- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
</Table>
COMMISSION FILE NUMBER 0-935
---------------------
MOLECULAR DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 36-4296006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 NORTH ORLEANS STREET, SUITE 510 60610
CHICAGO, IL (Zip Code)
(Address of principal executive offices)
</Table>
(312) 222-9550
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
<Table>
COMMON STOCK, $0.001 PAR VALUE 26,332,225
(Class) Outstanding shares as of August 10, 2002
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MOLECULAR DIAGNOSTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets -- June 30, 2002 and December
31, 2001................................................. 2
b) Consolidated Statements of Operations -- Six months ended
June 30, 2002 and June 30, 2001 and three months ended June
30, 2002 and June 30, 2001............................... 3
c) Consolidated Statements of Cash Flows -- Six months ended
June 30, 2002 and June 30, 2001............................. 4
d) Notes to Consolidated Financial Statements -- June 30,
2002..................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 18
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 3. Defaults upon Senior Securities............................. 19
Item 4. Submission of Matters to Vote of Security Holders........... 19
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES............................................................. 21
EXHIBIT INDEX.......................................................... 22
</Table>
1
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 116 $ 1,025
Accounts receivable, net allowance for doubtful accounts
of $4 at June 30, 2002 and December 31, 2001........... 348 463
Inventories............................................... 440 533
Refundable taxes.......................................... 127 116
Due from officer.......................................... (9) 50
Prepaid expenses and other current assets................. 268 141
-------- --------
Total current assets................................. 1,290 2,328
Fixed assets, net........................................... 820 835
Other Assets:
License, patents, and technology, net of amortization..... 7,853 8,180
Goodwill.................................................. 283 283
-------- --------
Total assets......................................... $ 10,246 $ 11,626
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,211 $ 2,502
Accrued payroll costs..................................... 1,111 868
Accrued expenses.......................................... 2,240 1,175
Deferred revenue.......................................... 353 567
Revolving line of credit.................................. 76 177
Lease obligation.......................................... 141 87
Notes payable -- related party............................ 86 65
Notes payable............................................. 3,555 1,359
-------- --------
Total current liabilities............................ $ 10,773 $ 6,800
Lease obligation, less current portion...................... 150 203
Deferred revenue............................................ 150 --
-------- --------
Total liabilities.................................... 11,073 7,003
-------- --------
Stockholders' Equity (Deficit)
Preferred stock, $0.001 par value; shares
authorized -- 10,000,000; shares issued and
outstanding -- 3,416,336 and 3,493,078, at June 30,
2002 and December 31, 2001............................. 19,519 21,089
Common stock, $0.001 par value; shares
authorized -- 100,000,000; shares issued and
outstanding -- 25,836,561 and 25,304,883, at June 31,
2002 and December 31, 2001, respectively............... 26 26
Additional paid-in capital................................ 15,435 12,212
Common stock held in treasury, at cost (192,088 shares)... (327) (327)
Deferred compensation..................................... (36) (61)
Accumulated deficit....................................... (35,300) (28,289)
Accumulated comprehensive loss --
Cumulative translation adjustment...................... (144) (27)
-------- --------
Total stockholders' equity (deficit)................. (827) 4,623
-------- --------
Total liabilities and stockholders' equity........... $ 10,246 $ 11,626
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS
SIX MONTHS ENDED JUNE 30, ENDED JUNE 30,
------------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Net revenues................................. $ 1,158 $ 697 $ 502 $ 288
Operating expenses
Cost of revenues........................... 482 487 287 209
Research and development................... 2,535 1,938 1,602 1,055
Selling, general, and administrative
expenses................................ 4,422 2,713 2,039 959
---------- ---------- ---------- ----------
Total operating expenses................ 7,439 5,138 3,928 2,223
---------- ---------- ---------- ----------
Operating loss............................... (6,281) (4,441) (3,426) (1,935)
Other income (expense):
Interest (expense) -- related party........ (9) (226) (8) (50)
Interest (expense)......................... (872) (119) (768) (68)
Interest income, related party............. -- 18 -- 9
Interest income............................ -- 53 -- 35
Gain on litigation settlement.............. 151 -- 1 --
Other, net................................. -- 3 -- --
---------- ---------- ---------- ----------
(730) (271) (775) (74)
---------- ---------- ---------- ----------
Loss before income taxes..................... $ (7,011) $ (4,712) $ (4,201) $ (2,009)
Income tax expense........................... -- -- -- --
---------- ---------- ---------- ----------
Net Loss..................................... $ (7,011) $ (4,712) $ (4,201) $ (2,009)
========== ========== ========== ==========
Preferred stock dividend..................... (414) (212) (292) (142)
Deemed dividend upon issuance of convertible
preferred stock............................ -- (1,933) -- (66)
---------- ---------- ---------- ----------
Total dividends.............................. (414) (2,145) (292) (208)
---------- ---------- ---------- ----------
Net loss available to common stockholders.... $ (7,425) $ (6,857) $ (4,493) $ (2,217)
========== ========== ========== ==========
Basic and fully diluted net loss per common
share...................................... $ (0.29) $ (0.23) $ (0.17) $ (0.07)
========== ========== ========== ==========
Weighed average number of common shares
outstanding................................ 25,654,840 30,369,328 25,747,224 30,468,212
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
MOLECULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2002 2001
-------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net Loss.................................................. $(7,011) $(4,712)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount........................... 683 248
Depreciation and amortization........................... 482 254
Stock, warrants, and options issued to non-employees for
service............................................... 765 416
Compensation expense related to stock appreciation
rights, stock options, and restricted stock........... 81 92
Expenses paid with common stock......................... -- 24
Interest paid with common stock......................... 79 --
Licensing fees recognized from Ventana contract......... (298) --
Changes in assets and liabilities:
Accounts receivables, net............................ 184 (89)
Inventories.......................................... 66 203
Refundable taxes..................................... 2 11
Due from stockholder................................. 59 --
Deferred acquisition costs........................... -- (319)
Prepaid expenses and other assets.................... (174) (79)
Prepaid royalties.................................... -- 27
Accounts payable..................................... 755 12
Deposits............................................. (28) (47)
Deferred revenue..................................... (89) (137)
Accrued expenses..................................... 1,342 (59)
------- -------
Net cash used in operating activities....................... (3,102) (4,155)
INVESTING ACTIVITIES:
Expenditures for licenses, patents and technology......... (4) (70)
Capital purchase.......................................... (87) (325)
Advances for notes receivable............................. -- (1,170)
------- -------
Net cash used in investing activities....................... (91) (1,565)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable....... 2,600 500
Proceeds from issuance of notes payable, related party.... 25 495
Proceeds from issuance of common stock, net of costs
incurred................................................ -- 200
Proceeds from issuance convertible preferred stock, net of
costs incurred.......................................... -- 5,840
Payment of notes payable.................................. (150)
Payment of notes payable, related party................... -- (795)
Payment of revolving line of credit, net.................. (111) (30)
Deposit received for future purchase of stock............. -- (500)
------- -------
Net cash provided by financing activities................... 2,364 5,710
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (80) 7
------- -------
Net increase (decrease) in cash and cash equivalents........ (909) (3)
Cash and cash equivalents at beginning of period............ 1,025 13
------- -------
Cash and cash equivalents at end of period.................. $ 116 $ 10
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 8 $ 3
Non-cash transaction during the period:
Deferred financing costs................................ $ -- $ 124
Preferred stock converted into common stock............. $ 345 $ --
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. ORGANIZATION
Molecular Diagnostics, Inc. was incorporated as Ampersand Medical
Corporation ("Ampersand") in Delaware on December 15, 1998, as the successor to
Bell National Corporation ("Bell National"). Bell National was incorporated in
California in 1958. Except where the context otherwise requires, "Molecular
Diagnostics", "MDI", "we", "us" and "our" refers to Molecular Diagnostics Inc.,
its subsidiaries and its predecessors.
