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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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 N. ORLEANS ST., SUITE 800, CHICAGO, IL 60610
(Address of Principal Executive Offices) (Zip Code)
(312) 222-9550
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Company as of June 28, 2002, the last business day of the Company's most
recently completed second fiscal quarter of fiscal 2002, was $16,694,958, based
upon the average bid and asked price of shares of the Company's Common Stock,
$0.001 par value per share ("Common Stock"), of $0.83 per share as reported on
the Nasdaq Over-the-Counter Bulletin Board Market on that date. The aggregate
market value of the Common Stock held by non-affiliates of the Company as of
June 30, 2003, the last business day of the Company's most recently completed
second quarter of fiscal 2003, was $8,564,133, based upon the average bid and
asked price of shares of the Company's Common Stock of $0.31 per share as
reported on the Pink Sheet Market on that date.
The number of shares of Common Stock outstanding as of June 30, 2003 was
36,442,180.
MOLECULAR DIAGNOSTICS, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS
General Development of Business................................ 1
Recent Developments 1
a) Bridge II Financing...................................... 1
b) Other Financing.......................................... 1
c) Settlement of Round Valley Capital, LLC Loan............. 2
d) Resignation of Officer................................... 2
e) Samba.................................................... 2
f) Short-term liquidity Problems............................ 2
g) Information About Industry Segments...................... 3
Description of Business 3
a) General Overview......................................... 3
b) Products................................................. 3
1) InPath System........................................ 3
2) In-Cell HPV Test..................................... 5
3) Samba Software Products and Services................. 4
4) Automated Microscopy Instruments..................... 4
1) AcCell.......................................... 4
2) AcCell Savant................................... 6
c) Back-Log of Orders....................................... 5
d) Markets.................................................. 5
e) Government Regulation, Clinical Studies and Regulatory Strategy7
f) Competition.............................................. 10
g) Operations............................................... 11
h) Intellectual Property.................................... 10
i) Research and Development................................. 13
j) Component and Raw Materials.............................. 12
k) Working Capital Practices................................ 14
l) Employees................................................ 13
Financial Information About Foreign and Domestic Operations and Export
Sales.......................................................... 13
Cautionary Statement for the Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995........ 15
ITEM 2. PROPERTIES..................................................... 19
ITEM 3. LEGAL PROCEEDINGS.............................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 23
Market Information............................................. 23
Holders........................................................ 23
Dividends...................................................... 23
Stock Transfer Agent........................................... 23
Recent Sales of Unregistered Securities and Use of Proceeds.... 24
Reimbursement of Legal Fees.................................... 25
Equity Compensation Plan Table Information..................... 25
ITEM 6. SELECTED FINANCIAL DATA........................................ 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 27
Results of Operations.......................................... 27
a) Overview................................................. 27
b) Significant Accounting Policies.......................... 28
c) Revenue.................................................. 29
d) Costs and Expenses....................................... 29
1) Cost of Goods Sold................................... 29
2) Research and Development............................. 30
3) Selling, General and Administrative.................. 30
4) Impairment Loss...................................... 31
5) Other Income and Expense............................. 31
1) Interest Income................................. 31
2) Interest Expense................................ 32
3) Other Income and Expense, Net................... 32
e) Net Loss................................................. 33
f) Liquidity and Capital Resources.......................... 33
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 39
Resignation of Auditors........................................ 39
Engagement of new Auditors..................................... 40
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................ 40
ITEM 11.EXECUTIVE COMPENSATION......................................... 42
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 44
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 49
ITEM 14.CONTROLS AND PROCEDURES........................................ 51
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 10-K
Documents Filed as Part of Report.............................. 53
a) Financial Statements..................................... 53
b) Financial Statement Schedules............................ 53
c) Exhibits................................................. 53
Signatures ......................................................... 63
Certifications......................................................... 64
Index to Financial Statements
Report of Independent Auditors......................................... F-1
Consolidated Balance Sheets at December 31, 2002 and 2001.............. F-2
Consolidated Statements of Operations for the three years ended
December 31, 2002, 2001, and 2000...................................... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 2002, 2001, and 2000...................................... F-4
Consolidated Statement of Stockholder's Equity (Deficit) for the three
years ended December 31, 2002, 2001 and 2000........................... F-9
Notes to Consolidated Financial Statements............................. F-10
EXHIBIT INDEX.......................................................... ii-1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
We were incorporated in Delaware in December 1998 as the successor to
Bell National Corporation. Bell National was incorporated in California in
1958. In December 1998, Bell National, which was then a shell corporation
without any business activity, acquired InPath, LLC, a development stage
company engaged in the design and development of products used in screening for
cervical and other types of cancer. For accounting purposes, the acquisition
was treated as if InPath had acquired Bell National. However, Bell National
continued as the legal entity and the registrant for Securities and Exchange
Commission filing purposes. Bell National merged into Ampersand Medical
Corporation, its wholly-owned subsidiary, in May 1999 in order to change the
state of incorporation of the company to Delaware. In January 1999, we
purchased all of the assets of Samba Technologies, SARL, ("Samba") based in
France, from Unilog Regions, S.A. In September 2001, we acquired 100% of the
outstanding stock of AccuMed International, Inc., ("AccuMed") by means of a
merger of AccuMed into our wholly-owned subsidiary. Shortly after the AccuMed
merger we changed our corporate name to Molecular Diagnostics, Inc. The name
change was effected by the merger of our wholly-owned subsidiary, Molecular
Diagnostics, Inc., with and into Ampersand Medical Corporation. In
October 2001, we became a minority shareholder in Cell Solutions, LLC, a
Virginia limited liability company. Except where the context otherwise
requires, "MDI", the "Company", "we" and "our" refers to Molecular Diagnostics,
Inc., and subsidiaries, and its predecessors.
MDI is focused on the design, development and marketing of the InPath
System, Samba software and related image analysis systems. The component
products of the InPath System are intended to detect, at the earliest possible
stage, cancer and cancer related diseases and may be used in a laboratory,
clinic, or doctor's office. We also design and manufacture the AcCell computer
aided automated microscopy instrument and the AcCell Savant, an instrument that
includes an AcCell and software, which collects quantitative cellular
information used in support of a diagnostic process. These instruments are sold
to laboratories and medical diagnostic companies for use in the customers'
proprietary applications. The instruments, in certain instances, are also
placed in the customers' facility on a fee-for-use basis. 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 also is developing the software used in the
InPath System. Nearly all of our reported revenue to date has been from the
sale of Samba and AcCell products and services.
RECENT DEVELOPMENTS
BRIDGE II FINANCING
Beginning in October 2002, we began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. The
notes bear interest at 12 % per annum payable at maturity date in kind in the
form of shares of our common stock and are due July 31, 2003. The notes are
convertible at any time into our common stock. The note conversion price and
the value of common shares paid in kind as interest for the first $1,000,000 in
cash subscriptions, determined on a "first come - first served basis," is $0.10
per share. The note conversion price and the value of common shares paid in
kind as interest for the remaining $3,000,000 of principal amount of notes in
the series is $0.15 per share. We granted each note holder the right to receive
a private warrant to purchase one share of our common stock for each four
shares of our common stock into which the notes convert at an exercise price of
$0.15 per share for warrants due to holders of notes within the first
$1,000,000 principal subscription class and $0.20 per share for warrants due to
holders of the remaining $3,000,000 principal class of notes. The warrants are
not issuable until such time as we complete significant additional financing
plans. We granted a junior security position in all of our assets to the
holders of the Bridge II convertible promissory notes. Through December 31,
2002, we had issued $550,000 in principal amount of Bridge II convertible
promissory notes in exchange for cash. Between January 1, 2003 and July 8,
2003, we issued an additional $1,141,000 principal amount of Bridge II
convertible promissory notes in exchange for cash. The Company is currently
negotiating additional financing.
OTHER FINANCING
On April 2, 2003, we issued a $1,000,000 Convertible Promissory Note due
April 2, 2004 to an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich
our Chairman and CEO, in exchange for cash. The note bears interest at the rate
of 12% per annum and is convertible into our common stock at a conversion price
of $0.10 per share. As additional consideration, we granted the holder a
warrant to purchase 1,000,000 shares of our common stock at an exercise price
of $0.15 per share. We also granted the holder a first priority security
interest in all of our assets. We used all of the cash proceeds from the note
to fund the exercise of a purchase option to reacquire our assets in the final
settlement with Round Valley Capital, LLC.
SETTLEMENT OF ROUND VALLEY CAPITAL, LLC LOAN AND RELATED LITIGATION
On August 30, 2002, we issued a promissory note to Round Valley Capital,
LLC ("RVC") in the amount of $825,500 representing $650,000 in cash received in
exchange for the note and $175,500 in unearned interest. The note was due June
1, 2003 and bore interest at a calculated rate of 36% per annum. The note was
secured by all of our assets. We paid transaction fees in cash of $147,063,
issued RVC 711,364 shares of our common stock and issued warrants to purchase
681,818 shares of our common stock at an exercise price of $0.20 per share. We
also issued a certificate representing 5,750,000 shares of our common stock as
additional collateral for the loan. As of December 31, 2002, we had made
principal and interest payments against the note of $350,000 and $59,500,
respectively. As a result of issues over the value of collateral, RVC declared
the note to be in default under the terms of the note and attempted to
foreclose on our assets and sell them at auction. We instituted legal action
against RVC, halting the foreclosure and asset sale, and immediately entered
into settlement negotiations. In early December 2002, we reached a settlement
agreement with RVC under which we were required to pay the remaining $300,000
principal balance of the note plus an additional amount of $190,000,
representing the remaining unearned interest on the note plus penalties, by
January 14, 2003. The agreement, which was amended in January and February of
2003, provided that if the payment due on January 14, 2003 was not made in a
timely manner, a default penalty would be assessed each week payment was not
made until a final payment amounting to $900,000 would be due on February 26,
2003. We were not able to make the payment due on January 14, 2003 and made no
further payments until February 17, 2003, when we paid RVC $250,000 leaving a
remaining balance due under the settlement agreement of $650,000. At the end of
February, RVC proceeded with foreclosure against our assets. At that time we
agreed to pay RVC $100,000 for an option to repurchase our assets any time
prior to the close of business on April 2, 2003. The option prevented RVC from
selling the assets to any party other than MDI before that date. We used funds
obtained from Bridge II convertible promissory note investors, as described
above, to make the aforementioned $250,000 payment to RVC. On April 2, 2003, we
paid RVC $900,000, utilizing funds received under a convertible promissory note
issued to an affiliate, as described above, and exercised the option to
repurchase our assets. In conjunction with this final payment, RVC returned
5,750,000 shares of our common stock issued as collateral, 711,364 shares of
our common stock issued and warrants to purchase 481,818 shares of our common
stock issued to RVC as payment for transaction fees. We cancelled the shares of
our common stock and warrants to purchase our common stock that were returned
by RVC.
RESIGNATION OF OFFICER
On January 22, 2003 Stephen G. Wasko tendered his resignation from his
position as our President and Chief Operating Officer, a position he held since
June 10, 2002. In February 2003 Mr. Wasko filed a claim with the Illinois
Department of Labor seeking approximately $84,000 in salary and bonuses due him
at the time of his resignation and severance payments amounting to
approximately $180,000. We are contesting the portion of the claim related to
severance payments. Our Board of Directors reappointed Peter P. Gombrich, our
Chairman and CEO, to temporarily fill the positions of President and Chief
Operating Officer. In June 2003, the Board of Directors appointed Dennis L.
Bergquist to be our President and Chief Financial Officer.
BANKRUPTCY FILING OF SAMBA TECHNOLOGIES, SARL
In late December of 2002, the General Managers of Samba Technologies,
Sarl, our wholly-owned subsidiary based in France, filed a petition with the
French Commercial Court for protection under the Bankruptcy Laws of France. The
Court approved the petition to cover all activities of Samba prior to December
20, 2002. Samba was unable to meet its current obligations primarily as a
result of our cash flow problems and our related failure to pay 262,000 Euros
due to Samba for work performed on behalf of our U.S. operations. During 2003,
Samba has maintained its normal operations under the protection of the French
Commercial Court and its managers have been supervised by a Court appointed
Administrator. Samba will continue to operate under the current format until a
plan of reorganization and continuation is approved by the Court, which must
act by December of 2003, unless a extension of time is granted. In consort with
the Samba managers, we anticipate filing a Continuation Plan with the French
Commercial Court during the third quarter of 2003. The Plan includes a payment
structure for our debt, direct participation in Samba's equity by the Samba
managers, and additional participation in Samba's equity by a strategic
partner, with a portion of the investment used to fund working capital. Upon
approval of the Plan, Samba will resume normal operations.
DELINQUENT PAYROLL TAX LIABILITIES
We are delinquent in paying Federal and certain State employee and
employer payroll taxes for a portion of 2001. We owed approximately $678,000
for this period including estimated penalties and interest of $250,000. In June
of 2003 we elected to recharacterize loans made to certain employees in lieu of
salary during the last quarter of 2002 and the first five months of 2003 as
payroll. As a result of this election, we estimate that we owe an additional
$80,000 in related Federal and State payroll taxes for the first two quarters
of 2003. We may also be subject to certain late filing and late payment
penalties, as well as interest on the unpaid amounts. We included the amounts
due, except for the unknown penalties and interest, as liabilities in our
accounting records and Consolidated Financial Statements for the respective
periods. We are currently in the process of communicating through counsel with
the Internal Revenue Service. At this time we do not believe it is possible to
determine the impact, if any, upon our financial condition.
SHORT-TERM LIQUIDITY PROBLEMS
We continued to have severe liquidity problems and had insufficient cash
on hand to effectively manage our business during the first six months of 2003.
As a result of our inability to meet cash payroll needs additional staff were
laid off or resigned, including key accounting personnel. During this time
period, we reduced our operations to a minimum level. Our Chairman and CEO
continued to loan personal funds to the Company to meet some of our current
cash needs. In February and March of 2003, we raised funds from the issuance of
Bridge II convertible promissory notes, including $1,000,000 from an affiliate,
as described above, to make the final loan settlement payments to RVC, also as
described above. Beginning in late April of 2003, we issued additional Bridge
II convertible promissory notes, the proceeds of which were used to meet
current operating needs, including those related to completing the audit of our
year-end financial statements. We have continued to raise operating cash
through the date of this report through the issuance of additional Bridge II
convertible promissory notes and management is negotiating additional
financing.
PLAN TO RESTRUCTURE OUTSTANDING LIABILITIES
Beginning in early 2003, we began to work on a plan to restructure all
of our outstanding liabilities to unsecured creditors. We have engaged an
independent firm with expertise in such plans, and have been working to
finalize the proposal. We plan to submit a formal restructuring proposal to our
unsecured creditors during the third quarter of 2003, contingent on our ability
to raise sufficient new equity to fund our operations as well as the plan.
AUTHORIZED SHARES OF COMMON STOCK
As a result of the issuance of numerous convertible securities,
including the Bridge I and Bridge II convertible promissory notes and related
warrants, we do not have sufficient shares of common stock authorized to issue
upon exercise of all of our currently outstanding convertible securities,
warrants and options. Our Board of Directors has approved an increase in the
number of authorized shares of common stock from 100,000,000 shares to
175,000,000 shares, but such action requires a vote of our stockholders. This
issue will be placed on the agenda at the next annual meeting of our
stockholders or at a special meeting to be called for this purpose. The failure
to have a sufficient number of authorized shares may constitute a breach of one
or more of our agreements governing issuance of such securities.
INSURANCE
Due to liquidity problems, we were unable to pay the continuing premiums
on insurance policies covering Directors & Officers Liability, Public
Liability, Property Damage and Workers Employment Compensation. These policies
were all cancelled retroactive to October 29, 2002. We are currently working
with insurance providers to reinstate our insurance coverage in these areas as
soon as possible.
INFORMATION ABOUT INDUSTRY SEGMENTS
We operate primarily in an industry segment involving medical devices,
diagnostics, and supplies. All of our operations during the reporting period
were conducted within this segment. We expect to continue to focus our
operations on this industry segment.
DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
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 analysis 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.
PRODUCTS
THE INPATH SYSTEM
We are currently developing and testing a family of products for use in
cancer screening and diagnosis. We call this family of products the InPath
System. The core of the InPath System is a combination of protein antibodies--
the Cocktail-CVX--that allows the InPath System to detect and highlight
abnormal cervical cells in a rapid and objective fashion. We intend to use
different antibody combinations to detect and diagnose different types of
cancer and other cancer-related diseases.
The initial application of the InPath System is designed to enhance the
current cervical cancer screening process performed in laboratories, commonly
referred to as the PAP test. Our ultimate goal is to perform this screening
test in a matter of minutes at the point of service, whether in a laboratory,
doctor's office, clinic or mobile medical vehicle. The InPath System includes
the following components:
{circle}An FDA approved unique sample collection device consisting of a
small disposable balloon, shaped to fit the cervix. The device is
intended to replace the spatula and brush currently used to
collect patient cytology samples.
{circle}A biochemical assay, fully-automated, is applied to a sample to
identify abnormal cells.
{circle}In the laboratory version of the InPath System
slide based test, this biochemical assay is applied to
sample cells released from a collection device and
deposited on a glass slide.
{circle}In the point of service version of the InPath
System, this biochemical assay is applied directly to the
cellular sample and analyzed either in solution or while
still on the collection device.
{circle}An instrument that performs an automated analysis of a sample by
means of an optical scan that detects the presence of multiple
wavelengths of fluorescent light. This light is produced by
fluorescent reporter tags, which are attached to certain
components used in the biochemical assay.
{circle}In the laboratory version of the InPath System, the
AcCell computer aided automated microscopy instrument uses
a camera to read the various wavelengths of light from the
sample.
{circle}In the point of service version of the InPath
System, the proprietary instrument uses custom designed
optical devices and lasers to capture the various
wavelengths of light directly on the collector.
{circle}Custom designed software that controls the automated instruments
and processes the analysis of the captured light detected.
IN-CELL HPV TEST
In June 2000, we obtained world-wide exclusive license from Invirion and
Bruce Patterson, M.D., its principal, for a proprietary medical technology to
detect the presence of E6 and E7 genes of the human papillomavirus ("HPV"), a
sexually transmitted disease. These viral oncogenes signify that the virus has
assimilated into the patient's cellular DNA, and presence of E6/E7 genes is
much more closely associated with a woman's risk of developing cervical cancer
than currently marketed HPV tests. We intended to use this technology as part
of the InPath System to allow physicians to manage patient care. The
combination of the two tests could give the healthcare provider a better
picture of the level of any disease present and whether a patient may be at an
increased risk to develop certain diseases in the future. Based on these
results, the health care provider may prescribe a more thorough course of
treatment. We began to offer this product for sale as an Analyte Specific
Reagent ("ASR") for use by laboratories qualified to perform high complexity
tests in "home-brew" applications at the end of 2001 and recorded initial
orders and shipments in the first quarter of 2002. We have been unable to raise
sufficient capital to devote the required dollars to further the clinical
development of this product. During 2002 we began discussions with a number of
potential strategic and distribution partners. We reached an initial
understanding, which included a deposit of $100,000, with Ventana regarding a
license for the In-Cell HPV test in July of 2002. We were unable to negotiate
the final terms of the license and we agreed to terminate the understanding. We
continue to negotiate the return of the deposit, less amounts owing to us for
related products and services, with Ventana. We anticipate that during 2003, we
will conclude an agreement with another of these potential partners to complete
clinical product development and begin large-scale distribution. This new
agreement should result in initial license fees and an ongoing royalty payment
stream.
SAMBA SOFTWARE PRODUCTS AND SERVICES
Samba designs, develops and markets web-enabled software based systems
for image analysis, image capture, and image transmission and management in
clinical and industrial applications. Samba also designs the imaging and
analysis software used in the laboratory version of the InPath System. Samba is
currently working on control and analysis software for other instruments in the
InPath System. Nearly all of our reported revenue to date is derived from the
sale of Samba's products and services to other researchers, other instrument
manufacturers and pharmaceutical companies.
Samba software suites, a group of programs that may be used alone or in
combination for a particular application, allow the user to capture and share
digital images and related data. Examples of applications are radiology,
pathology, and real-time coordination between a pathologist and a physician
during surgical procedures. Samba software can create a single data folder,
where patient information, physician case notes and diagnostic images from
various sources are maintained or annotated. The software can be employed in
local or wide area networks, or through an Internet browser using
security-encrypted files. All of Samba's software, developed using Visual
Basic, C/C++ and Java, can be used on a wide variety of image capture
instruments or devices and can employ static, historical, or dynamic (live)
images. Samba also provides software customization, installation, interface,
network, and Internet consulting services to the users of its products.
AUTOMATED MICROSCOPY INSTRUMENTS
AcCell
In November 2001, Ventana Medical Systems, Inc. ("Ventana") agreed to
purchase and distribute AcCell with their image analysis software, a computer
aided automated microscopy instrument, designed to help medical specialists
examine and diagnose specimens of human cells. During 2002, we agreed that
Ventana would assume responsibility for manufacturing the AcCell 2500
instruments directly, rather than purchasing them from us. Ventana will pay us
a royalty for each instrument they manufacture. We have elected instead to
proceed with the development and manufacture of the fully integrated AcCell
3000. AcCell may be delivered with a variety of features including:
{circle}Robotic slide-feeding systems to load and unload slides from the
microscope;
{circle}Bar code readers to ensure proper identification of samples
being analyzed;
{circle}Electro-mechanical scanning stages to facilitate accurate slide
screening;
{circle}Automated cellular focusing on slides; and
{circle}Data management software to facilitate primary or secondary
review of samples and report results into record-keeping systems.
The current AcCell instrument is a key tool of our research process,
clinical trials, and the InPath System laboratory based test. During the fourth
quarter of 2001, we initiated development of the next generation of the AcCell
instrument, AcCell 2500, utilizing strategic design and manufacturing partners.
During that same fourth quarter, we also signed contracts with customers to
deliver both the current version and the next generation of AcCell instruments
beginning late in 2001. During 2002, we continued development of the AcCell
platforms and delivered initial prototype systems to customers. We are
continuing to sell and market these instruments to other potential customers,
OEM laboratories and into the diagnostics marketplace.
AcCell Savant
The AcCell Savant includes an AcCell base instrument as well as an
electronic imaging system and image analysis software. This instrument is
designed for use as a quantitative microscopy platform. We currently have
instruments in use in a customer's laboratory or clinical facility for research
purposes under a fee-per-use contract, which extends through 2003. The customer
has also agreed to be a beta test site for new and updated versions of the
proprietary image analysis software used in the application. Variations of this
platform may also be used with image analysis software developed by Samba.
BACK-LOG OF ORDERS
At December 31, 2002, we had a backlog (that is, firm purchase orders
for goods or services) of signed contracts of $750,000, to be completed within
the next twelve months, amounting to $42,000 for InPath System products;
$108,000 for AcCell instruments and AcCell Savant products, exclusive of fee
per use revenues, which are covered by a contract through 2003; and $600,000
for Samba-related products.
MARKETS
According to several industry reports, there are approximately
60,000,000 PAP tests performed annually in the United States. The U.S. market
for cervical screening today amounts to approximately $1,000,000,000, based on
current average costs to perform the existing test. We do not plan to develop
and train a large direct sales force to sell the InPath System. Our initial
strategy is to market the laboratory version of the InPath System to major
laboratory organizations in the United States. Once the InPath System has been
successfully established in the laboratory market, our strategy is to form
alliances with these laboratories and other medical products distribution
companies and utilize their sales forces to broaden sales of the InPath System
to hospitals, clinics, managed care organizations and office-based physician
groups.
The cost of the PAP test outside of the United States, where
approximately 100,000,000 tests are performed, vary widely from country to
country. Outside of the United States, most healthcare services are provided by
governmental organizations. Healthcare in many of these countries is managed by
governmental agencies, often at the local level, making the precise number of
tests performed difficult to validate. In developing countries where
healthcare, especially cancer screening, may be minimal, non-profit
organizations often supplement government health programs. We estimate the
total of the non-U.S. market today at between $500,000,000 and $600,000,000.
We intend to distribute InPath System into both markets pursuant to our
statutory regulatory approvals. We also anticipate that because our products
are more cost-effective and designed to increase access to cervical screening,
the potential combined market could be expanded to a level in excess of
$3,000,000,000.
The AcCell is a key proprietary component of the laboratory version of
the InPath System. In addition, we are marketing the AcCell instrument
platform, including the version currently in development, to medical diagnostic
companies as a means to automate specific diagnostic testing processes. We will
attempt to expand our existing customer base and to supply the AcCell platform
to additional customers who are interested in automating their proprietary
diagnostic testing processes. We market the AcCell as the most versatile and
cost-effective automated microscopy platform currently available. We are
expanding our existing customer base for the AcCell Savant and will continue to
market this product to customers interested in image analysis and quantitative
microscopy. We introduced a new version of the analysis software used on the
AcCell Savant in mid 2002. We believe these innovations will allow us to
increase the level of potential customer interest in the instrument, thus
enabling us to expand our market.
Samba currently sells its products and services through direct sales and
representatives in Europe and through a distribution arrangement in Central and
South America. Prior to 1999, Samba had a distribution arrangement in North
America. Since our acquisition of Samba, we have restricted the marketing of
Samba products in the United States because of our limited operating capital.
Samba is adding to its distribution agreements to cover specific countries or
market segments in Europe, Asia, the Middle East and North Africa. The
potential market includes large laboratories, integrated healthcare delivery
networks, web-based medical information providers, and laboratory and hospital
information system vendors. We have licensed Samba software to a large medical
diagnostics company in the United States and had several pilot-study
installations in place during 2002 in the United States.
GOVERNMENT REGULATION, CLINICAL STUDIES AND REGULATORY STRATEGY
The development, manufacture, sale, and distribution of some of our
products is regulated by the Food and Drug Administration ("FDA") and
comparable authorities in certain states and foreign countries. In the United
States, the Food, Drug and Cosmetic Act (the "FD&C Act") and related
regulations apply to some of our products. These products cannot be shipped in
interstate commerce without prior authorization from the FDA.
Medical devices may be authorized by the FDA for marketing in the United
States either pursuant to a pre-market notification under Section 510(k) of the
FD&C Act, commonly referred to as a 510(k) notification, or a pre-market
approval application (a "PMA"). The process of obtaining FDA marketing
clearance and approval from other applicable regulatory authorities is costly
and there can be no guarantee that the process will be successful. The 510(k)
notifications and PMA applications typically require preliminary internal
studies, field studies, and/or clinical trials, in addition to submission of
other design documentation. We manage the regulatory process through the use of
consultants, Clinical Research Organizations, ("CROs") and members of our
Medical Advisory Board.
A 510(k) notification, among other things, requires an applicant to show
that its products are "substantially equivalent" in terms of safety and
effectiveness to an existing FDA cleared predicate product. An applicant may
only market a product submitted through a 510(k) notification after the FDA has
issued a written notification determining the product has been found to be
substantially equivalent. The E2 collector was approved for marketing by the
FDA on May 31, 2002 under the 510(k) notification.
To obtain PMA approval for a device, an applicant must demonstrate,
independent of other similar devices, that the device in question is safe and
effective for its intended uses. A PMA must be supported by extensive data,
including pre-clinical and clinical trial data, as well as extensive literature
and design documentation to prove the safety and effectiveness of the device.
The PMA process is substantially longer than a 510(k) notification process.
During the review period, the FDA may conduct extensive reviews of our clinical
trial center documentation and our manufacturing facilities and processes or
those of our strategic partners. In addition, the FDA may request additional
information and clarifications and convene a physician advisory panel to assist
in its determination.
The FD&C Act generally bars advertising, promoting, or other marketing
of medical devices that the FDA has not approved or cleared. Moreover, FDA
enforcement policy strictly prohibits the promotion of known or approved
medical devices for non-approved or "off-label" uses. In addition, the FDA may
withdraw product clearances or approvals for failure to comply with regulatory
standards.
Our current and prospective foreign operations are also subject to
government regulation, which varies from country to country. Many countries,
directly or indirectly through reimbursement limitations, control the price of
most healthcare products. Developing countries put restrictions on the
importation of finished products, which may delay such importation. European
Directives establish the requirements for medical devices in the European
Union. The specific directives are the Medical Device Directive (MDD 93/42/EEC)
and the In-Vitro Diagnostics Device Directive (IVDD/98/79/EEC). The
International Organization for Standardization ("ISO") establishes standards
for compliance with these directives, particularly for quality system
requirements.
The FDA has adopted regulations governing the design and manufacture of
medical devices that are, for the most part, harmonized with the ISO's quality
system standards for medical devices. The FDA's adoption of the ISO's approach
to regulation and other changes to the manner in which the FDA regulates
medical devices will increase the cost of compliance with those regulations.
We will be subject to certain registration, record-keeping and medical
device reporting requirements of the FDA. Our manufacturing facilities, or
those of our strategic partners, will be obligated to follow the FDA's Quality
System Regulation and be subject to periodic FDA inspections. Any failure to
comply with the FDA's Quality System Regulation or any other FDA or other
government regulations would have a material adverse effect on our future
operations.
The Cocktail CVX as part of the InPath System will need to be cleared
for marketing under a PMA+ by the FDA, as described above, prior to its sale
and use in the U.S. clinical market. We cannot be sure whether or when the FDA
will clear the InPath System. Internationally, the InPath System may be subject
to various government regulations, which may delay the introduction of new
products and services and adversely affect our business.
The InPath System may be subject to regulation in the United States
under the Clinical Laboratory Improvement Act ("CLIA"). CLIA establishes
quality standards for laboratories conducting testing to ensure the accuracy,
reliability and timeliness of patient test results, regardless of where the
test is performed. The requirements for laboratories vary depending on the
complexity of the tests performed. Thus, the more complicated the test, the
more stringent the requirement. Tests are categorized as high complexity,
moderate complexity (including the category of provider performed microscopy)
and waived tests. CLIA specifies quality standards for laboratory proficiency
testing, patient test management, quality control, personnel qualifications and
quality assurance, as applicable.
The FDA is responsible for categorization of commercially marketed
laboratory tests. The Centers for Disease Control ("CDC") is responsible for
categorization of laboratory procedures such as provider-performed microscopy.
For commercially-marketed tests, the FDA now determines the appropriate
complexity category as it reviews pre-market submissions for clinical
laboratory devices. Manufacturers are asked to include an extra copy of the
package insert identified as "FOR CLIA CLASSIFICATION" in the submission for
product commercialization (i.e., 510(k) or PMA). Manufacturers are notified of
the assigned complexity through routine FDA correspondence (that is, as an
enclosure with a clearance or approval letter or as a separate letter in
response to other submissions). Categorization is effective as of the date of
the written notification to the manufacturer.
We are developing the InPath System to be user-friendly, require minimum
operator training, and have safety and operating checks built into the
functionality of the instruments. We believe that our efforts will result in
the FDA and/or the CDC assigning the lowest possible Classification to the
InPath System. If, however, these products are classified into a higher
category, it may have a significant impact on our ability to market the product
in the United States.
We continue to conduct clinical studies and trials on our InPath System
during its development. These studies and trials vary in terms of number of
patient samples, individual product components, specific processes and
conditions, purpose, and other factors which may affect the results.
We have publicly reported the results of some of the studies of the
InPath System and Cocktail-CVX to various medical meetings, in publications and
in public announcements. Such studies demonstrate the system's capability to
detect cervical cellular abnormalities. The sensitivity factor, the test's
performance in detecting versus missing actual disease, commonly called false
negatives, is critical in terms of patient health.
In each of the reported studies and trials, the InPath System
demonstrated over 98% accuracy in detecting high-grade cervical disease and
cancer. In addition, the results demonstrate that the InPath System produces
more accurate results than the current PAP test. A Meta Analysis conducted in
2000 on the PAP test, which reviewed the results of 94 previous studies, showed
an average sensitivity of 74% and an average specificity of 68%.
Data from studies of other InPath System products has also been
presented at medical conferences. A controlled study of our In-Cell HPV test
showed the test accurately detected nearly 100% of patients with high-grade
disease and 64% of patients with low-grade disease.
In a presentation of early results of the clinical trial of the InPath
System collector, data showed that the cytology reports on samples collected
with the InPath System collector were at least as accurate as those collected
with the conventional brush/spatula method. The InPath System collector also
proved to be more comfortable for the patient and provided less blood and mucus
and required only one device to collect both endocervical and ectocervical
cells. The results of the additional clinical patients data were submitted in
January 2002 and we received FDA clearance to market the collector on May 31,
2002.
We believe the results of these studies support the continued
development process of the InPath System. We moved ahead with additional
studies and clinical trials in late 2001 and others began in 2002. Due to
liquidity problems we were forced to suspend all of our ongoing studies during
the last half of 2002.
We completed the initial phase of our clinical studies during 2002 and
we hope to begin the second phase during later half of 2003, contingent on our
securing adequate financing for our operations. At the conclusion of the
studies, the data will be submitted to the FDA as a PMA and will form the basis
of our substantiation of the clinical and economic value of the InPath System.
It will also allow us to continue to offer it for sale as an ASR in the United
States and for full-scale commercial and clinical use in countries such as
Mexico, Peru, Chile, India, China and other developing nations. We are not
permitted to market non-ASR products in the United States, with clinical or
diagnostic claims until we have received clearance from the FDA. ASR tests make
no medical claims but may be used by laboratories, which are qualified to
perform high complexity tests, and physicians as components of "home-brew"
procedures. We received our first U.S. ASR orders in early 2002. In other
countries listed, we may need regulatory and importation approval; however,
such approvals are generally based on the data submitted to the FDA.
We are pursuing regulatory approval of the InPath System products
through a series of submissions and in some cases, using data from a single
clinical study. This tiered approach is designed to accelerate revenue
opportunities for the InPath System in the short term and to drive adoption of
our innovative products over the long term, while minimizing the expense and
time involved in undertaking the appropriate study.
The first stage of the overall strategy involved the submission of our
e2 Collector for approval as a substantially equivalent device to the brush and
spatula method of gathering samples used in the current PAP tests. The 510(k)
notification was completed and filed in late September 2001. Additional data
was furnished to the FDA in the first quarter of 2002 and subsequent to that
submission we received approval to market the Collector in the United States.
The second stage of our overall strategy involves the continuing study
of the InPath System and Cocktail-CVX, as described in preceding paragraphs.
This submission will cover the InPath System as a means to eliminate true
negative samples from further testing. We anticipate completion of this portion
of the study and submission of the data to the FDA by the fourth quarter of
2003. We will also submit the data to foreign regulatory authorities that have
jurisdiction over these products. Subsequently, we will continue to collect and
submit data for the InPath System point of service test.
If the submissions for the various InPath System products are cleared by
the FDA for sale in the U.S. market or approved for sale by foreign regulatory
agencies, we intend to sell the cleared products in the respective clinical
markets.
INPATH SYSTEM PRODUCT INTRODUCTION TIMELINES
(CHANGE TABLE DATES)
PRODUCT PROCESS TIMELINE
- ------- ------- --------
e2 Collector........... Clinical trials Completed
Regulatory submission & review September 2001
Regulatory clearance received May 2002
US sales 2003 / 2004
International sales 2003 / 2004
Cocktail-CVX........... Clinical trials (1) 2003
Regulatory submission & review (1) 2003 / 2004
Regulatory clearance projected (1) 2004
US sales (1) 2004
International sales (CE Mark) (1) 2004
Cocktail-CVX ASRs...... US sales Begun
International sales Begun
(1) All of the above target dates are contingent on our securing
adequate financing for our operations during the third quarter of 2003.
We currently distribute AcCell, AcCell Savant and Samba software
products into commercial markets that do not require regulatory clearance. In
order to distribute these products for use in certain clinical applications,
however, we will be required to conduct clinical trials and to make submissions
to applicable regulatory agencies for clearance. We do not have any current
plans to make any submissions to the FDA or foreign regulatory agencies
covering these products. In the future, some of our customers may include these
products in submissions to the FDA or foreign regulatory agencies covering
their use in a customer's proprietary diagnostic or clinical process.
COMPETITION
Historically, competition in the healthcare industry has been
characterized by the search for technological innovations and efforts to market
such innovations. The cost of healthcare delivery has always been a significant
factor in markets outside of the United States. In recent years, the
U.S. market has also become much more cost conscious. We believe technological
innovations incorporated into certain of our products offer cost effective
benefits that address this particular market opportunity.
