Company and O.P., L.L.C.
dated November 1, 1999 pertaining to the premises at Suite 300,
414 N. Orleans, Chicago, IL 60610. (Incorporated herein by
reference to Exhibit 10.13 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.)*
10.13 Form of Note purchase agreements dated between March 1, 1999 and
June 29, 1999 between the Company and several purchasers.
(Incorporated herein by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)*
10.14 Form of 6% Convertible Subordinated Note Due 2000, dated between
March 1, 1999 and June 29, 1999 issued by the Company to several
purchasers. (Incorporated herein by reference to Exhibit 10.15 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.)*
10.15 Schedule of purchasers of 6% Convertible Notes Due 2000,
including dates and amount purchased. (Incorporated herein by
reference to Exhibit 10.16 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.)*
10.16 Form of Senior Convertible Promissory Note issued to Azimuth
Corporation on December 10, 1999. (Incorporated herein by
reference to Exhibit 10.17 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.)*
10.17 Form of Restricted Stock Award of 50,000 shares of Common Stock
issued to David A. Fishman, M.D., on August 10, 1999 as
additional compensation under a 36 month Consulting Agreement
dated June 1, 1999. (Incorporated herein by reference to Exhibit
10.18 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.)
10.18 Form of Restricted Stock award of 50,000 shares of Common Stock
issued to Arthur L. Herbst, M.D., on August 10, 1999 as
additional compensation under a 36 month Consulting Agreement
dated July 1, 1999. (Incorporated herein by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.)*
30
MOLECULAR DIAGNOSTICS, INC.
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NUMBER DESCRIPTION
------ -----------
10.19 Form of $2,000,000 note received from Seaside Partners, L.P. on
April 28, 2000. (Incorporated by reference to Exhibit 10.20 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.20 Form of $300,000 note received from AccuMed International, Inc.
on September 22, 2000 in conjunction with the proposed
acquisition of AccuMed by the Company. (Incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
10.21 Form of $500,000 Convertible Promissory Note issued to Azimuth
Corporation on September 22, 2000 in connection with the proposed
acquisition of AccuMed International, Inc. by the Company.
(Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)*
10.22 Form of $500,000 Convertible Promissory Note issued to Monsun, AS
on November 1, 2000. (Incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.23 Form of $200,000 Promissory Note issued to Azimuth Corporation on
December 4, 2000. (Incorporated by reference to Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)*
10.24 Form of $100,000 Promissory Note issued to Azimuth Corporation on
December 11, 2000 in conjunction with the proposed acquisition of
AccuMed International, Inc. by the Company. (Incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)*
10.25 Amendment to Patent and Technology License Agreement dated June
9, 2000 by and between Ampersand Medical Corporation, AccuMed
International, Inc. and InPath, L.L.C. (Incorporated by reference
to Exhibit 10.26 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.)*
10.26 License and Development Agreement for Specific Medical Technology
for the Detection of Oncogenic HPV Virus dated June 23, 2000, by
and between Invirion, Dr. Bruce Patterson, and Ampersand Medical
Corporation. (Incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.27 First Addendum to License and Development Agreement for Specific
Medical Technology for the Detection of Oncogenic HPV Virus dated
September 12, 2000, by and between Invirion, Dr. Bruce Patterson
and Ampersand Medical Corporation. (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
10.28 Second Addendum to License and Development Agreement for Specific
Medical Technology for the Detection of Oncogenic HPV Virus dated
January 12, 2001, by and between Invirion, Dr. Bruce Patterson
and Ampersand Medical Corporation. (Incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
10.29 Form of $25,000 Promissory Note issued to Azimuth Corporation on
February 1, 2001 in conjunction with the proposed acquisition of
AccuMed International, Inc. by the Company. (Incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)*
10.30 Form of $470,000 Promissory Note issued to Azimuth Corporation on
February 7, 2001 in conjunction with the proposed acquisition of
AccuMed International, Inc. by the Company. (Incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.)*
10.31 Lease Agreement between the Company and O.P., L.L.C date May 18,
2000, pertaining to premises located at 414 N. Orleans, 18, 2000,
pertaining to premises located at 414 N. Orleans, Suite 510,
Chicago, Illinois 60610. (Incorporated by reference to Exhibit
10.32 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.)*
10.32 First Amendment to Lease Agreement between the Company and O.P.,
L.L.C. dated February 13, 2001,
31
MOLECULAR DIAGNOSTICS, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
pertaining to additional premises at 414 N. Orleans, Suite 503,
Chicago, Illinois 60610 and extending the term of the original
lease until February 28, 2006. (Incorporated by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)*
10.33 Form of Restricted Stock Award of 25,000 shares of Common Stock
issued to Eric A Gombrich on May 1, 2000 as additional
compensation under a 36 month Employment Agreement dated April 1
2000. (Incorporated by reference to Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.34 Form of Restricted Stock Award of 50,000 shares of Common Stock
issued to Ralph M. Richart, M.D., on July 24, 2000 as additional
compensation under a 36 month Consulting Agreement dated June 1,
2000. (Incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
10.35 Form of Restricted Stock Award of 50,000 shares of Common Stock
issued to J. Thomas Cox, M.D., on October 20, 2000 as additional
compensation under a 36 month Consulting Agreement dated October
15, 2000. (Incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)
10.36 Form of Voting Agreement between the Company and each of the
officers and directors of AccuMed International, Inc. (Exhibit A
to the Agreement and Plan of Merger included in Appendix I to the
proxy statement-prospectus.)
10.37 $100,000 Promissory Note issued to Cadmus Corporation on July 26,
2001. (Incorporated by reference to Exhibit 10.39 to the
Company's S-4 Registration Statement, File No. 333-61666, filed
August 24, 2001.)
10.38 $100,000 Promissory Note issued to Azimuth Corporation on August
6, 2001. (Incorporated by reference to Exhibit 10.40 to the
Company's S-4 Registration Statement, File No. 333-61666, filed
August 24, 2001.)
10.39 $25,000 Promissory Note issued to Northlea Partners, Ltd. on
August 6, 2001. (Incorporated by reference to Exhibit 10.41 to
the Company's S-4 Registration Statement, File No. 333-61666,
filed August 24, 2001.)
10.40 $118,500 Promissory Note issued to Schwartz, Cooper, Greenberger
& Krauss on February 13, 2002. (Incorporated by reference to
Exhibit 10.40 to the Company's S-2 Registration Statement, File
No. 333-83578 filed June 28, 2002.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Peter Gombrich.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Michael Brodeur.
- ----------
* SEC File NO. 0-935
32