On September 25, 2001, we changed our corporate name to Molecular
Diagnostics, Inc. in order to better represent our operations and products. The
name change was effected by a merger of Ampersand with and into its wholly-owned
subsidiary. We retained Ampersand's Certificate of Incorporation, except as
amended to reflect the new name, bylaws and capitalization.
On December 4, 1998, Bell National, then a shell corporation without any
business activity, acquired InPath, LLC, ("InPath") a development-stage company
engaged in the design and development of medical instruments and related tests.
In the acquisition, Bell National issued 4,288,790 shares of common stock and
warrants to purchase 3,175,850 shares of common stock to the members of InPath
in exchange for their membership interests in InPath.
Based upon the terms of the acquisition agreement for financial reporting
and accounting purposes, the InPath acquisition was accounted for as a reverse
acquisition whereby InPath was deemed to have acquired Bell National. However,
Bell National was the continuing legal entity and registrant for both Securities
and Exchange Commission ("SEC") filing purposes and income tax filing purposes,
until its merger into Ampersand in May 1999.
On September 17, 2001, we completed the acquisition of AccuMed
International, Inc. ("AccuMed") whereby AccuMed was merged into one of our
wholly-owned subsidiaries. The value of the transaction was approximately
$14,178. Accordingly, the consolidated financial statements presented hereunder
include the operations of InPath from March 16, 1998 (inception), the operations
of Molecular Diagnostics (including its predecessors Bell National and
Ampersand) from December 4, 1998, and the operations of AccuMed from September
17, 2001.
We are focused on the design, development and marketing of the InPath
System. The InPath System and related products are intended to detect cancer and
cancer related diseases. These products may be used in a laboratory, clinic, or
doctor's office.
We acquired all of the assets of Samba Technologies, SARL ("Samba") in
January 1999 from Unilog Regions, SA. Samba designs, develops, and markets
web-enabled software based systems for image analysis, image capture, and image
transmission and management for clinical and industrial applications. Samba is
also developing software used in the InPath System.
We incurred significant operating losses since our inception. Management
expects that significant ongoing operating expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market our
products. These circumstances raise substantial doubt about our ability to
continue as a going concern. Implementation of these plans and our ability to
continue as a going concern depend upon our ability to secure substantial
additional financing. Our plans include substantial efforts to obtain additional
capital. If we are unable to obtain adequate additional financing or generate
profitable sales revenues, we may be required to curtail our product development
and other activities and we may be forced to cease operations.
5
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
us without audit according to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States have been omitted pursuant to such rules and regulations. The
financial statements reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations as
of and for the periods indicated. The results of operations for the six months
ended June 30, 2002, are not necessarily indicative of the results to be
expected for the full year or for any other period. The consolidated financial
statements include Molecular Diagnostics and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in our 2001 Annual Report on
Form 10-K/A, as filed with the SEC.
NOTE 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
("Opinion 30"), for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No. 121. For
example, SFAS No. 144 provides guidance on how a long-lived asset that is used
as part of a group should be evaluated for impairment, establishes criteria for
when a long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS No. 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike SFAS No.
121, SFAS No. 144 does not provide guidance on impairment of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, Goodwill and Other
Intangible Assets. MDI adopted SFAS No. 144 on January 1, 2002, and there was no
impact to the results of operations or its financial position upon adoption.
NOTE 4. ACQUISITION
On September 17, 2001, we acquired AccuMed by issuing 3,911,245 shares of
our common stock to holders of AccuMed's outstanding common stock, and 218,438
shares of our Series A convertible preferred stock to holders of AccuMed's
outstanding Series A convertible preferred stock.
As a result of the acquisition, we (1) assumed AccuMed's outstanding stock
options and warrants, (2) forgave a note receivable due from AccuMed, (3)
wrote-off unamortized license fees and prepaid royalties previously paid under a
licensing agreement with AccuMed and, (4) received 192,088 shares of our common
stock that was held by AccuMed.
The value of the transaction was approximately $14,178 and was determined
based on the market price of our common stock over the period of a few days
before and after February 7, 2001, the date the merger was agreed to and
announced. The acquisition was recorded as a purchase business combination in
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations. Accordingly, the excess of the purchase price over the fair value
of identifiable assets (including identifiable intangible assets) was
6
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocated to goodwill and other intangible assets. The consolidated financial
statements include the operating results of the business from the respective
date of acquisition. Acquired technology license agreements are being amortized
over the remaining life of the respective agreements which is seventeen years
for our license agreement and two years for the Dianon license agreement.
The following selected pro forma consolidated results of operations are
presented as if the AccuMed acquisition had occurred on January 1, 2001. This
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results that would have been achieved if the
acquisition had been completed as of January 1, 2001, nor are they necessarily
indicative of the future operating results of Molecular Diagnostics. The pro
forma data does not give effect to any cost savings or restructuring and
integration costs that might result.
Pro forma results for the six and three months ended June 30:
<Table>
<Caption>
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues....................................... $ 1,158 $ 1,357 $ 502 $ 416
Net loss available to common stockholders...... (7,425) (7,880) (4,493) (2,733)
Basic and fully diluted net loss per share..... $ (0.29) $ (0.23) $ (0.17) $ (0.08)
</Table>
NOTE 5. NOTE RECEIVABLE -- RELATED PARTY
A note receivable (payable), due from an officer of MDI was outstanding for
approximately ($9) and $50 at June 30, 2002 and December 31, 2001, respectively.