Competitors may introduce new products that compete with ours, or those,
which we are developing. We believe the portion of our research and development
efforts devoted towards continued refinement and cost reduction of our products
will permit us to remain or become competitive in all of the markets in which
we presently distribute or intend to distribute our products.
The market for our cancer screening and diagnostic product line is
significant but highly competitive. We are unaware of any other company that is
duplicating our efforts to develop a fully-automated, objective analysis and
diagnostic system for cervical cancer screening that can be used at the point
of service. There are a number of companies attempting to develop in-vivo
systems to differentiate between cancerous, pre-cancerous and normal tissue.
Our competition includes many companies with financial, marketing, and research
and development resources substantially greater than ours. There can be no
assurance that our technological innovations will provide us with a competitive
advantage.
Similarly, the worldwide markets in which we sell Samba's products are
highly competitive. Several U.S. and foreign companies are developing and
marketing products and services that compete directly with Samba's products and
services. However, Samba has the benefit of a robust customer base throughout
Europe, as well as a few long-term customers in the United States. Our strategy
is to use these customers as references in our marketing efforts to expand the
sales and use of Samba products.
There are several U.S. and foreign companies that produce automated and
quantitative microscopy instruments. In the past, the market for these
instruments has been primarily limited to research applications. However, as a
result of recent advances in the area of molecular diagnostics, we believe the
market for such instruments and applications will increase over the next
several years. We believe our instruments are the most versatile cost-effective
platforms available in the current market whether as an outright purchase or a
fee-for-use application.
We believe that all of our products must compete primarily on the basis
of accuracy, functionality, product features and effectiveness of the product
in standard medical applications. We also believe that cost control and cost
effectiveness are additional key factors in achieving or maintaining a
competitive advantage. We focus a significant amount of product development
effort on producing systems and tests, which will not add to overall healthcare
cost. Specifically, there are several companies whose technologies are similar
to, or overlap with MDI's. These include Cytyc Corporation, Tripath
Corporation, Digene Corporation, Ventana Medical Systems, Inc., ChromaVision
Systems, Inc., and Applied Imaging, Inc. However, none of these companies have
developed the fully integrated solution necessary to deliver a fully automated
solution. To develop fully-automated solutions, companies must have
technologies that fully integrate microscopy instruments, imaging software and
cancer-detecting biochemistry. At most, our competitors have two of the three
technologies. Only our Company has developed and integrated all three
technologies into a solution for cervical cancer screening.
OPERATIONS
We conduct research and development work for the InPath System using a
combination of our employees and contract workers in our Chicago, Illinois
laboratory, and contract laboratory facilities located in several states.
We do not intend to invest capital to construct and maintain a
medical-products manufacturing facility and all its related quality systems
requirements. Our strategy is to utilize the operations, quality systems, and
facilities of a contract manufacturer specializing in medical products
manufacturing to meet our current and future needs in the U.S. and other
international markets. This strategy covers manufacturing requirements related
to InPath System chemical components, plastic and silicone parts for the sample
collector, InPath System instruments and the AcCell and AcCell Savant
instruments.
We have preliminary agreements, including design and development work,
with manufacturers of medical grade components to supply low volumes of the
silicone balloon and other components of the sample collection device. We are
negotiating additional agreements with manufacturers to supply much higher
volumes that will be needed once we begin to sell the sample collection device.
These manufacturers have the capacity to handle high volume production through
facilities in both the United States and several foreign countries.
We entered into a strategic partnership with Cell Solutions, LLP, in
October 2001, to design, develop and improve leading-edge manual slide based
preparation systems with state-of-art biochemical preservatives.
We also have a preliminary agreement with a large manufacturer of
chemical and biological tests to integrate the various combinations of
ingredients that make up our assay Cocktail-CVX into a single product delivered
in high volume.
We have a sufficient supply of AcCell platforms. The computers, cameras,
automated slide staining equipment and slide preparation equipment, that make
up the remainder of the laboratory version of the InPath System, are available
from several manufacturers. These instruments are used in a sequential process.
The AcCell platform on which the actual sample screening is done is computer
controlled by our proprietary Samba software.
We have preliminary agreements with medical instrument manufacturers
covering the design, development and initial manufacturing of both the next
generation AcCell platform and the point of service instrument.
Samba develops its software products at its own facility located in
France. Additional software development work is conducted at our facility in
Chicago. The Samba software products are installed and integrated with
off-the-shelf computer and imaging components at the customer's location, or at
our French or Chicago facility, immediately prior to delivery. Consulting
services are generally performed at the customer's location, or at our French
or Chicago facility, using customer data and communications access. We have
added staff at our Chicago facility to support the delivery of Samba and image
analysis software products to customers in the United States. Liquidity
problems caused us to reduce this staff during the last half of 2002.
INTELLECTUAL PROPERTY
We rely on a combination of patents, licenses, trade names, trademarks,
know-how, proprietary technology, and policies and procedures to protect our
intellectual property. We consider such security and protection a very
important aspect of the successful marketing of our products in the U.S. and
foreign markets.
In the United States we follow the practice of immediately filing a
provisional patent application for each invention as soon as it has been
determined that the invention meets the minimum standards for patentability.
While a provisional patent application does not provide any formal rights or
protections, it does establish an official priority date for the invention that
carries over to any utility patent applications that are derived from the
provisional application within the next 12 months. A utility patent application
begins the process that can culminate in the issuance of a U.S. patent. We
convert each outstanding provisional patent application into some number of
utility patent applications within this 12 month period. In most cases each
provisional application results in one utility filing. However, in some cases a
single provisional application has generated two independent utility filings or
multiple (up to five) provisional applications have been consolidated into a
single utility application. During the prosecution of a utility application,
the U.S. Patent Office may require us to divide the application into two or
more separate applications or we may file a continuation-in-part patent
application that expands upon the technology claimed in another patent
application and which has the potential of superseding the earlier application.
For these reasons, estimating the number of patents that are likely to issue
based upon the numbers of provisional and utility applications filed is
difficult.
Prior to filing a utility application in the United States, we review
the application to determine whether obtaining patent coverage for the
invention outside of the United States is necessary or desirable to support our
business model. If so, a patent application is filed under the Patent
Cooperation Treaty (PCT) at the same time that the U.S. filing is made.
Depending upon the nature of the invention and business considerations, we
typically specify the patent offices in three to six countries to which the PCT
application is to be submitted after the initial examination is completed.
As of June 2003, we have filed ten U.S. utility patent applications and
two PCT applications. Four of the U.S. utility applications were "allowed" and
issued as U.S. Patents during 2002. Twelve additional provisional U.S. patent
applications have also been filed. In order to reduce the expenses related to
patent prosecution, we are currently treating these applications as inactive.
We also have five foreign patent applications pending. This group of patents
and patent applications cover all aspects of the InPath system including, but
not limited to, the point of service instrument; the personal and physicians'
collectors; and the slide-based test. As a result of the acquisition of
AccuMed, we acquired seventeen issued U.S. patents; four U.S. patent
applications, which issued as patents during 2002; two U.S. design patents;
twenty-six foreign patents, of which seventeen were transferred to a third
party under a license agreement; and twenty-seven foreign patent applications
primarily covering the AcCell and AcCell Savant technology and related
software. We also hold an exclusive license from Invirion and Dr. Bruce
Patterson covering a patent and certain medical technology for detection of E6
and E7 genes in cancer causing types of HPV virus. We purchased the license for
cash, future royalties, and other considerations.
We continue to prepare additional patent applications for processes and
inventions arising from our research and development process. The protections
provided by a patent are determined by the claims that are allowed by the
patent office that is processing the application. During the patent prosecution
process it is not unusual for the claims made in the initial application to be
modified or deleted or for new claims to be added to the application. For this
reason it is not possible to know the exact extent of protection provided by a
patent until it issues.
Patent applications filed prior to November 29, 2000 in the United
States are maintained in secrecy until any resulting patent issues. As there
have been examples of U.S. patent applications that have remained "in
prosecution" and, therefore, secret for decades, it is not possible to know
with certainty that any U.S. patent that we may own, file for or have issued to
us will not be pre-empted or impaired by patents filed before ours and that
subsequently issue to others. Utility patent applications filed in the United
States after November 29, 2000 are published eighteen months after the earliest
applicable filing date. As this revised standard takes full effect, the chances
that such a "submarine" patent will impair our intellectual property portfolio
will be significantly reduced. Foreign patent applications are automatically
published eighteen months after filing. As the time required to prosecute a
foreign utility patent application generally exceeds eighteen months and the
foreign patents use a "first to file" rather than a "first to invent" standard,
we do not consider submarine patents to be a significant consideration in our
patent protection outside of the United States.
Samba software and technology consists primarily of trade secrets,
know-how, and technical documentation. To further enhance security, we restrict
access to our software source codes and the details of the step-by-step
instructions for command, control and operation of a software program.
Furthermore, a hardware security key, or "dongle," is required in order for a
user to operate the software.
Our products are or will be sold worldwide, under trademarks that we
consider to be important to our business. We own the Samba trademark and trade
names of "Samba", "InPath", "e2 Collector", "Cocktail-CVX", "In-Cell HPV Test",
"AcCell" and "AcCell Savant". We may file additional U.S. and foreign trademark
applications in the future.
Our future technology acquisition efforts will be focused toward those
technologies that have strong patent or trade secret protection.
We cannot be sure that patents or trademarks issued or which may be
issued in the future will provide us with any significant competitive
advantages. We cannot be sure any of our patent applications will be granted or
that validity or enforceability will not be successfully challenged. The cost
of any patent related litigation could be substantial even if we were to
prevail. In addition, we cannot be sure that someone will not independently
develop similar technologies or products, duplicate our technology or design
around the patented aspects of our products. The protection provided by patents
depends upon a variety of factors, which may severely limit the value of the
patent protection, particularly in foreign countries. We intend to protect much
of our core technology as trade secrets, either because patent protection is
not possible or, in our opinion, would be less effective than maintaining
secrecy. However, we cannot be sure that our efforts to maintain secrecy will
be successful or that third parties will not be able to develop the technology
independently.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on introducing new
products as well as enhancing our existing product line. We utilize both
in-house and contracted research and development efforts. We believe research
and development is critical to the success of our business strategy. During the
years 2002, 2001, and 2000 our research and development expenditures were
approximately $3,338,000, $4,034,000, and, $3,426,000, respectively.
We completed clinical testing of the sample collection device, the
e2 Collector, and submitted the results of this trial to the FDA in the form of
a 510(k) notification on September 28, 2001.
The design and validation of the laboratory version of the InPath
System, including image analysis software developed in-house by Samba, is
currently in process. We have reviewed and validated the performance of over
forty biological components for use in our Cocktail-CVX. We used samples from
patients with normal and abnormal (those with cancer or its precursors)
pathology reports in our studies. We selected a specific combination of
chemical and biological components for the Cocktail-CVX and commenced testing
in the fourth quarter of 2001.
The design specifications for the point of service analysis instrument
are complete and several prototypes have been assembled. Additional development
work will progress with an outside strategic design/manufacturing partner based
upon further funding.
Our research work in the area of chemical and biological components will
continue for the foreseeable future as we seek to refine the current process
and add additional capabilities to our analysis procedure, including the
detection of other forms of cancer and precursors to cancer.
We have entered into negotiations with an outside strategic
design/manufacturing partner to develop the next generation AcCell instrument
platform. The design specifications are complete and prototypes are in process.
We completed development of a new version of the AcCell Savant image
analysis software, which will make the device more user friendly and in-line
with current software technologies, during 2002.
We anticipate the need to invest a substantial amount of capital in the
research and development process, including the cost of clinical trials, in
order to complete the development and use of the InPath System and bring it to
market.
COMPONENTS AND RAW MATERIALS
Low cost products are a key component of our business strategy. We
designed the sample collection device using widely available and inexpensive
silicone and plastic materials. These materials are available from numerous
sources and can be fabricated into finished devices by a variety of
manufacturers within and outside the United States. We can use sources outside
of the United States, so that we may service a particular market at the lowest
possible cost.
The instrument components of the laboratory version of the InPath System
are available from a number of sources. Computers, cameras, automated
slide-staining instruments and automated slide-preparation instruments are
currently available from several large manufacturers. We have an adequate
supply of current AcCell platforms used in the InPath System and have
contracted for the design and manufacture of the next generation of the AcCell
platform.
The point of service instruments are designed to use off-the-shelf
components and a limited number of custom manufactured parts or use a third
party manufactured instrument. The strategic partner chosen to manufacture the
unique final instrument, as is the case with the company building the
prototypes, will be responsible for sourcing, fabrication, and assembly of all
components into the final instrument.
Samba's software products are based on leading edge technology and are
compatible with numerous off-the-shelf computers, computer components,
microscopes, and imaging equipment.
WORKING CAPITAL PRACTICES
As of December 31, 2002, we have not sold any InPath System products,
except for ASR's. During 2002, we sold several AcCell instrument platforms,
billed and received fees under an AcCell Savant fee-for-use contract and closed
on additional sales of Samba software products in the United States. We have
financed our U.S. operations and research and development by raising funds
through the sale of debt or equity. We will continue to use these methods to
fund our operations until such time as we are able to generate adequate
revenues and profits from the sales of some or all of our products.
The sale of Samba products, totaling approximately $783,066 for the year
ended December 31, 2002, outside the United States generates revenue that is
used to support Samba operations. Samba has obtained a 150,000 Euro
(approximately $158,000) overdraw facility from its bank to provide
supplemental funds, as needed. Availability of funds under the overdraw
facility is based on and secured by Samba's monthly billings to customers. The
overdraw facility is especially helpful since collection periods for many
customers may exceed standard thirty-day terms. Customers requiring government
funding to pay their bills or customers outside France often take longer than
thirty days to pay. At times Samba requires a deposit on an order before
ordering any equipment or beginning any work.
Similarly, we believe that future sales of the InPath System or other
products into foreign markets will result in collection periods that may be
longer than those expected for domestic sales of these products. Our strategy
will be to use letters of credit or other secured forms of payment, whenever
possible, in sales of products in foreign markets.
EMPLOYEES
As of June 30, 2003 we employed a total of six full-time employees in
the United States and nine full-time employees in France. The Samba employees
in France are represented by a national labor union (customary to all French
workers) and Samba management considers its relations with its employees to be
good. The staff reductions from prior years were undertaken in late 2002 and
during 2003 to date in order to conserve our limited operating funds during
those timeframes. We will attempt to rehire key operational personnel in the
second half of 2003, contingent on our ability to secure adequate funding to
meet our operational requirements.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Our current operations outside North America are conducted by Samba.
Sales of Samba products accounted for a significant portion of sales reported
for 2002 and nearly all of our sales reported for 2001 and prior periods.
Markets outside of North America are an important factor in our business
strategy. Any business that operates on a worldwide basis and conducts its
business in one or more local currencies is subject to risks of fluctuations in
the value of those currencies against the dollar. It is subject to changing
political climates, differences in culture and the local practices of doing
business. It is also subject to North American and foreign government actions,
such as export and import rules, tariffs and duties, embargoes and trade
sanctions. We do not regard these risks, however, as a significant deterrent to
our strategy to introduce our InPath System to foreign markets.
As we begin to market and sell our InPath System, we will closely review
our foreign operational practices. We will attempt to adopt strategies to
minimize risks of changing economic and political conditions within foreign
countries.
2002 2001 2000
---- ---- ----
NORTH AMERICA:
Revenue........................ $ 963 $ 75 $ 0.0
Profit (loss).................. $(11,937) $(16,468) $ (6,506)
Total Assets................... $ 9,047 $ 10,876 $ 3,617
FRANCE:
Revenue........................ $ 783 $ 802 $ 1,094
Profit (loss).................. $ (23) $ (162) $ (105)
Total Assets................... $ 612 $ 750 $ 958
As part of the Series D convertible preferred stock offering in November
2001, we licensed software and software technology to Ventana. We recognized
revenue of $297,000 related to the license and technology development agreement
during 2002. We did not recognize any revenue related to the license and
technology development agreement during 2001.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
There are forward-looking statements throughout this report that are not
historical facts, including statements in this Item 1 and statements contained
in material incorporated into this report by reference. These statements are
based on our current expectations and plans, and involve many risks and
uncertainties. Some of these risks and uncertainties are factors that affect
all international businesses, while others are specific to us, and the areas of
the medical products industry in which we operate.
The factors below in some cases have affected our historical results and
could affect our future results, causing them to differ, possibly materially,
from those expressed in this report's forward-looking statements. These factors
include: our ability to raise capital; our ability to settle litigation; our
ability to retain key employees, economic conditions; technological advances in
the medical field; demand and market acceptance risks for new and existing
products, technologies, and healthcare services; the impact of competitive
products and pricing; manufacturing capacity; new plant start-ups; U.S. and
international regulatory, trade, and tax policies; product development risks,
including technological difficulties; ability to enforce patents; and
foreseeable and unforeseeable foreign regulatory and commercialization factors.
Currency fluctuations are also a significant variable for global
companies, especially fluctuations in local currencies where hedging
opportunities are unreasonably expensive or unavailable. If the value of the
U.S. dollar strengthens relative to the currencies of the countries in which we
market or intend to market our products, our ability to achieve projected sales
and net earnings in such countries could be adversely affected.
We believe that our expectations with regard to forward-looking
statements are based upon reasonable assumptions within the bounds of our
current business and operations knowledge, but we cannot be sure that our
actual results or performance will conform to any future results or performance
expressed or implied by any forward-looking statements.
RISK FACTORS
The risks described below are not the only ones we are facing.
Additional risks are described in this report under recent developments and
litigation. There may also be risks not presently known to us or that we
currently deem immaterial that may also impair our business operations. Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks
THERE IS A LIMITED MARKET FOR "PENNY STOCKS" SUCH AS OUR COMMON STOCK.
Our Common Stock is considered a "penny stock" because, among other
things, our price is below $5 per share, it trades on the Over-the-Counter Pink
Sheet Market and we have net tangible assets of less than $2,000,000. As a
result, there may be little or coverage by security analysts, the trading price
may be lower, and it may be more difficult for our stockholders to dispose of,
or to obtain accurate quotations as to the market value of, their Common Stock.
Being a penny stock could limit the liquidity of our Common Stock.
THE HISTORICALLY VOLATILE MARKET PRICE OF OUR COMMON STOCK MAY AFFECT
THE VALUE OF OUR STOCKHOLDERS' INVESTMENTS.
The market price of our Common Stock, like that of many other medical
products and biotechnology companies, has in the past been highly volatile.
This volatility is likely to continue for the foreseeable future. Factors
affecting potential volatility include:
* general economic and other external market factors;
* announcements of mergers, acquisitions, licenses and strategic
agreements;
* announcements of private or public sales of securities;
* announcements of new products or technology by us or our competitors;
* ability to finance our operations;
* fluctuations in operating results; and
* announcements of the Food and Drug Administration ("FDA") relating
to products.
OUR COMMON STOCK IS UNLIKELY TO PRODUCE DIVIDEND INCOME FOR THE
FORESEEABLE FUTURE.
We have never paid a cash dividend on our Common Stock and we do not
anticipate paying cash dividends for the foreseeable future. We intend to
reinvest any funds that might otherwise be available for the payment of
dividends in further development of our business.
OUR COMMON STOCK IS SUBJECT TO DILUTION, AND AN INVESTOR'S OWNERSHIP
INTEREST AND RELATED VALUE MAY DECLINE.
We are authorized to issue up to 10,000,000 shares of preferred stock.
As of December 31, 2002, we have approximately 118,092 shares of Series A
convertible preferred stock outstanding which convert into 51,580 shares of our
common stock; 799,856 shares of Series B convertible preferred stock
outstanding which convert into 3,199,424 shares of our common stock; 1,258,833
shares of Series C convertible preferred stock outstanding which convert into
6,294,165 shares of our common stock; 175,000 shares of Series D convertible
preferred stock outstanding which convert into 1,750,000 shares of our common
stock,; and 429,243.48 shares of Series E convertible preferred stock
outstanding, which convert into 11,804,195 shares of our common stock. There
are cumulative dividends due on the Series B, Series C, Series D, and Series E
convertible preferred stock, which may be paid in kind in shares of our common
stock. Our Certificate of Incorporation gives our board of directors authority
to issue the remaining undesignated shares of preferred stock with such voting
rights, if any, designations, rights, preferences and limitations as they may
determine.
At December 31, 2002, we have outstanding warrants to purchase
15,240,000 shares of our common stock, outstanding options to purchase
approximately 3,508,000 shares of our common stock, and 450,000 stock
appreciation rights which are convertible into 289,286 shares of common stock.
At December 31, 2002, outstanding convertible promissory notes are
convertible into approximately 32,610,000 shares of our common stock. Under the
provisions of certain outstanding convertible promissory notes, the holders has
the right to receive a warrant to purchase additional shares of common stock
upon exercise of the conversion right. We are unable to determine the exact
number of additional warrants to purchase shares of our common stock that will
be issuable upon conversion of the notes.
At December 31, 2002, we have approximately 1,320,000 shares of our
common stock reserved for future stock options and 160,000 shares of our common
stock reserved for future sale to employees.
WE HAVE A LIMITED OPERATING HISTORY AND THERE ARE DOUBTS AS TO OUR BEING
A GOING CONCERN.
We have limited operating history. Our revenues, from inception in March
1998 through 2001, were derived almost entirely from sales by Samba
Technologies, Sarl, our wholly-owned subsidiary. Samba is currently operating
under protection of the French Commercial Court and we cannot be certain of the
outcome of the bankruptcy proceedings. We have sold only a very limited amount
of our InPath System products to date.
We will continue to devote substantial resources to product development.
We anticipate that we will continue to incur significant losses unless and
until some or all of our products have been successfully introduced, if ever,
into the market place.
We have incurred substantial losses and have limited financial
resources. Consequently our independent accountants have noted that these
conditions raise substantial doubt as to our ability to continue as a going
concern. Our financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that may result from the outcome of this
uncertainty. The going concern explanatory paragraph may make obtaining
additional financing more difficulty or costly.
WE CONTINUE TO HAVE SEVERE LIQUIDITY PROBLEMS.
We continue to have severe liquidity problems, which affect our overall
ability to operate our business, including the ability to employ adequate staff
and conduct ongoing studies and clinical trials of our products. Failure to
raise adequate financing to meet our business needs could materially jeopardize
MDI and its ability to conduct its business. There can be no assurance that we
will be able to secure the necessary funds.
WE MAY NOT BE ABLE TO MEET OUR SHORT-TERM CAPITAL REQUIREMENTS.
We believe that our existing capital resources are not sufficient to
meet the short-term requirements of our company. These short-term requirements
include a significant amount of liabilities and promissory notes in arrears. In
addition, we have unpaid tax liabilities for payroll taxes from 2001 through
2003. Therefore, we need to raise additional capital to support our operations.
We do not have any current commitments for additional funds, and our management
cannot be certain that we will be able to raise such funds.
It is unlikely that we will be able to meet our short-term funding
requirements through the issuance of notes or other debt instruments. We
anticipate that these short-term funding needs will require the sale or
issuance of additional shares of common stock on instruments convertible into
common stock. Such sales or issuances, if any, may have a dilutive effect on
the value of our common stock. We cannot be certain what level of dilution, if
any, may occur or if we will be able to complete any such sales of common stock
in the future
Our operating business plan for 2002 anticipated that we would need to
raise new equity. We were not able to raise the necessary level of new equity
and had to reduce our operations significantly during the year. The lack of
sufficient new equity continued through the first half of 2003.
A failure to raise sufficient additional funds would adversely affect
our ability to meet our short-term capital requirements, resume our clinical
tests and meet our product timelines, and/or continue as a going concern.
WE MAY NOT BE ABLE TO MEET OUR LONG-TERM CAPITAL REQUIREMENTS.
We do not know if we will be able to sustain our long-term operations
through future revenues. Whether we will need to raise additional funds to
support our long-term operations is influenced by many factors, including the
costs, timing and success of efforts to develop products and market acceptance
of our products.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATION AND THEY MAY NOT
RECEIVE NECESSARY GOVERNMENT APPROVALS.
The sale and use of our products in the United States is regulated by
the FDA. We must meet significant FDA requirements before we receive clearance
to market our products. Included in these FDA requirements is the conduct of
lengthy and expensive clinical trials to prove the safety and efficacy of the
products. Until we complete such clinical trials our products may be used only
for research purposes or to provide supplemental diagnostic information in the
United States. We have completed FDA approval for one of our products, the e2
Collector. We have started clinical trials for two other products and expect to
begin additional trials in 2003. We cannot be certain that our product
development plans will allow these additional trials to commence or be
completed according to plan or that the results of these trials, or any future
trials, when submitted to the FDA along with other information, will result in
FDA clearance to market our products in the United States.
Sales of medical devices and diagnostic tests outside the United States
are subject to foreign regulatory requirements that vary from country to
country. The time required to obtain regulatory clearance in a foreign country
may be longer or shorter than that required for FDA marketing clearance. Export
sales of certain devices that have not received FDA marketing clearance may be
subject to regulations and permits, which may restrict our ability to export
the products to foreign markets. If we are unable to obtain FDA clearance for
our products, we may need to seek foreign manufacturing agreements to be able
to produce and deliver our products to foreign markets. We cannot be certain
that we will be able to secure such foreign manufacturing agreements.
WE MAY NOT BE ABLE TO COMPETE WITH COMPANIES THAT ARE LARGER AND HAVE
MORE RESOURCES.
We compete in the medical device and diagnostics marketplace with
companies that are much larger and have greater financial resources than we do.
We cannot be certain that our products will be able to be successfully marketed
in this competitive environment.
WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS.
We do not intend to maintain a direct sales force to market our
products. Therefore, in order to successfully market our products, we must be
able to negotiate profitable sales and marketing agreements with organizations
that have direct sales forces calling on domestic and foreign markets that may
use the products. If we are not able to successfully negotiate such agreements,
we may be forced to market our products through our own sales force. We cannot
be certain that we will be successful in developing and training such a sales
force, should one be required, or that we will have the financial resources to
carry out such development and training.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.
We hold a variety of patents and trademarks and have applied for a
significant number of additional patents and trademarks with the United States
Patent and Trademark Office and several foreign patent authorities. We intend
to file additional patent and trademark applications as dictated by our
research and development projects and business interests. We cannot be certain
that any of the currently pending patent or trademark applications, or any of
those which may be filed in the future, will be granted.
We protect much of our core technology as trade secrets because our
management believes that patent protection would not be possible or would be
less effective than maintaining secrecy. We cannot be certain that we will be
able to maintain secrecy or that a third-party will not be able to develop
technology independently.
The cost of litigation to uphold the validity of a patent or patent
application, prevent infringement or protect trade secrets can be substantial,
even if we are successful. Furthermore, we cannot be certain that others will
not develop similar technology independently or design around the patent
aspects of our products.
THE LOSS OF KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER.
The success of our current and future operations will depend, to a
significant extent, upon the experience, abilities, and continued services of
key personnel, and on our ability to rehire certain key personnel who were
released due to our severe liquidity problems. Although we have other
management, a significant loss of the services of Peter P. Gombrich, our
Chairman and Chief Executive Officer, could cause our business to suffer.
Beginning at the end of 2001, we experienced significant turnover in our senior
management, including our president and chief financial officer. There can be
no assurance that we will be able to attract and retain key personnel. We
entered into employment agreements with all of our senior executives. We do not
carry key-man insurance.
ITEM 2. PROPERTIES
We occupy approximately 3,660 square feet of leased space at
414 N. Orleans St., Suites 800 and 503, Chicago, Illinois 60610, under a
five-year lease, which expires in September 2006. This space houses our
executive offices, research laboratory, and engineering development. Samba
leases approximately 300 square meters of space in a suburb of Grenoble,
France, at 53, chemin du Vieux Chene, 38240 Meylan. The Samba lease has a term
of nine years expiring in 2008. Samba has the option to terminate the lease at
the end of each three-year period. The location houses Samba's administrative,
sales, and research and development activities. We consider our facilities to
be well utilized, well maintained, and in good operating condition. We consider
the facilities to be suitable for their intended purposes and to have
capacities adequate to meet current and projected needs for our operations.
ITEM 3. LEGAL PROCEEDINGS
SETTLED DURING 2002
On October 20, 2000, we filed suit in Circuit Court of Cook County,
Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc.
Our suits sought injunctive relief and damages from SpectRx based on a
complaint of fraud and breach of certain confidentiality agreements with regard
to our business plans, marketing plans, and technology related to in-vivo
diagnostic devices. Our claim arose from disclosure of confidential information
to SpectRx in the course of negotiations contemplating a joint venture to
develop new medical products. The information covered cancer detection systems
relying on fluorescence technologies as well as bio-molecular marking agents
for use in applications within and outside of the body. We also provided
SpectRx with marketing plans, revenue, income and cash flow projections,
product development and launch plans, and product distribution strategies. In
addition, we provided SpectRx with certain confidential technical information
regarding patent applications, measurement technologies, design specifications,
quantitative analyses, optimization techniques, positional information for
cellular mapping, and other technical specifications. Subsequent to the
disclosure of our information to SpectRx, they entered into a business
arrangement with Welch Allyn to develop products of a similar nature to ours.
The suit also charged SpectRx and with misappropriation of our trade secrets in
violation of the Illinois Trade Secrets Act.
Our suit was filed in response to a suit filed by SpectRx in the
Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1),
seeking a declaratory judgment (but no monetary damages or other relief) that
SpectRx did not breach the confidentiality agreements as charged in our suit.
On July 5, 2001, we filed counterclaims, similar to the claims outlined in our
Illinois suit, to the SpectRx action in Georgia.
On February 1, 2002, we reached an out-of- court settlement with
SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum
cash payment to us, and we granted SpectRx an option to license certain of our
technology. Additional terms of the settlement are confidential. Under the
terms of the settlement, neither party admitted any liability or wrongdoing.
Welch Allyn also was a party to the settlement agreement.
In 2001, Dawn H. Grohs, a former employee / consultant to the Company,
filed suit against the Company and certain affiliated companies, as well as two
of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for
the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust
enrichment, misrepresentation, breach of contract and quantum merit related to
her assertions that the defendants allegedly failed to provide her with equity;
tortuous interference with contractual relations and intentional interference
with contractual relations based on alleged encouragement of changes to the
business relationship with Ms. Grohs; breach of the covenant of good faith and
fair dealing, negligent infliction of emotional distress and intentional
infliction of emotional distress based on defendants' treatment of Ms. Grohs;
and violation of state law for alleged unfair and deceptive acts by defendants
for the purpose of inducing Ms. Grohs to continue to provide services without
compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity
for contributions and efforts during the formation of certain of the Company's
affiliates, payment of a sum to be determined by the court for the intentional
and/or negligent infliction of emotional distress, a finding that the actions
of defendants constitute unfair and deceptive acts, and that the court treble
the damages awarded. In addition to the specific relief described above, each
count seeks an award of attorneys' fees and costs and such other and further
relief the court deems just and appropriate. In October 2002, we reached an
out-of-court settlement with Ms. Grohs. Under the terms of the settlement, we
paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of our
common stock to her. We calculated a fair value of $84,000 for the shares of
our common stock. We also granted Ms. Gross an option to purchase 400,000
shares of our common stock at an exercise price of $0.20 per share. One third
of the option vested immediately and the remaining two thirds vest in equal
amounts on the first and second annual anniversary dates of the grant.
PENDING CURRENTLY AND AS OF DECEMBER 31, 2002
Prior to our acquisition of AccuMed, Garrett Realty, Inc. filed suit
against AccuMed for unpaid rent and related expenses under a lease for premises
located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook
County (Case No. 01 M1 725821)). Garrett originally claimed approximately
$50,000 was due them. Following completion of our acquisition of AccuMed,
management vacated AccuMed's leased facility and consolidated its operations
into our headquarters facility. However, Garrett continued to claim ongoing
rent and amended its complaint in 2002 claiming approximately $148,000 in
unpaid rent and related legal costs through July 2002. On July 18, 2002,
judgment was entered in favor of Garrett and against AccuMed in the amount of
approximately $157,000. On December 20, 2002, pursuant to a court order, Garret
seized approximately $12,500 from an MDI bank account, as a partial payment
against the judgment amount. The unpaid remainder of the judgment will continue
to accrue interest until paid in full. Since AccuMed had a continuing
obligation for the minimum lease payments, MDI recorded a $290,000 lease
obligation in accounting for the AccuMed merger based on the present value of
the future payments. We are contesting the right of Garrett to pursue
collection of the judgment against the assets of MDI. Management believes that
the amount of the accrued lease obligation recorded as of December 31, 2002 is
sufficient to cover any remaining expenses of this litigation and the related
judgment.
On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an action brought by Merrill claiming unpaid fees for financial printing
services, provided to AccuMed in 1996, and related interest and legal costs
totaling in excess of $400,000. Under terms of the settlement and the related
judgment, AccuMed was required to make 12 monthly payments of $26,000, and a
final payment to include all interest accrued on declining unpaid balance of
the judgment over the term of payment. AccuMed made 7 payments in accordance
with the terms of the settlement and ceased to make any additional payments. In
May of 2002, Merrill asserted its rights under the original judgment and filed
a citation to discover assets of AccuMed and obtain the remaining amount due.
On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed
responsibility for the remaining unpaid amount of the judgment and related
costs totaling $145,000 and agreed to pay such amount no later than November
15, 2002. MDI failed to make the required payment on November 15, 2002 and
Merrill instituted an action against MDI to discover assets and to obtain
payment of the $145,000. As of June 30, 2003, this litigation has not been
resolved. At December 31, 2002 MDI had accrued the entire $145,000 amount of
the judgment on the records of AccuMed. Management is currently negotiating
with Merrill representatives to resolve this action.
PENDING CURRENTLY
On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999.
Under the settlement agreement, MDI executed an $80,000 promissory note in
favor of Trek. The note required principal payments of $40,000 each on
September 1 and December 1, 2002. MDI made the initial payment and Trek filed
suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03
492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at
8% per annum and legal and other costs. At December 31, 2002, MDI accrued the
remaining amount due on the note. On April 18th, 2003, judgment was entered
against MDI in the amount of $40,000 plus interest. Management is currently
negotiating with Trek representatives to resolve this matter.
On March 28, 2003 The Cleveland Clinic Foundation filed suit against MDI
(United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and attorney fees and costs. The sum in question pertains to remaining unpaid
fees for certain clinical trial work conducted by The Cleveland Clinic
Foundation in the Peoples Republic of China on behalf of MDI. At December 31,
2002, MDI has recorded the full amount owing to The Cleveland Clinic Foundation
as a liability in its accounts. MDI is currently engaged in settlement
discussions with The Cleveland Clinic Foundation.
On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03
L 000009)) claiming approximately $342,000, plus interest and attorney fees and
costs, related to financial printing service fees provided to MDI by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. As of December
31, 2002 and June 30, 2003, management and its counsel are unable to determine
the outcome of this litigation.
On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, our Chairman and CEO, (United States District Court for the Northern
District of Illinois Eastern Division (Case No. 03C 0184)) claiming $500,000
plus consequential damages for failure to make payment in compliance with the
terms of a personal guaranty signed by Mr. Gombrich in relation to Monsun's
grant of an extension in the maturity date of a convertible promissory note in
the principal amount of $500,000 issued by MDI on November 1, 2000. The note
had an original maturity date of November 1, 2001. The maturity date of the
note was initially extended until January 31, 2002 and subsequently to April 1,
2002 and finally to July 31, 2002. Monsun granted the maturity date extensions
in exchange for various warrants issued by MDI entitling the holder to purchase
shares of our common stock at various prices. In November 2002, our Board of
Directors approved the issuance of 200,000 shares of our common stock to Monsun
to satisfy a default penalty clause in the guaranty. The terms of the guaranty
required that Monsun receive registered shares of our common stock, however, in
order to comply with securities laws, we issued the shares of our common stock
to Monsun with a restrictive legend which permits their sale only in compliance
with Rule 144 of the ACT. MDI has recorded the principal amount of the note
plus accrued and unpaid interest to December 31, 2002 as a note payable on its
records. Since Mr. Gombrich's potential liability under the suit, including the
failure to deliver registered shares of our common stock, is the result of the
failure of MDI to pay the principal amount of its convertible promissory note
when due, our Board of Directors has agreed that MDI will assume responsibility
for Mr. Gombrich's obligations under the guaranty, including legal costs.
Management and counsel are unable to determine the result of this pending
litigation as of June 30, 2003.