NOTE 6. LICENSES, PATENTS, AND TECHNOLOGY
Licenses, patents, and technology include the following at June 30, 2002:
<Table>
Licenses.................................................... $1,027
Patent costs................................................ 133
MDI Technology Agreement.................................... 7,230
Dianon Technology Agreement................................. 260
------
Subtotal.................................................... 8,650
Less accumulated amortization............................... (797)
------
Total..................................................... $7,853
======
</Table>
Effective January 1, 2002, we adopted a change in accounting principle to
comply with the specific provisions and guidance of SFAS 141 and SFAS 142. We
estimate that our adoption of SFAS 142 will result in a $7 decrease in
amortization expense and $7 increase in net income during 2002 related to
goodwill. We have completed the transitional intangible asset impairment test
required under SFAS 142 and, based on the results of the test, concluded that no
impairment of goodwill or other indefinite lived intangible assets has occurred.
Therefore, no impairment loss will be recorded in connection with our adoption
of the statement.
Our definite lived intangible assets of $8,650, net of accumulated
amortization of $797, continue to be amortized over their useful lives.
7
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense for intangible assets during the three and six months
ended June 30, 2002 was $164 and $328, respectively. Estimated amortization
expense for the remainder of 2002 and the five succeeding fiscal years is as
follows:
<Table>
<Caption>
ESTIMATED
AMORTIZATION
EXPENSE
------------
2002 (remainder)............................................ $328
2003........................................................ $612
2004........................................................ $526
2005........................................................ $526
2006........................................................ $526
2007........................................................ $526
</Table>
NOTE 7. ACCRUED PAYROLL TAXES
We are delinquent in paying federal and state 2000 and 2001 employee and
employer payroll taxes. As of June 30, 2002, we owed $586 in past-due payroll
taxes, including $160 in assessed statutory penalties and interest. We have
retained legal representation who is working with the Internal Revenue Service
to attempt to reach an agreement on the total due, settlement term and basis for
payment. At this time, we believe it is not possible to determine the impact, if
any, upon our financial condition. Past-due payroll taxes, assessed penalties
and interest were included in accrued payroll costs in the June 30, 2002 and
December 31, 2001 consolidated balance sheets. We are also delinquent in filing
federal and state income tax returns for 1999 and 2000, and we are actively
attempting to remedy this matter.
NOTE 8. NOTES PAYABLE -- RELATED PARTIES
Debt from related parties at June 30, 2002 consists of:
<Table>
Northlea Partners, Ltd., $25 Promissory Note issued August
6, 2001; interest rate 15% per annum; matures September
22, 2001; note in default; interest rate increases to 18%
per annum upon default.................................... $25
Northlea Partners, Ltd., $15 Convertible Promissory Note
issued September 20, 2001; interest rate 9% per annum;
matures December 18, 2001; note in arrears................ 15
Northlea Partners, Ltd., $25 Bridge Note issued May 28,
2002; interest rate 7% per annum, matures July 30, 2002;
25,000 warrants at an exercise price of $0.70; net of
unamortized debt discount of $4; note in arrears.......... 21
Robert Shaw, $25 Convertible Promissory Note issued
September 20, 2001; interest rate 9% per annual; matures
December 18, 2001; note in arrears........................ 25
---
$86
===
</Table>
The carrying amount of notes payable approximates fair value at June 30,
2002.
DEFAULTS ON NOTES FROM RELATED PARTIES AND NOTES PAYABLE
Northlea Partners, Ltd. $25 note dated August 6, 2001; interest rate per
annum increases from 15% to 18%. As of August 1, 2002, we are in default on the
Bridge Notes and are working with the holders to remedy the default. Management
is currently discussing default resolutions with holders of notes in default.
All other notes in default, including those to related parties, have no default
remedies in the note agreements. Management is currently discussing default
resolutions with holders of notes in default.
8
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. NOTES PAYABLE
Notes payable at June 30, 2002 consists of:
<Table>
Monsun, AS, $500 Promissory Note issued November 1, 2000;
interest rate 15% per annum; beneficial conversion feature
valued at $125; extension of maturity date for issuance of
100,000 warrants at an exercise price of $0.60 per share
and 200,000 warrants at $0.30 per share; matures July 31,
2002; note in default..................................... $ 512
NeoMed Innovations III, $500 Promissory Note issued May 15,
2001; interest rate 7% per annum, matures July 30, 2002;
560,000 warrants with an exercise price of $0.65 per
share; net of unamortized debt discount of $36; note in
arrears................................................... 464
Xillix Technologies Corporation, $361 Promissory Note issued
June 26, 1998; interest rate Canadian Prime plus 6% per
annum, due on demand; represents debt of AccuMed
International............................................. 34
Western Economic Diversification, $221 Promissory Note
issued June 1989; no interest, due on demand.............. 189
Schwarz, Cooper, Greenberger & Krauss, $118 Promissory Note
issued February 13, 2002; interest rate 12% per annum
final settlement due September 1, 2002.................... 100
Bridge Notes issued for $2,600 between March 19, 2002 and
June 28, 2002; interest rate of 7% per annum, that mature
July 30, 2002; 2,600,000 warrants at an exercise price of
$0.70; net of unamortized debt discount of $344; note in
arrears................................................... 2,256
------
$3,555
======
</Table>
The carrying amounts of notes payable approximates fair value at June 30,
2002.
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued new convertible promissory notes ("Bridge
Notes") and 2,625,000 warrants ("Bridge Warrants"). The Bridge Notes bear
interest at 7% per annum and mature on July 30, 2002. The Bridge Notes are
currently in arrears. The Bridge Notes are convertible at any time at the option
of the holder or automatically when we receive an equity infusion of at least
$7,000. The conversion price of the Bridge Notes are equal to a 25% discount to
the market price of the common stock at the date of conversion, but will not be
less than $0.50 per share nor greater than $1.00 per share. Each of the Bridge
Warrants is exercisable into one share of common stock at an exercise price of
$0.65 per share for a period of five years. Upon conversion, the Bridge Notes
holder will be entitled to receive an additional number of warrants ("Private
Warrants") equal to 25% of the number of common shares issued in conversion of
the Bridge Notes. These Private Warrants will be exercisable into one share of
our common stock at a price equal to 150% of the conversion price of the Bridge
Notes.
Using the fair value interest rate method, we determined the fair value of
the Bridge Warrants issued to be $108 as of June 30, 2002. Of this amount, $71
was charged to interest expense during the quarter ended June 30, 2002. The
value of the beneficial conversion feature of total Bridge Notes was determined
to be $1,050 at June 30, 2002 based on a closing price of our common stock of
$0.87. This beneficial conversion feature was accounted for as debt discount.
Interest expense of $631 was recorded during the quarter ended June 30, 2002 for
accretion of this debt discount. As the conversion terms of these notes are not
fixed at June 30, 2002 the ultimate amount of the debt discount will vary based
on the market price of common stock. Changes in the underlying value of this
beneficial conversion feature will be recorded prospectively in future periods.
DEFAULTS ON NOTES PAYABLE
Defaults on notes payable are in Notes to Consolidated Financial
Statements -- Note 8 preceding.
9
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY
BASIC AND FULLY-DILUTED COMMON STOCK
Basic net loss per share is based upon net loss and the weighted-average
number of shares of common stock outstanding during the period. Diluted net loss
per common share adjusts for the effect of common stock equivalents such as
stock options and stock warrants, only in the periods presented in which such
effect would have been dilutive. Diluted net loss per share is not presented
separately, as the effect of the common stock equivalents is anti-dilutive for
each of the periods presented. Accordingly, diluted net loss per share is the
same as basic net loss per share.
Fully-diluted shares of common stock are calculated by assuming MDI's
warrants, stock appreciation rights and employee stock options to purchase
common stock, convertible notes payable and convertible preferred stock have
been converted and exchanged for MDI's common stock. MDI's basic and
fully-diluted common stock for the period ended June 30, 2002 are summarized
below:
<Table>
<Caption>
FULLY-DILUTED
INSTRUMENT BASIC COMMON COMMON
- ---------- ----------------- ---------------
Common stock........................................... 25,836,561 25,836,561
Warrants, options, SARs and convertible notes.......... -- 24,383,973
Convertible preferred stock............................ -- 27,248,569
---------- ----------
Total................................................ 25,836,561 77,469,103
========== ==========
</Table>
Summary of MDI's preferred stock capital table as of June 30, 2002 is as
follows:
<Table>
<Caption>
SHARES ISSUED &
OFFERING SHARES AUTHORIZED OUTSTANDING
- -------- ----------------- ---------------
Series A convertible................................... 590,197 118,093
Series B convertible, 10% cumulative................... 1,500,000 1,357,356
Series C convertible, 10% cumulative................... 1,666,666 1,331,499
Series D convertible, 10% cumulative................... 300,000 175,000
Series E convertible, 10% cumulative................... 800,000 434,388
---------- ----------
TOTAL PREFERRED STOCK................................ 4,856,863 3,416,336
========== ==========
</Table>
SUMMARY OF PREFERRED STOCK TERMS
SERIES A CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
Liquidation Value: $4.50 per share
Conversion Price: $10.3034 per share
Conversion Rate: 0.4368 -- Liquidation Value divided by Conversion Price
($4.50/$10.3034)
Voting Rights: None
Dividends: None
Conversion Period: Any time -- 3 years
</Table>
10
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
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 June 30, 2001
Conversion Period: Any time
Cumulative dividends in arrears at June 30, 2002 were $733
</Table>
SERIES C CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
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 June 30, 2002
Conversion Period: Any time
Cumulative dividends in arrears at June 30, 2002 were $265
</Table>
SERIES D CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
Liquidation Value: $10.00 per share
Conversion Price: $1.00 per share
Conversion Rate: 10.00 -- Liquidation Value divided by Conversion Price
($10.00/$1.00)
Voting Rights: None
Dividends: 10% -- Quarterly -- Commencing April 30, 2002
Conversion Period: After April 1, 2002
Cumulative dividends in arrears at June 30, 2002 were $116
</Table>
SERIES E CONVERTIBLE PREFERRED STOCK
<Table>
<Caption>
Liquidation Value: $22.00 per share
Conversion Price: $0.80 per share
Conversion Rate: 27.50 -- Liquidation Value divided by Conversion Price
($22.00/$0.80)
Voting Rights: Equal in all respects to holders of common shares
Dividends: 10% -- Quarterly -- Commencing May 31, 2002
Conversion Period: After December 1, 2002
Cumulative dividends in arrears at June 30, 2002 were $99
</Table>
ISSUANCE OF RESTRICTED SHARES FOR SERVICES
Beginning in 1999, we have, at various times, issued restricted shares of
common stock to non-employee consultants for services. Some of the shares issued
were made for past services and their value was fixed. Other issuances were made
as partial consideration for services to be performed under three-year
consulting agreements and vest over the life of the agreements. The measurement
date of these shares has not been determined as of June 30, 2002. Therefore the
value of the these shares will be based on the market value of
11
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the common stock at the end of each interim period until the measurement date is
determined. A fair value of these shares of $87 and $185 was calculated using
the Black-Scholes valuation model and we recorded $4 and $38 as expense during
the quarter ended June 30, 2002 and June 30, 2001, respectively.
ISSUANCE OF STOCK OPTIONS TO NON-EMPLOYEES FOR SERVICES
Beginning in 1999, we have, at various times, granted options to purchase
shares of our common stock to non-employee consultants. We issued the options as
partial consideration for services to be performed under three-year consulting
agreements and vest over the life of the agreements. The measurement date of
these options has not been determined as of June 30, 2002. Therefore the value
of the these shares will be based on the market value of the common stock at the
end of each interim period until the measurement date is determined. A fair
value of $125 and $484 was calculated for these options at June 30, 2002 and
June 30, 2001, respectively, using the Black-Scholes valuation model. This value
is charged to expense over the term of the consulting agreements. The amount of
expense to be ultimately recognized will vary depending on the market value of
the common stock at the end of each interim period. We recorded $5 as expense
related to these options during the quarter ended June 30, 2002.
ISSUANCE OF WARRANTS FOR SERVICES
During the first quarter 2002, we issued warrants to purchase 750,000
shares of common stock at $0.01 per share in exchange for services to a law
firm. Using the Black-Scholes valuation model, the fair value of these warrants
was calculated to be $675. In 2000 and 2001, we issued warrants to purchase
common stock to non-employees as compensation for financial services. The
warrants vest in equal amounts each month over the service period. We may
terminate the agreements upon thirty days written notice, and any unvested
warrants as of the date of termination would be cancelled. For those warrants
where the measurement date has not been determined, fair values of $63 and $464
were calculated at June 30, 2002 and June 30, 2001, respectively, using the
Black-Scholes valuation model. The amount of expense to be ultimately recognized
will vary depending on the market value of the common stock at the end of each
period. We recorded $16 and $72 as expense related to these warrants during the
quarter ended June 30, 2002 and 2001, respectively.
CELL SOLUTIONS INVESTMENT
On October 11, 2001, we made a 30% investment in Cell Solutions, LLC.