We are the defendant in several lawsuits brought by current or former
unsecured creditors to collect past due amounts for goods and services. MDI has
recorded the amounts due in its records and is attempting to settle these suits
and unfiled claims.
MDI is a defendant in several legal actions brought by former employees
seeking to collect amounts due for unpaid wages and severance benefits. MDI has
recorded the amounts due in its records and is attempting to settle these
actions
In May 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court of Cook County, Illinois)). The suit arises out of
two license agreements between AccuMed, Oncometrics and MonoGen in which
certain intellectual property was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements"). At the time of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics by the British
Columbia Cancer Agency ("BCCA") pursuant to a written license agreement.
Pressman was the President of AccuMed and Oncometrics when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position with MonoGen. The Complaint alleges that that the technology was
transferred at a below market price. The Complaint also asserts that AccuMed
and Oncometrics may not have obtained the requisite approval from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.
The Complaint contains claims against Pressman for breach of fiduciary
duty and fraud. To the extent that the requisite approval from BCCA was not
obtained, Pressman breached his fiduciary duty to AccuMed and Oncometrics by
failing to obtain that approval, and falsely representing that he had in fact
obtained the requisite approval. Pressman breached his fiduciary duty further
by failing to negotiate an arms length transaction with MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of fiduciary duty to AccuMed and Oncometrics, fraud in the inducement and
tortuous interference with prospective economic advantage.
The Company's claims against MonoGen have been dismissed from this
action and consolidated in a separate arbitration proceeding involving the
Company and MonoGen. The Company's claims against Pressman remain pending in
this action. In June 2003, the Court dismissed the Company's request for a
preliminary injunction. The denial of preliminary injunctive relief does not
affect the Company's rights to pursue permanent injunctive relief at the
conclusion of the case, if such relief is warranted. The Company is attempting
to negotiate a global settlement of the claims in this action, the arbitration
proceeding with MonoGen and any threatened but unasserted claims by BCCA
relating to the Agreements. The failure to negotiate a favorable settlement
could have a material adverse effect on MDI's business.
On April 14, 2003, we received a notification from the attorney for the
licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development
Agreement covering certain HPV technology, which forms the basis for our In-
Cell HPV test, indicating that the licensor intended to terminate the license
in accordance with a specific clause of the license, which permits termination
in the event the Company makes an assignment for the benefit of creditors or
bankruptcy, or otherwise relinquishes or loses control of all its assets. On
April 15, 2003, we informed the attorney that the facts used by the licensor to
invoke the termination right were incorrect and that we are still in control of
all of our assets and that such assets are pledged as security under debt
instruments and that such pledges are not included under events which would
permit the licensor to terminate the license. We, and our counsel, believe that
the MDI would prevail should the licensor attempt to pursue a termination
action. We are also engaged in a dispute with the licensor over completion of
the third milestone of the license under which completion requires process and
procedure verification by an independent third party. This verification
requirement has not been satisfied as yet.
The Company and its subsidiaries Samba Sarl and AccuMed international,
Inc. (collectively, "MDI") are parties to an Amended License and development
Agreement with Ventana Medical Systems, Inc. ("Ventana") dated October 31,
2001, pursuant to which MDI has licensed certain intellectual property rights
and technical information to Ventana. Under the Amended License and Development
Agreement, Ventana was to produce an automated pathology imaging system using
the intellectual property rights and technical information licensed from MDI,
and Ventana was to pay MDI royalties based on the sales of such imaging system,
as well as software support fees related to licensed software rights.
Disputes have arisen between MDI and Ventana regarding their respective
performance under the Amended License and Development Agreement. MDI and
Ventana are currently negotiating an agreement of settlement and release,
pursuant to which the Amended License and Development Agreement would be
modified or terminated and if terminated would be replaced by a new agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the
fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is quoted on the Over-the-Counter Pink Sheet Market
under the symbol "MCDG" (prior to September 25, 2001 our common stock traded
under the symbol "AMPM"). Prior to May 27, 2003 our common stock traded on the
Nasdaq Over-the-Counter Bulletin Board under the symbol MCDG. AccuMed's common
stock was quoted on the Nasdaq Over-the-Counter Bulletin Board under the symbol
"ACMI".
The following table lists the high and low closing sale prices per share
of our common stock for the periods indicated, as reported on the Nasdaq
Over-the-Counter Bulletin Board. These prices represent prices between dealers,
and may not include retail mark-ups, mark-downs, or commissions.
CLOSING SALES PRICE
RANGE OF COMMON
STOCK
-----
HIGH LOW
---- ---
Year Ended December 31, 2002
1st Quarter........................................... $1.190 $0.820
2nd Quarter........................................... $1.120 $0.690
3rd Quarter........................................... $0.750 $0.380
4th Quarter........................................... $0.340 $0.130
Year Ended December 31, 2001
1st Quarter........................................... $2.060 $0.810
2nd Quarter........................................... $1.590 $0.970
3rd Quarter........................................... $1.200 $0.360
4th Quarter........................................... $1.250 $0.630
HOLDERS
As of June 30, 2003 we had approximately 1,330 record holders of our
shares of common stock. This number does not include other persons who may hold
only a beneficial interest, and not an interest of record, in our common stock.
DIVIDENDS
We have not paid a cash dividend on common shares, and the Board of
Directors is not contemplating paying one for the foreseeable future. We paid
non-cash dividends, in the form of newly issued shares of our common stock,
amounting to $392,869 and $34,593 during 2002 and 2001 respectively, to holders
of preferred stock who elected to convert their preferred shares and cumulative
dividends into our common stock. We have a contingent obligation to pay
cumulative dividends on various Series of convertible preferred stock in the
amount of $2,189,246, which we intend to pay through the issuance of shares of
our common stock, if and when the holders of the preferred shares elect to
convert their shares into our common stock. Cumulative dividends for various
Series of convertible preferred stock total approximately $3,143,000 at
December 31, 2002, including $954,000 in deemed dividends arising as a result
of beneficial conversion features on Series' B and C convertible preferred
stock sold during 2001.
STOCK TRANSFER AGENT
Our stock transfer agent is LaSalle Bank NA, 135 South LaSalle Street,
Chicago, IL 60603, and its telephone number is (312) 904-2000.
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
In November 2001, we completed a private placement of Series D
convertible preferred stock to Ventana pursuant to Regulation D. We received
$1,750,000 in net proceeds from the sale of 175,000 shares of Series D
convertible preferred stock. The Series D convertible preferred stock has a
dividend rate of 10% and is convertible into our common stock at a conversion
price of $1.00 per share. We also issued a three-year warrant to Ventana
entitling the holder to purchase 1,750,000 shares of our common stock at an
exercise price of $1.15 per share. The sale of the Series D Convertible
preferred stock to Ventana was made in conjunction with a license and
technology agreement under which Ventana was granted a perpetual license to
Samba software and agreed to purchase AcCell instruments over a three year
period. During the first quarter of 2002, we fulfilled the terms of the
transfer of Samba software under the license. We reduced the carrying value of
175,000 shares of Series D convertible preferred stock issued to Ventana in the
transaction from $1,750,000 to $525,000. This amount reflects a value for the
shares of Series D convertible preferred stock equal to the value of a similar
number of shares of Series C convertible preferred stock, which was issued
during the same time period of 2001. There were no warrants, licenses, or other
agreements attached to Series C convertible preferred stock. We calculated a
fair value of $928,000 for the warrant issued to Ventana and recorded the value
as additional paid in capital. We used the Black-Scholes valuation method to
calculate the value of the warrant. We recorded the remaining $297,000 as
license fee revenue.
In December 2001, we completed an exchange offer in which our
shareholders tendered 10,859,688 shares of our common stock in exchange for
approximately 434,388 shares of Series E convertible preferred stock. The
Series E convertible preferred stock has a dividend rate of 10% and is
convertible into our common stock at any time after December 1, 2002 at a
conversion rate equal to $0.80 per share. During December of 2002, holders
converted 5,144 shares of Series E convertible preferred stock into our common
stock. We issued: 128,601 registered shares of our common stock representing
registered shares originally converted into Series E convertible preferred
stock by the holder; 12,860 unregistered shares of our common stock
representing the 10% Series E convertible preferred stock conversion premium;
and 13,719 shares of our common stock representing cumulative dividends due on
Series E convertible preferred stock as of the date of conversion.
Between October 28, 2002 and November 17, 2002 we issued $550,000 in
principal amount Bridge II convertible promissory notes to four holders in
exchange for cash. The notes are convertible into common stock at any time at
$0.10 per share. Since the notes are convertible at less than the market price
on the date of issuance, the holders are deemed to have a beneficial conversion
feature. We calculated a fair value $330,000 for this beneficial conversion
feature and will amortize the amount as additional interest expense over the
life of the notes. Upon completion of significant additional financing plans
during 2003, the holders of the Bridge II notes are entitled to receive a
warrant to purchase one share of our common stock for each four shares of our
common stock into which the note converts.
Between October 30, 2002 and November 7, 2002, four holders converted a
total of 525,000 shares of our Series B convertible preferred stock, including
cumulative dividends due thereon as of the conversion date, into 3,788,969
unregistered shares of our common stock.
In November 2002, we issued 225,001 unregistered shares of our common
stock to Ralph M. Richart, M.D., as payment for accrued and unpaid consulting
fees amounting to $179,689 due to him for the period June 2000 through June
2002 in accordance with the terms of a consulting agreement.
In November 2002, we issued 400,000 unregistered shares of our common
stock to Dawn Grohs, a former consultant to MDI. A fair value of $84,000 was
calculated for the shares based on the market price of our common stock on the
date of issuance. The par value of $0.001 of the common shares, or $400, was
recorded as common stock and the remaining amount was recorded as additional
paid in capital. We recorded an offsetting expense amount of $84,000 to
research and development costs during 2002. At the same time, we issued an
option to Ms. Grohs to purchase 400,000 shares of our common stock at an
exercise price of $0.20 per share. One third of the option vested immediately
and the remaining two thirds vest in equal amounts on the first and second
anniversaries of the grant date.
In November 2002, we issued 200,000 unregistered shares of our common
stock to Monsun, AS as payment of a default penalty on a convertible promissory
note. A fair value of $42,000 was calculated for the shares based on the market
price of our common stock on the date of issuance.
In November 2002, we issued a warrant to purchase 200,000 shares of our
common stock at an exercise price of $0.16 per share. The warrant was issued to
an advisor as a "finder's fee" related to locating investors for Bridge II
notes described above.
In December 2002, a holder converted 10,000 shares of Series C
convertible preferred stock, including dividends due thereon as of the
conversion date, into 55,657 shares of unregistered common stock.
We issued the common stock, convertible promissory notes, and warrants
pursuant to exemptions under Section 4(2) of the Securities Act of 1934 as
amended.
REIMBURSEMENT OF LEGAL FEES
On November 1, 2001 MDI issued a Convertible Promissory Note to Schwarz,
Cooper, Greenberger & Krauss ("SCGK") in exchange for $500,000 in legal
services. The Note bears interest at the rate of 12% per year and is due in
five installments. The Note is convertible into Common Stock of MDI upon
issuance of the Note at a conversion price equal to the stock price on the
conversion date.
In accordance with Promissory Note provisions, SCGK forgave the final
installment on the note, which was due February 28, 2002. Therefore, MDI did
not include the final payment in its debt balance as of December 31, 2001.
MDI executed a settlement agreement with SpectRx in January 2002
regarding the outstanding litigation in which SCGK served as MDI's counsel. MDI
also executed an agreement with SCGK for its outstanding legal fees, dated
February 13, 2002, that stipulated that MDI would provide SCGK with warrants to
purchase 750,000 shares of common stock, a promissory note in the amount of
$118,500 and a personal guaranty of the note from Peter Gombrich. MDI was
required to pay a $25,000 fee upon the execution of the agreement.
On February 13, 2002, MDI issued 750,000 warrants to SCGK for its common
stock. The warrants are exercisable at $.01 per share. The 750,000 warrants
represent payment for the SpectRx settlement. The expiration date of the
warrant is February 12, 2012 and warrants may not be exercised until
February 14, 2003.
EQUITY COMPENSATION PLAN INFORMATION
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of securities to Weighted-average Number of securities
be issued opon exercise Excersise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
1999 EQUITY INCENTIVE PLAN AS AMENDED -
5,500,000 SHARES 3,507,517 $1.296 1,319,817
1999 EMPLOYEE STOCK PURCHASE PLAN -
200,000 SHARES -- -- 160,415
EQUITY COMPENSATION PLANS NOT APPROVED
BY SECURITY HOLDERS
Warrants issued with debt (1) 7,554,318 $0.506 0
Warrants issued for finders services (2) 2,658,426 $0.696 0
Warrants issued for IR services (3) 680,000 $0.860 0
Warrants issued of other services (4) 1,051,493 $0.086 0
Warrants issued for asset acquisitions (5) 472,120 $0.305 0
Warrants from AccuMed acquisition (7) 1,074,056 $7.174 0
1) MDI has and will most likely continue to attach warrants to
issuances of debt as an additional consideration to debt holders in lieu
of payment of higher interest rates on the debt, which would be required
based on market interest rates prevalent at the time of the debt
issuance and the significant level of risk involved based on the
financial condition of MDI.
2) MDI has and will most likely continue to issue warrants to
financial advisors who act as finders in the placement of MDI's debt or
equity instruments. The issuance of warrants to these advisors
significantly reduces the cash costs, which would otherwise be
associated with raising debt or equity.
3) MDI has generally included warrants in compensation agreements for
providers of investor relations and or public relations services. This
practice significantly reduces the cash costs to MDI to obtain these
services.
4) From time to time, MDI has issued warrants to providers of legal
and consulting services in lieu of cash payments for those services.
During 2002, MDI issued a warrant to a law firm entitling the holder to
purchase 750,000 shares of MDI's common stock at an exercise price of
$0.01 per share in settlement of fees due to the firm arising from the
settlement of litigation. A non-employee consultant also agreed to
accept a warrant in lieu of approximately $51,000 in unpaid consulting
fees due.
5) During 2000 and 2001, MDI issued warrants and cash to pay the
initial licensing fees, required under agreement to exclusively license
the technology underlying the "In-Cell HPV Test". During 2001, MDI
issued warrants under an agreement to acquire a thirty percent (30%)
interest in Cell Solutions, Inc., a company assisting in the development
of MDI's products.
6) In September 2001, MDI completed the acquisition of AccuMed
International, Inc. by merging it into a wholly owned subsidiary of MDI.
As a result, MDI assumed stock options and warrants outstanding on the
records of AccuMed at the time of the acquisition. The remainder of the
options that were assumed in the acquisition are included in total
options outstanding under the Equity Incentive Plan.
7) See Footnotes No. 10: Stockholders' Equity and No. 13: Equity
Incentive Plan and Employee Stock Purchase Plan to the Consolidated
Financial Statements for additional specifics on the Plans listed above
and other issuances of equity for compensation.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data shown below is derived from the audited
Consolidated Financial Statements and notes included elsewhere in this Annual
Report on Form 10-K.
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
2002 2001 2000
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net Sales............................ $ 1,746 $ 877 $ 1,094
Operating loss....................... $(10,503) $(16,087) $(6,688)
Net loss allocable to common shareholders $(13,972) $(19,791) $(6,611)
PER SHARE DATA:
Net loss............................. $ (0.49) $ (0.62) $ (0.24)
Weighted average shares outstanding.. 28,204,245 32,019,531 27,869,274
BALANCE SHEET DATA:
Working deficit...................... $(12,929) $ (4,472) $ (3,301)
Total assets......................... $ 9,659 $ 11,626 $ 4,575
Notes payable: current............... $ 4,650 $ 1,424 $ 1,105
Notes payable: long-term............. $ 0 $ 0 $ 0
Stockholders' equity (deficit)....... $ (4,579) $ 4,623 $ (125)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in Delaware on December 15, 1998, as the successor
to Bell National Corporation, which was incorporated in California in 1958.
On December 4, 1998, Bell National, then a shell corporation without any
business activity, acquired InPath, LLC, a development-stage company engaged in
the design and development of products used in screening for cervical and other
types of cancer. 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. The senior
executives of InPath assumed management control of the Company.
For financial reporting and accounting purposes the 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 SEC filing purposes and income tax filing purposes, until
its merger into Ampersand in May 1999. Because Bell National was a
non-operating public shell company with nominal assets and InPath was a private
operating company, the acquisition was recorded as the issuance of stock for
the net monetary assets of Bell National, accompanied by a recapitalization and
no goodwill or other intangible assets were recorded in accordance with
generally accepted accounting principles.
On September 25, 2001, the Company changed its corporate name to
"Molecular Diagnostics, Inc." in order to better represent its operations and
products. The name change was affected by the merger of Ampersand's wholly
owned subsidiary, Molecular Diagnostics, Inc., with and into Ampersand. The
Company retained its Certificate of Incorporation, except as amended to reflect
its new name, bylaws and capitalization.
The Company is focused on the design, development and marketing of the
InPath System of products. These products are intended to detect cancer and
cancer related diseases. These products may be used in a laboratory, clinic or
doctor's office.
The Company has a wholly owned subsidiary, Samba Technologies, Sarl.
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. A significant portion of 2002 revenues and nearly all
revenues reported for prior periods, since the inception of the Company, have
been generated by Samba. Since December 20, 2002 Samba has operated under the
protection of the French Commercial Court in compliance with the bankruptcy
laws of France. Samba continues to maintain normal operations under the
supervision of an Administrator appointed by the French Commercial Court. Samba
will continue under operating under the current format until a reorganization
and continuation plan is approved by the Court, which must act by December
2003, unless an extension of time is granted. We anticipate filing a plan of
reorganization and continuation for Samba during the third quarter of 2003.
On September 17, 2001, the Company completed its acquisition of AccuMed
pursuant to a merger. In consideration for the acquisition, the Company issued
3,911,245, shares of its common stock to holders of AccuMed common stock, and
218,438 shares of its Series A convertible preferred stock to holders of
AccuMed Series A preferred stock. The value of the transaction, based on the
fair value of the shares of common stock and preferred stock issued by the
Company, the value of options and warrants assumed, the direct acquisition
costs incurred, and the fair market value of tangible and intangible assets
purchased, as determined by a third-party valuation, was approximately
$14,178,000.
On October 11, 2001, MDI obtained a 30% investment in Cell Solutions,
LLC. Cell Solutions was formed for the purposes of developing and improving
slide preparation systems. As consideration, MDI provided 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 $127,000. MDI has included the value of these warrants as an
investment at December 31, 2001. MDI determined the fair value of the
investment to be impaired at December 31, 2001. The investment was written down
to zero as a result of the uncertainty of future benefit or revenue stream.
MDI is contractually committed to issue a total of 1,549,086 warrants
with the same terms based upon delivery of certain products by Cell Solutions.
As of December 31, 2002, Cell Solutions had not delivered these products and
MDI was not liable for the issuance of the warrants.
The Company has incurred a significant operating loss since its
inception. The Company has raised approximately $27,336,000 since March 1998.
The Company expects that significant on-going operating expenditures will be
necessary to successfully implement its business plan and to develop,
manufacture and market its products. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern.
Implementation of the Company's plans and its ability to continue as a going
concern may depend upon it securing substantial additional financing.
Management's plans include efforts to obtain additional capital. During 2002,
we raised approximately $3,825,000 through the issuance of short-term
convertible debt. During 2003, through July 8, we raised $2,141,000 through the
issuance of additional short-term convertible debt. There can be no assurance
that the Company will continue to be successful in raising capital. If the
Company is unable to obtain additional capital or generate profitable sales
revenues, the Company may be required to curtail its product development and
other activities and may even be forced to cease operations.
As mentioned in Item 1, for financial reporting and accounting purposes,
we treated the acquisition of InPath by Bell National as if InPath had acquired
Bell National. We recorded the issuance of common stock, combined the equity of
the two companies, and did not record any goodwill. Information presented in
our Consolidated Financial Statements includes the operations of InPath from
March 16, 1998 (inception) and the operations of the combined company from
December 4, 1998.
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue
upon shipment of product or license to customers and no remaining Company
obligations or contingencies exist, or in the case of sales of software by its
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; the fee is
fixed or determinable; and collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is 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 number of actual hours of service
rendered. Implementation and installation services are generally completed
within 120 days.
License, Patents, and Technology. Licenses, 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 begun 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. The Company assesses licenses, patents, &
technology quarterly for impairment.
Stock Compensation. As permitted by the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), Molecular Diagnostics, Inc. 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, the Company has 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 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.
REVENUE
Revenues for the year 2002 were $1,746,000, an increase of $869,000, or
99%, over revenues for the year 2001. The 2002 revenue increase was the result
of increases of: $502,000 in revenues from sales of AccuMed related products
and services; $297,500 in revenues realized from the sale by MDI of a Samba
software and software technology license to Ventana in 2001; $12,500 in
revenues from initial sales of MDI products; and $77,000 in maintenance fees
related to installed software and instruments. Samba's sales to outside
customers declined approximately $20,000. Samba personnel spent a considerable
amount of billable time working on MDI products, the revenues for which are
eliminated in consolidation. The operations of Samba are conducted in local
currency, the Euro. We convert the local currency into U.S. Dollars for
consolidated reporting purposes. Approximately $40,000 of the Samba's revenues
are the result of an increase in the value of the Euro compared to the U.S.
Dollar. Samba's revenue recognition is also subject to the timing of receipt
and completion of customer contracts from period to period. We may experience
quarter-to-quarter and year-to-year variability in revenues as a result of
these contract-timing issues until we begin to market some or all of our other
products.
Revenues for the year 2001 were $877,000, a decrease of $217,000, or
19.8%, over revenues for the year 2000. The 2001 revenue decrease was a result
of a decrease in revenues at Samba of $292,000, offset by $75,000 of revenues
generated by MDI in the United States. Samba's revenue declined primarily as a
result of the timing of completing contract deliverables in 2001 compared to
2000 and a decline in the value of the Euro compared to the U.S. Dollar. This
decline in the value of the Euro reduced Samba's revenues by approximately
$44,000. MDI generated revenues were comprised of $52,000 from the acquisition
of AccuMed's contracts and $23,000 from the re-sale of one AcCell Unit.
All of our reported revenues for the year 2000 amounting to $1,094,000
were produced through sales of Samba products and services. Revenues for the
year 2000 reflect an increase of $54,000, or 5%, over 1999 revenues. During
2000, the average exchange rate of the Euro to the U.S. Dollar declined by
approximately 15%. This decline reduced the translated U.S. Dollar value of
Samba's 2000 revenues by approximately $169,000.
COSTS AND EXPENSES
Cost of Goods Sold
Cost of goods sold for 2002 amounted to $852,000, an increase of
$376,000, or 79%, over 2001 cost of goods sold. The increase was primarily the
result of costs related to the sale of AcCell instruments, changes in Samba's
product mix, and the related increase in the translated value of Samba's costs.
Cost of goods sold for 2001 amounted to $476,000, a decrease of
$161,000, or 25.3% over 2000 cost of goods sold, resulting primarily from
reductions of net sales and decreases in software products sold with higher
gross margins.
Cost of goods sold for 2000 amounting to $637,000 relates to the Samba
revenues and represents the cost of computer and imaging hardware, purchased
services and products and software engineering labor and related expenses. The
increase in 2000 costs over 1999 costs reflects the increase in the level of
business as well as a change in the product-mix components of sales. The
hardware component of Samba sales generates a much higher level of cost and a
lower gross margin, than do the software or service components of sales. Samba
may supply necessary hardware or the customer may supply hardware directly.
There is no set pattern in contract hardware and software components.
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.
In 2002, our R&D expenses were $3,338,000, a decrease of $696,000, or
17%, over 2001 R&D expenses. The decrease was the result of reductions in R&D
staff and related payroll costs of $205,000 most of which came as the result of
the closing of the Cleveland laboratory in January of 2002, product development
costs of $446,000 because the majority of product development was completed in
prior years, and in consulting costs of $176,000 primarily resulting from non-
cash costs described below. These reductions were offset by an increase in
clinical trial related costs of $205,000. 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 engineering consultants for advice related to the design and development of
our products and their potential uses in the medical technology marketplace,
and payroll related costs for in-house engineering, scientific, laboratory,
software development; and research management staff.
In 2001, our R&D expenses were $4,034,000, an increase of $608,000, or
17.7% over 2000 R&D expenses a result of increased product development costs
for the Cocktail CVX and HPV assays, the AcCell 2500, and the Point-of-Service
(POS) product.
In 2000, our R&D expenses were $3,426,000 compared to $1,782,000 in
1999, an increase of 92%. During 2000, we incurred significant additional costs
of $160,000 to expand our in-house research related staff; $170,000 to cover
additional medical and technical consultants, including costs related to full
year engagements for those added in 1999; $260,000 to expand our contract
research staffs and related laboratory operations; $110,000 to cover costs
related to clinical trials and studies; and $700,000 in additional outside
design and development costs related to instruments and disposable test
products. These costs were offset by a reduction in software development costs
related to Samba products of approximately $150,000.
In order to reduce our R&D expenses, a portion of the compensation paid
to consultants may be in the form of awards of our common stock (with
restrictions attached) or grants of options to purchase our common stock. Since
these awards and/or option grants cover services to be performed over a future
time period, we are required to calculate their market value at the end of each
reporting period until the work is complete. Included in the above R&D expense
amounts for 2002, 2001 and 2000 are non-cash expenses of $92,000, of $215,000,
and $446,000 respectively, related to the calculated cost of these share awards
and options that were charged to expense in each period.
SELLING, GENERAL AND ADMINISTRATIVE
Significant components of SG&A are compensation costs for executive,
sales and administrative personnel, professional fees primarily related to
legal or accounting services, travel costs, fees for public and/or investor
relations services, insurance premiums, recruitment fees, marketing related
costs, amortization and depreciation.
In 2002, selling, general and administrative expenses ("SG&A") were
$8,059,000, an increase of $1,712,000, or 27%, over similar expenses for 2001.
The increase includes: $780,000 in legal expenses related to various public and
private offerings as well as increased litigation costs related to the RVC loan
transaction; $406,000 in financing cost primarily related to the RVC loan
transaction; $597,000 in printing, accounting and other professional fees
related to the aforementioned offerings; and approximately $450,000 in
additional amortization resulting from the AccuMed acquisition. These increases
were offset by reductions of $250,000 reduction in investor relations expenses
and $250,000 in administrative related payroll expenses.
In 2001, SG&A expenses were $6,347,000, an increase of $2,628,000, or
70.7%, over similar expenses for the year 2000. This increase is primarily due
to increased salaries and wages and related payroll costs and other operating
expenses resulting from AccuMed merger operations integration.
In 2000, SG&A expenses were $3,719,000 compared to $2,833,000 in 1999,
an increase of 31.3%. The increase in SG&A expenses for 2000 included
additional costs of approximately $210,000 for staff and expenses related to
the newly established sales and marketing activity; $100,000 in legal costs
primarily related to litigation; and $200,000 in travel costs related to the
sales and marketing activity, management of a broader operation, and continued
efforts to raise new equity.
In 1989, we issued 450,000 stock appreciation rights ("SARs") to various
individuals. In 1990, Cadmus Corporation, a company controlled by Alexander
Milley, one of our directors and a significant stockholder, purchased the SARs
from the individual holders. These SARs entitle the holder to receive a payment
equal to the amount by which the market price of our common stock, at the time
of exercise, exceeds $0.30 per share. We can make the payment in cash or by
issuing an equivalent number of shares of common stock. The SARs expired in
November 2001. We are required to charge an amount to expense at the end of
each interim reporting period, which represents the excess of the closing
market price of our common stock over the exercise price at that point in time,
until the SARs are exercised or expire. The charge to expense is cumulative
over the life of the SARs and increases or decreases from period to period in
conjunction with the movement of our common stock price. Included in the above
SG&A expense amounts for 2001 and 2000 are non-cash expenses (or reductions of
expenses) of ($79,000), $91,000 respectively, which represent the calculated
cost of the SARs charged to expense in each period.
In order to reduce our cash SG&A expenses, we may issue shares of our
common stock (with restrictions attached) or grant options, or warrants to
purchase shares of our common stock in lieu of compensation or payments for
financial advisory work, including advice on deal structure, finder fees,
investor relations and introductory services, and general financial and
investment advice. If the services are completed, we record an expense based on
the value of the services. If the services are to be completed over a future
period of time, we are required to calculate a market value for the shares,
options, or warrants at the end of each reporting period until the services are
completed. Included in the above SG&A expense amounts for 2002, 2001 and 2000
are non-cash expenses of $1,078,000, $443,081 and $66,000 respectively, related
to the calculated cost of these share awards, options and warrants, charged to
expense in each period.
IMPAIRMENT LOSS
Management determined that there was no further impairment of our
intangible assets and technology as of December 31, 2002. Management utilized
the results of a valuation prepared by an independent third party to make its
determination.
In 2001, MDI recorded impairment losses aggregating $6,107,000. These
losses are comprised of $5,833,000 for the impairment of goodwill recognized in
MDI's acquisition of AccuMed and $274,000 for the write-off of the full amount
of MDI's pending patent portfolio. At December 31, 2001, management determined
several factors, principally that certain contracts being negotiated by AccuMed
failed to materialize, indicating that the carrying value of goodwill from the
AccuMed acquisition was impaired. Management also performed an assessment of
the development of MDI's pending patent portfolio. As a result of the
developmental nature of the portfolio and significant uncertainty surrounding
the ultimate issuance of the related patents, MDI recorded an impairment loss.
OTHER INCOME AND EXPENSE
Interest Income
We had no interest income during 2002.
During 2001, we earned interest income on notes from Seaside Partners,
L.P., a related party, and AccuMed of, $25,000, and $85,000, respectively. The
interest earned on the AccuMed notes during 2001 and 2000 amounting to $95,000
was reclassified from accrued interest receivable to inter-company accounts
payable in accordance with generally accepted accounting principles when we
closed the acquisition of AccuMed in September 2001.
During 2000, we earned interest income on the notes receivable from
Seaside Partners, L.P. and AccuMed amounting to $73,000.
Interest Expense
In 2002, our interest expense amounted to $1,606,000, an increase of
$1,080,000, or 205% over 2001 interest expense. The entire increase can be
attributed to the amortization of debt discount arising from the beneficial
conversion feature of Bridge I and Bridge II convertible promissory notes.
In 2001, our interest expense amounted to $526,000, an increase of
$291,000, or 123.8% over 2000 interest expense. The increase reflects interest
on a higher level of average outstanding debt during the current year. The
amount includes a non-cash expense of $226,000 representing the amortization of
debt discount on two $500,000 convertible promissory notes issued in September
and November 2000 and an additional $500,000 convertible promissory note issued
in May of 2001 in exchange for cash under the same terms as the notes issued in
2000. The conversion price of the 2001 note was less than the market price of
our common stock at the time of the transaction and the holders of this note
are also considered to have a beneficial conversion feature. We recorded the
calculated value of the beneficial conversion feature amounting to $50,000 as
debt discount, and we are amortizing the discount as additional interest
expense over the life of the note. The 2001 amount also includes an additional
non-cash expense of $11,589 representing the value of warrants issued as
additional consideration for a $470,000 note issued to Azimuth Corporation in
February 2001, a $100,000 note issued to Azimuth Corporation in August 2001, a
$100,000 note issued to Cadmus Corporation in July 2001, and a $25,000 note
issued to Northlea Partners, Ltd. in August 2001. Alexander Milley, one of our
directors and significant stockholder, has a controlling interest in and is
considered a control person of Azimuth Corporation and Cadmus Corporation, and
John Abeles, M.D., also one of our directors, is the managing general partner
of Northlea Partners, Ltd. Lastly, the 2001 amount includes the calculated
value of a warrant issued to Azimuth Corporation in exchange for their waiver
of the conversion feature of the September 2000 convertible promissory note and
the calculated value of a warrant issued to Monsun, SA as consideration for a
three month extension of the due date of the convertible promissory note issued
in November 2000.
In 2000, our interest expense amounted to $235,000 compared to $86,000
in 1999, an increase of 173.3%. The increase reflects a higher rate of interest
paid on new borrowings issued during the year offset by elimination of interest
on a series of 6% convertible subordinated notes issued during 1999, which
automatically converted into common stock on April 28, 2000. The 2000 amount
also includes a non-cash expense of $139,000 representing the amortization debt
discount. We issued two $500,000 convertible promissory notes, to Azimuth
Corporation in September 2000 and to Monsun, SA in November 2000, in exchange
for cash. The notes provide the holder with an option to convert the principal
of the note into our common stock at a conversion price of $1.00 per share any
time after 180 days from the original note issue date. Since the conversion
price was less than the market price of our common stock at the time of the
transaction the holders are considered to have a beneficial conversion feature.
We are required to record the calculated value of this beneficial conversion
feature, amounting to $250,000, as debt discount, and to amortize the discount
as additional interest expense over the life of the note.
Other Income and Expense, Net
In January 2002, we received $150,000 as an out-of-court settlement of a
lawsuit.
In 2001, we recorded a $127,000 expense for write-off of warrants earned
by Cell Solutions, LLP, a Virginia limited liability company, as a result of
the uncertainty of future benefit or revenue stream.
In 2000, we had a dispute with our former outside legal counsel
regarding services and fees. We recorded the disputed fee expense represented
by invoices and a note payable in 2000 and 1999. In September 2000, we settled
the dispute for approximately $226,000, less than the existing liability, and
recorded the amount as other income. To be consistent with 1999 consolidated
reporting we also treated $14,000 in refundable income taxes, related to an
R & D credit due to Samba under French taxation rules, as other income.
NET LOSS
Our net loss for 2002 was $11,960,000. Cumulative dividends for 2002 on
the outstanding Series B convertible preferred stock, Series C convertible
preferred stock and Series D convertible preferred stock totaled $2,012,000.
The combined total of the loss and the preferred dividends results in a net
loss applicable to common stockholders of $13,972,000, or $0.49 per share on
28,704,245 weighted average shares outstanding. The 2002 weighted average
shares outstanding reflect additional shares issued during the year and shares
issued as the result of the conversions of shares of Series B convertible
preferred stock, Series C convertible preferred stock, and Series E convertible
preferred stock, and their related cumulative dividends into our common stock.
They also reflect the issuance of 5,750,000 of our common stock as additional
collateral on the RVC loan. Although these shares are treated as issued and
outstanding at December 31, 2002, they were returned to MDI in 2003 and we
cancelled them in April of 2003. If we had not treated these shares as
outstanding at December 31, 2002 the net loss applicable to common stockholders
would have been $0.52 per share.
Our net loss for 2001 was $16,630,000. 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 $562,000. Deemed dividends on the Series B and Series C
convertible preferred stock, resulting from the beneficial conversion feature
of the Series B and Series C convertible preferred stock totaled $2,559,000.
The combined total of the loss and the preferred dividends results in a net
loss available to common stockholders of $19,791,000, or $0.62 per share on
32,019,531 weighted average shares outstanding. The 2001 weighted average
shares outstanding reflect additional shares of common stock issued during the
year and the exchange of 10,859,688 shares of common stock into shares of
Series E convertible preferred stock in December 2001.
Our net loss for 2000 was $6,611,000, or $0.24 per share, on 27,869,274
weighted average outstanding shares. The 2000 weighted average outstanding
shares are 94% higher than the 1999 average. During the year we sold additional
shares of our common stock in a private offering and a series of 6% convertible
subordinated notes issued in 1999 that were automatically converted into shares
of common stock in 2000.
We did not have any shares of preferred stock outstanding in 2000.
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 limited numbers of U.S. and foreign accredited investors. We may 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 $4,227,000, $7,963,000 during 2002 and 2001, respectively, in
operating activities.
We had severe liquidity problems during the second half of 2002. As a
result, we were forced to stop our clinical trials, cut staff, and reduce our
operations to a minimum level. Officers refrained from drawing salaries during
part of the third quarter and all of the fourth quarter of 2002 in order to
reduce demands on our limited cash position. Officers continued to refrain from
drawing salaries through the first five months of 2003. We were able to raise
funds at the end of August 2002 under a loan from Round Valley Capital, LLC, as
described below. The proceeds of the loan were used to satisfy certain
obligations coming due at that time as well as current operational expenses.
However, as a result of a dispute over the value of a portion of the collateral
for the loan, RVC declared the loan in default. We were forced to devote our
energies to raising funds to repay the RVC loan and to defend our assets from
foreclosure. Nearly all of the funds raised during the last quarter of 2002 and
the first quarter of 2003 from the issuance of Bridge II convertible promissory
notes went to this effort. We reached a final settlement on with RVC April 2,
2003.