("Cell Solutions"), a company formed for the purpose of developing and improving
slide preparation systems. As consideration, we issued Cell Solutions five-year
warrants to purchase 172,120 shares of common stock with an exercise price of
$0.82. These warrants were valued using Black-Scholes and determined to have a
value of $127 which was included as an investment at December 31, 2001. We also
determined the fair value of the investment to be impaired at December 31, 2001
and consequently the investment was written down to zero as a result of the
uncertainty of future benefit or revenue stream. We are contractually committed
to issue a total of 1,549,086 additional warrants with the same terms based upon
delivery of certain products by Cell Solutions. As of June 30, 2002, Cell
Solutions had not delivered these products and we were not bound to issue
additional warrants.
STOCK APPRECIATION RIGHTS
At June 30, 2002 and June 30, 2001, we had 450,000 stock appreciation
rights ("SARs") outstanding. Issued in 1989, these SARs have an exercise price
of $0.30 and were deemed automatically exercised on November 20, 2001. In
general, each SAR entitles the holder to receive upon exercise an amount equal
to the excess, if any, of the market value per share of common stock at the date
of exercise over the exercise price of the SAR, plus any dividends or
distributions per share made by us prior to the exercise date. In lieu of making
cash payments, we may, and intend to, elect to issue shares of common stock on a
one share for one SAR basis. Since the SARs were deemed exercised on November
20, 2001, no compensation expense was recorded
12
MOLECULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the three or six month periods ended June 30, 2002. We recorded compensation
expense in the amount of $92 for the six-months ended June 30, 2001 to reflect
the difference between the closing market price of our common stock at June 30,
2001 and December 31, 2000 and the exercise price of the SARs.
APPLICATION OF BLACK-SCHOLES VALUATION MODEL
In applying the Black-Scholes valuation model, we have used an expected
dividend yield of zero, a risk-free interest rate of 6% and a volatility factor
of 90% for the three months ended June 30, 2002 and 2001, and a fair value of
the underlying common shares of closing market price on the date of the grant.
The expected life equaled the term of the warrants, options, or restricted
shares.
NOTE 11. SUBSEQUENT EVENTS
STOCK PURCHASE AGREEMENT
On May 9, 2002, we entered into a stock purchase agreement ("Purchase
Agreement") that was amended May 16, 2002 and June 24, 2002. In accordance with
the terms of the Purchase Agreement, we are to deliver 21,428,000 shares of
restricted common stock in exchange for $15,000 upon closing of the Purchase
Agreement. We also delivered to an escrow agent 740,000 restricted shares of
Series E convertible preferred shares as collateral for the Purchase Agreement.
As of August 14, 2002, the closing under the Purchase Agreement has not yet
occurred.
LICENSE AGREEMENT -- LETTER OF INTENT
On July 12, 2002, we entered into letter of intent ("LOI") with Ventana
Medical Systems, Inc. ("Ventana") for exclusive use and distribution license
rights to certain MDI processes, systems and technologies with respect to HPV
tests for use in Ventana's slide-based technology platform. The LOI requires
Ventana to deliver a $100 deposit upon execution of the LOI, $200 upon our
delivery of certain license and development agreements, and $400 upon completion
of specific technology validations. We received $300 upon meeting the first two
LOI milestones in July 2002.
NOTE 12. LEGAL PROCEEDINGS
LITIGATION CONTINGENCIES
From time to time, we have been a party to routine pending or threatened
legal proceedings and arbitrations. We insure some, but not all, of our exposure
with respect to such proceedings. Based upon information presently available,
and in light of legal and other defenses available to us, management does not
consider the liability from any threatened or pending litigation to be material
nor have we experienced any significant environmental problems.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements presented in Part I, Item 1 of this quarterly report and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part I, Item 7 of our Annual Report on Form 10-K/A for the year
ended December 31, 2001.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this discussion and analysis of financial
condition and results of operations that are not related to historical results
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements that are predictive, that depend upon
or refer to future events or conditions, or that include words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," "hopes,"
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, or possible
future actions by us are also forward-looking statements.
These forward-looking statements are based on beliefs of our management as
well as current expectations, projections and assumptions currently available to
the Company and are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those
anticipated. Should one or more of those risks or uncertainties materialize or
should underlying expectations, projections and assumptions prove incorrect,
actual results may vary materially from those described. Those events and
uncertainties are difficult to predict accurately and many are beyond our
control. We assume no obligation to update these forward-looking statements to
reflect events or circumstances that occur after the date of these statements.
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Molecular Diagnostics recognizes revenue upon
shipment of product or license to customers and no remaining obligations or
contingencies exist, or in the case of sales of software by our wholly owned
subsidiary Samba, upon shipment if persuasive evidence of an arrangement exists,
sufficient vendor-specific objective evidence exists to support allocating the
total fee to all elements of the arrangement, fee is fixed or determinable, and
collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, generally twelve months. Revenue from training
services and professional services is recognized when the service is completed.
Revenue from implementation and installation services is recognized using the
percentage of completion method. Samba calculates percentage of completion based
on the estimated total number of hours of service required to complete an
implementation project and the actual number of hours of service rendered.
Implementation and installation services are generally completed within 120
days.
License, Patents, and Technology. License, patents, and purchased
technology are recorded at their acquisition cost. Costs to prepare patent
filings are capitalized when incurred. Costs related to abandoned or denied
patent applications are written off at the time of abandonment or denial.
Amortization is commenced as of the date of acquisition or upon the grant of the
final patent. Costs are amortized over the asset's useful life, which ranges
from two to seventeen years. We assess licenses, patents, and technology
annually for impairment unless an event has occurred which would indicate a
possible impairment.
Stock Compensation. As permitted by the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), Molecular
Diagnostics uses the intrinsic value method to account for stock options as set
forth in Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees (APB 25).
Application of Black-Scholes Valuation Model. In applying the
Black-Scholes valuation model, we have used an expected dividend yield of zero,
a risk-free interest rate of 6% for 2002 and 2001, a volatility factor of 90%
for 2002 and 216% for 2001, and the closing market price of the underlying
common stock on the date of the grant. The expected life equaled the term of the
warrants, options, or restricted shares.
14
OVERVIEW OF MOLECULAR DIAGNOSTICS
The science of medical diagnostics has advanced significantly during the
past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology and
the human body. Our goal is to utilize this research as a base to develop
screening and diagnostic testing products for cancer and cancer-related
diseases. We believe that the success of these products will improve patient
care through more accurate test performance, wider availability and cost
effective service delivery. We are developing an initial series of products to
address these criteria including sample collection devices, chemical and
biological tests, and analytical instruments and related software.
Our strategy is to develop products through internal development processes,
strategic partnerships, licenses and acquisitions of companies. This strategy
has required and will continue to require additional capital. As a result, we
will incur substantial operating losses until we are able to successfully market
some, or all, of our products.
RESULTS OF OPERATIONS
REVENUE
Our revenue for the six-month period ended June 30, 2002 totaled $1,158,
representing an increase of $461, or 66.1%, over revenue of $697 for the
six-month period ended June 30, 2001. The 2002 revenue increase resulted
primarily from the first quarter revenue recognition of $298 for providing
Ventana with a three-year irrevocable, world-wide, royalty-free license for full
access to Samba's image analysis software and development tools. The remaining
increase represents gains in new customer AcCell instrument sales and
installations.
Revenue of $502 for the three months ended June 30, 2002 represented an
increase of $214, or 74.3%, over revenue for the same period in 2001. This
resulted from a $146 increase in revenues from Samba, a European provider of
proprietary Telemedicine software and software consulting services. Samba
conducts its operations in local currency, the Euro. We convert the local
currency into U.S. Dollars for consolidated reporting purposes. 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.
OPERATING EXPENSES
Cost of Revenues
Cost of revenues for the six months ended June 30, 2002 totaled $482, a
decrease of $5 from the same period in 2001. No cost of revenues attributable to
the Ventana license sale was recorded since related research and development
costs related thereto were expensed as incurred in prior years. Increases in
software sales and products with higher gross margins also contributed to the
decline in cost of sales over the same period in the previous year.
Cost of revenues for the three months ended June 30, 2002 totaled $287, an
increase of $78, or 37.3%, from the same period in 2001. Increases in software
sales and AcCell instrument deliveries with higher gross margins resulted in the
increase in cost of sales over the same period in the previous year.
Research and Development
We devote a substantial amount of our resources to research and development
("R&D") related to new products, including markers, tests, instruments and
software applications, as well as modifications and refinements of our existing
products.
R&D expenses increased $597 and $547 for the six month and three month
periods ended June 30, 2002 to $2,535 and $1,602, an increase of 30.8% and
51.8%, respectively, over the comparable prior year periods. R&D expenses
consist of costs related to specific development programs with scientists and
researchers at
15
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;
instrumentation, disposables, clinical consumables, clinical supplies and
regulatory costs to develop clinical trial reference laboratories and to recruit
and test patients in support of our various Food and Drug Administration ("FDA")
clinical trials, and payroll-related costs for in-house engineering, scientific,
laboratory, and software development activities; and research management staff.
The increase in expenses for the three and six-month periods in 2002 compared
with the same periods in 2001 stems primarily from increased product development
costs for the Cocktail CVX and HPV assays, the next version of AcCell, the
AcCell 2500, and the patient participation fees of our world-wide Cocktail CVX
clinical trials.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") increased $1,709 and
$1,080 for the six-month and three-month periods ended June 30, 2002 to $4,422
and $2,039, an increase of 62.9% and 112.6% over the same periods ended June 30,
2001, respectively. This increase is primarily due to an increase of
approximately $500 in professional services fees as a result of increased
investor and shareholder base and expanded operations pursuant to the AccuMed
merger; an approximate $350 increase in infrastructure payroll and related
payroll costs and other operating expenses resulting from the integration of the
recently acquired AccuMed's operations; and increased litigation costs and
contingency payments related to the SpectRx settlement, which totaled $675, in
the form of warrants.
Significant components of SG&A are compensation costs for executive, sales
and administrative personnel, professional fees primarily related to legal and
accounting and consulting services, travel costs, printing costs, fees for
public and/or investor relations services, insurance premiums, facilities and
office expenses, marketing related costs, and amortization/depreciation charges.
OTHER INCOME AND EXPENSE
Interest Expense
Interest expenses, including interest expense to related parties, increased
$536 and $658 for the six-month and three-month periods ended June 30, 2002 to
$881 and $776, an increase of 155.3% and 557.6% over the same periods ended June
30, 2001, respectively. Approximately $631 of the three-month increase relates
to a non-cash interest charge for the value of a beneficial conversion feature
charged to interest expense during the period. See further discussion in the
preceding Notes To Consolidated Financial Statements -- Note 9. Also, accrued
interest expense resulting from related party convertible notes payable is
included in interest expense -- related party.
Other Income and Expense, Net
For the six months ended June 30, 2002, we recorded a $150 gain from the
settlement of the SpectRx litigation during the first quarter 2002. Related
SpectRx settlement legal expenses are included in selling, general and
administrative expenses for the period ended June 30, 2002.
NET LOSS
The net loss for the six and three month period ended June 30, 2002 before
preferred dividends totaled $7,011 and $4,201 compared with $4,712 and $2,009
for the same periods in 2001, an increase of $2,299 and $2,192 or a 48.8% and a
109.2% increase, respectively. The increases resulted from increases in R&D
expenses, SG&A and interest expenses as described previously. In addition,
cumulative dividends on the outstanding Series B convertible preferred stock
through Series E convertible preferred stock totaled $414 and $292 for the six
and three months periods ended June 30, 2002 compared with $212 and $142 for the
same periods in 2001, respectively, and $1,933 of deemed dividends on the Series
B convertible preferred stock during first quarter 2001 due to a conversion
feature on the Series B convertible preferred stock that was less
16
than market, resulting in a net loss available to common stockholders for the
six and three months ended June 30, 2002 of $7,425 and $4,493, or $0.29 and
$0.17 per share, on 25,654,840 and 25,747,224 weighted average common shares
outstanding, respectively, compared with the net loss and net loss available to
common stockholders for the six and three month periods ended June 30, 2001 of
$6,857 and $2,217, or $0.23 and $0.07 per share, on 30,369,328 and 30,468,212
weighted average common shares outstanding.
For the six months ended June 30, 2002, cumulative dividends on the
outstanding Series B convertible preferred stock, Series C convertible preferred
stock, Series D convertible preferred stock and Series E convertible preferred
stock totaled $1,213.
The weighted average shares outstanding as of June 30, 2002 reflect a
10,859,688 reduction in common stock as a result of the exchange of common stock
for shares of Series E convertible preferred stock in December 2001 and the
issuance of approximately 3,900,000 shares of common stock on September 17, 2001
for the AccuMed acquisition.
LIQUIDITY AND CAPITAL RESOURCES
R&D, clinical trials and other studies of the components of our InPath
System, conversions from designs and prototypes into product manufacturing,
initial sales and marketing efforts, medical consultants and advisors, and
research, administrative, and executive personnel are and will continue to be
the principal basis for our cash requirements. We have provided operating funds
for the business since its inception through private offerings of debt and
equity to U.S. and foreign accredited investors. We will be required to make
additional offerings in the future to support the operations of the business
until some or all of our products are introduced into the market. We used $3,102
and $4,155 for the six months ended June 30, 2002 and 2001, respectively, in
operating activities.