At December 31, 2002, we had cash on hand of $42,000, a decrease of
$983,000 over cash on hand at December 31, 2001 of $1,025,000. This decrease
results from our loss from operations and our inability to raise sufficient new
capital due to very unfavorable conditions in financing markets, both public
and private, for companies in general, and especially for small biotech
companies such as ours. We were unable to raise sufficient funds during the
year to maintain adequate cash reserves and to meet the ongoing operational
needs of the business.
Between February 7, 2000 and April 30, 2000 we sold 3,583,330 shares of
our common stock at a price of $1.50 per share, for total proceeds of
$5,329,000, in the private offering. Of the total shares of our common stock
sold in the private offering, we sold 1,333,333 shares of our common stock to
Seaside Partners, L.P., a hedge fund, at $1.50 per share, for total proceeds of
$2,000,000. Dr. Denis M. O'Donnell, one of our directors, is a member and
manager of Seaside Advisors, L.L.C., which provides investment management
services to Seaside Partners, L.P. In lieu of cash, we agreed to accept payment
in the form of a $2,000,000 promissory note due July 27, 2000, bearing interest
at the rate of 8% per year. We agreed to extend the original due date of the
note until November 30, 2000. Seaside Partners, L.P. made payments against the
principal of the note amounting to $1,550,000 during 2000. The remaining
principal amount of the note was repaid between June 2001 and August 2001.
Accrued interest due on the note amounting to $88,000 was paid in August and
December of 2001.
In July 1999, Samba negotiated a Revolving Credit Line with Banc
National de Paris ("BNP"). In January 2003 the Revolving Credit Line was
converted to an overdraft facility capped at 150,000 Euros, approximately
$158,000 U. S. Dollars. The terms of the overdraft facility require Samba to
pay interest at 8.8% on advances outstanding under the overdraft facility and
grant BNP a security interest in Samba accounts receivable. As of December 31,
2002, an amount of $207,000 was outstanding against the revolver. The overdraw
facility continues in effect under Samba' current operating conditions.
On September 22, 2000, in conjunction with the signing of a Letter of
Intent to merge with AccuMed we loaned AccuMed $300,000 in cash in exchange for
a promissory note bearing interest at 2.5% above the prime rate. On February 7,
2001, this note was cancelled and replaced by a new promissory note, secured by
AccuMed's inventory, issued in conjunction with the signing of a definitive
agreement under which we acquired AccuMed.
On December 28, 2000, we loaned AccuMed an additional $30,000 in
conjunction with the merger. The loan was included in the new secured
promissory note signed on February 7, 2001.
On February 7, 2001, we signed a definitive agreement to merge our
subsidiary, AccuMed Acquisition, Corp., with AccuMed. We formed AccuMed
Acquisition Corp. to acquire AccuMed. Under the terms of this agreement, we
exchanged 3,911,245 shares of our common stock for all of the outstanding
common stock of AccuMed. In addition, we exchanged 218,438 shares of our
Series A convertible preferred stock for all of the outstanding convertible
preferred stock of AccuMed. The 218,438 shares of our Series A convertible
preferred stock are convertible into approximately 95,000 shares of our common
stock. On September 17, 2001 we completed the acquisition of AccuMed. This
acquisition was recorded as a purchase business combination in accordance with
Statement of Financial Accounting Standards No. 141, "Business Combination".
The Company has consolidated the results of operations of AccuMed from the date
of acquisition. Fair market value of tangible and intangible assets of AccuMed
was determined by a third-party valuation, resulting in a total purchase price
of approximately $14,178,000.
In June 2000, we entered into a License and Technology Agreement with
Invirion, a company controlled by Dr. Bruce Patterson, granting us worldwide
exclusive rights to certain medical technology for the detection of oncogenic
(cancer causing) types of the HPV. This agreement provides for $500,000 in cash
payments and warrants to purchase 400,000 shares of our common stock at an
exercise price of $0.01, based on technology delivery milestones. On
September 12, 2000, we signed an addendum to the agreement. The first addendum
provided that Invirion's ownership and patentability of the technology was
established, the initial HPV probe was delivered, and the first development
milestone was met, and that the $250,000 in cash payments due would be paid in
equal installments over a period of ten months. We also issued warrants to
purchase 250,000 shares of our common stock at an exercise price of $0.01 per
share in accordance with the terms of the agreement and first addendum. We used
the Black-Scholes valuation model to determine a fair value for the warrants of
$530,000 and recorded the amount as capitalized license and additional paid in
capital. In January 2001, we signed the second addendum. This second addendum
provided that the second development milestone was met in December 2000 and
that $150,000 cash payment due would be paid in equal installments over a
period of six months beginning in January 2000. The second addendum also
amended the agreement to more closely reflect Dr. Patterson's inventorship and
ownership of the technology. In June 2001, we signed the third addendum to the
agreement. This third addendum provided that the final milestone would be split
into three parts and that the first part was met in June 2001. The remaining
two parts of the final milestone have yet to be completed. As a result of the
completion of the first part of the third milestone, we paid Dr. Patterson
$35,000 in cash and issued a warrant to purchase 50,000 shares of our common
stock at an exercise price of $0.01 per share. We used the Black-Scholes
valuation model to determine the fair value for the warrants of $49,000 and
recorded the amount as capitalized license costs and additional paid in
capital.
We also signed a Development Agreement with Invirion and Dr. Patterson
in June of 2000 to complete the development and integration of the HPV product
with the InPath System. We paid $100,000 in cash and continued to pay $5,000
monthly consulting fees, until March 2003, to cover all costs to complete the
development project.
On September 22, 2000, we issued a convertible promissory note to
Azimuth in exchange for $500,000 in cash. The note bears interest at the rate
of 15% per year and was due twelve months from the date of issue. The note was
convertible into our common stock, any time after the expiration of the first
180 days of the loan term, at a conversion price of $1.00 per share. Since the
conversion price was less than the market price of our common stock at the time
of the transaction the holders are considered to have a beneficial conversion
feature. We recorded a value of $125,000 to this beneficial conversion feature
as debt discount, reducing the carrying amount of the debt. The debt discount
is amortized as additional interest expense over the life of the note. During
2001 and 2000, we recorded non-cash charges of $91,000 and $34,000
respectively, to interest expense to reflect the amortized amount of debt
discount. In August 2001, we issued Azimuth a warrant, which entitled the
holder to purchase 500,000 shares of our common stock at an exercise price on
$1.00 per share in exchange for Azimuth's agreement to relinquish the
conversion feature of the note and extend the due date. We used the
Black-Scholes valuation model to calculate a fair value of the warrant of
$25,000 and charged the amount to interest expense. We repaid the note in full
in November 2001. We used $300,000 in proceeds from this note to fund the
AccuMed notes described above. The balance was used to fund license payments
and the initial payment of a settlement arrangement with our former legal
counsel.
On November 1, 2000, we issued a convertible promissory note to Monsun,
AS in exchange for $500,000 in cash. The note bears interest at the rate of 15%
per year and was due twelve months from the date of issue. The note is
convertible into our common stock, any time after the expiration of the first
180 days of the loan term, at a conversion price of $1.00 per share. Since the
conversion price was less than the market price of our common stock at the time
of the transaction the holders are considered to have a beneficial conversion
feature. We recorded a value of $125,000 to this beneficial conversion feature
as debt discount, reducing the carrying amount of the debt. The debt discount
is amortized as additional interest expense over the life of the note. During
2001 and 2000, we recorded charges of $104,000 and $21,000 to interest expense
to reflect the amortized amount of debt discount. On October 31, 2001 we issued
a warrant to Monsun, AS entitling the holder to purchase 100,000 shares of our
common stock at an exercise price of $0.60 per share, a discount of 20% to the
market price of our common stock at the time, as consideration for Monsun's
agreement to extend the maturity date of the note until January 31, 2002. We
used the fair value interest rate method to determine a fair value of the
warrant of $25,000 and charged the amount to interest expense during the
period. On January 31, 2002, we issued a three-year warrant to Monsun, AS
entitling the holder to purchase 200,000 shares of our common stock at an
exercise price of $0.30 per share, a 70% discount to the market price of our
common stock at that date, as consideration for a further extension of the
maturity date of the note until April 1, 2002. A fair value of $4,110 was
calculated for the warrant using the fair value interest rate method. We
recorded the amount as additional interest expense during the period. On April,
1, 2002, we issued a five-year warrant to Monsun, AS entitling the holder to
purchase 200,000 shares of our common stock at an exercise price of $0.70 per
share, a 23% discount to the market price of our common stock on that date, as
consideration for another extension of the maturity date of the note until July
31, 2002. A fair value of $8,287 was calculated for the warrant using the fair
value interest rate method and was recorded as additional interest expense
during the period. In November 2002, we issued 200,000 shares of our common
stock to Monsun, AS in lieu of a default penalty on the note. A fair value of
$42,000 for the shares was calculated using the market price of our common
stock on the date the shares were issued. We recorded this amount as financing
expenses during the period. We made payments against the note, including
accrued interest, totaling $117,000 during 2002. The note is currently in
default and Monsun has brought suit against Peter Gombrich, our Chairman, to
collect the unpaid principal and accrued interest based on Mr. Gombrich's
personal guaranty of the note. We are paying Mr. Gombrich's legal expenses to
defend the suit.
On December 4, 2000, we issued a promissory note to Azimuth in exchange
for $200,000 in cash. The note bore interest at the rate of 12% per year and
was due December 31, 2000. As additional consideration for the note we issued
Azimuth a warrant to purchase 50,000 shares of our common stock at a price of
$0.937 per share, the approximate market price of our common stock at the time.
Since the note was not repaid until February 20, 2001 we were required to pay a
3% increase in the rate of interest from January 1, 2001. We also were required
to issue Azimuth two warrants, each to purchase 12,500 shares of our common
stock, at an exercise price of $0.01 per share.
On December 11, 2000, we issued a promissory note to Azimuth in exchange
for $100,000 in cash. The note bore interest at the rate of 12% per year and
was due 180 days from date of issue. As additional consideration for the note
we issued Azimuth a warrant to purchase 1,000,000 shares of our common stock at
a price of $1.25 per share, an approximate 15% premium to the market price of
our stock at the time. The proceeds of this note were used to repay a
convertible promissory note to AccuMed in conjunction with negotiations to
acquire AccuMed.
On February 1, 2001 and February 7, 2001, we issued promissory notes to
Azimuth in exchange for $25,000 and $470,000, respectively, in cash. Those
notes bore interest at the rate of 15% per annum. Those notes were required to
be repaid from the proceeds of any new offering of debt or equity undertaken by
us subsequent to the dates of the notes. As additional consideration for the
note issued on February 7, 2001, we granted Azimuth a warrant to purchase
1,000,000 shares of common stock at an exercise price of $0.25 per share, an
approximate 83% discount from the $1.50 market price of the common stock on the
date the warrant was issued. That warrant expires five years from the date of
the grant. We determined the value of the warrant to be $12,000, using the
difference between the fair market interest rate and the stated interest rate.
We used $470,000 to partially fund the loan to AccuMed made on February 7,
2001, in connection with the signing of a definitive agreement to acquire
AccuMed. We repaid both notes and accrued interest on February 20, 2001. Since
the February 7, 2001 note was repaid on February 20, 2001, we charged the
entire value of the warrant, issued as additional consideration for the note,
to interest expense during February 2001. We also repaid two additional
promissory notes, issued in December 2000, and accrued interest on February 20,
2001. The proceeds of the February 2001 notes were used to fund a portion of
the loan to AccuMed upon the signing of the agreement on February 7, 2001,
pursuant to which AccuMed was merged into our subsidiary.
In February 2001, we sold 1,333,856 shares of Series B convertible
preferred stock to a limited number of U.S. and foreign accredited investors in
a private offering. We received net cash proceeds from the offering of
$5,176,000, including $500,000 received as a deposit in December 2000. On
February 20, 2001, we used $809,000 of the proceeds to repay these two
additional notes issued to Azimuth in December 2000, and all of the related
accrued interest.
Several advisory groups that assisted us in the February 2001 offering
were compensated through the payment of $159,000 in cash, the issuance of
374,000 shares of common stock and the issuance of warrants to purchase
534,000 shares of common stock at an exercise price of $1.20 per share.
On May 15, 2001, we completed the sale of the remaining 166,000 shares
of authorized Series B convertible preferred stock in the private offering. We
received net cash proceeds of $664,000. An advisory group that assisted us in
finding investors was compensated through the issuance of 66,400 shares of our
common stock. We determined a fair value of approximately $81,000 for the
common stock issued to the advisory group. The fair value was based on the
closing price of our common stock on the date of the transaction.
On May 15, 2001, we issued a convertible promissory note to NeoMed
Innovations III, LP in exchange for $500,000 in cash. The note bears interest
at the rate of 12% per year and is due twelve months from the date of issue.
The note is convertible into common stock, any time after the expiration of the
first 180 days of the loan term at a conversion price of $1.00 per share. The
conversion price of the note was less than the market price of the common stock
at the date of issuance and therefore, the holder is considered to have a
beneficial conversion feature. We determined the value of this beneficial
conversion feature to be $50,000. This value was recorded as a reduction to the
debt and will be amortized as additional interest expense over the life of the
note. During the period from May 15, 2001 through September 30, 2001, we
recorded $31,000 to interest expense to reflect the amortization of the debt
discount on this note. In March 2002, NeoMed Innovations III, L.P. converted
the $500,000 principal amount of this note and $60,000 in accrued interest due
thereon into a Bridge I convertible promissory note as described in a
succeeding paragraph.
On July 26, 2001, we issued a promissory note to Cadmus Corporation
("Cadmus") in exchange for $100,000 in cash. Alexander Milley, one of our
directors and a significant stockholder, is also considered a control person of
Cadmus. On August 6, 2001, we issued a promissory note to Azimuth in exchange
for $100,000 in cash. The notes, which were due on September 22, 2001 and
subsequently extended to November 15, 2001, bore interest at the rate of 15%
per annum. As additional consideration for the notes, we issued five-year
warrants to Cadmus and Azimuth entitling each holder to purchase 250,000 shares
of the common stock at an exercise price of $1.00 per share. The closing market
prices of the common stock on the respective issue dates of the warrants
entitling each holder to purchase 250,000 shares of common stock were $0.73 per
share. We determined using the fair value interest rate method, the fair value
of these warrants to be $1,400. This value was charged to interest expense
during the third quarter.
In August 2001, we agreed to issue a five-year warrant to Azimuth,
entitling the holder to purchase 500,000 shares of common stock at $1.00 per
share. In conjunction with the issuance of this warrant, Azimuth agreed to
relinquish the conversion rights of a convertible promissory note issued by us
in September 2000, which entitled Azimuth to convert the principal and accrued
interest due under the note into common stock at a conversion price of $1.00
per share. The September 2000 note was considered to have a beneficial
conversion feature for which we had determined a fair value of $125,000 in
2000. This fair value was recorded as a discount to the debt and was being
amortized as additional interest expense over the term of the note. The closing
market price of the common stock on the issue date of this warrant was $0.73
per share. We determined the fair value of the warrant to be approximately
$25,000 based on the value of the unamortized debt discount at the date this
warrant was issued and the conversion right on the note was waived. This value
was charged to interest expense during the third quarter.
In November 2001, we received $3,635,000 in net proceeds from the
private sale of 1,331,499 shares of Series C convertible preferred stock to a
limited number of accredited investors. The Series C preferred stock has a
dividend rate of 10% and is convertible into common stock at a conversion rate
equal to $0.60 per share.
Also in November 2001, we received $1,750,000 in proceeds from the sale
of 175,000 shares of Series D convertible preferred stock in a private sale to
Ventana. The Series D convertible preferred stock has a dividend rate of 10%
and is convertible into the common stock at a conversion rate of $1.00 per
share. We also issued a three-year warrant to Ventana entitling the holder to
purchase 1,750,000 shares of common stock at an exercise price of $1.15 per
share.
In December 2001, we completed a tender offer to exchange 1/25 of a
share of Series E convertible preferred stock, par value $0.001 per share, for
each outstanding share of our common stock, par value $0.001 per share, up to a
maximum of 20,000,000 shares of common stock, or a maximum of 800,000 Series E
convertible preferred stock. Since the transaction provided no liquidity or
capital resources, further discussion is not considered necessary for this
purpose.
In February 2002, we issued a $118,500 promissory note to Schwartz
Cooper Greenberger & Krauss ("SCGK") in exchange for past legal services
regarding the settlement of litigation in which we were represented by SCGK. We
repaid the note in September of 2002. As part of the settlement related legal
services, we also issued a warrant to SCGK entitling the holder to purchase
750,000 shares of our common stock at an exercise price of $0.01 per share. We
calculated a fair value of $675,000 for the warrnt using the Black-Scholes
valuation method and recorded the amount as legal fees during 2002.
Between March 22, 2002 and June 28, 2002, we issued $3,185,000 in series
Bridge I convertible promissory notes to accredited investors. Included in the
total amount of Bridge I notes issued is a note issued to NeoMed Innovations
III, which represents the conversion of an outstanding convertible promissory
note, including $60,000 in accrued interest due thereon, into a Bridge I
convertible promissory note. The notes are due December 31, 2002, bear interest
at the rate of 7% per annum and are convertible at any time into our common
stock at a conversion price equal to 75% of the market price of our common
stock on the date of the conversion. In addition, we issued a warrant, which
entitled each holder to purchase one share of common stock, at an exercise
price of $0.25 per share, for each dollar principal amount of notes. We
calculated a fair value of $99,950 for these warrants using the fair value
interest rate method and recorded this amount as additional interest expense
during the 2002. At the time of conversion of the note, the holder is entitled
to receive a Private Warrant to purchase one share of common stock for each
four shares of common stock into which the note converts at an exercise price
equal to 150% of the conversion price. Since the measurement date of these
warrants was not determined as of December 31, 2002, we have not determined a
value for these warrants as of that date. Since the conversion price of the
notes is at a 25% discount to the market price of our common stock, the holder
is considered to have a beneficial conversion feature. We determined the value
of this beneficial conversion feature to be $1,049,808 and recorded this amount
as additional interest expense during 2002. The notes are in default as of
January 1, 2003 and we are working with the holders to resolve the situation.
In February 2003, NeoMed Innovations III converted $1,060,000 in principal
amount of Bridge I convertible promissory notes into Bridge II convertible
promissory notes.
In May 2002, we issued a warrant entitling the holder to purchase 51,493
shares of our common stock at an exercise price of $0.01 per share to a non-
employee consultant in lieu of payment of consulting fees due for past
services. We calculated a fair value of $50,969 for the warrant based on the
value of the consulting fees due. We recorded the amount as a reduction of
accounts payable.
In July 2002, we issued 113,832 shares of our common stock to a vendor
in lieu of payment in cash for services. We calculated a fair value for the
shares of $78,000 based on the value of the services and the market value of
our common stock at the time of the transaction. We recorded the entire amount
as administrative expense during 2002.
In July 2002, we settled a claim brought by Trek Diagnostic Systems, Inc
against AccuMed regarding breach of representations and warranties in a certain
agreement under which Trek purchased the microbiology business of AccuMed in
2000. We issued a promissory note to Trek in the amount of $80,000, payable in
two equal installments on September 1 and December 1, 2002. We made the first
payment but did not make the second causing a default on the note. Trek has
instituted legal against to obtain payment of the remaining amount due. The
unpaid portion of the note accrues interest at the rate of 8% per annum.
In August 2002, we issued 60,182 shares of our common stock to a
financial advisor as consideration for services provided. We determined a fair
value of $30,000 for the shares based on the market value of our common stock
at the time the shares were issued. We recorded the entire amount as
administrative expense during 2002.
On August 30, 2002, we issued a promissory note to Round Valley Capital,
LLC in the amount of $825,500 representing $650,000 in cash proceeds and
$175,500 in unearned interest. The note bears a calculated effective interest
rate of 36% per annum and is due June 1, 2003. The note is secured by all of
our assets. We issued a certificate representing 5,750,000 shares of our common
stock as additional collateral for the loan. We paid cash transaction fees of
$147,063. As additional non-cash transaction fees, we issued RVC 711,364 shares
of our common and one-year warrants to purchase 681,818 shares of our common
stock at an exercise price of $0.20 per share. We calculated affair value of
$362,795 for the shares of our common stock based on the market price of our
common stock on the date the shares were issued. We calculated a fair value of
$156,000 for the warrant using the Black-Scholes valuation method. The total
value of the combined cash and non-cash transaction fees was recorded as
prepaid financing costs and will be amortized over the life of the note. During
2002, we made principal and interest payments on the note amounting to $350,000
and $59,500, respectively. We also recorded amortization of $377,638 in prepaid
financing costs through the end of 2002. As a result of a dispute over the
value of certain collateral, RVC declared the note in default shortly after we
received the proceeds and began attempts to foreclose on the collateral and all
of our assets. We instituted legal action to prevent the foreclosure and sale
of our assets. We reached a final settlement, as described under the heading
"Recent Developments" covered earlier in this report, with RVC in April of
2003.
Beginning in October 2002, we began a issue of up to $4,000,000 in
series Bridge II convertible promissory notes to accredited investors. As of
December 31, 2002, we had issued $550,000 in principal amount of notes in the
series, the proceeds of which were primarily used to make payments under the
RVC loan described above. The notes are due July 31, 2003 and bear interest at
the rate of 12% per annum, payable at maturity date in kind in the form of
shares of our common stock. We granted the holders a junior security position
in all of our assets. The Bridge II notes are convertible at any time into our
common stock. The conversion price of the note and the value of common shares
paid in kind as interest for the first $1,000,000 in principal amount of cash
subscriptions, determined on a "first come - first served" basis is $0.10 per
share. The note conversion price and the value of shares paid in kind as
interest for the remaining $3,000,000 in principal amount of notes is $0.15 per
share. The conversion price of the notes issued during the fourth quarter of
2002 was less than the market price of our common stock, therefore the holder
is considered to have a beneficial conversion feature. We determined the value
of the beneficial conversion feature to be $330,000, based on the difference
between the conversion price and the market price of our common stock. We
recorded the amount as a discount to the notes and we are amortizing the
discount amount as additional interest expense over the life of the notes. We
recorded additional interest expense of $71,800 during the fourth quarter of
2002 to reflect the amortization for the period. When, and if, we complete
significant additional financing plans, as outlined in the subscription, each
holder of Bridge II notes is entitled to receive a warrant to purchase one
share of our common stock for each four shares of our common stock into which
the note converts at an exercise price of $0.15 per share for notes issued
within the first $1,000,000 in principal amounts and $0.20 per share for notes
in the remaining $3,000,000 of the offering.
In November 2002, we issued 400,000 shares of our common stock to a
former employee / consultant in settlement of litigation. We calculated a fair
value for the shares of $84,000 based on the market price of our common stock
on the date the shares were issued. We recorded the entire amount as research
and development expense during 2002.
In November 2002, we issued 225,001 shares of our common stock to a non-
employee consultant as payment for past consulting services in accordance with
the provisions of a contract we have with the consultant. We determined a fair
value of $180,000 for the shares based on the market price of our common stock
on the date the shares were issued. We recorded a reduction in accrued expenses
of $130,000 and we recorded the remaining amount as research and development
expense during 2002.
In November 2002, we issued a warrant entitling the holder to purchase
200,000 shares of our common stock at an exercise price of $0.16 per share to
an advisor who acted as a finder for investors in Bridge II convertible
promissory notes. We calculated a fair value of $44,000 for the warrant using
the Black-Scholes valuation method. We recorded the entire amount as financing
costs during 2002.
We incurred approximately $88,000 and $542,000 in capital expenditures
for the years ended December 31, 2002 and 2001 respectively. Capital
expenditures are defined as disbursements for laboratory equipment, leasehold
improvements, software, and furniture/fixtures with a purchase price in excess
of $1,000 per item and useful life in excess of one year. The decrease in 2002
capital expenditures resulted from decreased purchases of laboratory and
computer equipment and software in support of our product development and
research efforts and in support of our clinical trial network.
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 inception of the business.
We expect that significant on-going 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 and other activities and may be forced to cease operations.
ITEM 7A.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. At December 31, 2002, the carrying amount of our debt
instruments approximated their fair value. In addition, as of December 31,
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 local European currencies. At December 31, 2002, we
have recorded a negative cumulative translation adjustment of $151,000
reflecting the valuation, using December 31, 2002 currency exchange rates, of
our investment in and current accounts with Samba and Oncometrics.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements for the years ended December 31,
2002, 2001, and 2000, together with the reports of: Altschuler Melvoin and
Glasser, LLP dated June 26, 2003 on the Consolidated Financial Statements for
the year ended December 31, 2002; Auditeurs & Conseils Associes dated June 26,
2003 on the Financial Statements of Samba Technologies SARL; and Ernst & Young
LLP dated April 8, 2002, on the Consolidated Financial Statements for the years
ended December 31, 2001 and 2000, are filed as part of this report commencing
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
RESIGNATION OF PRIOR AUDITORS:
Ernst & Young LLP resigned as our auditors effective February 25, 2003.
The reports of Ernst & Young LLP on our 2000 and 2001 financial
statements, respectively, included an explanatory paragraph regarding our
ability to continue as a going concern. The reports of Ernst & Young LLP on our
consolidated financial statements for the past two fiscal years did not contain
an adverse opinion or a disclaimer of opinion and, other than as described in
the preceding sentence, were not qualified or modified as to uncertainty, audit
scope, or accounting principles.
In connection with the audits of our financial statements for each of
the two fiscal years ended December 31, 2000 and 2001, and in the subsequent
interim period, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures, which if not resolved to the satisfaction of
Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the
matter in their report.
In accordance with paragraph 304(a)(1)(v)A of Regulation S-K we report
that a letter from Ernst & Young LLP to our Audit Committee dated April 8,
2002 reported material weaknesses related to the following matters, which were
also discussed directly between our Audit Committee and Ernst & Young LLP.
* Ernst & Young LLP reported that the financial oversight function to
monitor and summarize appropriately the transactions and operations of the
Company was ineffective.
* Ernst & Young LLP reported that significant account
reconciliations/analyses were not performed on a timely basis and additionally,
in cases where reconciliations/analyses were prepared, reconciling items had
not been investigated and reconciliations were not reviewed or approved.
In a meeting with our Audit Committee on August 13, 2002, management
reported to the Committee that it had developed procedures, forms, checklists
and reporting packages to address these weaknesses and some progress had been
made to improve our system of internal controls.
We authorized Ernst & Young LLP to respond fully to the inquiries of the
successor auditor regarding these matters.
ENGAGEMENT OF NEW AUDITORS:
The Board of Directors and the Audit Committee, after reviewing
proposals from several firms, engaged Altschuler Melvoin and Glasser LLP as our
auditors for the fiscal year ended December 31, 2002. The engagement was
effective April 30, 2003. During the two most recent fiscal years and through
April 30, 2003, we did not consult with Altschuler Melvoin and Glasser LLP
regarding either the application of accounting principles to a specified
transaction, either completed or proposed; or, the type of audit opinion that
might be rendered on our financial statements. Altschuler Melvoin and Glasser
LLP has not provided us with a written report or oral advice regarding such
principles or audit opinion.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
NAME OFFICES AND POSITIONS, IF ANY, HELD WITH THE
---- COMPANY; AGE
------------
Peter P. Gombrich........ Chairman of the Board, Chief Executive Officer,
Secretary and Director; Age 65
Dennis L Bergquist....... President and Chief Financial Officer; Age 43
Alexander M. Milley...... Director; Age 49
Robert C. Shaw........... Director; Age 49
John Abeles, M.D......... Director; Age 58
Denis M. O'Donnell, M.D.. Director; Age 49
PETER P. GOMBRICH has been Chairman of the Board and Chief Executive
Officer of the Company and a director since December 1998. Mr. Gombrich served
as Chairman of the Board and Chief Executive Officer of InPath, L.L.C.
("InPath"), a bio-molecular medical testing company, since Mr. Gombrich founded
that company in March 1998. InPath was acquired by the Company in December
1998. In 1994, Mr. Gombrich founded AccuMed International, Inc., a
cytopathology products company, and served as Chairman, President and Chief
Executive Officer of AccuMed until January 1998. From 1990 until he founded
AccuMed in 1994, Mr. Gombrich was a consultant in the cytology and microbiology
industries. From July 1985 until September 1989, Mr. Gombrich was President and
Chief Executive Officer, and from July 1985 until November 1990 was Chairman of
the Board of CliniCom Incorporated, a bedside clinical information systems
company, which he founded. In 1976, Mr. Gombrich co-founded St. Jude Medical,
Inc., a life support medical device company, in which he served as Executive
Vice President until 1980, when he became President of the pacemaker division
of that company, serving in that position until 1982. Mr. Gombrich has a
Bachelor of Science degree in Electrical Engineering from the University of
Colorado and a Masters in Business Administration from the University of
Denver.
DENNIS L BERGQUIST was appointed President and Chief Financial Officer
on June 1, 2003. Mr. Bergquist is a principal and founder of Bergquist &
Bergquist, a financial consulting firm, established in 1990. The firm offers
services in finance, restructuring, tax, accounting, operations, and executive
services of a Chief Financial Officer on a temporary or permanent basis. Mr.
Bergquist was Chief Financial Officer of DCNL Incorporated, a privately held
beauty supply manufacturer and distributor from 1997 until its sale in 1998 to
Helen of Troy, Inc. As both a consultant and Chief Financial Officer, he has
been involved in raising private equity and various forms of secured and line-
of-credit financing. Mr. Bergquist has a Bachelor of Science degree in Business
Administration - Accounting from California State University - Fresno and an
MBA in Finance from Cornell University. Mr. Bergquist is a licensed Certified
Public Accountnat in the State of California.
ALEXANDER M. MILLEY has been a director of the Company since 1989.
Mr. Milley is President and Chairman of the Board of ELXSI Corp. a holding
company with subsidiaries operating in the restaurant and environmental
inspection equipment industries. He is also President and Chairman of the Board
of Azimuth, a holding company with subsidiaries operating in the trade show
exhibit and retail environment design and the distribution of electrical
components and fasteners industries. Mr. Milley was Chairman of the Board and
Chief Executive Officer of Bell National Corporation ("Bell"), a predecessor of
the Company until December 1998 and was President of Bell from August 1990
until December 1998. Mr. Milley is the founder, President, sole director and
majority shareholder of Milley Management, Inc. ("MMI"), a private investment
and management-consulting firm. Mr. Milley is also the President of Cadmus, a
private investment and management-consulting firm. Mr. Milley was Senior Vice
President-Acquisitions from December 1983 until July 1986 of the
Dyson-Kissner-Moran Corporation, a private investment company.
DENIS M. O'DONNELL, M.D. has been a director of the Company since
December 1998. Since 1997, he has been Managing Director of Seaside Advisors,
L.L.C., an investment advisor to Seaside Partners a fund specializing in small
capitalization private placements. Prior to joining Seaside Advisors, L.L.C.,
Dr. O'Donnell was President of Novavax, Inc. ("Novavax"), a company engaged in
the development of pharmaceutical products, from its inception in 1995 to 1997.
Dr. O'Donnell currently serves as a director and Chairman of Novavax. From 1991
to 1995, Dr. O'Donnell served as Corporate Vice President of Medical Affairs of
IGI, Inc., a clinical drug testing company. Prior to joining IGI, Inc. in 1991,
Dr. O'Donnell was Director of the Clinical Research Center at MTRA, Inc. a
company engaged as investigator in human clinical trails. Dr. O'Donnell has
been a director of ELXSI Corporation since 1996 and of Columbia Laboratories,
Inc., a pharmaceutical company, since 1999. Dr. O'Donnell is a Fellow of the
American College of Clinical Pharmacology and serves on the Scientific Advisory
Board of the Associates of Clinical Pharmacology.
JOHN H. ABELES, M.D. has been a director of the Company since May 1999.
Dr. Abeles is President of MedVest, Inc. a venture capital and consulting firm
he founded in 1980. He is also General Partner of Northlea Partners, Ltd.
("Northlea Partners"), a family investment partnership. Dr. Abeles was a senior
medical executive at Sterling Drug, Pfizer, and Revlon Healthcare, Inc. and
subsequently was a medical analyst at Kidder, Peabody & Co. Dr. Abeles is a
director of a number of companies operating in the medical device or healthcare
fields, including I-Flow Corporation, Oryx Technology Corp., Encore Medical
Corporation, and DUSA Pharmaceuticals, Inc. Dr. Abeles received his medical
degree and degree in pharmacology at the University of Birmingham in England
and is currently a director at the Higuchi BioSciences Institute at the
University of Kansas.
ROBERT C. SHAW has been a Director of the Company since November 1989.
Mr. Shaw is President of Contempo Design, Inc., a firm specializing in the
design of exhibits and retail environments. Mr. Shaw was Chief Financial
Officer of Bell from November 20, 1989 to December 1998. Mr. Shaw has been a
Vice President of MMI since March 1989, an officer or director of Azimuth or
certain of its subsidiaries since November 1990, a director of Cadmus since
January 1992 and an officer or director of ELXSI since September 1989. Mr. Shaw
was Vice President of Berkeley Softworks, Incorporated ("Berkeley") from
September 1987 to March 1989. From January 1987 to September 1987, he was Vice
President, and from July 1985 until January 1987, he was Director of Finance
and Operations, at Ansa Software, Incorporated ("Ansa"). Berkeley and Ansa
developed and produced personal computer software.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who
beneficially own more than 10% of the outstanding shares of the common stock,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies of all reports they
file.
Based solely on the Company's review of copies of such reports it has
received and of written representations from certain reporting persons
concerning their beneficial ownership of the common stock, the Company believes
that during 2002 all reports were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION
COMPENSATION OF DIRECTORS
The Company compensates its non-management directors through the annual
grant of options to purchase shares of common stock. The options are granted at
the first directors meeting following the annual meeting of stockholders. The
exercise price of the options is set at the fair market value determined by the
closing price of the common stock as reported on the Over-the-Counter Bulletin
Board on the date of the grant. Non-Management directors were not granted
options for the year 2002. Non-management directors were each granted options
to purchase 219,000 shares, and 50,000 shares for the years, 2001 and 2000,
respectively. The Company also reimburses directors for expenses incurred in
connection with their attendance at meetings of the Board of Directors.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
RESTRICTED
ANNUAL COMPENSATION STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2)(3) AWARDS OPTIONS
- --------------------------- ---- ------ -------- ----------- ------ -------
Peter P. Gombrich,........................ 2002 $ 200,000 0 $ 0 0 0
Chairman of the Board and.............. 2001 $ 247,000 $ 0 $ 9,000 0 150,000
Chief Executive Officer, President,.... 2000 $ 227,000 $ 50,000 $ 35,153 0 200,000
Acting Chief Financial Officer and
Secretary
Leonard R. Prange(4)...................... 2002 $ 0 0 $ 0 0 0
President, Chief Operating, Chief 2001 $ 177,000 $ 0 $ 18,307 0 50,000
Financial Officer and.................. 2000 $ 162,500 $ 25,000 $ 24,270 0 100,000
Secretary
Stephen G. Wasko(5)....................... 2002 $ 85,161 $ 13,750 $ 0 0 0
President and Chief Operating Officer.. 2001 $ 0 $ 0 $ 0 0 0
.................................... 2000 $ 0 $ 0 $ 0 0 0
- -----------------------
(1) The employment agreements of Mr. Gombrich and Mr. Prange, until his
resignation, provide that they are each entitled to receive bonus compensation
at the discretion of the Board of Directors. During February 2001, the Board
authorized bonus payments for the year 2000, respectively, to Mr. Gombrich and
Mr. Prange.
(2) Prior to 2002, MDI policy provides that an employee may receive cash
compensation in lieu of unused vacation time or defer unused vacation time for
use in future periods. Mr. Gombrich received cash compensation of $26,153 in
2000 and Mr. Prange received cash compensation of $18,270 in 2000 and $12,307
in 2001 to offset portions of their respective unused vacation time.
(3) The employment agreements of Mr. Gombrich and Mr. Prange, until his
resignation, provide that they are to receive monthly automobile allowances of
$750 and $500, respectively.
(4) Mr. Prange resigned his executive officer positions effective December 31,
2001.