At the end of June 30, 2002 we had cash on hand of $116, a decrease of $909
compared to the $1,025 cash on hand at December 31, 2001. This decrease resulted
from delays associated with our private equity financing.
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued Bridge Notes and 2,625,000 Bridge
Warrants. The Bridge Notes bear interest at 7% per annum and mature on July 30,
2002. The Bridge Notes are currently in arrears. The Bridge Notes are
convertible at any time at the option of the holder or automatically when we
receive an equity infusion of at least $7,000. The conversion price of the
Bridge Notes are equal to a 25% discount to the market price of the common stock
at the date of conversion, but will not be less than $0.50 per share nor greater
than $1.00 per share. Each of the Bridge Warrants is exercisable into one share
of common stock at an exercise price of $0.65 per share for a period of five
years. Upon conversion, the Bridge Notes holder will be entitled to receive an
additional number of warrants ("Private Warrants") equal to 25% of the number of
common shares issued in conversion of the Bridge Notes. These Private Warrants
will be exercisable into one share of our common stock at a price equal to 150%
of the conversion price of the Bridge Notes.
As of August 1, 2002, we are in default on the Bridge Notes and are working
with the holders to remedy the default. Management is currently discussing
default resolutions with holders of notes in default.
These Bridge Notes are convertible into shares of common stock at a
conversion price that is less than market. This beneficial conversion feature
totals $716 at June 30, 2002, of which $403 was charged to interest expense for
the period.
Our capital expenditures were approximately $87 for the six months ended
June 30, 2002, a reduction of $238, or 73.2% from the prior year period's $325.
Capital expenditures are defined as disbursements for laboratory equipment,
leasehold improvements, software, and furniture/fixtures with a purchase price
in excess of $1 per item and useful life in excess of one year. The decrease in
2002 capital expenditures resulted from a reduction of laboratory and computer
equipment and software purchases in support of our product development and
research efforts in order to conserve cash through our private placement and
bridge financings.
17
Our operations have been, and will continue to be, dependent upon
management's ability to raise operating capital in the form of debt or equity.
We have incurred significant operating losses since the inception of our
business. We expect that significant ongoing operating expenditures will be
necessary to successfully implement our business plan and develop, manufacture
and market our products. These circumstances raise substantial doubt about our
ability to continue as a going concern. There can be no assurance that we will
be able to obtain additional capital to meet our current operating needs or to
complete pending or contemplated licenses or acquisitions of technologies. If we
are unable to raise sufficient adequate additional capital or generate
profitable sales revenues, we may be forced to substantially curtail product
research and development, clinical trials and other activities and may be forced
to cease operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A market risk inherent in our financial statements is the potential loss in
fair value arising from adverse changes in interest rates. We do not engage in
any hedge transactions or use derivative financial instruments to reduce our
exposure to interest rate changes since all of our indebtedness is at fixed
interest rates. At June 30, 2002, the carrying amount of our debt instruments
approximated their fair value. A 10% change in the rate of interest would not
have a material effect on our financial position, results of operation or cash
flows. In addition, as of June 30, 2002, we were not exposed to any material
foreign-currency, equity-price or other type of market or price risk. Samba
conducts the majority of its operations in Europe using the Euro and other local
European currencies. Since changes in translation risk are reported as
adjustments to stockholders' equity, a 10% change in the foreign exchange rate
would not have a material effect on our financial position, results of operation
or cash flows. For the six months ended June 30, 2002, we recorded a negative
cumulative translation adjustment of $80, reflecting the valuation, using the
period ended currency exchange rates, of our investment in Samba.
18
PART II. OTHER INFORMATION
(In thousands, except share and per share amounts)
ITEM 1. LEGAL PROCEEDINGS
On July 31, 2002, MDI reached a settlement with Trek Diagnostic Systems,
Inc. ("Trek") with respect to Trek's allegations of certain breaches of
representations and warranties made in connection with the sale of a division of
AccuMed to Trek in November 1998. Under the terms of the settlement, MDI issued
Trek a promissory note in which it agreed to pay Trek $80 in two equal
installments, the first installment of $40 due September 1, 2002 and the second
installment of $40 due December 1, 2002. In consideration of MDI's promissory
note, Trek agreed to release MDI and its affiliates from any claims Trek may
have against the parties relating to and arising out of the sale of the business
division by AccuMed.
On July 10, 2002, MDI reached a settlement with Schwartz Cooper Greenberger
and Krauss by agreeing to pay $104 to Schwartz Cooper no later than September 1,
2002 as compensation for legal services rendered. Schwartz Cooper had filed a
complaint against MDI in the Circuit Court of Cook County.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From March 19, 2002 through June 28, 2002, we received cash of $2,625 from
over 25 separate investors and issued Bridge Notes and 2,625,000 Bridge
Warrants. We utilized these debt proceeds for working capital purposes during
the three months ended June 30, 2002. Bathgate Capital Group acted as our
placement agent and is due $78 in fees at June 30, 2002.
On March 19, 2002, we agreed to amend a previously outstanding $500
Original Note issued to NeoMed that was originally due on May 15, 2002. The
terms of conversion of the Original Note were changed to reflect the conversion
terms of the new $500 Bridge Note issued to NeoMed as described above and the
maturity date was extended to July 30, 2002. This Bridge Note is currently in
arrears. NeoMed also received an additional 560,000 Bridge Warrants and will be
entitled to receive Private Warrants on the same terms as those described above.
We utilized these debt proceeds for working capital purposes during the six
months ended June 30, 2002.
As of August 1, 2002, we are in default on the Bridge Notes and are working
with the holders to remedy the default. Management is currently discussing
default resolutions with holders of notes in default.
During the six months ended June 30, 2002, we made principal payments to
Monsun AS and Schwarz, Cooper, Greenberger and Krauss totaling $150.