(5) Mr. Wasko was appointed President and Chief Operating Officer on June 10,
2002 and resigned those positions on January 22, 2003. Mr. Wasko did not draw
any cash salary or cash bonus payments from September 1, 2002 through his date
of resignation in January 2003. Mr. Wasko has filed a claim with the Illinois
Department of Labor seeking unpaid compensation due to him for this period.
(6) Mr. Gombrich did not draw any cash salary, cash bonus payments, or cash
car allowance from September 1, 2002 through December 31, 2002. Mr. Gombrich
continued to refrain from drawing any cash compensation for the first five
months of 2003. In conjunction with the proposed debt restructuring in 2003,
Mr. Gombrich has agreed to forgo $50,000 of unpaid compensation due to him at
December 31, 2002. He also agreed to reduce his current salary to $225,000 and
to forgo any salary increases due under his employment agreement, automobile
allowances, and incentive compensation for 2002 and 2003.
STOCK OPTIONS
OPTION GRANTS IN 2002
There were no options relating to common stock granted to the named
executive officers during 2002.
The following table sets forth information with respect to the value of
all stock options held at December 31, 2002 by the named current and former
executive officers. Mr. Prange exercised options to purchase 361,000 shares of
common stock during 2002
FISCAL YEAR END OPTION / SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR ENDED AT FISCAL YEAR ENDED
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Peter P. Gombrich............ 196,666 153,334 0 0(2)
Leonard R. Prange(1)......... 0 0 0 0
- -----------------------
(1) On May 27, 1999, Mr. Prange was granted an option to purchase 400,000
shares of common stock at an exercise price of $0.3937 per share, the fair
market value as of the date of the grant determined in accordance with the
provisions of the 1999 Equity Incentive Plan. One third of the option vested on
the date of grant, one third on May 27, 2000, and the remainder vested on May
27, 2001. Mr. Prange's options for 100,000 shares granted May 23, 2000 and for
50,000 shares granted February 22, 2001 were cancelled upon his resignation on
December 31, 2001. In January of 2002 Mr. Prange exercised options to purchase
250,000 shares of common stock under the terms of his severance agreement. On
March 31, 2002 Mr. Prange exercised options to purchase 111,000 shares of
common stock and surrendered options to purchase 39,000 shares of common stock
in lieu of the exercise price.
(2) Options granted to Mr. Gombrich during 2000 vest at the rate of 20% per
year beginning on May 23, 2001, and have exercise prices of $2.75 per share.
Options granted to Mr. Gombrich during 2001 are options for 100,000 shares,
which vest at the rate of 33% per year beginning February 22, 2001 with an
exercise price of $1.6875 and options for 50,000 shares, which vested on July
25, 2001 with an exercise price of $1.01.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. The Board of
Directors participates in deliberations concerning executive compensation.
Mr. Gombrich, Chairman of the Board and Chief Executive Officer does not
participate in any of the Board's deliberations concerning his own
compensation. Other than Mr. Gombrich and Messrs. Milley and Shaw, who were
officers and directors of Bell, a predecessor of the Company, no member of the
Board of Directors is a current or former officer or employee of the Company or
any of the Company's subsidiaries. None of the Company's executive officers
have served on the board of directors or on the compensation committee of any
other entity that had an executive officer serving on the Company's Board of
Directors.
EMPLOYMENT AGREEMENTS
Mr. Gombrich is employed as Chairman of the Board and Chief Executive
Officer of the Company pursuant to an employment agreement (the "Gombrich
Agreement") with InPath dated May 1, 1998. The Gombrich Agreement was amended
on December 4, 1998, to reflect changes related to the acquisition of InPath by
MDI. Under the Gombrich Agreement, Mr. Gombrich receives annual compensation
consisting of a base salary, a bonus determined at the discretion of the Board
of Directors, and a monthly automobile allowance of $750. Mr. Gombrich's base
salary may be increased at the discretion of the Board of Directors. His base
salary was $225,000 in 2000 and $250,000 in 2001 and 2002. In conjunction with
the Company's planned restructuring in 2003, Mr. Gombrich agreed to reduce his
current base salary to $225,000 and to forgo salary increases, bonus
compensation, and the monthly automobile allowance for 2002 and 2003. Mr.
Gombrich also agreed to forgo $50,000 in accrued an unpaid compensation due to
him for 2002. The Gombrich Agreement had an initial term of three years,
beginning May 1, 1998 and ending April 30, 2001. Thereafter, the Gombrich
Agreement automatically renews for consecutive terms of two years unless either
Mr. Gombrich or the Company elects not to renew it. The Gombrich Agreement has
been renewed and is effective through April 30, 2005. For two years following
the termination of the Gombrich Agreement, Mr. Gombrich may not participate in
a business that substantially and directly competes with the Company. If there
is a change of control, as defined in the Gombrich Agreement, and the Company
thereafter terminates the Gombrich Agreement without cause, or Mr. Gombrich
terminates the agreement for good reason, as defined in the Gombrich Agreement,
Mr. Gombrich is entitled to a lump-sum severance payment equal to three times
the sum of his annual base salary, his annualized monthly automobile allowance,
and the highest incentive compensation paid to him in any of the previous year
incentive compensation periods. If Mr. Gombrich is terminated without cause or
resigns for good reason, and no change of control has occurred, he is entitled
to a lump-sum severance payment equal to two times the sum of the foregoing
amounts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of June 30, 2003 with respect to any
person who is known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of common stock of the Company, the name and address
of such owner, the number of shares of common stock beneficially owned, the
nature of such ownership, and the percentage such ownership is of the
outstanding shares of common stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------------------ ------------------ --------
Peter P. Gombrich............................... 15,162,821 31.8%
414 N. Orleans, Suite 510
Chicago, IL 60610(1)
Alexander M. Milley............................. 11,553,559 24.2%
Azimuth Corporation
3600 Rio Vista Boulevard, Suite A
Orlando, FL 32805(2)
William J. Ritger............................... 8,805,208 21.3%
Seaside Partners, L.P.
623 Ocean Avenue
Sea Girt, NJ 08750(3)
Ventana Medical Systems, Inc.................... 3,783,836 9.4%
3865 N. Business Center Dr.
Tucson, AZ 85705(4)
RS Diversified Growth Fund...................... 4,242,000 10.4%
388 Market Street
Suite 1700
San Francisco, CA 94111(5)
NeoMed Innovations, III, L.P.................... 10,160,614 21.8%
8 Queensway House, Queen Street
St. Helier
Jersey, JE2 4WD, Channel Islands(6)
- -----------------------
(1) Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's
wife as the result of the conversion of Series E convertible preferred
stock, including cumulative dividends; (ii) 1,000,000 shares issuable
upon exercise of a warrant granted by the Company to Mr. Gombrich's
wife, which is exercisable within sixty days; (iii) 10,000,000 shares
issuable upon conversion of a convertible promissory note held by Mr.
Gombrich's wife; and (iv) 270,000 shares subject to options granted by
the Company to Mr. Gombrich that are exercisable within sixty days.
Mr. Gombrich disclaims beneficial ownership of the aforesaid shares held
by his wife.
(2) Includes: (i) 779,552 shares issuable upon conversion of Series E
convertible preferred stock, including cumulative dividends, held by
Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is a
director and executive officer, 1,522,038 shares subject to conversion
of Series E convertible preferred stock, including cumulative dividends,
held by Cadmus, 250,000 shares issuable to Cadmus under warrants granted
by the Company, and 289,285 shares issuable to Cadmus under Stock
Appreciation Rights granted by the Company; (iii) 638,495 shares
issuable upon conversion of Series E convertible preferred stock,
including cumulative dividends, held by Azimuth, of which Mr. Milley is
a director and executive officer and 2,875,000 shares issuable to
Azimuth under warrants granted by the Company; (iv) 634,819 shares
issuable upon conversion of Series E convertible preferred stock,
including cumulative dividends, held by MMI, of which Mr. Milley is a
director and executive officer; (v) 187,489 shares issuable upon
conversion of Series E convertible preferred stock, including cumulative
dividends, held by Winchester National, Inc. ("Winchester National"), of
which Mr. Milley is a director and executive officer; and (vi) 219,000
shares subject to options granted by the Company to Mr. Milley that are
exercisable within 60 days. In July of 2003, MDI agreed to cancel the
outstanding warrants held by Azimuth and Cadmus and to issue a new five-
year warrant entitling the holders to purchase 6,500,000 shares of
common stock. MDI also agreed to issue an additional 120-day warrant
entitling the holders to purchase 500,000 shares of common stock. The
number of shares beneficially held by Mr. Milley is adjusted to reflect
this transaction. (See Item 13 Certain Relationships and Related
Transactions for additional details concerning this transaction.)
(3) Includes: (i) 290,548 shares issuable upon conversion of Series C
convertible preferred stock, including shares issuable for cumulative
dividends, 1,566,451 shares issuable upon conversion of Series E
convertible preferred stock, including shares issuable for cumulative
dividends, and 3,000,000 shares issuable upon conversion of Bridge II
convertible promissory notes, all held by Mr. Ritger; (ii) 70,000 shares
owned by The Research Works, Inc., a corporation controlled by
Mr. Ritger; and (iii) 3,735,000 shares owned by Seaside Partners, L.P.
("Seaside"), of which Mr. Ritger is the Managing Partner.
(4) Includes 2,033,836 shares issuable upon conversion of Series D
convertible preferred stock, including cumulative dividends, held by
Ventana and 1,750,000 shares issuable to Ventana under warrants granted
by the Company.
(5) Includes 4,242,000 shares issuable upon conversion of Series C
convertible preferred stock, including cumulative dividends, held by RS
Diversified.
(6) Includes: (i) 2,033,947 shares issuable upon conversion of Series B
convertible preferred stock, including cumulative dividends; (ii)
7,066,667 shares issuable upon conversion of a Bridge II convertible
promissory note, which is convertible at any time; and (iii) 1,060,000
shares issuable upon exercise of warrants granted by the Company that
are exercisable within 60 days.
The following table sets forth as of June30, 2003, with respect to any
person who is known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Series A convertible preferred stock, the name and
address of such owner, the number of shares of Series A convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series A convertible preferred stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
--------------------------------------- ------------------ --------
France Finance IV(2)............................ 47,250 40.0%
Societe de Bure Ferri
51, rue Vivienne
75002 Paris, FRANCE
Mizbourne Investment Corp.(3)................... 11,812 10.0%
c/o RNYS F/B/O
1 Hanson Place, 8th Floor
Brooklyn, NY 11243
Fifth Third Bank of Western Ohio, Ttee(4)....... 35,405 30.0%
John Scarbrough Sr. IRA
PO Box 703
Piquah, OH 45356
Vitali Maritime Corp.(5)........................ 23,625 20.0%
c/o RNYS F/B/O
1 Hanson Place, 8th Floor
Brooklyn, NY 11243
- -----------------------
(1) No executive officer or director beneficially owns any shares of
Series A convertible preferred stock.
(2) Convertible into 20,634 shares of common stock.
(3) Convertible into 5,158 shares of common stock.
(4) Convertible into 15,461 shares of common stock.
(5) Convertible into 10,317 shares of common stock.
The following table sets forth as of June 30, 2003, with respect to any
person who is known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Series B convertible preferred stock, the name and
address of such owner, the number of shares of Series B convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series B convertible preferred stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
--------------------------------------- ------------------ --------
NeoMed Innovations III, L.P.(2)................. 416,000 52.0%
8 Queensway House, Queen Street
St. Helier
Jersey, JE2 4WD, Channel Islands
Monsun, AS(3)................................... 125,000 15.6%
Torvveien 12 C
1383 Asker, Norway
CAT Investment I, AS(4)......................... 51,625 6.5%
Postboks 1484 Vika
0116 Oslo, Norway
Violina, AS(4).................................. 51,625 6.5%
Postboks 1484 Vika
0116 Oslo, Norway
- -----------------------
(1) No executive officer or director beneficially owns any shares of Series B
convertible preferred stock.
(2) Converts into 2,033,947 shares, including shares issuable for cumulative
dividends, of common stock.
(3) Converts into 624,658 shares, including shares issuable for cumulative
dividends, of common stock.
(4) Converts into 254,527 shares, including shares issuable for cumulative
dividends, of common stock.
The following table sets forth as of June 30, 2003, with respect to any
person who is known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Series C convertible preferred stock, the name and
address of such owner, the number of shares of Series C convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series C convertible preferred stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
--------------------------------------- ------------------ --------
RS Diversified Growth Fund(2)................... 730,000 59.6%
388 Market Street
Suite 1700
San Francisco, CA 94111
The Paisley Fund, LP(3)......................... 120,000 9.8%
388 Market Street
Suite 1700
San Francisco, CA 94111
- -----------------------
(1) No executive officer or director beneficially owns any shares of Series C
convertible preferred stock.
(2) Converts into 4,242,000 shares, including shares issuable for cumulative
dividends, of common stock.
(3) Converts into 697,315 shares, including shares issuable for cumulative
dividends, of common stock.
The following table sets forth as of June 30, 2003, with respect to any
person who is known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of Series D convertible preferred stock, the name and
address of such owner, the number of shares of Series D convertible preferred
stock beneficially owned, the nature of such ownership, and the percentage such
ownership is of the outstanding shares of Series D convertible preferred stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OF CLASS
--------------------------------------- ------------------ --------
Ventana Medical Systems, Inc.(2)................ 175,000 100.0%
3865 N. Business Center Dr.
Tucson, AZ 85705
- -----------------------
(1) No executive officer or director beneficially owns any shares of Series D
convertible preferred.
(2) Converts into 2,033,836 shares, including shares issuable for cumulative
dividends, of common stock.
The following table sets forth as of June 30, 2003, with respect to
(1) any person who is known to the Company to be the beneficial owner of more
than 5% of the outstanding shares of Series E convertible preferred stock,
(2) each director, nominee, or executive officer who owns Series E convertible
preferred stock, and (3) executive officers and directors as a group, the name
and address of such owner, the number of shares of Series E convertible
preferred stock beneficially owned, the nature of such ownership, and the
percentage such ownership is of the outstanding shares of Series E convertible
preferred stock:
NUMBER OF SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------------------ ------------------ --------
Alexander M. Milley(1).......................... 119,324 45.7%
William J. Ritger(2)............................ 49,680 19.0%
All directors and executive officers as a group(1)
(6 persons)................................... 119,324 45.7%
- -----------------------
(1) Includes: (i) 48,271 shares owned by Cadmus; (ii) 20,250 shares owned by
Azimuth; (iii) 20,133 shares owned by MMI; and (iv) 5,946 shares owned by
Winchester National. Converts into 3,762,393 shares of common stock,
including shares issuable upon payment of cumulative dividends.
(2) Converts into 1,566,451 shares, including shares issuable for cumulative
dividends, of common stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of June 30, 2003, certain information
concerning the ownership of common stock of each director, nominee, and
executive officer named in the Summary Compensation Table hereof referred to as
the named executive officers, and all directors and executive officers of the
Company as a group.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------------ --------- --------
Peter P. Gombrich (1)................................ 15,162,821 31.8%
Alexander M. Milley (2).............................. 11,553,559 24.2%
Robert C. Shaw (3)................................... 719,417 2.0%
John Abeles, M.D. (4)................................ 598,116 1.6%
Denis M. O'Donnell, M. D.(5)......................... 1,003,901 2.7%
Dennis L. Bergquist.................................. 75,000 --%
All directors and executive officers as a group
(6 persons).......................................... 29,112,814 48.0%
- -----------------------
(1) Includes: (i) 1,021,327 shares of common stock held by Mr. Gombrich's
wife as the result of the conversion of Series E convertible preferred
stock, including cumulative dividends; (ii) 1,000,000 shares issuable
upon exercise of a warrant granted to Mr. Gombrich's wife, which is
exercisable within sixty days; (iii) 10,000,000 shares issuable upon
conversion of a convertible promissory note held by Mr. Gombrich's wife;
and (iv) 270,000 shares issuable upon options granted by the Company to
Mr. Gombrich that are exercisable within 60 days. Mr. Gombrich disclaims
beneficial ownership of the aforesaid shares held by his wife.
(2) Includes: (i) 779,552 shares issuable upon conversion of Series E
convertible preferred stock, including cumulative dividends, held by
Mr. Milley; (ii) 282,881 shares owned by Cadmus of which Mr. Milley is a
director and executive officer, 1,522,038 shares subject to conversion
of Series E convertible preferred stock, including cumulative dividends,
held by Cadmus, 250,000 shares issuable to Cadmus under warrants granted
by the Company, and 289,285 shares issuable to Cadmus under Stock
Appreciation Rights granted by the Company; (iii) 638,495 shares
issuable upon conversion of Series E convertible preferred stock,
including cumulative dividends, held by Azimuth, of which Mr. Milley is
a director and executive officer and 2,875,000 shares issuable to
Azimuth under warrants granted by the Company; (iv) 634,819 shares
issuable upon conversion of Series E convertible preferred stock,
including cumulative dividends, held by MMI, of which Mr. Milley is a
director and executive officer; (v) 187,489 shares issuable upon
conversion of Series E convertible preferred stock, including cumulative
dividends, held by Winchester National, Inc. ("Winchester National"), of
which Mr. Milley is a director and executive officer; and (vi) 219,000
shares subject to options granted by the Company to Mr. Milley that are
exercisable within 60 days. In July of 2003, MDI agreed to cancel the
outstanding warrants held by Azimuth and Cadmus and to issue a new five-
year warrant entitling the holders to purchase 6,500,000 shares of
common stock. MDI also agreed to issue an additional 120-day warrant
entitling the holders to purchase 500,000 shares of common stock. The
number of shares beneficially held by Mr. Milley is adjusted to reflect
this transaction. (See Item 13 Certain Relationships and Related
Transactions for additional details concerning this transaction.)
(3) Includes 219,000 shares issuable upon options granted by the Company to
Mr. Shaw that exercisable within 60 days.
(4) Includes: (i) 191,616 shares owned by Northlea Partners, of which
Dr. Abeles is the general partner; (ii) 87,500 shares underlying
warrants granted by the Company to Northlea Partners; (iii) 100,000
shares issuable upon conversion of a Bridge II convertible promissory
note held By Northlea Partners; and (iv) 219,000 shares issuable upon
exercise of options granted by the Company to Dr. Abeles, which are
exercisable within 60 days. Dr. Abeles disclaims beneficial ownership of
all shares owned by, or issuable to, Northlea except 3,719 shares, which
number are attributable to his 1% interest in Northlea as general
partner.
(5) Includes: (i) 784,901 shares issuable upon warrants granted by the
Company to Dr. O'Donnell and (ii) 219,000 shares issuable upon options
granted by the Company to Dr. O'Donnell.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2000 and 2001, the Company sold 3,440,743 shares in a private
placement of which 1,333,333 shares of common stock were sold to Seaside
Partners, L.P. at $1.50 per share for total proceeds of $2,000,000.
Dr. O'Donnell, a director, is a member and manager of Seaside Advisers, L.L.C.,
a firm, which provides investment management services to Seaside Partners, L.P.
The sale was made under terms similar to other investors in the offering. In
lieu of cash, the Company agreed to accept payment in the form of a $2,000,000
promissory note due July 27, 2000 that bore interest at the rate of 8% per
annum. The note provisions allowed for prepayment at anytime and the due date
could be extended by mutual agreement. The Company retained the stock
certificates until the note principal and accrued interest was paid in full.
The Company agreed to extend the due date of the note until November 30, 2000.
Seaside made principal payments amounting to $1,550,000 during 2000 and the
remaining $450,000 principal amount was repaid between June and August 2001.
The accrued interest on the note was paid in August and December 2001.
On September 22, 2000, the Company issued a convertible promissory note
to Azimuth, a company controlled by Mr. Milley, a director and a significant
stockholder, in exchange for $500,000 in cash. The note bore interest at the
rate of 15% per year and was due twelve months from the date of issue. The note
was convertible into common stock, any time after the expiration of the first
180 days of the loan term, at a conversion price of $1.00 per share. Since the
conversion price was less than the market price of common stock at the time of
the transaction, the holder was considered to have a beneficial conversion
option. The Company is required to record the $125,000 calculated value of this
beneficial conversion option as debt discount, reducing the carrying amount of
the debt and additional paid in capital. The debt discount was amortized as
additional interest expense over the life of the note. During 2001 and 2000,
the Company recorded charges of $91,000 and $34,000, respectively, to interest
expense to reflect the amortized amount of debt discount in each period.
The Company used $300,000 from the September 2000 note to fund a loan to
AccuMed International, Inc. in accordance with the terms of an agreement under
which AccuMed was merged into a wholly-owned subsidiary of the Company. The
balance was used to fund license payments and the initial payment of a
settlement arrangement with the Company's former legal counsel.
On December 4, 2000, the Company issued a promissory note to Azimuth in
exchange for $200,000 in cash. The note bore interest at the rate of 12% per
year and was due December 31, 2000. As additional consideration for the note,
the Company issued Azimuth a five-year warrant to purchase 50,000 shares of
common stock at a price of $0.937 per share, the approximate market price of
common stock at the time. The note was repaid on February 20, 2001. In that the
note was not repaid when due, the Company was obligated by the terms of the
note to pay a 3% increase in the rate of interest from January 1, 2001 until
the date of payment. The Company was also obligated to issue Azimuth two
warrants, each to purchase 12,500 shares of our common stock, at an exercise
price of $0.01 per share, representing a two month late payment penalty. The
Company determined a fair value of $1,184 for these warrants and charged the
amount to interest expense during 2001. The proceeds of the note were used for
general working capital and to pay license fees.
On December 11, 2000, the Company issued a promissory note to Azimuth in
exchange for $100,000 in cash. The note bore interest at the rate of 12% per
year and was due 180 days from date of issue. As additional consideration for
the note, the Company issued Azimuth a five-year warrant to purchase
1,000,000 shares of common stock at a price of $1.25 per share, an approximate
15% premium over the market price of common stock on the date the warrant was
issued. The proceeds of this note were used to repay a convertible promissory
note to AccuMed due on March 29, 2001. The prepayment was made in conjunction
with ongoing negotiations to acquire AccuMed. The Company repaid the note and
accrued interest on February 20, 2001.
On February 1, 2001 and February 7, 2001, the Company received $495,000
in cash from Azimuth in exchange for two promissory notes that bore interest at
15% per year. Of the cash received, $470,000 was used to partially fund a loan
to AccuMed made on February 7, 2001, in connection with a definitive agreement
to acquire AccuMed. As additional compensation for these loans, the Company
issued Azimuth a five-year warrant to purchase 1,000,000 shares of common stock
at an exercise price of $0.25 per share, an approximate 83% discount from the
$1.50 market price of our common stock on the date the warrant was issued. The
Company determined the value of the warrant to be $12,000, using the difference
between the fair market interest rate and the stated interest rate, and
recorded the value as additional paid in capital and also charged the entire
value to interest expense during February 2001. On February 20, 2001, the
Company used $809,000 of the proceeds from a private placement of Series B
convertible preferred stock to repay these notes, two additional notes issued
to Azimuth in December 2000, and all of their related accrued interest.
On July 26, 2001, the Company issued a promissory note to Cadmus in
exchange for $100,000 in cash. On August 6, 2001, the Company issued a
promissory note to Azimuth in exchange for $100,000 in cash. Mr. Milley,
director and a significant stockholder, is also considered a control person of
both Cadmus and Azimuth. The notes, which were due on September 22, 2001 and
subsequently extended until November 15, 2001, bore interest at the rate of
15% per annum. As additional consideration for the notes, the Company issued
five-year warrants to Cadmus and Azimuth entitling the holders to each purchase
250,000 shares of common stock at an exercise price of $1.00 per share. The
closing market prices of common stock on the respective issue dates of the
warrants entitling each holder to purchase 250,000 shares of common stock was
$0.73 per share. The Company determined the fair value of these warrants to be
$1,400 using the fair value interest rate method. This value was charged to
interest expense during the third quarter. The notes were repaid in November
2001.
In August 2001, the Company agreed to issue a five-year warrant to
Azimuth entitling the holder to purchase 500,000 shares of common stock at an
exercise price of $1.00 per share. In conjunction with the issuance of this
warrant, Azimuth agreed to relinquish the conversion rights granted to it under
the terms of the September 2000 convertible promissory note. The closing market
price of common stock on the issue date of the warrant was $.73 per share. The
Company determined the fair value of the warrant to be approximately $25,000
based on the value of the unamortized debt discount at the date the warrant was
issued and the conversion right under the note was waived. This value was
charged to interest expense during the third quarter of 2001.
On August 6, 2001, the Company issued a promissory note to Northlea
Partners in exchange for $25,000 in cash. Dr. Abeles, a director, is the
general partner of Northlea Partners. The terms of the note are the same as the
notes issued to Cadmus and Azimuth. As additional consideration for this note,
the Company issued a five-year warrant to Northlea Partners entitling the
holder to purchase 62,500 shares of common stock at an exercise price of
$1.00 per share. The closing market price of the common stock on the issue date
of this warrant was $0.73 per share. The Company determined the fair value of
the warrant to be $1,400 using the fair value interest rate method. This value
was charged to interest expense during the third quarter. The note remains
outstanding as of the date of this report.
On September 20, 2001, the Company issued a promissory note to Northlea
Partners in exchange for $15,000 in cash. The note was due on December 20, 2001
and bears interest at the rate of 9% per annum. Also on September 20, 2001, the
Company issued a promissory note to Mr. Shaw, a director, in exchange for
$25,000 in cash. The note was due December 20, 2001 and bore interest at the
rate of 9% per annum. The notes remain outstanding as of the date of this
report.
In October 2001, Mr. Prange, the former President and COO/CFO, purchased
20,000 shares of Series C convertible preferred stock at a purchase price of
$3.00 per share. The purchase was made in conjunction with a private placement
of Series C convertible preferred stock and was made under the same terms and
conditions as other investors in the offering. The Series C convertible
preferred stock has a dividend of 10% and is convertible into common stock at a
conversion price of $0.60 per share.
In December 2001, Mr. Gombrich, the CEO and Chairman, tendered
2,631,625 shares of common stock in exchange for 105,265 shares of Series E
convertible preferred stock and Mr. Gombrich's wife tendered 838,425 shares of
common stock in exchange for 33,537 shares of Series E convertible preferred
stock. Also in December of 2001, Mr. Milley, a director, tendered
616,486 shares of common stock in exchange for 24,659 shares of Series E
convertible preferred stock.. Cadmus, Azmiuth, Winchester National, and MMI,
companies of which Mr. Milley is director and executive officer tendered
1,206,786, 533,522, 503,333, and 148,655 shares of common stock respectively
for a total of 94,600 shares of Series E convertible preferred stock.
During 2002, Mr. Gombrich repaid approximately $50,000 owed to MDI at
December 31, 2001 and loaned the Company an additional $127,000 in cash.
In January of 2002, Mr. Prange, the former President and COO/CFO,
exercised options to purchase 250,000 shares of the Company's common stock at
$0.3937 per share. In accordance with the terms of Mr. Prange's severance
agreement, the Company waived the $98,425 exercise price of the options. On
March 31, 2002, Mr. Prange exercised options to purchase 111,000 shares of the
Company's common stock at $0.3937 per share and surrendered options to purchase
39,000 shares of common stock in lieu of payment of the exercise price.
On July 18, 2003, Mr. Milley, a director, Azimuth Corporation and Cadmus
Corporation, agreed to cancel seven warrants held by Azimuth and one warrant
held by Cadmus, which entitled the holders to purchase a total of 3,125,000
shares of common stock at various exercise prices between $0.01 and $1.25 per
share. The warrants, issued between December 1999 and August 2001, contained
anti-dilution clauses which required MDI to increase the number of shares of
common stock the holders were entitled to purchase under the warrants by
approximately 1,500,000 shares as of the date of the agreement, with
commensurate adjustments in individual exercise prices so that gross proceeds
to the Company from exercise of the warrants remained the same. These anti-
dilution provisions could have required the Company to make additional
adjustments in shares and exercise prices in the future based on the Company's
issuance of debt or equity instruments at prices below the adjusted exercise
prices of these warrants. In consideration for the parties agreement to cancel
these warrants, including their individual anti-dilution clauses, and the
forgiveness of approximately $120,000 currently owing to Azimuth and Cadmus,
MDI agreed to issue a new five-year warrant entitling the holders to purchase
6,500,000 shares of common stock at an exercise price of $0.30 per share. MDI
also agreed to issue a 120- day warrant entitling the holder to purchase
500,000 shares of common stock at an exercise price of $0.30. Management
believes that the Company will derive significant additional benefits in the
future as a result of the elimination of the anti dilution provisions in the
original warrants.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer have
concluded, based upon their evaluation as of a date within 90 days prior to the
date of filing this Annual Report on Form 10-K, the our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
MDI in the reports filed or submitted by us under the Securities Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Our former independent
auditors, Ernst & Young, LLP, issued a report at the completion of their audit
of our consolidated financial statements for the year ended December 31, 2001
detailing certain deficiencies in our internal control systems and procedures
(See Item 9 of this Annual Report on Form 10-K). During 2002, we hired an
independent consultant, Tatum CFO Partners, LLP ("Tatum"), to address the
issues raised by Ernst & Young, LLP. In August of 2002, Tatum reported to the
Audit Committee that it had assisted management in developing procedures,
forms, checklists and reporting packages to address these deficiencies, and
that progress had been made to improve our system of internal controls.
Additional progress in these area continued through the end of 2002. In
designing and evaluating the controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management was necessarily required to apply judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
There have been no significant changes in our internal controls, with
the exception of those which may have temporarily arisen as a result of the
departure of accounting personnel during the first half of 2003 and which
reverted or will revert to their prior status as soon as new personnel are in
place, or in other factors that could significantly affect our internal
controls subsequent to the date we completed our evaluation. Our principal
financial officer has only recently joined MDI and therefore his review was
somewhat limited, and he was required to rely on our books and records, on
comments from independent auditors regarding their recently completed audit,
and on review and discussions with independent consultants who participated in
the audit and the preparation of this report and with other members of
management.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
DOCUMENTS FILED AS PART OF REPORT
(A) 1. FINANCIAL STATEMENTS
PAGE
INDEX TO FINANCIAL STATEMENTS NUMBER NUMBER
Reports of Independent Auditors..................................... F-1
Consolidated Balance Sheets at December 31, 2002 and 2001........... F-2
Consolidated Statements of Operations for the three years ended
December 31, 2002, 2001, and 2000................................... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 2002, 2001, and 2000................................... F-4
Consolidated Statement of Stockholder's Equity (Deficit) for the
three years ended December 31, 2002, 2001 and 2000.................. F-6
Notes to Consolidated Financial Statements.......................... F-9
2. FINANCIAL STATEMENT SCHEDULES........................ F-40
The following financial statement schedule is filed as part of this
report as page F-40
Schedule IX--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
3. EXHIBITS
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.)
EXHIBIT
NUMBER DESCRIPTION
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)
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.)*
EXHIBIT
NUMBER DESCRIPTION
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.)*
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.)*
EXHIBIT
NUMBER DESCRIPTION
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.)
EXHIBIT
NUMBER DESCRIPTION
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 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.)
EXHIBIT
NUMBER DESCRIPTION
4.33 Form of Common Stock Purchase Warrant issued in connection with certain
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.)
4.34 Common Stock Purchase Warrant issued to Richard Domanik on May 30, 2002
representing the right to purchase 51,483 shares of common stock.
(Incorporated by reference to Exhibit 4.34 to the Company's S-2
Registration Statement, File No. 333-100150 filed September 27, 2002.)
4.35 Common Stock Purchase Warrant issued to Round Valley Capital, LLC on
September 4, 2002 representing the right to purchase 681,818 shares of
common stock. (Incorporated by reference to Exhibit 4.35 to the
Company's S-2 Registration Statement, File No. 333-100150 filed on
September 27, 2002.)
4.36 Amendment No. 1 to the Common Stock Purchase Warrant issued in
connection with certain Bridge Financing dated August 20,2002.
4.37 Form of Common Stock Purchase Warrant to be issued in connection with
certain Bridge II Financing beginning in October 2002.
4.38 Common Stock Purchase Warrant issued to Qwestar Resources on November
1, 2002 representing the right to purchase 200,000 shares of common
stock.
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. (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.)*
EXHIBIT
NUMBER DESCRIPTION
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 Employment Agreement dated June 1, 1999 between Mr. Prange and the
Company. (Incorporated herein by reference to Exhibit 10.11 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)*
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.)*
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.)*
EXHIBIT
NUMBER DESCRIPTION
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, 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, 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.)*
EXHIBIT
NUMBER DESCRIPTION
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 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.)
10.41 $650,000 Promissory Note issued to Round Valley Capital, LLC on August
30, 2002. (Incorporated by reference to the Company's S-2 Registration
Statement, File No. 333-100150 filed on September 27, 2002.)
10.42 Form of Convertible Promissory Note issued in connection with certain
Bridge Financing beginning in March 2002.
10.43 Amendment No. 1 to Convertible Promissory Note issued in connection
with certain Bridge Financing dated August 20, 2003.
10.44 Bridge II Convertible Promissory Note Indenture, including Form of
Convertible Promissory Note, Form of Security Agreement, Form of
Collateral Sharing Agreement, and For of Warrant issued in connection
with certain Bridge II Financing beginning in October 2002.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Altschuler Melvoin and Glasser, LLP
1.1 Section 906 Certification by principal executive officer.
1.2 Section 906 Certification by principal financial officer.
* SEC File No. 0-935
(a) Reports on Form 8-K
None
(c) See item 14 (a)3 above
(d) The financial statements schedules are filed (as a separate
section of this report)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MOLECULAR DIAGNOSTICS, INC.
By: /s/PETER P. GOMBRICH
-------------------------------
Peter P. Gombrich
Chairman of the Board, and
Chief Executive Officer
Date: July 18, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ PETER P. GOMBRICH Director, Chairman of the Board, and July 18, 2003
- ------------------------------- Chief Executive Officer, (Principal Executive
Peter P. Gombrich Officer)(Principal Accounting Officer)
/S/ Dennis L. Bergquist President and Chief Financial Officer July 18, 2003
- ------------------------------- (Principal Accounting Officer)
Dennis L. Bergquist
/S/ Alexander M. Milley
- ------------------------------- Director July 18, 2003
Alexander M. Milley
/S/ JOHN ABELES Director July 18, 2003
- -------------------------------
John Abeles
/S/ DENIS M. O'DONNELL Director July 18, 2003
- -------------------------------
Denis M. O'Donnell
/S/
- ------------------------------- Director July ___, 2003
Robert C. Shaw
CERTIFICATIONS
I, Peter P. Gombrich, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Molecular
Diagnostics, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: July 18, 2003
/s/ Peter P. Gombrich
------------------------------------
Peter P. Gombrich
Chairman of the Board and Chief
Executive Officer of
Molecular Diagnostics, Inc.
I, Dennis L. Bergquist, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: July 18, 2003
/s/ Dennis L. Bergquist
------------------------------------
Dennis L. Bergquist
Chief Financial Officer of
Molecular Diagnostics, Inc
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Molecular Diagnostics, Inc.
We have audited the accompanying consolidated balance sheet of Molecular
Diagnostics, Inc. and Subsidiaries as of December 31, 2002, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the index at item 15. These consolidated financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audit. We did not audit the financial statements of
Samba Technologies, SARL, a wholly owned subsidiary, which statements reflect
total assets of $612,000 at December 31, 2002, and total revenue of $783,000
for the year then ended. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Samba Technologies, SARL as of December 31, 2002 and for
the year then ended, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Molecular Diagnostics, Inc. and
Subsidiaries as of December 31, 2002 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has incurred substantial net losses from
operations and has limited financial resources. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
/s/ ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
June 26, 2003, except for Note 10, as to which the date is July 18, 2003
REPORT OF INDEPENDENT AUDITORS
To The Stockholders of
SARL Samba Technologies
In our opinion the balance sheet, the income statement, and the statement of
changes in shareholder's equity of SARL Samba Technologies, after elimination
of the goodwill of 472,591 Euros, present a true and fair view of the Company's
financial position as at December 31, 2002 and of the result for the year then
ended and has been prepared in accordance with U.S. Generally Accepted
Accounting Principles and is suitable for inclusion in the consolidated
accounts of Molecular Diagnostics, Inc.
/s/ AUDITEURS & CONSEILS ASSOCIES
Paris, France
June 26, 2003
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Molecular Diagnostics, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Molecular
Diagnostics, Inc. and Subsidiaries, formerly Ampersand Medical Corporation, as
of December 31, 2001, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the two years in the
period ended December 31, 2001. Our audits also included the financial
statement schedule for 2001 and 2000 listed in the index at item 15. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Molecular
Diagnostics, Inc. and Subsidiaries as of December 31, 2001 and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has incurred substantial net
losses from operations and has limited financial resources. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are described in Note
1. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ ERNST & YOUNG, LLP
Chicago, Illinois
April 8, 2002
PART I--FINANCIAL INFORMATION
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 42 $1,025
Accounts receivables, net of allowance for doubtful
accounts of $145 and $ 4 at December 31, 2002 and 2001,
respectively........................................... 307 463
Inventories............................................. 427 533
Refundable taxes........................................ 56 116
Due from stockholder.................................... -- 50
Prepaid financings costs................................ 288 --
Prepaid expenses and other current assets............... 69 141
------ -------
Total current assets............................... 1,189 2,328
Fixed Assets, net.......................................... 666 835
Other Assets:
License, patents, and technology, net of amortization... 7,521 8,180
Goodwill, net of amortization........................... 283 283
------ -------
Total assets....................................... $9,659 $11,626
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable........................................ $5,202 $2,502
Customer and other deposits............................. 24 49
Accrued payroll costs................................... 1,856 868
Accrued expenses........................................ 1,143 1,126
Deferred revenue........................................ 630 567
Revolving line of credit................................ 207 177
Due to stockholder...................................... 127 --
Lease obligation........................................ 279 87
Notes payable--related party............................ 65 65
Notes payable........................................... 4,585 1,359
------ ------
Total current liabilities.......................... 14,118 6,800
Lease obligation, less current portion..................... -- 203
Deferred revenue, less current portion..................... 120 --
------ ------
Total liabilities.................................. 14,238 7,003
------ ------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; shares authorized--
10,000,000; shares issued and outstanding
- 2,781,024 and - 3,493,078, at December 31, 2002
and December 31, 2001, respectively..................... 16,958 21,089
Common stock, $0.001 par value; shares authorized--
100,000,000; shares issued and outstanding-
36,440,700 and 25,304,883, at December 31, 2002
and December 31, 2001, respectively..................... 37 26
Additional paid-in capital................................. 19,557 12,212
Treasury stock; 192,088 shares at December 31, 2001........ (327) (327)
Deferred compensation...................................... (11) (61)
Accumulated deficit........................................ (40,642) (28,289)
Accumulated comprehensive loss--
Cumulative translation adjustment.................... (151) (27)
------ ------
Total stockholders' equity (deficit)............... (4,579) 4,623
------ ------
Total liabilities and stockholders' equity (deficit) $9,659 $11,626
====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Net Sales.................................... $ 1,746 $ 877 $ 1,094
Costs and Expenses:
Cost of goods sold........................ 852 476 637
Research and development.................. 3,338 4,034 3,426
Selling, general and administrative expenses 8,059 6,347 3,719
Impairment loss........................... -- 6,107 --
-------- -------- --------
Total costs and expenses............. 12,249 16,964 7,782
-------- -------- --------
Operating Loss (10,503) (16,087) (6,688)
-------- -------- --------
Other income (expense):
Interest expense--related party........... (9) (230) (155)
Interest expense.......................... (1,597) (296) (80)
Interest income, related party............ -- 25 63
Interest income........................... -- 85 10
Other, net................................ 149 (127) 239
-------- -------- --------
(1,457) (543) 77
-------- -------- --------
Loss before income taxes..................... (11,960) (16,630) (6,611)
-------- -------- --------
Income taxes................................. -- -- --
-------- -------- --------
Net loss..................................... $(11,960) $(16,630) $ (6,611)
======== ======== ========
Preferred stock dividends.................... (2,012) (562) --
Deemed dividend upon issuance of convertible
preferred stock............................ -- (2,599) --
-------- -------- --------
Total dividends (2,012) (3,161) --
-------- -------- --------
Net loss available for common shareholders... $(13,972) $(19,791) $ (6,611)
======== ======== ========
Basic and fully diluted net loss per common
share...................................... $ (.49) $ (.62) $ (.24)
======== ======== ========
Weighted average number of common shares
outstanding................................ 28,704,245 32,019,531 27,869,274
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Operating Activities:
Net loss......................................... $(11,960) $(16,630) $(6,611)
Adjustments to reconcile net loss to net cash
used for operating activities:
Forgiveness of amounts due to service
providers recognized as expense in
prior years................................. -- -- (220)
Amortization of debt discount................. 1,176 241 139
Depreciation and amortization................. 967 683 428
Loss on impairment of goodwill................ -- 5,833 --
Loss on write-off of Cell Solutions........... -- 127 --
Loss on disposal of equipment................. -- -- --
Loss on impairment of patents................. -- 274 --
Licensing fees recognized on preferred stock
sale........................................ (298) -- --
Stock, warrants, and options issued to
non-employees for services.................. 1,284 416 559
Compensation expense related to Stock
Appreciation Rights........................ -- 252 91
Interest expense paid with stock.............. -- 66 20
Changes in assets and liabilities:
Accounts receivable, net.................... 257 12 (67)
Inventories................................. 98 (9) (186)
Refundable taxes............................ 73 (3) 12
Due from stockholder........................ 177 (50) --
Prepaid expenses and other current assets... 26 32 (166)
Prepaid royalties........................... -- 36 (500)
Accounts payable............................ 2,742 (334) 680
Deposits.................................... (31) 3 7
Deferred revenue............................ 139 135 127
Lease obligation............................ (12) -- --
Accrued royalties........................... -- -- (250)
Accrued expenses............................ 1,135 953 21
------ ------ ------
Net cash used for operating activities.............. (4,227) (7,963) (5,916)
------ ------ ------
Cash used in investing activities:
Net cash acquired................................ -- 43 --
Expenditures for license, patents, and technology (4) (134) (532)
Capital purchases................................ (88) (542) (307)
Issuances for notes receivable................... -- (1,270) (330)
------ ------ ------
Net cash used for investing activities.............. (92) (1,903) (1,169)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of convertible notes
payable........................................ 3,825 -- 500
Proceeds from issuance of convertible notes
payable, related party......................... -- -- 500
Proceeds from issuance of notes payable.......... 80 600 --
Proceeds from issuance of notes payable,
related party.................................. -- 810 300
Proceeds from issuance of common stock, net of
costs incurred................................. -- 6 5,484
Proceeds from issuance of preferred stock, net
of costs incurred.............................. -- 10,452 10,452
Proceeds from note payable from shareholder...... -- 450 --
Payment of notes payable......................... (500) (27) (175)
Payment of notes payable, related party.......... -- (1,545) (26)
Proceeds from revolving line of credit, net...... (2) 58 (7)
Deposit received for future purchase of stock....... -- -- 500
------ ------ ------
Net cash provided by financing activities........... 3,403 10,804 7,076
------ ------ ------
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------
2002 2001 2000
-------- -------- --------
Effect of exchange rate changes on cash (67) 74 (14)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (983) 1,012 (23)
Cash and cash equivalents at beginning of period 1,025 13 36
-------- -------- --------
Cash and cash equivalents at end of period $ 42 $ 1,025 $ 13
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 179 $ 135 $ 13
Income taxes $ -- $ -- $ --
NON-CASH TRANSACTION DURING THE PERIOD FOR:
Note receivable given to purchase Common Stock $ -- $ -- $ 450
Warrants issued for license $ -- $ 49 $ 530
Common stock issued for license $ -- $ -- $ 450
Deferred financing costs $ 519 $ -- $ 334
Warrant issued for Cell Solutions Investment $ -- $ 127 $ --
Series E preferred stock issued in exchange for
common stock $ -- $ 9,557 $ --
Preferred stock and cumulative dividends
converted into common stock $ 3,297 $ 676 $ --
See Note 3 for non-cash transaction related to the acquisition of
AccuMed.
The accompanying notes are an integral part of these financial statements.
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
Note
Preferred Stock Common Stock Additional Receivable Other Total
Par Value $0.001 Par Value $0.001 Treasury Stock Paid-In From Deferred Accumulated Comprehensive Stockholder's
Shares Amount Shares Amount Shares Amount Capital Stockholder Compensation Deficit Loss Equity (Deficit)
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
December 31, 1999 $ -- 19,027,570 $ 19 $ -- $ 3,039 $ -- $ -- $(5,015) $ (83) $ (2,040)
Comprehensive Loss:
Net loss ....................... -- -- -- -- -- -- -(6,611) -- (6,611)
Foreign currency translation.... -- -- -- -- -- -- -- (14) (14)
------
Total comprehensive loss (6,625)
Note receivable from
stockholder..................... -- -- -- -- (450) -- -- -- (450)
Conversion of notes payable
and accrued interest............ -- 5,412,544 5 -- 1,077 -- -- -- -- 1,082
Debt discount on convertible
notes........................... -- -- -- -- 250 -- -- -- -- 250
Warrants issued as debt
discount........................ -- -- -- -- 84 -- -- -- -- 84
Warrants issued to purchase
license......................... -- -- -- -- 530 -- -- -- -- 530
Warrants issued for services....... -- -- -- -- 91 -- -- -- -- 91
Exercise of warrants............... -- 70,000 -- -- 23 -- -- -- -- 23
Sale of common stock............... -- 5,300,450 6 -- 5,883 -- -- -- -- 5,889
Sale of common stock to
employees....................... -- 21,989 -- -- 17 -- -- -- -- 17
Common stock issued for
royalty payment................. -- 128,571 -- -- 386 -- -- -- -- 386
Common stock issued for
services........................ -- -- -- 60 -- -- -- -- 60
Restricted stock issued for
services........................ -- 225,333 -- -- 202 -- -- -- -- 202
Restricted stock issued for
compensation.................... -- 25,000 -- -- 15 -- -- -- -- 15
Options issued to non-
employees for services.......... -- -- -- 270 -- -- -- -- 270
Compensation expense related
to SARs......................... -- -- 91 -- -- 91
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
December 31, 2000.................. -- -- 30,211,457 $ 30 -- -- $ 12,018 $ (450) -- $(11,626) $ (97) $(125)
Comprehensive Loss:
Net loss........................ -- -- -- -- -- -- -- -- (16,630) -- (16,630)
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
Preferred Stock Common Stock Additional Receivable Other Total
Par Value $0.001 Par Value $0.001 Treasury Stock Paid-In From Deferred Accumulated Comprehensive Stockholder's
Shares Amount Shares Amount Shares Amount Capital Stockholder Compensation Deficit Loss Equity (Deficit)
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
Foreign currency translation.... -- -- -- -- -- -- -- 70 70
--------
Total net comprehensive
loss............................ -- -- -- -- -- -- -- -- (16,560)
Sale of Series B preferred
stock, net of offering
costs........................... 1,499,856 5,840 -- -- -- -- -- -- -- 5,840
Series B preferred stock and
cumulative dividends
converted to common............. (142,500) (570) 604,592 1 -- 602 -- -- (33) -- --
Series A preferred stock,
common stock, options and
warrants issued in
AccuMed acquisition............. 218,438 983 3,911,245 4 (192,088) (327) 8,423 -- (75) -- -- 9,008
Series A preferred stock
converted to common............. (23,603) (106) 10,310 -- -- 106 -- -- -- -- --
Sale of Series C preferred
stock, net of offering
costs........................... 1,331,499 3,635 -- -- -- -- -- -- -- 3,635
Sale of Series D preferred
stock........................... 175,000 1,750 -- -- -- -- -- -- -- 1,750
Common stock tendered for
Series E preferred stock........ 434,388 9,557 (10,859,688) (11) -- (9,546) -- -- -- -- --
Equity issuance costs.............. -- -- -- (272) -- -- -- -- (272)
Beneficial conversion feature
on convertible notes............ -- -- -- 50 -- -- -- -- 50
Restricted stock issued for
services........................ -- -- -- 50 -- -- -- -- 50
Warrants issued for services....... -- -- -- 249 -- -- -- -- 249
Options issued to non-
employees for services.......... -- -- -- 52 -- -- -- -- 52
Reversal of Compensation
expense related to SARs......... -- -- -- (79) -- -- -- -- (79)
Sale of common stock to
employees....................... -- 8,028 -- -- 11 -- -- -- -- 11
Warrants issued with debt.......... -- -- 66 -- -- -- -- 66
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
Preferred Stock Common Stock Additional Receivable Other Total
Par Value $0.001 Par Value $0.001 Treasury Stock Paid-In From Deferred Accumulated Comprehensive Stockholder's
Shares Amount Shares Amount Shares Amount Capital Stockholder Compensation Deficit Loss Equity (Deficit)
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
Warrants issued for
investment in Cell
Solutions....................... -- -- -- 127 -- -- -- -- 127
Deferred compensation
expense for unvested
options issued in
acquisition..................... -- -- -- -- -- 14 -- -- 14
Common stock issued on
exercise of warrants............ -- 840,247 1 -- (1) -- -- -- -- --
Common stock issued for
services........................ -- 510,692 1 -- (1) -- -- -- -- --
Common stock issued to
employees....................... -- 51,334 -- -- -- -- -- -- -- --
Exercise of options................ -- 16,666 -- -- 5 -- -- -- -- 5
Options issued to former
officer......................... -- -- -- 303 -- -- -- -- 303
Payments received on
stockholder note................ -- -- -- -- 450 -- -- -- 450
Warrants issued to purchase
license......................... -- -- -- 49 -- -- -- 49
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
December 31, 2001..................3,493,078 $ 21,089 25,304,883 $ 26 (192,088) $ (327) $ 12,212 $ -- $ (61) $(28,289) $ (27) $ 4,623
Comprehensive Loss:
Net loss........................ -- -- -- -- -- -- (11,960) -- (11,960)
Foreign currency translation.... -- -- -- -- -- -- -- (124) (124)
Total net comprehensive......... -- -- -- -- -- -- -- -- (12,084)
Loss............................
Series A preferred stock
converted to common............. (76,743) (345) 33,510 -- -- 345 -- -- -- -- --
Series B preferred stock and
Cumulative dividends
converted to common............. (557,500) (2,230) 2,594,175 3 -- 2,590 -- -- (364) -- --
Series C preferred stock
And cumulative dividends
converted to common............. (72,666) (218) 392,858 -- -- 235 -- -- (18) -- --
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
Preferred Stock Common Stock Additional Receivable Other Total
Par Value $0.001 Par Value $0.001 Treasury Stock Paid-In From Deferred Accumulated Comprehensive Stockholder's
Shares Amount Shares Amount Shares Amount Capital Stockholder Compensation Deficit Loss Equity (Deficit)
------ ------ ---------- ------ ------ ------ -------- ------- ------ ------- ------ --------
Series E preferred stock, conversion
premium and cumulative
dividends converted to common (5,145) (113) 155,180 -- -- 124 -- -- (11) -- --
Transfer value of warrant and
license related to Series D
preferred stock................. (1,225) -- -- 928 -- -- -- -- (297)
Deferred compensation expense for
unvested options issued in
acquisition..................... -- -- -- -- -- 50 -- -- 50
Common stock issued to employees 16,666 -- -- -- -- -- -- -- -- --
Common stock issued for services -- 911,496 1 -- 354 -- -- -- -- 354
Sale of common stock to
Employees....................... -- 9,568 -- -- 1 -- -- -- -- 1
Common stock issued for loan
transaction fees................ -- 711,364 1 -- 363 -- -- -- -- 363
Exercise of options................ -- 361,000 -- -- 44 -- -- -- -- 44
Common stock issued for
financing fees.................. -- 200,000 -- -- 44 -- -- -- -- 44
Common stock issued for
collateral...................... -- 5,750,000 6 -- (6) -- -- -- -- --
Beneficial conversion feature
on convertible notes............ -- -- -- 1,372 -- -- -- -- 1,372
Reversal of common stock
issued as compensation.......... -- -- -- (4) -- -- -- -- (4)
Reversal of restricted stock
issued for services............. -- -- -- (38) -- -- -- -- (38)
Reversal of options issued to
non-employees for
compensation.................... -- -- -- (55) -- -- -- -- (55)
Warrants issued for services....... -- -- -- 848 -- -- -- -- 848
Warrants issued with debt.......... -- -- -- 200 -- -- -- -- 200
--------- ------- ---------- ------ ------- ------ -------- ------- ------ -------- ------ --------
December 31, 2002.................. 2,781,024 $16,958 36,440,700 $ 37 192,088 $ (327) $ 19,557 $ -- $ (11) $(40,642) $ (151) $ (4,579)
========= ======= ========== ====== ======= ====== ======== ======= ====== ======== ====== ========
The accompanying notes are an integral part of these financial statements.
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
Molecular Diagnostics, Inc, ("MDI") was incorporated as Ampersand
Medical Corporation in Delaware on December 15, 1998, as the successor to Bell
National Corporation ("Bell National"). Bell National was incorporated in
California in 1958.
On September 25, 2001, the Company changed its corporate name to
Molecular Diagnostics, Inc. in order to better represent its operations and
products. The name change was effected by a merger with a wholly-owned
subsidiary. Molecular Diagnostics, Inc. has retained its 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, 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 units of membership interest in InPath and the senior
executives of InPath assumed management control of MDI.
Based upon the terms of the acquisition agreement, for financial
reporting and accounting purposes the acquisition was accounted for as a
reverse acquisition whereby InPath is deemed to have acquired Bell National.
However, Bell National was the continuing legal entity and registrant for both
Securities and Exchange Commission filing purposes and income tax filing
purposes, until its merger into MDI in May 1999. Because Bell National was a
non-operating public shell company with nominal assets and InPath was a private
operating company, the acquisition was recorded as the issuance of stock for
the net monetary assets of Bell National, accompanied by a recapitalization and
no goodwill or other intangible assets were recorded.
On September 17, 2001, Molecular Diagnostics, Inc. completed an
acquisition transaction whereby AccuMed International, Inc. was merged into a
wholly-owned subsidiary of MDI. The value of the transaction was approximately
$14,178,000. Accordingly, the consolidated financial statements presented
hereunder include the operations of InPath from March 16, 1998 (inception), the
operations of Bell National and Molecular Diagnostics, Inc. from December 4,
1998, and the operations of AccuMed International, Inc. from September 17,
2001, the date of acquisition.
Molecular Diagnostics, Inc. is focused on the design, development and
marketing of the InPath System, Samba software and related image analysis
systems. 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.
Molecular Diagnostics, Inc. has another wholly owned subsidiary, Samba
Technologies, Sarl ("Samba"). MDI acquired all of the assets of Samba in
January 1999 from Unilog Regions, SA for approximately $500,000 in cash. 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. A majority of reported revenues prior to 2002 and since inception of
Molecular Diagnostics, Inc. have been generated by Samba. Since December 20,
2002, Samba has operated under the protection of the French Commercial Court in
compliance with the bankruptcy laws of France. Samba continues to maintain
normal operations under the supervision of an Administrator appointed by the
French Commercial Court. Samba will continue to operate under the current
format until a plan of reorganization and continuation is approved by the
Court, which must act by December 2003, unless an extension of time is granted.
In consort with Samba managers, MDI anticipates filing a Continuation Plan with
the French Commercial Court during the third quarter of 2003.
Molecular Diagnostics, Inc. has incurred significant operating losses
since its inception. Management expects that significant on-going operating
expenditures will be necessary to successfully implement MDI's business plan
and develop, manufacture and market its products. These circumstances raise
substantial doubt about MDI's ability to continue as a going concern.
Implementation of its plans and its ability to continue as a going concern
depend upon its securing substantial additional financing. Management's plans
include substantial efforts to obtain additional capital. If Molecular
Diagnostics, Inc. is unable to obtain adequate additional financing or generate
profitable sales revenues, management may be required to curtail its product
development and other activities and may be forced to cease operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include Molecular Diagnostics, Inc. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
New Accounting Standards.
Goodwill and Other Intangible Assets
On June 29, 2001, the Financial Accounting Standards Board
(FASB) approved its proposed Statements of Financial Accounting Standards
No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 supercedes
APB 17, Intangible Assets. FAS 142 primarily addresses accounting for goodwill
and intangible assets subsequent to their acquisition (i.e., the
post-acquisition accounting). The most significant changes made by FAS 142 are
(1): goodwill and indefinite lived intangible assets will no longer be
amortized, (2) goodwill will be tested for impairment at least annually at the
reporting unit level, (3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to
forty years.
The Company adopted FAS 142 effective January 1, 2002. The Company
completed its initial review of goodwill and intangible assets during the first
quarter of 2002. An additional review was conducted during the second quarter
of 2003. The results of these reviews indicated that there was no additional
impairment of goodwill or intangible assets above that reflected in the
financial statements for the year ended December 31, 2001. The adoption of
FAS 142 in 2002 did not have a material effect on the financial statements for
the year ended December 31, 2002.
Asset Retirement Obligations
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("FAS 143"). FAS 143 addresses the accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. FAS 143 became effective for
MDI in the first quarter of 2002. The provisions of FAS 143 did not have a
material impact on the Company's consolidated financial statements.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 clarifies the
accounting for the impairment of long-lived assets and for long-lived assets to
be disposed of, including the disposal of business segments and major lines of
business. FAS 144 became effective for MDI in the first quarter of 2002. The
provisions of FAS 144 did not have a material impact on the Company's
consolidated financial statements.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
variable interest entities (commonly referred to as SPEs) to be consolidated by
the primary beneficiary of the entity if certain criteria are met. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 become effective
for the Company during the third quarter of 2003. For variable interest
entities acquired prior to February 1, 2003, any difference between the net
amount added to the balance sheet and the amount of any previously recognized
interest in the variable interest entity will be recognized as a cumulative
effect of an accounting change. The provisions of FASB Interpretation No. 46
will not have a material impact on the Company's consolidated financial
statements.
Stock-Based Compensation
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure" ("FAS 148"). FAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. FAS 148
also requires that disclosures of the pro forma effect of using the fair value
method of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, FAS 148 requires disclosure
of the pro forma effect in interim financial statements. The transition and
annual disclosure requirements of FAS 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements of FAS 148 are
effective for interim periods beginning after December 15, 2002. The adoption
of the provisions of FAS 148 did not have an impact on the Company's
consolidated financial statements, however, the Company has modified its
disclosures as provided for in the new standard.
Exit and Disposal Activities
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 nullifies the
accounting for restructuring costs provided in EITF Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146
requires that a liability associated with an exit or disposal activity be
recognized and measured at fair value only when incurred. In addition, one-time
termination benefits should be recognized over the period employees will render
service, if the service period required is beyond a minimum retention period.
FAS 146 is effective for exit or disposal activities initiated after
December 31, 2002. Management does not expect that the application of the
provisions of FAS 146 will have a material impact on the Company's consolidated
financial statements.
Guarantees
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The initial recognition and initial measurement provisions of FIN 45
are not expected to have a material impact on the Company's consolidated
financial statements. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002; therefore, the Company has modified its disclosures if and where
appropriate as required.
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125" ("FAS 140"). FAS 140
revises the criteria for accounting for securitizations and other transfers of
financial assets and collateral. In addition, FAS 140 requires certain
additional disclosures. Except for the new disclosure provisions, which were
effective for the year ended December 31, 2000, FAS 140 was effective for the
transfer of financial assets occurring after March 31, 2001. The provisions of
FAS 140 did not have a material impact on MDI's consolidated financial
statements.
Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue
upon shipment of product or license to customers and no remaining Company
obligations or contingencies exist, or in the case of sales of software by its
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; the fee is
fixed or determinable; and collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is 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. Revenue from prepayments under
licenses is recognized over the license period. Samba calculates percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Implementation and installation services are generally completed
within 120 days.
Cash and Cash Equivalents. Molecular Diagnostics, Inc. considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Inventory of Instruments, Component Parts and Labor. Inventory of
instruments and component parts consists of AcCell instruments and component
parts necessary to manufacture AcCell instruments. The manufacturing process is
carried out in the facilities of a third-party contractor. Inventory is stated
at the lower-of-cost-or-market; cost is determined by the first-in-first-out
(FIFO) method. The Company has established a policy for reserving obsolete and
excess inventory, any non-usable, damaged, or non-salable inventory or
inventory with little or no demand for the product in excess of one year.
Samba's inventory consists primarily of in-process labor expended to date on
uncompleted contracts.
Property and Equipment. Property and equipment are stated at cost and
are depreciated using the straight-line method over the assets' estimated
useful lives. Principal useful lives are as follows:
Furniture and fixtures............... 5 years
Laboratory equipment................. 5 years
Computer and communications equipment 3 years
Leasehold improvements............... Useful life or life of
lease, whichever is shorter
Normal maintenance and repairs are charged to expense as incurred,
significant improvements are capitalized.
License, Patents, and Technology. License, patents, and purchased
technology are recorded at their acquisition cost. Costs to prepare patent
filings are expensed when incurred. Costs related to abandoned patents are
written off at the time of abandonment. Amortization is begun 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. The Company
assesses licenses, patents, and technology quarterly for impairment.
Goodwill. Amortization expense for 2001, 2000 related to goodwill was
approximately $141,000 and $146,000 respectively. As described in New
Accounting Standards above, the Company has adopted FAS 141 and FAS 142.
FAS 142 sets forth guidelines for discontinuing periodic goodwill amortization
costs in results of operations and for establishing an annual goodwill
impairment review and related net realizable value asset write-down
methodology.
Research and Development Costs. Research and development costs are
charged to operations as incurred. Molecular Diagnostics, Inc. conducts a
portion of its research activities under contractual arrangements with
scientists, researchers, universities, and other independent third parties.
Foreign Currency Translation. The functional currency of Molecular
Diagnostics, Inc.'s foreign operations is the local currency. Accordingly, all
assets and liabilities are translated into United States dollars using year-end
exchange rates, and all revenues and expenses are translated using average
exchange rates during the year. The amount of foreign currency translation is
not material to the results of operations and the financial position of
Molecular Diagnostics, Inc.
Other Comprehensive Income (Loss). Translation adjustments related to
Molecular Diagnostics, Inc.'s foreign operations are included in other
comprehensive loss and reported separately in stockholders' equity (deficit).
Loss Per Share. Basic loss per share is calculated based on the
weighted-average number of outstanding common shares. Diluted loss per share is
calculated based on the weighted-average number of outstanding common shares
plus the effect of dilutive potential common shares. Molecular Diagnostics,
Inc.'s calculation of dilutive net loss per share excludes potential common
shares as the effect would be antidilutive. Cumulative and deemed dividends on
convertible preferred shares totaled approximately $3,143,000 and $3,161,000 at
December 31, 2002 and 2001, respectively. There were no preferred dividends in
2000. Loss per share applicable to common shareholders as of December 31, 2002
is $0.49. The weighted average shares at December 31, 2002 include the weighted
average effect of 5,750,000 shares of common stock issued to Round Valley
Capital, LLC in August of 2002. These shares of common stock were issued to RVC
additional collateral for a loan made to the Company. The shares were returned
to the Company by RVC upon final settlement of the loan in 2003. MDI cancelled
the shares in April of 2003. If we had not treated these shares as issued and
outstanding at December 31, 2002, the loss per share applicable to common
shareholders would have been $0.52. Potential common shares include stock
underlying convertible notes, convertible preferred stock, cumulative dividends
on preferred stock payable in common stock, stock options, and warrants. The
weighted-average number of options and warrants to purchase common stock using
the treasury stock method for 2002 and 2001 was 14,774,294 and 19,575,547
shares, respectively.
Income Taxes. MDI follows the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using tax rates and laws that are expected to be
in effect when the differences are expected to reverse. Valuation allowances
are provided against deferred tax assets if it is more likely than not that the
deferred tax assets will not be realized.
Stock Compensation. As permitted by the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), Molecular Diagnostics, Inc. uses the intrinsic value method to
account for stock options as set forth in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25).
Reclassification. Certain amounts reported in 2000 and 2001 consolidated
financial statements have been reclassified to conform with 2002 presentation.
Impairment. At each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, management of the Company evaluates recoverability of such assets.
An impairment loss is recognized if the amount of undiscounted cash flows is
less than the carrying amount of the asset in which case the asset is written
down to fair value. The fair value of the asset is measured by either quoted
market prices or the present value of estimated expected future cash flows
using a discount rate commensurate with the risks involved.
NOTE 3. ACQUISITION
On September 17, 2001, Molecular Diagnostics, Inc. acquired AccuMed by
issuing 3,911,245 shares of its common stock to holders of all of the
outstanding common stock of AccuMed, and 218,438 shares of its Series A
convertible preferred stock to holders of all of the outstanding Series A
convertible preferred stock of AccuMed.
MDI made loans to AccuMed amounting to $1,270,000 and $330,000 in 2001
and 2000 respectively, prior to completion of the acquisition. The notes,
including accrued interest receivable due on thereon, amounting to
approximately $80,000 and $10,000, respectively, were reclassified to
intercompany accounts and eliminated in the consolidated financial statements
as of December 31, 2001 and 2000 in accordance with accounting principles
generally accepted in the United States.
On June 9, 2000, Molecular Diagnostics, Inc. executed an amendment to a
Patent and Technology License Agreement originally dated September 4, 1998,
between InPath and AccuMed. The amendment assigned the Patent and Technology
License Agreement directly to MDI, eliminated a minimum royalty payment
required by the original License, and reduced the royalty rate to 4%. As
consideration for this amendment, MDI paid $500,000 cash, issued a convertible
note payable in the principal amount of $100,000 and issued 128,571 shares of
MDI common stock, with a fixed value of $450,000, to AccuMed. The convertible
note was paid in full during December 2000. The $1,050,000 combined
consideration paid to AccuMed was recorded as prepaid royalty and was being
charged to royalty expense based on the recognition of revenues by MDI. As a
result of the completion of the merger of AccuMed into a wholly-owned
subsidiary of MDI, the unamortized prepaid royalty amount was eliminated in
purchase accounting. During 2001 and 2000, MDI recognized $36,000 and $44,000,
respectively, as royalty expense prior to the completion of the merger.
As a result of the acquisition, MDI (1) assumed AccuMed's outstanding
stock options and warrants, (2) forgave a note receivable, as described above,
due from AccuMed, (3) wrote-off unamortized license fees and prepaid royalties
previously paid under a licensing agreement with AccuMed, also as described
above, and, (4) received 192,088 shares of its common stock that was held by
AccuMed.
The value of the transaction was approximately $14,178,000 and was
determined based on the market price of MDI's 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. Molecular Diagnostics, Inc. is consolidating the results
of AccuMed operations from the date of acquisition.
A summary of the purchase price is as follows (in thousands):
Fair value of 3,911,245 common shares issued.................. $ 6,649
Fair value of 218,438 Series A preferred shared issued........ 162
Fair value of 1,128,198 AccuMed warrants assumed.............. 1,918
Fair value of 366,495 AccuMed stock options assumed........... 606
Note receivable due from AccuMed, including accrued interest.. 1,595
Unamortized license fees and prepaid royalties previously
paid to AccuMed............................................... 1,423
Fair value of 192,088 MDI common shares held by AccuMed....... (326)
AccuMed liabilities assumed................................... 1,455
Direct acquisition costs incurred by MDI...................... 696
-------
Total purchase price.................................. $14,178
=======
The purchase price was allocated to AccuMed's acquired assets based on
their respective fair market values, as follows (in thousands):
Cash and cash equivalents..................................... $ 43
Inventories................................................... 290
Other current assets.......................................... 49
Fixed assets.................................................. 115
Deferred compensation......................................... 75
Technology license agreements:
MDI license agreement....................................... 7,230
Dianon license agreement.................................... 260
Goodwill...................................................... 6,116
-------
Total purchase price.................................. $14,178
=======
In allocating the purchase price, MDI obtained an appraisal to determine
the fair market values of the acquired technology license agreement and
inventories. Acquired technology license agreements are being amortized over
the remaining life of the respective agreements; seventeen years for the MDI
license agreement and two years for the Dianon license agreement.
The following selected unaudited pro forma consolidated results of
operations are presented as if the acquisition had occurred on January 1, 2000.
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, 2000, nor are they
necessarily indicative of the future operating results of Molecular
Diagnostics, Inc. The pro forma data does not give effect to any cost savings
or restructuring and integration costs that might result from the integration
of the companies' operations.
Pro forma results for the fiscal years ended December 31 (in thousands):
2001 2000
---- ----
Revenues........................................ $ 1,586 $ 1,296
Net loss available to common stockholders....... (21,187) (10,084)
Basic and fully diluted net loss per share...... $ (0.59) $ (0.32)
At December 31, 2001, management determined several factors, principally
that certain contracts being negotiated by AccuMed failed to materialize,
indicating that the carrying value of goodwill relating to the AccuMed
acquisition was impaired. Based on this evaluation, MDI recognized an
impairment charge of $5,833,000.
NOTE 4. NOTES AND ACCOUNTS RECEIVABLE--RELATED PARTY
On April 28, 2000, Molecular Diagnostics, Inc. sold 1,333,333 shares of
common stock to Seaside Partners, LP, a hedge fund, at $1.50 per share, or
total proceeds of $2,000,000. Dr. Denis M. O'Donnell, a director of MDI, is a
member and manager of Seaside Advisors, L.L.C., which provides investment
management services to Seaside Partners, L.P. The sale was in conjunction with
the private offering of common stock of Molecular Diagnostics, Inc. (See
Note 13). In lieu of cash, MDI agreed to accept payment in the form of a
$2,000,000 promissory note due July 27, 2000 and bearing interest at the rate
of 8% per annum. The note provisions allow for prepayment at anytime and the
due date may be extended by mutual agreement. MDI agreed to extend the due date
of the note until November 30, 2000. Seaside Partners, L.P. made principal
payments amounting to $1,550,000 during 2000 and the remaining $450,000 in
principal was repaid during 2001 along with all accrued interest. At
December 31, 2000 the unpaid principal of the note was classified as a
reduction of stockholders equity.
As of December 31, 2001, the Chairman of the Board and Chief Executive
Officer, Peter Gombrich, owed the Company approximately $50,000. The Company
considered this receivable to be collectible in the ordinary course of
business. The amount was repaid during 2002 and Mr. Gombrich advanced
additional funds to the Company. At December 31, 2002, the Company owed Mr.
Gombrich $126,911 for such advances. MDI has classified the amount due to Mr.
Gombrich under the current liabilities heading "Due to stockholder." In March
and April of 2003, MDI borrowed $1,000,000 from an affiliate, Mr. Gombrich's
wife (See Footnote 17: Subsequent Events).
NOTE 5. FIXED ASSETS
Fixed assets consist of the following at December 31 (in thousands):
2002 2001
---- ----
Furniture and fixtures............................. $ 158 $ 199
Laboratory equipment............................... 786 671
Computer and communications equipment.............. 353 286
Leasehold improvements............................. 34 34
------ ------
1,331 1,190
Less accumulated depreciation and amortization..... (665) (355)
------ ------
Total...................................... $ 666 $ 835
====== ======
NOTE 6. LICENSES, PATENTS, TECHNOLOGY AND GOODWILL
Licenses, patents, technology and goodwill include the following at
December 31 (in thousands):
2002 2001
---- ----
Licenses........................................... $ 1,028 $ 1,022
Patent costs....................................... 133 133
MDI Technology Agreement........................... 7,230 7,230
Dianon Technology Agreement........................ 260 260
------- -------
Subtotal........................................... 8,651 8,645
Less accumulated amortization...................... (1,130) (465)
------- -------
Total...................................... $ 7,521 $ 8,180
======= =======
Goodwill........................................... $ 283 $ 283
======= =======
Aggregate Amortization Expense
For the year ended December 31, 2002 ......... $ 665
Estimated Amortization Expense
Year Ended December 31,
2003............... $612
2004............... $525
2005............... $525
2006............... $525
2007............... $525
INTANGIBLE ASSETS - ADOPTION OF STATEMENT 142
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
(in thousands except for per share amounts)
REPORTED NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(13,972) $(19,791) $(6,611)
Add back: Goodwill amortization................ $ -- $ 141 $ 146
--------- --------- --------
ADJUSTED NET LOSS................................. $(13,972) $(19,650) $(6,465)
========= ========= ========
BASIC AND DILUTED LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS
Reported net loss................................. $ (.49) $ (.62) $ (.24)
Goodwill amortization.......................... $ -- $ -- $ .01
--------- --------- --------
Adjusted net loss per share applicable to
common shareholders $ (.49) $ (.62) $ (.23)
========= ========= ========
During the fourth quarter of 2001, management performed an assessment of
the development of MDI's pending patent portfolio. As a result of the
developmental nature of the portfolio and significant uncertainty surrounding
the ultimate issuance of the related patents, MDI recorded an impairment loss
of $274,000 for the full amount of the carrying value of its pending patent
portfolio. During 2002, MDI recorded all costs related to the prosecution of
patents as legal expenses.
NOTE 7. ACCRUED EXPENSES
Accrued expenses includes the following December 31 (in thousands):
2002 2001
---- ----
Accrued interest.................................. $ 155 $ 38
Accrued interest--related party................... 111 103
Accrued professional fees......................... 146 281
Accrued taxes..................................... 412 334
Reserve for warranty.............................. 21 20
Other accrued expenses............................ 298 350
------ ------
Total........................................ $1,143 $1,126
====== ======
MDI is delinquent in filing certain Federal and State Income Tax returns
for 2002 and 2001. MDI is also delinquent in paying a portion of Federal and
State employee and employer payroll taxes for 2001. The Company owed $678,000
and $549,000 as of December 31, 2002 and 2001, respectively, in past-due
payroll taxes, including $250,000 and $134,000 respectively in assessed and
estimated statutory penalties and interest. MDI is currently in the process of
communicating through counsel with the Internal Revenue Service. The amount was
included in accrued payroll costs in the accompanying balance sheet.
NOTE 8. NOTES PAYABLE--RELATED PARTIES
Notes payable to related parties at December 31 consisted of:
2002 2001
---- ----
Northlea Partners, Ltd., $25,000 Promissory Note
issued August 6, 2001; interest rate 15% per
annum.............................................. 25 25
Northlea Partners, Ltd., $15,000 Promissory Note
issued September 20, 2001; interest rate 9% per
annum.............................................. 15 15
Robert Shaw, $25,000 Promissory Note issued
September 20, 2001; interest rate 9% per annum.... 25 25
---- ----
$ 65 $ 65
==== ====
On August 6, 2001, Molecular Diagnostics, Inc. issued a promissory note
to Northlea Partners, Ltd. in exchange for $25,000 in cash. John Abeles, a
director of MDI, is the general partner of Northlea Partners, Ltd. The note was
due on September 22, 2001 and bears interest at the rate of 15% per annum. As
additional consideration for this note, MDI issued a five-year warrant to
Northlea Partners, Ltd. entitling the holder to purchase 62,500 shares of
common stock at an exercise price of $1.00 per share. The closing market price
of the common stock on the issue date of the warrant was $0.73 per share. MDI
determined the fair value of the warrant to be $1,411 using the fair value
interest rate method. This value was charged to interest expense during the
third quarter of 2001. The note and related accrued interest remain outstanding
as of December 31, 2002.
On September 20, 2001, Molecular Diagnostics, Inc. issued a promissory
note to Northlea Partners, Ltd. in exchange for $15,000 in cash. The note was
due on December 20, 2001 and bears interest at the rate of 9% per annum. Also
on September 20, 2001 MDI issued a promissory note to Robert Shaw, a director
of MDI, in exchange for $25,000 in cash. The note was due December 20, 2001 and
bears interest at the rate of 9% per annum. The notes remain outstanding as of
December 31, 2002.
The carrying amount of notes payable - related parties approximates fair
value at December 31, 2002 and 2001.
NOTE 9. NOTES PAYABLE
Notes payable to unrelated parties at December 31 (in thousands)
consisted of:
2002 2001
---- ----
Bridge I Convertible Promissory Notes; due December 31,
2002; interest rate 7% per annum; convertible into
common stock at 75% of the market price on date of
conversion; beneficial conversion feature valued
at $1,049,808; Bridge Warrants at an exercise price
of $0.25 per share; Private Warrants at an exercise
price equal to 150% of note conversion price................ $3,185 $
Bridge II Convertible Promissory Notes; due July 31, 2003;
interest rate 12% per annum; convertible into common
stock at $0.10 per share; beneficial conversion
feature valued at $330,000 as of December 31, 2002;
Bridge II warrants at an exercise price of $0.10 per
share....................................................... 293 --
Round Valley Capital, LLC $825,000 Promissory Note,
including unearned interest dated August 30, 2002;
interest rate 36% per annum; warrants at an exercise
price of $0.20 per share; 711,364 shares of common stock.... 300 --
Monsun, AS, $500,000 Promissory Note issued November 1,
2000; interest rate 15% per annum, compounded into
principal amount; beneficial conversion feature valued
at $125,000; 1st extension of maturity date for
issuance of 100,000 warrants at an exercise price of $0.60
per share; 2nd extension of maturity date for the
issuance of 200,000 warrants at an exercise price of $0.30
per share; 3rd extension of maturity date for the issuance
of 200,000 warrants at an exercise price of $0.70 per share;
stock issuance of 200,000 shares of common stock in lieu of
default penalty.............................................. 552 590
Trek Diagnostic Systems $80,000 Promissory Note issued July
31, 2002; due in equal Installments on September 1, 2002
and December 1, 2002......................................... 40 --
NeoMed Innovations III, $500,000 Promissory Note issued May
15, 2001; interest rate 12% per annum; beneficial conversion
feature valued at $50,000.................................... -- 481
Xillix Technologies Corporation, $361,000 Promissory Note
issued June 26, 1998; interest rate Canadian Prime + 6%
per annum; represents a debt of AccuMed International.... 34 49
Western Economic Diversification, $221,000 Promissory Note
issued June 1989; no interest; represents a debt of
Oncometrics.................................................. 182 181
Schwartz, Cooper, Greenberger & Krauss, $500,000 Promissory
Note issued October 17, 2001; interest rate 12% per annum.... -- 58
------ ------
$4,585 $1,359
====== ======
Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in
series Bridge I Convertible Promissory Notes to accredited investors. The notes
bear interest at the rate of 7% per annum and are convertible at any time into
the common stock of MDI at a conversion price equal to 75% of the market price
of the common stock on the date of conversion. In addition, MDI issued a
warrant, which entitled each holder to purchase one share of common stock, at
an exercise price of $0.25 per share, for each dollar principal amount of
notes. MDI calculated a fair value of $99,950 for these warrants using the fair
value interest rate method and recorded this amount as additional interest
expense during 2002. At the time of conversion of the note, the holder is
entitled to receive a Private Warrant to purchase one share of common stock for
each four shares of common stock into which the note converts at an exercise
price equal to 150% of the conversion price of the note. MDI has not determined
a value for the Private warrants as of December 31, 2002. Since the conversion
price of the note is at a 25% discount to the market price of the common stock
of MDI, the holder is considered to have a beneficial conversion feature. MDI
determined the value of the beneficial conversion feature to be $1,041,666 and
recorded this amount as additional interest expense during 2002. The notes had
not been repaid as of June 30,2003. Subsequent to year end, a note holder,
NeoMed Innovations III, converted $1,060,000 in principal amount of Bridge I
notes into Bridge II notes. (See Footnote 17: Subsequent Events)
Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. MDI
issued $550,000 in Bridge II notes as of December 31, 2002. The notes bear
interest at a rate of 12% per annum payable at the maturity date in kind in the
form of shares of common stock of MDI. The Company granted the holders a junior
security position in all of its assets. The notes are convertible at any time
into the common stock of MDI. The note conversion price and the value of common
shares paid in kind as interest for the first $1,000,000 in principal amount of
cash subscriptions, determined on a "first come - first served basis," is $0.10
per share. The note conversion price and the value of common shares paid in
kind as interest for the remaining $3,000,000 of principal amount of notes in
the series is $0.15 per share. The conversion price of the notes issued during
2002 was less than the market price of the common stock when the notes were
issued; therefore, the holder is considered to have a beneficial conversion
feature. MDI determined the value of the beneficial conversion feature to be
$330,000. The value was recorded as a reduction of the debt and will be
amortized as additional interest over the life of the note. MDI recorded
additional interest expense of $71,800 to reflect amortization of the discount
for the time the notes were outstanding during 2002. At the time MDI completes
significant additional funding plans, as outlined in the subscription
agreement, each holder of Bridge II notes is entitled to receive a warrant to
purchase one share of the common stock of the Company for each four shares of
common stock into which the note is convertible at an exercise price of $0.15
per share for notes in the class pertaining to the first $1,000,000 in
subscriptions and $0.20 for the remaining $3,000,000 in note principal
subscriptions. Subsequent to year-end, MDI issued additional notes in the
Bridge II series. (See Footnote 17: Subsequent Events)
On August 30, 2002, MDI issued a Promissory note to Round Valley
Capital, LLC ("RVC") in the amount of $825,500 representing $650,000 in cash
received by MDI and $175,500 in unearned interest. The note bears a calculated
effective interest rate of 36% per annum and is due June 1, 2003. The note is
secured by all of the assets of MDI. MDI issued a certificate representing
5,750,000 shares of the common stock of the Company to RVC as collateral for
the loan and paid transaction fees including: cash payments of $147,063;
711,364 shares of common stock of MDI; and warrants to purchase 681,818 shares
of common stock of MDI at an exercise price of $0.20 per share. MDI recorded
the note at a value, net of unearned interest, of $650,000. A fair value of
$362,795 was calculated for the shares of common stock of MDI issued to RVC
using the market price of the common stock on the date the shares were issued.
A fair value of $156,000 was calculated for the warrants using the Black-
Scholes valuation method. The total value of the transaction fees was recorded
as prepaid financing costs and is being amortized over the life of the note.
MDI recorded interest expense of $59,500 and financing costs, including
amortization of prepaid financing costs, of $377,638 during 2002. RVC declared
MDI to be in default under the terms of the note and the parties were engaged
in litigation as of December 31, 2002. Subsequent to year-end RVC and MDI
settled the litigation. The note, including default penalties, was paid in
full. (See Footnote 17: Subsequent Events)
In July 2002, MDI agreed to settle a claim brought by Trek Diagnostic
Systems, Inc. ("Trek") against AccuMed regarding breach of representation and
warranties in a certain agreement under which Trek purchased the microbiology
business of AccuMed in 2000. MDI issued a promissory note to Trek in the amount
of $80,000, payable in two equal installments on September 1, 2002 and December
1, 2002. MDI made the first payment due on September 1, 2002. MDI did not make
the second payment causing a default on the note. Trek has instituted legal
action against MDI to obtain payment of the remaining amount due under the
note. The unpaid portion of the note accrues interest at the rate of 8% per
annum.
On May 15, 2001, MDI issued a convertible promissory note to NeoMed
Innovations III in exchange for $500,000 in cash. The note bears interest at
the rate of 12% per year and is due twelve months from the date of issue. The
note is convertible into common stock of MDI, any time after the expiration of
the first 180 days of the loan term, at a conversion price of $1.00 per share.
The conversion price of the note was less than the market price of the common
stock of MDI at the date of issuance of the note and therefore, the holder is
considered to have a beneficial conversion feature. MDI determined the value of
this beneficial conversion feature to be $50,000. This value was recorded as a
reduction to the debt and will be amortized as additional interest expense over
the life of the note. MDI recorded interest expense, including amortization of
the debt discount, of $59,569 and $31,000 in 2002 and 2001, respectively. On
June 12, 2002 NeoMed converted the note principal and $60,000 in accrued
interest into a Bridge I Convertible Promissory Note under terms similar to
those offered to other subscribers to the Bridge I notes.
In conjunction with the acquisition of AccuMed International, Inc. on
September 17, 2001, MDI assumed the $76,516 unpaid principal amount of an
outstanding Canadian dollar convertible promissory note payable to Xillix
Technologies. The note is due on demand, bears interest at a rate of 6% over
the Canadian prime rate, and is convertible into the common stock of MDI at a
conversion price of $2.18 per share. Through December 31, 2001, MDI made cash
principal payments against the note amounting to $27,467. During 2002, MDI made
further cash principal payments against the note amounting to $14,610. MDI also
made cash interest payments of $390 and $2,533 during 2002 and 2001,
respectively.
In conjunction with the acquisition of AccuMed International, Inc. on
September 17, 2001, MDI assumed the $180,663 unpaid principal balance of an
outstanding Canadian dollar loan due from Oncometrics, a wholly owned
subsidiary of AccuMed, to Western Economic Diversification ("WED"). Payments
against the principal of the loan are due from a percentage of revenues derived
from the sales of products, which include technology licensed to Oncometrics
under WED loan agreement. Oncometrics failed to make principal payments as
required by the terms of the loan causing a technical default. Neither
Oncometrics, nor MDI has received formal notification from WED of the default
as required under the terms of the loan. As a result of the technical default
MDI has classified the entire principal of the loan as current.
On November 1, 2000, Molecular Diagnostics, Inc. issued a convertible
promissory note to Monsun, AS in exchange for $500,000 in cash. The note bears
interest at the rate of 15% per year and was due twelve months from the date of
issue. The note is convertible into common stock, any time after the expiration
of the first 180 days of the loan term, at a conversion price of $1.00 per
share. The conversion price of the note was less than the market price of
common stock at the date of issuance of the note and therefore, the holder is
considered to have a beneficial conversion feature. MDI determined the value of
this beneficial conversion feature to be $125,000. This value was recorded as a
reduction to the debt and was amortized as additional interest expense over the
life of the note. During 2001 and 2000, MDI recorded $104,000 and $21,000,
respectively, to interest expense.
On October 31, 2001 Monsun, AS and MDI agreed to the 1st extension of
the maturity date of the convertible promissory note until January 31, 2002. As
consideration for the 1st extension agreement, MDI issued a three-year warrant
to Monsun, entitling the holder to purchase 100,000 shares of common stock of
MDI at an exercise price of $0.60 per share. A fair value of $25,000 for the
warrant was calculated using the fair value interest rate method and was
recorded as additional interest expense during 2001. On January 31, 2002
Monsun, AS and MDI agreed to the 2nd extension of the maturity date of the note
until March 31, 2002. As consideration for the 2nd extension agreement, MDI
issued a three-year warrant to Monsun, entitling the holder to purchase 200,000
shares of common stock of MDI at an exercise price of $0.30 per share. A fair
value of $4,110 for the warrant was calculated using the fair value interest
rate method and was recorded as additional interest expense during 2002. On
April 1, 2002 Monsun, AS and MDI agreed to the 3rd extension of the maturity
date until July 31, 2002. As consideration for the 3rd extension agreement, MDI
issued a five-year warrant to Monsun, entitling the holder to purchase 200,000
shares of common stock of MDI at an exercise price of $0.70 per share. A fair
value of $8,287 for the warrant was calculated using the fair value interest
rate method and was recorded as additional interest expense during 2002. In
November 2002, MDI issued 200,000 shares of common stock of MDI as a default
penalty on the note. A fair value of $42,000 for the shares was calculated
using the market price of the common stock on the date the shares were issued
and was recorded as financing expenses during 2002. MDI made payments against
the principal of the note amounting to $117,266 and recorded interest expense,
in addition to the amounts mentioned above, of $80,200 during 2002. Monsun, AS
has initiated a legal action against Peter Gombrich, MDI's Chairman and CEO, as
a personal guarantor on the note, in an attempt to collect the unpaid principal
balance of the note. The Board of Directors of MDI has agreed to pay Mr.
Gombrich's legal costs to defend himself against this action. The action is
pending as of the date of this report.
In July 1999, Molecular Diagnostics, Inc.'s wholly owned subsidiary,
Samba, negotiated a Revolving Credit Line ("Revolver") with the Banc National
de Paris (BNP). The terms of the Revolver provided that Samba may borrow, in
the form of an advance on payment against monthly billings, up to a maximum of
137,204 Euros, approximately $144,000. In January of 2003 the revolver was
converted to a cash overdraw facility capped at 150,000 Euros, approximately
$157,000. The interest rate on all overdraw balances is 8.8%. Samba has granted
BNP a security interest in its accounts receivable. As of December 31, 2002 and
2001 MDI recorded approximately $207,000 and $177,000, respectively in the
consolidated balance sheet as the current amount due under the revolving line
of credit.
On November 1, 2001 MDI issued a Convertible Promissory Note to
Schwartz, Cooper, Greenberger & Krauss ("SCGK") in exchange for $500,000 in
legal services. The Note bears interest at the rate of 12% per year and is due
in five installments. The Note is convertible into common stock of MDI upon
issuance of the Note at a conversion price equal to the stock price on the
conversion date.
In accordance with Promissory Note provisions, SCGK forgave the final
installment on the note, which was due February 28, 2002. Therefore, MDI did
not include the final payment in its debt balance as of December 31, 2001.
The carrying amounts of notes payable approximates fair value at
December 31, 2002 and 2001.
NOTE 10. STOCKHOLDERS' EQUITY
SALE OF EQUITY
Summary of the Company's preferred stock capital table as of
December 31, 2002 is as follows:
SHARES ISSUED &
OFFERING SHARES AUTHORIZED OUTSTANDING
-------- ----------------- -----------
Series A convertible...................... 590,197 118,092
Series B convertible, 10% cumulative...... 1,500,000 799,856
Series C convertible, 10% cumulative...... 1,666,666 1,258,833
Series D convertible, 10% cumulative...... 300,000 175,000
Series E convertible, 10% cumulative...... 800,000 429,243
--------- ---------
Total Preferred Stock..................... 4,856,863 2,781,024
========= =========
In September 2001, MDI issued 218,438 shares of Series A convertible
preferred stock to AccuMed in conjunction with the acquisition. In November
2001, a holder converted 23,603 shares of Series A convertible preferred stock
into 10,310 shares of common stock of the Company. During March and April of
2002, holders converted a total of 76,743 shares of Series A convertible
preferred stock into 33,510 shares of common stock of the Company.
In October 2000, the Board of Directors authorized Molecular
Diagnostics, Inc. to raise additional new equity to support current and future
operations. In February 2001, MDI sold 1,333,856 shares of Series B convertible
preferred stock to accredited investors in a private offering. The Series B
preferred stock has a stated value of $4.00 per share, an annual dividend rate
of 10%, and is convertible into common stock at a conversion price equal to
$1.00 per share. MDI received net cash proceeds from the February 2001 offering
of $5,176,000, including $500,000 received during December 2000. Proceeds from
the offering were used to complete the acquisition of AccuMed, repay some
outstanding indebtedness, fund clinical studies and trials of MDI's products,
and general working capital. Upon issuance of the preferred stock, the Company
determined the fair value of its Common Stock to be $1.35 per share. The
$1,867,398 was considered a deemed dividend for loss per share purposes. As
commission for soliciting sales of Series B convertible preferred stock, MDI
issued 374,000 shares of Common Stock and 533,542 warrants to advisors. Shares
of common stock were recorded at par value per share of $0.0001 or $374. The
value of the shares, $572,000, and the fair value of the warrants of $817,000
were recorded as additional paid in capital. The cash payment of $159,000 made
to advisors and the fair value of the Common Stock and warrants were recorded
as a debit to additional paid in capital to reflect the cost of raising equity.
In May 2001, Molecular Diagnostics, Inc. sold the remaining 166,000
authorized shares of Series B convertible preferred stock to an accredited
foreign investor to complete the February 2001 private offering. MDI received
net cash proceeds of $664,000. Upon issuance of the preferred stock, the
Company determined the fair value of its Common Stock on May 15, 2001 to be
$1.10 per share. The $66,400 was considered a deemed dividend for loss per
share purposes. The 66,400 shares of Common Stock issued to the advisory group
were recorded as Common Stock at the par value per share of $0.001, or $66. The
balance of the value determined for the shares, $81,000, was recorded as
additional paid-in-capital to reflect the cost of raising equity.
During 2001 several holders converted 142,500 shares of Series B
convertible preferred stock, including cumulative dividends due thereon, into
604,592 shares of common stock of MDI. During 2002, several additional holders
converted 557,500 shares of Series B convertible preferred stock, including
cumulative dividends due thereon, into 2,594,175 shares of common stock of MDI
In November 2001, the Company received $3,635,000 in net proceeds from
the private sale of 1,331,499 shares of Series C Convertible Preferred Stock,
to a limited number of accredited investors. The Series C preferred stock has a
dividend rate of 10% and is convertible into the Common Stock of the Company at
a conversion rate equal to $0.60 per share.
During 2002, several holders converted 72,666 shares of Series C
convertible preferred stock, including cumulative dividends due thereon, into
392,858 shares of common stock of MDI.
Also in November 2001, the Company received $1,750,000 in proceeds from
the sale of 175,000 shares of Series D Convertible Preferred Stock in a private
sale to Ventana Medical Systems, Inc ("Ventana"). The Series D preferred stock
has a dividend rate of 10% and is convertible into the Common Stock at a
conversion rate of $1.00 per share. The Company also issued a three-year
warrant to Ventana entitling the holder to purchase 1,750,000 shares of the
Common Stock of the Company at an exercise price of $1.15 per share. In
conjunction with the purchase of the Series D Convertible Preferred Stock,
Ventana was also granted a perpetual license to Samba software. During the
first quarter of 2002 the Company completed the delivery terms of the license
agreement and transferred $297,500 from preferred stock to license revenue to
reflect the value of the license. The Company also determined a measurement
date for the warrant during the first quarter of 2002. A fair value of $928,000
was calculated for the warrant using the Black-Scholes valuation method and the
Company transferred this amount from preferred stock to additional paid in
capital.
In December 2001, the Company completed a tender offer to exchange 1/25
of a share of Series E convertible preferred stock, par value $0.001 per share,
for each common share of Molecular Diagnostics, par value $0.001 per share, up
to a maximum of 20,000,000 shares of common, or a maximum of 800,000 Series E
preferred stock. As of December 31, 2001, 10,859,688 common shares have been
tendered for 434,388 preferred shares under the terms of this offering and are
valued at $9,557,000.
During December 2002, several holders converted 5,145 shares of Series E
convertible preferred stock, including cumulative dividends due thereon, into
155,180 shares of common stock of MDI.
ISSUES OF PREFERRED STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
Liquidation Value: $4.50 per share
Conversion Price: $10.3034 per share
Conversion Rate: 0.4367--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 March 31, 2001
Conversion Period: Any time
Cumulative dividends in arrears at December 31, 2002 were $589,551
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 March 31, 2002
Conversion Period: Any time
Cumulative dividends in arrears at December 31, 2002 were $440,763
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: Any time--After April 1, 2002
Cumulative dividends in arrears at December 31, 2002 were $204,247
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: Any time--After December 1, 2002
Cumulative dividends in arrears at December 31, 2002 were $954,685
ISSUANCE OF RESTRICTED SHARES FOR SERVICES
In August 1999, Molecular Diagnostics, Inc. awarded 50,000 restricted
shares of common stock to a non-employee consultant under a three-year
agreement for consulting services. The restricted shares vested over a twenty-
four month period. During 2002, a determination was made to expense these
shares over the vesting period. A measurement date was determined and a fair
value for these shares of $23,600 was calculated using the Black-Scholes
valuation model. During 2002 and 2001 MDI recorded a reduction in expense of
$13,000 and expense of $13,000, respectively, as consulting expense related to
these shares.
During 2000, Molecular Diagnostics, Inc. issued additional awards of
restricted shares of common stock to non-employee consultants for services. The
awards total 100,000 shares, and were issued under agreements for consulting
services with terms similar to those outlined in the preceding paragraph. The
measurement date of these shares had not been determined as of December 31,
2002 and therefore the value of these shares will be based on the market value
of common stock at the end of each interim period until the measurement date is
determined. A fair value of $16,000 was calculated at December 31, 2002 using
the Black-Scholes valuation model. During 2002 and 2001, MDI recorded a
reduction of expense of $25,000 and expense of $30,000 respectively, as
consulting expense.
ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
Molecular Diagnostics, Inc. issued options to purchase 200,000 shares of
common stock to non-employee consultants during 1999. The options vest over a
period of time, ranging from the date of grant to two years, and have exercise
prices of $0.394 and $0.406 per share. MDI issued these options to consultants
as consideration for consulting services that commenced during 1999 and were
completed during 2002. Services provided under several consulting agreements
ceased during 2001 and 2000, resulting in the cancellation of 45,000 and 46,666
options, respectively. Based on the option-vesting schedule, the measurement
date of the remaining outstanding options was determined at December 31, 2001.
A fair value of $95,000 was calculated for the remaining options outstanding at
December 31, 2001, using the Black-Scholes valuation model. During 2001, MDI
recorded $16,000 as consulting expense related to the remaining outstanding
options.
During 2000, Molecular Diagnostics, Inc. issued an additional 270,000
options to purchase common stock to non-employees under agreements for
consulting services. The options vest over a time period, ranging from the date
of grant to three years, and have exercise prices from $1.75 to $2.875 per
share. MDI issued these options to consultants as consideration for consulting
services that commenced during 2000 and will be completed through 2003. One of
the consulting agreements was terminated in 2002 and options to purchase 15,000
shares of common stock were cancelled. As the measurement date of these options
had not been determined as of December 31, 2002, the value of these options
will be determined at the end of each interim period until the measurement date
is determined. A fair value of $11,200 was determined as of December 31, 2002,
using the Black-Scholes valuation model. This value is charged to consulting
expense over the term of the 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 period. During 2002 and 2001, MDI recorded a reduction in expense
of $55,000 and expense of $37,000 respectively as consulting expense.
ISSUANCE OF COMMON STOCK FOR SERVICES
During 2000, Molecular Diagnostics, Inc. issued 40,000 shares of common
stock in exchange for medical consulting and financial advisory services. The
services had a fair value of $60,000. During 2001 and 2000, the Company charged
$4,000 and $56,000 respectively, to medical consulting and investor-relations
expenses.
In July 2002, the Company issued 113,832 shares of common stock to a
vendor in lieu of payment in cash for services provided. The Company determined
a fair value for the shares of $61,000 based on the invoiced value of the
services. The Company recorded the entire amount as selling, general and
administrative expense in 2002.
In August 2002, the Company issued 60,182 shares of common stock to a
financial advisor as consideration for services provided. The Company
determined a fair value for the shares of $30,000 based on the market value of
the stock at the time the services were performed. The Company recorded the
entire amount as selling, general and administrative expense in 2002.
Also in August 2002, the Company issued 711,364 shares of common stock
to Round Valley Capital as part of the transactions fees related to a $650,000
loan. The Company determined a fair value for the shares of $362,795 based on
the closing market price of the stock on the date the shares were issued. The
Company is amortizing this amount over the life of the loan. During 2002, the
Company amortized $161,000 as selling general and administrative expenses to
reflect the time the loan was outstanding during the year. The Company also
issued an additional 5,750,000 shares of unregistered and restricted common
stock to be held as collateral against the note. The Company recorded the
$5,750 par value of these shares as common stock and a reduction of additional
paid in capital. Because the shares were used only as collateral for the note,
no other value was calculated for the shares. In 2003, upon final settlement of
the loan, the 711,364 shares and the 5,750,000 shares were returned to MDI and
cancelled. (See Footnote 17: Subsequent Events).
In November 2002, the Company issued 400,000 shares of common stock to a
former employee / consultant in settlement of litigation. The Company
determined a fair value for the shares of $84,000 based on the market price of
the stock on the date of issuance. The Company recorded the entire amount as
research and development expenses in 2002.
In November 2002, the Company issued 225,001 shares of common stock to a
non-employee consultant as payment for consulting services performed in 2000
and 2001, which were in addition to those services detailed in the consultant's
contract, and for regular services under the contract for the first six months
of 2002. The Company determined a fair value for the shares of $180,000 based
on the market price of the stock on the date of issue and the unpaid fees
outstanding. The Company recorded a reduction in accrued expenses of $130,000
and the remaining amount was recorded as research and development expenses in
2002.
ISSUANCE OF COMMON STOCK UNDER INCENTIVE PLANS
In January 2002, a former officer of MDI exercised stock options to
purchase 250,000 shares of common stock at an exercise price of $0.3937 per
share. The Company recorded the $98,425 exercise price of the options as
compensation expense in 2001 in accordance with the terms of the officer's
severance agreement. In March 2002, the former officer exercised additional
stock options to purchase 111,000 shares of common stock at an exercise price
of $0.3937 per share and surrendered options to purchase 39,000 shares of
common stock in lieu of the exercise price.
ISSUANCE OF WARRANTS FOR SERVICES
In November 2000, Molecular Diagnostics, Inc. issued warrants to
purchase a total of 200,000 shares of common stock, at an exercise price of
$1.00 per share, to non-employees as compensation for financial services to be
provided under agreements covering a one-year period. The warrants vested in
equal amounts each month over the period. MDI may terminate the agreements upon
thirty days written notice, and any unvested options as of the date of
termination would be cancelled. The measurement date of these warrants was
determined as of December 31, 2001. A fair value of $75,000 for these warrants
was calculated at December 31, 2001, using the Black-Scholes valuation model.
During 2001 and 2000, MDI recorded $59,000 and $17,000 respectively, as
selling, general, and administrative expense.
In January 2001, Molecular Diagnostics, Inc. issued warrants to purchase
80,000 shares of common stock, at an exercise price of $1.00, and 100,000
shares of common stock, at an exercise price of $.50, to a non employee as
compensation for financial services to be provided under agreements covering
January through April, 2001 and May through December 2001 respectively. The
warrants vested in equal amounts each month. The agreements were replaced on
October 1, 2001 with a new agreement covering a fifteen-month period ending on
December 31, 2002. In accordance with the terms of the new agreement all of the
outstanding warrants were immediately vested and MDI issued a new warrant to
purchase 150,000 shares of common stock at an exercise price of $0.50. The new
warrant vests in equal amounts each month as services are provided. A fair
value of $13,500 was calculated for this warrant using the Black-Scholes
valuation method as the services were completed and vesting took place during
2002. MDI recorded a reduction of expense of $10,500 and expense of $24,000 as
selling, general, and administrative expense in 2002 and 2001, respectively, to
cover the vested warrants.
In July 2001, the Company issued a warrant to purchase 150,000 shares of
common stock at an exercise price of $1.20 per share to an investment-banking
firm as compensation for services provided over a twelve-month period. As the
measurement date of this warrant had not been determined as of December 31,
2001, the fair value of the warrant will be determined at the end of each
interim period until the measurement date is determined. A measurement date was
determined upon completion of services during 2002 and a fair value of $66,375
was calculated, using the Black-Scholes valuation model. During 2002 and 2001,
the company recorded $10,875 and $55,500,respectively, as selling, general and
administrative expense.
During 2001, several advisory groups, contracted to assist Molecular
Diagnostics, Inc. in completing the Private Placement Offering of Series B
Convertible Preferred Stock in 2001 were compensated through the payment of
$159,000 in cash, the issuance of 440,692 shares of common stock, and the
issuance of warrants to purchase 566,942 shares of common stock at an exercise
price of $1.20 per share.
In January 2002, the Company issued a warrant to purchase 200,000 shares
of common stock at an exercise price of $0.30 per share to the holder of a
convertible promissory note in consideration for a ninety-day extension of the
note maturity date. A fair value of the warrant of $4,110 was calculated using
the fair value interest method. In April 2002, the Company issued an additional
warrant to purchase 200,000 shares of common stock at an exercise price of
$0.70 per share to the same note holder for another ninety-day extension of the
note maturity date. A fair value of this warrant of $8,287 was calculated using
the fair value interest method. The Company recorded both amounts as additional
interest expense in 2002.
In February 2002, the Company issued a warrant to purchase 750,000
shares of common stock at an exercise price of $0.01 per share to its former
legal counsel as compensation for legal services performed in regard to settled
litigation. A fair value of the warrant of $675,000 was calculated using the
Black-Scholes valuation method. The Company recorded the amount as legal
expenses during 2002.
Between March 2002 and June 2002, the Company issued a series of Bridge
I convertible promissory notes. As additional consideration for the notes, the
company issued warrants to purchase 3,185,000 shares of common stock at an
exercise price of $0.25 per share to the note holders. A fair value of the
warrants of $99,950 was calculated using the fair value interest method. This
amount was recorded as additional interest expense during 2002.
On May 31, 2002, the Company issued a warrant to purchase 51,493 shares
of common stock at an exercise price of $0.01 per share to a non-employee
consultant in lieu of payment of fees due to the consultant for past services.
The Company recorded a fair value of $50,969, the value of the consulting fees
due, as a reduction of accounts payable.
In September 2002, the Company issued a warrant to purchase 681,818
shares of common stock at an exercise price of $0.20 per share to various
individuals related to Round Valley Capital, LLC as additional loan transaction
fees. A fair value of the warrant of $156,000 was calculated using the Black-
Scholes valuation method modified so that cash and non-cash transactions fees
did not exceed the loan value. This fair value will be amortized as additional
financing costs over the life of the loan. The Company recorded $69,333 as
financing costs to reflect the amount amortized during 2002. As part of the
loan settlement with Round Valley Capital, LLC, in April of 2003, warrants to
purchase 481,818 shares of common stock were returned to the Company and
cancelled.
In November 2002, the Company issued a warrant to purchase 200,000
shares of common stock at an exercise price of $0.16 per share as compensation
to an advisor who acted as a finder for investors in Bridge II convertible
promissory notes. A fair value for the warrant of $44,000 was calculated using
the Black-Scholes valuation method. The Company recorded the amount as
financing costs during 2002.
ISSUANCE OF WARRANTS TO PURCHASE ASSETS
In June 2000, the Company entered into a License and Technology
Agreement (the "Agreement") with Invirion and Dr. Bruce Patterson, M.D., Ph.D.,
its principal, granting the Company exclusive rights to certain medical
technology for the detection of oncogenic (cancer causing) types of the Human
Papilloma Virus ("HPV"). The Agreement provides for $500,000 in cash payments
and the issuance of warrants to purchase 400,000 shares of our Common Stock at
an exercise price of $0.01, based on the delivery of milestones. The first two
milestones were met in 2000, which required the Company to pay $400,000 and
issue 250,000 warrants. The third milestone was tentatively reached during 2001
and the Company paid $34,000 in cash and issued 50,000 warrants. Final
agreement on the completion of the third milestone continues to be subject to
verification of processes and procedures by an independent third party. The
Company used the Black-Scholes valuation model to determine a fair value for
the warrants issued in 2001 and 2000 of $49,000 and $530,000, respectively, and
recorded the amount as license fees.
APPLICATION OF BLACK-SCHOLES VALUATION MODEL
In applying the Black-Scholes valuation model for the year 2002 and
2001, the Company has used an expected dividend yield of zero, a risk-free
interest rate of 6%, a volatility factor of 90%, 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.
WARRANTS
At December 31, 2002, the Company had the following outstanding warrants
to purchase shares of Common Stock:
WEIGHTED
AVERAGE
TOTAL SHARES EXERCISABLE UNEXERCISABLE EXERCISE PRICE EXPIRATION DATE
------------ ----------- ------------- -------------- ---------------
39,834 39,834 0 $15.060 Perpetual
55,000 55,000 0 $0.264 January 3, 2003
10,920 10,920 0 $6.870 February 3, 2003
48,333 48,333 0 $1.500 May 23, 2003
784,901 784,901 0 $0.010 May 24, 2003
681,818 681,818 0 $0.200 September 3, 2003
250,000 250,000 0 $0.010 September 11, 2003
50,000 50,000 0 $0.010 July 15, 2004
372,500 372,500 0 $1.090 August 29, 2004
100,000 100,000 0 $0.600 October 31, 2004
1,750,000 1,750,000 0 $1.150 November 2, 2004
50,000 50,000 0 $0.330 December 10, 2004
200,000 200,000 0 $0.300 January 31, 2005
1,023,302 1,023,302 0 $6.870 March 23, 2005
200,000 200,000 0 $1.000 November 22, 2005
50,000 50,000 0 $0.937 December 1, 2005
1,000,000 1,000,000 0 $1.250 December 8, 2005
180,000 180,000 0 $0.720 January 8, 2006
25,000 25,000 0 $0.010 February 1, 2006
1,000,000 1,000,000 0 $0.250 February 7, 2006
599,942 599,942 0 $1.200 February 28, 2006
150,000 150,000 0 $1.200 July 10, 2006
750,000 750,000 0 $1.000 July 26, 2006
312,500 312,500 0 $1.000 August 6, 2006
150,000 150,000 0 $0.500 October 1, 2006
172,120 172,120 0 $0.820 October 11, 2006
597,750 597,750 0 $1.000 November 30, 2006
200,000 200,000 0 $0.700 March 31, 2007
51,493 51,493 0 $0.010 May 31, 2007
3,185,000 3,185,000 0 $0.250 July 31, 2007
200,000 200,000 0 $0.160 November 1, 2007
250,000 250,000 0 $0.330 July 14, 2009
750,000 0 750,000 $0.001 February 12, 2012
---------- ---------- ------- ------
15,240,413 14,490,413 750,000 $1.063
========== ========== ======= ======
The Company is obligated under the terms of subscription agreements
for Bridge I and Bridge II convertible promissory notes to issue additional
private warrants to the note holders based on certain events. If and when the
holder of a Bridge I note elects to convert the principal of the note into
shares of MDI common stock, the holder is entitled to receive a warrant to
purchase one share of MDI common stock for each four shares of MDI common stock
into which the note is converted at an exercise price equal to 150% of the note
conversion price. Since the Bridge I convertible promissory note conversion
price is set at 75% of the market price on the date of conversion, the number
of warrants to be issued and their exercise price or prices cannot be
determined until such time as the notes are actually converted into the common
stock of MDI. If and when the Company completes additional financing plans as
outlined in the subscription agreements for Bridge II notes, the holder of a
Bridge II note is entitled to receive a warrant to purchase one share of stock
for each four shares into which the note is convertible. The exercise price of
the warrants is $0.15 per share for Bridge II notes, which fall into the class
of the first $1,000,000 in cash subscriptions and $0.20 for the holders of the
remaining Bridge II notes.
Certain warrants in the above table entitling the holders, Azimuth
Corporation and Cadmus Corporation, to purchase a total of 3,125,000 shares of
common stock, include additional anti-dilution provisions, over and above the
standard anti-dilution provisions included in all warrants which cover dilution
caused by common stock dividends and stock splits or reverse stock splits.
These additional provisions consider other items as dilutive events, including
but not limited to the issuance of convertible debt or equity securities,
options, warrants, etc. A calculation of the dilutive effect of a convertible
security is required at the time the security is issued rather than if and when
actual conversion takes place. The Company calculated that at December 31,
2002, these warrants were required to be adjusted to reflect that the holders
were entitled to purchase and additional 519,000 shares of common stock. The
exercise prices of the warrants would be adjusted so that the total proceeds to
the Company from an exercise of these warrants would remain the same. The
Company also calculated that as of the beginning of July 2003, additional
adjustments were required to reflect that holders were entitled to purchase a
further 897,000 additional shares with commensurate adjustments in per share
exercise prices. On July 18, 2003, the Company negotiated an agreement with the
holders of these warrants. The holders agreed to cancel the warrants and
forgive approximately $120,000 owing to the holders by MDI as of that date. The
Company agreed to issue a new warrant to the holders entitling them to purchase
6,500,000 shares of common stock at an exercise price of $0.30 per share. The
Company also agreed to issue a 120-day warrant entitling the holders to
purchase 500,000 shares of common stock at $0.30 per share. The new warrants
will only contain the standard anti-dilution provisions included in all other
warrants.
STOCK APPRECIATION RIGHTS
At December 31, 2002 and 2001, MDI had 450,000 stock appreciation rights
(SARs) outstanding. These SARs, issued in 1989, have an exercise price of $0.30
and could be exercised through November 20, 2001. These SARs are deemed
automatically exercised on November 20, 2001 if not done so at the option of
the holder. 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 MDI prior to the exercise date. In
lieu of making cash payments, MDI may elect and intends, to issue shares of
Common Stock. MDI recorded compensation expense of $91,395 for the year ended
December 31, 2000, and a reversal of compensation expense of $79,020 in 2001,
to reflect the difference between the closing market price of MDI's common
stock at November 20, 2001 and December 31, 2000 and the exercise price of the
SARs. Since the SARs were deemed exercised at November 20, 2001, no additional
entries were required for 2002.
SHARES OF COMMON STOCK
As a result of the issuance of numerous convertible securities,
including the Bridge I and Bridge II convertible promissory notes and related
warrants, MDI does not have sufficient shares of common stock authorized to
issue upon exercise of all of the currently outstanding convertible securities,
warrants and options. The Board of Directors has approved an increase in the
number of authorized shares of common stock from 100,000,000 shares to
175,000,000 shares, but such action requires a vote of MDI's stockholders. This
issue will be placed on the agenda at the next annual meeting of MDI's
stockholders or at a special meeting to be called for this purpose. The failure
to have a sufficient number of authorized shares may constitute a breach of one
or more of the agreements governing issuance of such securities.
NOTE 11. LEASES
As of December 31, 2002, the Company currently leases approximately
5,700 square feet of space for its Chicago, Illinois corporate headquarters and
research laboratory and offices under an operating lease expiring in 2006. The
Company's wholly owned subsidiary, Samba Technologies SARL, leases
approximately 300 square meters of office space in a suburb of Grenoble, France
under an operating lease expiring in 2008. Samba has the option to terminate
the lease at May 31, 2006. Total rental expense, including expenses related to
the Company's previous headquarters location, Samba's previous temporary office
space, and AccuMed's leased facilities prior to vacating the leased facility
during the years ended December 31, 2002, 2001 and 2000 was $179,000, $231,000
and $90,000, respectively.
Future minimum annual lease payments under these leases as of
December 31, 2002 are (in thousands):
ACCUMED
OPERATING LEASE
YEAR LEASES OBLIGATION
---- ------- ----------
2003........................................... $148 $ 327
2004........................................... $153 $ --
2005........................................... $158
2006........................................... $ 33
---- -----
Total lease payments........................... $492 $ 327
---- -----
Amount of interest included in the minimum
lease payments................................. $ (48)
-----
Carrying value of lease obligation............. $ 279
Following completion of MDI's merger with AccuMed, management decided to
vacate AccuMed's leased facility and consolidate its operations into MDI's
headquarters facility. During 2002, AccuMed's landlord brought suit against
AccuMed for unpaid rent and obtained a judgment in the amount of approximately
$157,000. The landlord, under a court order, was able to obtain a $12,500
payment against the judgment, from the bank account of MDI. Since the
obligation under the lease is AccuMed, MDI is currently contesting the
landlord's right to enforce the judgment against MDI. Because the judgment has
not been paid as of December 31, 2002, MDI continues to carry the remaining
$279,000 of the lease obligation as a current liability as originally recorded
in accounting for the AccuMed merger based on the present value of the future
lease payments.
NOTE 12. INCOME TAXES
Significant components of deferred income taxes consist of the following
at December 31 (in thousands):
2002 2001
---- ----
Deferred tax assets related to:
Net operating loss carryforwards................ $27,833 $23,128
Research and Development Credit................. 656 657
Writedown of patents............................ 110 110
Accrued expenses................................ 367 1,054
------- -------
28,966 25,019
Less valuation reserve.................... 28,966 25,019
------- -------
Net deferred tax asset $ -- $ --
======= =======
At December 31, 2002, the Company had domestic net operating loss
carryforwards aggregating approximately $69,600,000. For financial reporting
purposes, this entire amount of deferred tax assets related principally to the
net operating loss carryforwards has been offset by a valuation allowance due
to uncertainty regarding the realizations of the assets. The valuation
allowance increased by approximately $3,947,000 and $21,048,000 for the year
ended December 31, 2002 and 2001, respectively.
The net operating loss carryforwards and Research and Development credit
carryforwards may not be available to offset future taxable income of MDI due
to statutory limitations based on the changes of ownership and other statutory
restrictions.
The net operating loss carryforwards begin to expire in 2006. The
Research and Development credit carryforwards expire from 2003 to 2014.
NOTE 13. EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN
On May 25, 1999, stockholders approved the establishment of the 1999
Equity Incentive Plan effective as of June 1, 1999. The Plan provides that the
Board may grant various forms of equity incentives to directors, employees, and
consultants, including but not limited to Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, and Restricted Stock
Awards. Grants under the Plan are exercisable at fair market value determined
as of the date of grant in accordance with the terms of the Plan. Grants vest
to recipients immediately or ratably over periods ranging from two to five
years, and expire five to ten years from the date of grant.
On May 23, 2000, stockholders approved Amendment No. 1 to the Plan,
which increased the number of shares of common stock allocated for use in the
Plan from 2,000,000 shares to 3,000,000 shares. On June 21, 2002, stockholders
approved an Amendment to the Plan, which increased the number of shares
allocated for use in the Plan from 3,000,000 shares to 5,500,000 shares.
The Board of Directors has also granted options to purchase common stock
of MDI, which are not covered by the terms of the Plan.
MDI applies APB Opinion No. 25 and related interpretations in accounting
for options granted to employees under the Equity Incentive Plan. No
compensation cost was recorded during 2002, 2001 or 2000 for options granted to
employees as the exercise price approximated the fair value of the underlying
common stock on the date of the grant. Had stock options been accounted for
under the fair value method recommended by FAS 123, the Company's net loss
allocated to common shareholders would have been changed to the pro forma
amounts indicated below:
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
(in thousands except for per share amounts)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS AS REPORTED...... $(13,972) $(19,791) $ (6,611)
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net
of related taxes........................................ (345) (1,159) (1,028)
--------- --------- ---------
PRO FORMA NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........ $(14,317) $(20,950) $ (7,639)
========= ========= =========
Basic loss per share applicable to common
shareholders - as reported.............................. $ (.49) $ (.62) $ (.24)
========= ========= =========
Basic and diluted loss per share applicable to common
shareholders - pro forma................................ $ (.50) $ (.65) $ (.27)
========= ========= =========
The fair value for these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6%; dividend yields of zero;
volatility factors of the expected market price of the Company's common stock
of 90% for both years and a weighted average expected life of the options of
2.5 - 5 years.
A summary of the Company's stock option activity, and related
information follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------- -----
OUTSTANDING AT DECEMBER 31, 1999.... 1,020,000 $0.3964
Granted............................. 1,510,000 $2.5258
Forfeited........................... (274,166) $2.4177
--------- -------
OUTSTANDING AT DECEMBER 31, 2000.... 2,255,834
=========
Granted............................. 1,676,000 $1.1772
Assumed in acquisition.............. 366,495 $12.1040
Exercised........................... (16,666) $0.4063
Forfeited........................... (489,167) $1.9206
---------
OUTSTANDING AT DECEMBER 31, 2001.... 3,792,496
=========
Granted............................. 686,833 $0.4104
Exercised........................... (361,000) $0.3937
Forfeited - assumed in acquisition.. (321,812) 6.7961
Forfeited........................... (289,000) $1.0702
---------
OUTSTANDING AT DECEMBER 31, 2002.... 3,507,517
=========
EXERCISABLE AT DECEMBER 31, 2002.... 2,592,682 $1.2629
=========
Weighted average fair value of options
granted in 2002..................... $0.3943
At the Annual Meeting on May 25, 1999, the stockholders also approved
the Employee Stock Purchase Plan. The Plan offers employees the opportunity to
purchase shares of common stock of MDI through a payroll deduction plan, at 85%
of the fair market value of such shares at specified enrollment measurement
dates. The aggregate number of shares available for purchase under the Plan is
200,000.
NOTE 14. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, MDI was contractually committed to pay $320,000 to
scientists, researchers, universities, and other independent third parties for
services to be performed during 2003. MDI may unilaterally cancel these
contracts with thirty days written notice or for non-performance.
On October 11, 2001, MDI obtained a 30% investment in Cell Solutions,
LLC. Cell Solutions was formed for the purposes of developing and improving
slide preparation systems. As consideration, MDI provided 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 $127,000. MDI has included the value of these warrants as an
investment at December 31, 2002 and 2001. MDI determined the fair value of the
investment to be impaired at December 31, 2001. The investment was written down
to zero as a result of the uncertainty of future benefit or revenue stream.
MDI is contractually committed to issue a total of 1,549,086 warrants
with the same terms based upon delivery of certain products by Cell Solutions.
As of December 31, 2002, Cell Solutions had not delivered these products and
MDI was not liable for the issuance of the warrants.
NOTE 15 LEGAL PROCEEDINGS
SETTLED DURING 2002
On October 20, 2000, MDI filed suit in Circuit Court of Cook County,
Illinois (Case No. 00 CH 15652), against SpectRx, Inc. and Welch Allyn, Inc.
The suits sought injunctive relief and damages from SpectRx based on a
complaint of fraud and breach of certain confidentiality agreements with regard
to MDI's business plans, marketing plans, and technology related to in-vivo
diagnostic devices. MDI's claim arose from disclosure of confidential
information to SpectRx in the course of negotiations contemplating a joint
venture to develop new medical products. The information covered cancer
detection systems relying on fluorescence technologies as well as bio-molecular
marking agents for use in applications within and outside of the body. MDI also
provided SpectRx with marketing plans, revenue, income and cash flow
projections, product development and launch plans, and product distribution
strategies. In addition, MDI provided SpectRx with certain confidential
technical information regarding patent applications, measurement technologies,
design specifications, quantitative analyses, optimization techniques,
positional information for cellular mapping, and other technical
specifications. Subsequent to the disclosure of MDI's information to SpectRx,
they entered into a business arrangement with Welch Allyn to develop products
of a similar nature to MDI's. The suit also charged SpectRx and with
misappropriation of MDI's trade secrets in violation of the Illinois Trade
Secrets Act.
MDI's suit was filed in response to a suit filed by SpectRx in the
Superior Court of Gwinnett County, Georgia (Civil Action NO. 00-A-7604 1),
seeking a declaratory judgment (but no monetary damages or other relief) that
SpectRx did not breach the confidentiality agreements as charged in MDI's suit.
On July 5, 2001, MDI filed counterclaims, similar to the claims outlined in
MDI's Illinois suit, to the SpectRx action in Georgia.
On February 1, 2002, MDI reached an out-of- court settlement with
SpectRx. Under the terms of the settlement, SpectRx paid a $150,000 lump sum
cash payment to MDI, and MDI granted SpectRx an option to license certain of
MDI's technology. Additional terms of the settlement are confidential. Under
the terms of the settlement, neither party admitted any liability or
wrongdoing. Welch Allyn also was a party to the settlement agreement.
In 2001, Dawn H. Grohs, a former employee / consultant to the Company,
filed suit against the Company and certain affiliated companies, as well as two
of the Company's senior officers (C.A. No. 02-C-1010 (U.S. District Court for
the Northern District of Illinois). Ms. Grohs' claimed fraud, unjust
enrichment, misrepresentation, breach of contract and quantum merit related to
her assertions that the defendants allegedly failed to provide her with equity;
tortuous interference with contractual relations and intentional interference
with contractual relations based on alleged encouragement of changes to the
business relationship with Ms. Grohs; breach of the covenant of good faith and
fair dealing, negligent infliction of emotional distress and intentional
infliction of emotional distress based on defendants' treatment of Ms. Grohs;
and violation of state law for alleged unfair and deceptive acts by defendants
for the purpose of inducing Ms. Grohs to continue to provide services without
compensation. Ms. Grohs sought $85,000 in wages, $40,250 in expenses, equity
for contributions and efforts during the formation of certain of the Company's
affiliates, payment of a sum to be determined by the court for the intentional
and/or negligent infliction of emotional distress, a finding that the actions
of defendants constitute unfair and deceptive acts, and that the court treble
the damages awarded. In addition to the specific relief described above, each
count seeks an award of attorneys' fees and costs and such other and further
relief the court deems just and appropriate. In October 2002, MDI reached an
out-of-court settlement with Ms. Grohs. Under the terms of the settlement, MDI
paid Ms. Grohs $5,000 in cash and issued 400,000 unregistered shares of MDI's
common stock to her. MDI calculated a fair value of $84,000 for the shares of
its common stock. MDI also granted Ms. Grohs an option to purchase 400,000
shares of MDI's common stock at an exercise price of $0.20 per share. One third
of the option vested immediately and the remaining two thirds vest in equal
amounts on the first and second annual anniversary dates of the grant.
PENDING AT DECEMBER 31, 2002 AND AS OF DATE OF REPORT
Prior to MDI's acquisition of AccuMed, Garrett Realty, Inc. filed suit
against AccuMed for unpaid rent and related expenses under a lease for premises
located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook
County (Case No. 01 M1 725821)). Garrett originally claimed approximately
$50,000 was due them. Following completion of MDI's acquisition of AccuMed,
management vacated AccuMed's leased facility and consolidated its operations
into MDI's headquarters facility. However, Garrett continued to claim ongoing
rent and amended its complaint in 2002 claiming approximately $148,000 in
unpaid rent and related legal costs through July 2002. On July 18, 2002,
judgment was entered in favor of Garrett and against AccuMed in the amount of
approximately $157,000. On December 20, 2002, pursuant to a court order, Garret
seized approximately $12,500 from an MDI bank account, as a partial payment
against the judgment amount. The unpaid remainder of the judgment will continue
to accrue interest until paid in full. Since AccuMed had a continuing
obligation for the minimum lease payments, MDI recorded a $290,000 lease
obligation in accounting for the AccuMed merger based on the present value of
the future payments. MDI is contesting the right of Garrett to pursue
collection of the judgment against the assets of MDI. Management believes that
the amount of the accrued lease obligation recorded as of December 31, 2002 is
sufficient to cover any remaining expenses of this litigation and the related
judgment.
On May 22, 2001, a judgment in the amount of $312,000 plus interest was
entered against AccuMed (Circuit Court of Cook County (Case N0. 97 L 7158)) in
favor of Merrill Corporation. The judgment was the result of the settlement of
an action brought by Merrill claiming unpaid fees for financial printing
services, provided to AccuMed in 1996, and related interest and legal costs
totaling in excess of $400,000. Under terms of the settlement and the related
judgment, AccuMed was required to make 12 monthly payments of $26,000, and a
final payment to include all interest accrued on declining unpaid balance of
the judgment over the term of payment. AccuMed made 7 payments in accordance
with the terms of the settlement and ceased to make any additional payments. In
May of 2002, Merrill asserted its rights under the original judgment and filed
a citation to discover assets of AccuMed and obtain the remaining amount due.
On October 17, 2002, MDI reached an agreement with Merrill whereby MDI assumed
responsibility for the remaining unpaid amount of the judgment and related
costs totaling $145,000 and agreed to pay such amount no later than November
15, 2002. MDI failed to make the required payment on November 15, 2002 and
Merrill instituted an action against MDI to discover assets and to obtain
payment of the $145,000. As of June 30, 2003, this litigation has not been
resolved. At December 31, 2002 MDI had accrued the entire $145,000 amount of
the judgment on the records of AccuMed. Management is currently negotiating
with Merrill representatives to resolve this action.
PENDING AS OF DATE OF REPORT
On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999.
Under the settlement agreement, MDI executed an $80,000 promissory note in
favor of Trek. The note required principal payments of $40,000 each on
September 1 and December 1, 2002. MDI made the initial payment and Trek filed
suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03
492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at
8% per annum and legal and other costs. At December 31, 2002, MDI accrued the
remaining amount due on the note. On April 18th, 2003, judgment was entered
against MDI in the amount of $40,000 plus interest. Management is currently
negotiating with Trek representatives to resolve this matter.
On March 28, 2003 The Cleveland Clinic Foundation filed suit against MDI
(United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and attorney fees and costs. The sum in question pertains to remaining unpaid
fees for certain clinical trial work conducted by The Cleveland Clinic
Foundation in the Peoples Republic of China on behalf of MDI. At December 31,
2002, MDI has recorded the full amount owing to The Cleveland Clinic Foundation
as a liability in its accounts. MDI is currently engaged in settlement
discussions with The Cleveland Clinic Foundation.
On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03
L 000009)) claiming approximately $342,000, plus interest and attorney fees and
costs, related to financial printing service fees provided to MDI by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. As of December
31, 2002 and June 30, 2003, management and its counsel are unable to determine
the outcome of this litigation.
On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, MDI's Chairman and CEO, (United States District Court for the
Northern District of Illinois Eastern Division (Case No. 03C 0184)) claiming
$500,000 plus consequential damages for failure to make payment in compliance
with the terms of a personal guaranty signed by Mr. Gombrich in relation to
Monsun's grant of an extension in the maturity date of a convertible promissory
note in the principal amount of $500,000 issued by MDI on November 1, 2000. The
note had an original maturity date of November 1, 2001. The maturity date of
the note was initially extended until January 31, 2002 and subsequently to
April 1, 2002 and finally to July 31, 2002. Monsun granted the maturity date
extensions in exchange for various warrants issued by MDI entitling the holder
to purchase shares of MDI's common stock at various prices. In November 2002,
the Board of Directors approved the issuance of 200,000 shares of MDI's common
stock to Monsun to satisfy a default penalty clause in the guaranty. The terms
of the guaranty required that Monsun receive registered shares of MDI's common
stock, however, in order to comply with securities laws, MDI issued the shares
of its common stock to Monsun with a restrictive legend which permits their
sale only in compliance with Rule 144 of the Securities Exchange Act. MDI has
recorded the principal amount of the note plus accrued and unpaid interest to
December 31, 2002 as a note payable on its records. Since Mr. Gombrich's
potential liability under the suit, including the failure to deliver registered
shares of MDI's common stock, is the result of the failure of MDI to pay the
principal amount of its convertible promissory note when due, the Board of
Directors has agreed that MDI will assume responsibility for Mr. Gombrich's
obligations under the guaranty, including legal costs. Management and counsel
are unable to determine the result of this pending litigation as of June 30,
2003.
MDI is a defendant in several lawsuits brought by current or former
unsecured creditors to collect past due amounts for goods and services. MDI has
recorded the amounts due in its records and is attempting to settle these suits
and unfiled claims.
MDI is a defendant in several legal actions brought by former employees
seeking to collect amounts due for unpaid wages. MDI has recorded the amounts
due in its records and is attempting to settle these actions
In May 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court of Cook County, Illinois)). The suit arises out of
two license agreements between AccuMed, Oncometrics and MonoGen in which
certain intellectual property was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements"). At the time of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics by the British
Columbia Cancer Agency ("BCCA") pursuant to a written license agreement.
Pressman was the President of AccuMed and Oncometrics when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position with MonoGen. The Complaint alleges that that the technology was
transferred at a below market price. The Complaint also asserts that AccuMed
and Oncometrics may not have obtained the requisite approval from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.
The Complaint contains claims against Pressman for breach of fiduciary
duty and fraud. To the extent that the requisite approval from BCCA was not
obtained, Pressman breached his fiduciary duty to AccuMed and Oncometrics by
failing to obtain that approval, and falsely representing that he had in fact
obtained the requisite approval. Pressman breached his fiduciary duty further
by failing to negotiate an arms length transaction with MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of fiduciary duty to AccuMed and Oncometrics, fraud in the inducement and
tortuous interference with prospective economic advantage.
The Company's claims against MonoGen have been dismissed from this
action and consolidated in a separate arbitration proceeding involving the
Company and MonoGen. The Company's claims against Pressman remain pending in
this action. In June 2003, the Court dismissed the Company's request for a
preliminary injunction. The denial of preliminary injunctive relief does not
affect the Company's rights to pursue permanent injunctive relief at the
conclusion of the case, if such relief is warranted. The Company is attempting
to negotiate a global settlement of the claims in this action, the arbitration
proceeding with MonoGen and any threatened but unasserted claims by BCCA
relating to the Agreements. The failure to negotiate a favorable settlement
could have a material adverse effect on MDI's business.
On April 14, 2003, we received a notification from the attorney for the
licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development
Agreement covering certain HPV technology, which forms the basis for our In-
Cell HPV test, indicating that the licensor intended to terminate the license
in accordance with a specific clause of the license, which permits termination
in the event the Company makes an assignment for the benefit of creditors or
bankruptcy, or otherwise relinquishes or loses control of all its assets. On
April 15, 2003, we informed the attorney that the facts used by the licensor to
invoke the termination right were incorrect and that we are still in control of
all of our assets and that such assets are pledged as security under debt
instruments and that such pledges are not included under events which would
permit the licensor to terminate the license. We, and our counsel, believe that
the MDI would prevail should the licensor attempt to pursue a termination
action. We are also engaged in a dispute with the licensor over completion of
the third milestone of the license under which completion requires process and
procedure verification by an independent third party. This verification
requirement has not been satisfied as yet.
NOTE 16. QUARTERLY DATA (UNAUDITED)
The following table represents unaudited quarterly operating results for
the two years ended December 31, 2002 and 2001. The Company prepared this
information on a basis consistent with the Company's audited financial
statements. In management's opinion, the quarterly operating results include
all adjustments necessary (which are of a normal and recurring nature) for the
fair presentation of the results of the interim periods presented. Basic loss
per share for each quarter is computed using the weighted-average number of
shares outstanding during that quarter. Basic loss per share for the full year
is computed using the weighted-average number of shares outstanding during the
year. Thus, the sum of the four quarters' basic loss per share may not equal
the full-year basic loss per share. In addition, due to rounding of each
quarters' operating results, the full-year operating results disclosed in the
consolidated financial statements may not equal the sum of each quarters'
operating results shown below.
2002 2001
---- ----
QUARTER ENDED QUARTER ENDED
------------- -------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues $ 656 $ 502 $ 295 $ 293 $ 409 $ 288 $ 174 $ 6
Gross profit 461 215 133 85 131 79 65 126
Net loss available
for common
shareholders (2,932) (4,493) (3,638) (2,909) (4,640) (2,217) (2,344) (10,590)
Basic loss per
share $ (0.11) $ (0.17) $ (0.14) $ (0.08) $ (0.15) $ (0.07) $ (0.07) $ (0.30)
Weighted average
number of shares
outstanding 25,561 25,747 26,551 34,795 30,269 30,468 31,846 35,440
NOTE 16. SUBSEQUENT EVENTS
BRIDGE II FINANCING
Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. The
notes bear interest at 12 % per annum payable at maturity date in kind in the
form of shares of common stock and are due July 31, 2003. The notes are
convertible at any time into the common stock of MDI. The note conversion price
and the value of common shares paid in kind as interest for the first
$1,000,000 in cash subscriptions, determined on a "first come - first served
basis," is $0.10 per share. The note conversion price and the value of common
shares paid in kind as interest for the remaining $3,000,000 of principal
amount of notes in the series is $0.15 per share. MDI granted each note holder
the right to receive a private warrant to purchase one share of the common
stock of MDI for each dollar of principal amount of notes held at an exercise
price of $0.15 per share. The warrants are not issuable until such time as MDI
completes significant additional financing plans. MDI granted a junior security
position in all of the Company's assets to the holders of the Bridge II
convertible promissory notes. Through December 31, 2002, MDI had issued
$550,000 in principal amount of Bridge II convertible promissory notes in
exchange for cash. Between February 17, 2003 and July 8, 2003, MDI issued an
additional $1,141,000 principal amount of Bridge II convertible promissory
notes in exchange for cash.
OTHER FINANCING
On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to
an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman
and CEO, in exchange for cash. The note bears interest at the rate of 12% per
annum and is convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per share. MDI also granted the holder a first priority security interest
in all of the Company's assets. MDI used all of the cash proceeds from the note
to fund the $100,000 cost of an option to repurchase all of its assets from
Round Valley Capital, LLC and to make the $900,000 payment required to exercise
the purchase option in conjunction with the final settlement of the loan with
Round Valley Capital, LLC.
SETTLEMENT OF ROUND VALLEY CAPITAL, LLC LOAN AND RELATED LITIGATION
On August 30, 2002, MDI issued a promissory note to Round Valley
Capital, LLC ("RVC") in the amount of $825,500 representing $650,000 in cash
received in exchange for the note and $175,500 in unearned interest. The note
was due June 1, 2003 and bore interest at a calculated rate of 36% per annum.
The note was secured by all of the Company's assets. MDI paid transaction fees
in cash of $147,063, issued RVC 711,364 shares of the common stock of MDI and
warrants to purchase 681,818 shares of the common stock of MDI at an exercise
price of $0.20 per share. MDI also issued a certificate representing 5,750,000
shares of the common stock of MDI as additional collateral for the loan. As of
December 31, 2002, MDI had made principal and interest payments against the
note of $350,000 and $59,500, respectively. As a result of issues over the
value of collateral, RVC declared the note to be in default under the terms of
the note and attempted to foreclose on the Company's assets and sell them at
auction. MDI instituted legal action against RVC, halting the foreclosure and
asset sale, and immediately entered into settlement negotiations. In early
December of 2002, MDI reached a settlement agreement with RVC under which the
Company was required to pay the remaining $300,000 principal balance of the
note plus an additional amount of $115,000, representing the remaining unearned
interest on the note, by January 4, 2003. The agreement provided that if the
payment due on January 4, 2003 was not made in a timely manner, a default
penalty would be assessed each week payment was not made until a final payment
amounting to $950,000 would be due on February 19, 2003. MDI was not able to
make the payment due on January 4, 2003 and made no further payments until
February 17, 2003, when MDI paid RVC $250,000 leaving a remaining balance due
under the settlement agreement of $700,000. At the end of February RVC
proceeded with foreclosure against the Company's assets. At that time MDI
agreed to pay RVC $100,000 for an option to repurchase the Company's assets at
any time prior to the close of business on April 2, 2003. The option prevented
RVC from selling the assets to any party other than MDI before that date. MDI
used the proceeds of Bridge II convertible promissory notes issued in February,
as described above, to make the $250,000 payment to RVC. On April 2, 2003, MDI
paid RVC $900,000 to exercise the purchase option to reacquire all of the
Company's assets. MDI used the proceeds of a convertible promissory note issued
to an affiliate, as described above, to make the payment for the purchase
option and the final payment to RVC. In conjunction with this final payment,
RVC returned 5,750,000 shares of the common stock of MDI issued as collateral,
711,364 shares of the common stock of MDI and warrants to purchase 481,818
shares of the common stock of MDI issued to RVC as payment for transaction
fees. MDI cancelled the shares of common stock and warrants.
RESIGNATION OF OFFICER
On January 22, 2003 Stephen G. Wasko tendered his resignation from his
position as President and Chief Operating Officer, a position he held since
June 10, 2002. In February 2003 Mr. Wasko filed a claim with the Illinois
Department of Labor seeking approximately $84,000 in salary and bonuses due him
at the time of his resignation and severance payments amounting to
approximately $180,000. MDI is contesting the portion of the claim related to
severance payments. The Board of Directors reappointed Peter P. Gombrich,
Chairman and CEO, to temporarily fill the positions of President and Chief
Operating Officer. In June 2003, the Board of Directors appointed Dennis L.
Bergquist to be President and Chief Financial Officer of MDI.
BANKRUPTCY FILING OF SAMBA TECHNOLOGIES, SARL
In late December of 2002, the General Managers of Samba Technologies,
Sarl, a wholly-owned subsidiary of the Company, based in France, filed a
petition with the French Commercial Court for protection under the Bankruptcy
Laws of France. The Court approved the petition to cover all activities of
Samba prior to December 20, 2002. Samba was unable to meet its current
obligations primarily as a result of MDI's cash flow problems and its related
failure to pay 262,000 Euros due to Samba for work performed on behalf of the
Company's U.S. operations. During 2003, Samba has maintained its normal
operations under the protection of the French Commercial Court and its managers
have been supervised by a Court appointed Administrator. Samba will continue to
operate under the current format until a plan of reorganization and
continuation is approved by the Court, which must act by December of 2003,
unless an extension of time is granted. In consort with the Samba managers, MDI
anticipates filing a Continuation Plan with the French Commercial Court during
the third quarter. The Plan will include a payment structure for the U.S.
operations debt, direct participation in Samba's equity by the Samba managers,
and additional participation in Samba's equity by a strategic partner, with a
portion of the investment used to fund working capital. Upon approval of the
Plan, Samba will resume normal operations.
INSURANCE
Due to MDI's liquidity problems, the Company was unable to pay insurance
premiums for policies covering Directors and Officers Liability, Public
liability, Property Damage and Workers Employment Compensation. These policies
were all cancelled retroactive to October 29, 2002. MDI is currently working
with insurance providers to reinstate the aforementioned insurance coverage.
Schedule IX--Valuation and Qualifying Accounts
ADDITIONS
CHARGED BALANCE
BALANCE AT TO COSTS AT END
BEGINNING AND OTHER OF
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS CHANGES PERIOD
- ----------- --------- -------- ----------- ------- -------
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNTS......
ALLOWANCE FOR UNCOLLECTABLE
ACCOUNTS RECEIVABLE...............
Year ended December 31, 2000....... $ 20 $ 0 $ 16 $ 0 $ 4
Year ended December 31, 2001....... $ 4 $ 0 $ 0 $ 0 $ 4
Year ended December 31, 2002....... $ 4 $ 141 $ 0 $ 0 $ 145
RESERVES AND ALLOWANCES WHICH
SUPPORT BALANCE SHEET CAPTION
RESERVES
WARRANTY RESERVES
Year ended December 31, 2000....... $ 28 $ 0 $ 7 $ 0 $ 21
Year ended December 31, 2001....... $ 21 $ 0 $ 1 $ 0 $ 20
Year ended December 31, 2002....... $ 20 $ 1 $ 0 $ 0 $ 21
INVENTORY RESERVES
Year ended December 31, 2000....... $ 2 $ 0 $ 0 $ 0 $ 2
Year ended December 31, 2001....... $ 2 $ 0 $ 0 $ 0 $ 2
Year ended December 31, 2002....... $ 2 $ 0 $ 0 $ 0 $ 2
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.)
EXHIBIT
NUMBER DESCRIPTION
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)
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.)*
EXHIBIT
NUMBER DESCRIPTION
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.)*
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.)*
EXHIBIT
NUMBER DESCRIPTION
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 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.)
EXHIBIT
NUMBER DESCRIPTION
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 certain
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.)
4.34 Common Stock Purchase Warrant issued to Richard Domanik on May 20, 2002
representing the right to purchase 51,483 shares of common stock.
(Incorporated by reference to Exhibit 4.34 of the Company's Registration
Statement, File No. 333-100150 filed September 27, 2002.)
4.35 Common Stock Purchase Warrant issued to Round Valley Capital, LLC on
September 4, 2002 representing the right to purchase 681,818 shares of
common stock. (Incorporated by reference to the Company's S-2
Registration Statement, File No. 333-100150 filed September 27, 2002.)
4.36 Amendment No. 1 to the Common Stock Purchase Warrant issued in connection
with certain Bridge Financing dated August 20, 2002.
4.37 Form of Common Stock Purchase Warrant to be issued in connection with
certain Bridge II Financing beginning in October 2002.
EXHIBIT
NUMBER DESCRIPTION
4.38 Common Stock Purchase Warrant issued to Qwestar resources on November 1,
2002 representing the right to purchase 200,000 shares of common stock.
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. (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 Employment Agreement dated June 1, 1999 between Mr. Prange and the
Company. (Incorporated herein by reference to Exhibit 10.11 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)*
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.)*
EXHIBIT
NUMBER DESCRIPTION
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.)*
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.)*
EXHIBIT
NUMBER DESCRIPTION
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, 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, 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.)
EXHIBIT
NUMBER DESCRIPTION
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.)
99.1 $118,500 Promissory Note issued to Schwartz Cooper Greenberger & Krauss,
Chartered of February 13, 2002. (Incorporated by reference to Exhibit
10.40 to the Company's S-2 Registration Statement, File No. 333-83578
filed June 27, 2002.)
10.41 $650,000 Promissory Note issued to Round Valley Capital, LLC on August
30, 2002. (Incorporated by reference to the Company's S-2 Registration
Statement, File No. 333-100150 filed on September 27, 2002.)
10.42 Form of Convertible Promissory Note issued in connection with certain
Bridge Financing beginning in March 2002.
10.43 Amendment No. 1 to Convertible Promissory Note issued in connection with
certain Bridge Financing dated August 20, 2002.
10.44 Bridge II Convertible Promissory Note Indenture, including Form of
Convertible Promissory Note, Form Of Security Agreement, Form of
Collateral Sharing Agreement, and Form of Warrant issued in connection
with certain Bridge II Financing beginning in October 2002.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Altschuler Melvoin and Glasser, LLP
0.1 Section 906 Certification by principal executive officer
99.2 Section 906 Certification by principal financial officer.
* SEC File NO. 0-935
EXHIBIT 21.1
SUBSIDIARIES OF MOLECULAR DIAGNOSTICS, INC.
1. Bell Savings and Loan Association, a savings and loan association
chartered in the state of California.
2. Pacific Coast Holdings Insurance Company, an insurance company organized
under the laws of the state of California.
3. PFI National Corporation, a Delaware corporation.
4. InPath, LLC, a Delaware limited liability company.
5. Samba Technologies, SARL, a limited liability company organized under
the laws of France.
6. AccuMed International Inc., a Delaware corporation
7. Oncometrics Imaging Corp, a Canadian company registered in the Yukon
territory