We issued the notes and warrants pursuant to exemptions under Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Molecular Diagnostics held its Annual Meeting of Stockholders on Friday,
May 31, 2002 and adjourned it until June 21, 2002 in order to allow sufficient
time for stockholders to vote on our proposals. Each holder of common stock was
entitled to one vote per share of common stock for the election of directors as
well as on all other matters. Each holder of Series E convertible preferred
stock was entitled to vote on any matter in which the holders of common stock
were entitled to vote. When voting with the holders of common stock as a single
class, each holder of Series E convertible preferred stock was entitled to one
vote for each share of common stock into which such holders' preferred stock was
convertible on the record date. Each holder of all other series of convertible
preferred stock was entitled to one vote per share of preferred stock for
proposal number
19
two. The tabulation of final stockholder votes at the June 21, 2002 Annual
Meeting for each proposal presented was as follows:
PROPOSAL #1: ELECTION OF DIRECTORS:
<Table>
<Caption>
(COMMON STOCK AND SERIES E
CONVERTIBLE PREFERRED STOCK)
-----------------------------
NOMINEE IN FAVOR WITHHELD
- ------- ----------- ---------
John Abeles................................................ 30,148,985 73,339
Peter Gombrich............................................. 30,140,951 81,373
Alexander Milley........................................... 30,151,615 70,709
Robert Shaw................................................ 30,151,615 70,709
Denis O'Donnell............................................ 29,780,808 441,516
</Table>
PROPOSAL #2: AMENDMENT TO THE CORPORATION'S CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK (FROM 50,000,000 TO
100,000,000 SHARES) AND PREFERRED STOCK (FROM 5,000,000 TO 10,000,000):
<Table>
<Caption>
IN FAVOR AGAINST WITHHELD
---------- ------- --------
Class I (Common Stock)................................ 14,318,131 429,454 109,790
Class II (Preferred Stock -- all series).............. 3,191,060 2,118 40
Class III (Common Stock and Preferred Stock).......... 17,509,191 431,572 109,830
</Table>
PROPOSAL #3: AMENDMENT TO THE CORPORATION'S 1999 EQUITY INCENTIVE PLAN TO
INCREASE BY 2,500,000 THE SHARES OF COMMON STOCK THAT MAY BE ISSUED UNDER THE
PLAN:
<Table>
<Caption>
(COMMON STOCK AND SERIES E CONVERTIBLE PREFERRED STOCK)
- -------------------------------------------------------
IN FAVOR AGAINST WITHHELD
- ------------------ --------------- ----------------
22,816,861 564,596 156,280
</Table>
PROPOSAL #4: RATIFICATION OF INDEPENDENT ACCOUNTANTS, ERNST & YOUNG:
<Table>
<Caption>
(COMMON STOCK AND SERIES E CONVERTIBLE PREFERRED STOCK)
- -------------------------------------------------------
IN FAVOR AGAINST WITHHELD
- ------------------ --------------- ----------------
30,170,815 27,878 23,631
</Table>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
MDI filed a Current Report on Form 8-K dated June 10, 2002 reporting, under
Item 5, the appointments of Stephen G. Wasko, as President and Chief Operating
Officer, and Michael A. Brodeur, as Interim Chief Financial Officer.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR DIAGNOSTICS, INC.
/s/ PETER P. GOMBRICH
--------------------------------------
PETER P. GOMBRICH
Chairman of the Board
Chief Executive Officer
/s/ MICHAEL A. BRODEUR
--------------------------------------
Michael A. Brodeur
Chief Financial Officer
Principal Accounting Officer
Date: August 14, 2002
21
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Bell National Corporation Plan of Reorganization (Annex I).
(Incorporated herein by reference to Item 1 of the Bell
National Corporation Annual Report on Form 10-K for the
period from August 20, 1985 to December 31, 1985 and for the
years ended December 31, 1986 and 1987.)*
2.2 Exchange Agreement dated December 4, 1998 among the Company,
InPath, and the InPath Members. (Incorporated herein by
reference to Appendix A to the Bell National Corporation
Definitive Proxy Statement on Schedule 14A, filed on April
30, 1999.)*
2.3 Agreement and Plan of Merger of Bell National Corporation
and the Company. (Incorporated herein by reference to
Appendix C to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
2.4 Agreement and Plan of Merger by and among AccuMed
International, Inc., AccuMed Acquisition Corp. and Ampersand
Medical Corporation, dated as of February 7, 2001.
(Incorporated herein by reference to Appendix I to
Registration Statement No. 333-61666.)
2.5 Amendment No. 1, dated May 14, 2001 to the Agreement and
Plan of Merger by and among AccuMed International, Inc.,
AccuMed Acquisition Corp. and Ampersand Medical Corporation,
dated February 7, 2001. (Incorporated herein by reference to
Appendix I to Registration Statement No. 333-61666.)
3.1 Restated Articles of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 of the Bell National Corporation
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.)*
3.2 Bylaws of Bell National Corporation. (Incorporated herein by
reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.)*
3.3 Certificate of Incorporation of the Company as amended.
(Incorporated herein by reference to Appendix D to the Bell
National Corporation Definitive Proxy Statement on Schedule
14A, filed on April 30, 1999.)*
3.4 By-laws of the Company. (Incorporated herein by reference to
Appendix E to the Bell National Corporation Definitive Proxy
Statement on Schedule 14A, filed on April 30, 1999.)*
3.5 Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.6 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock of Ampersand Medical
Corporation. (Incorporated herein by reference to Exhibit
3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.)
3.7 Certificate of Incorporation of Molecular Diagnostics, Inc.,
as amended. (Incorporated herein by reference to the
Company's Current Report on Form 8-K dated September 26,
2001.)
3.8 Section 6 of Article VII of the By-laws of the Company as
amended. (Incorporated herein by reference to Exhibit 3.3 to
the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
3.9 Certificate of Designation, Preferences and Rights of Series
C Convertible Preferred Stock of Molecular Diagnostics, Inc.
(Incorporated herein by reference to Exhibit 3.4 to the
Company's S-2 Registration Statement, File, No. 333083578
filed February 28, 2002)
3.10 Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Series C Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.5 to
the Company's S-2 Registration Statement, File, No.
333083578 filed February 28, 2002)
3.11 Certificate of Amendment of Amended Certificate of
Designation, Preferences and Rights of Series C Convertible
Preferred Stock. (Incorporated herein by reference to
Exhibit 3.6 to the Company's S-2 Registration Statement,
File, No. 333083578 filed February 28, 2002)
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)
</Table>
22
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.13 Certificate of Designation, Preferences and Rights of Series
E Convertible Preferred Stock. (Incorporated herein by
reference to Exhibit 3.8 to the Company's S-2 Registration
Statement, File, No. 333083578 filed February 28, 2002)
4.1 Form of Common Stock Purchase Warrant, as executed by Bell
National Corporation on December 4, 1998 with respect to
each of Mr. Gombrich, Theodore L. Koenig, William J. Ritger,
Fred H. Pearson, Walter Herbst, AccuMed International, Inc.,
Northlea Partners Ltd., and Monroe Investments, Inc.
(collectively, the "InPath Members"). (Incorporated herein
by reference to Exhibit 3 of the Schedule 13D filed jointly
by the InPath Members on December 14, 1998.)*
4.2 Stockholders Agreement dated December 4, 1998 among the
Company, Winchester National, Inc., the InPath Members, and
Mr. Milley, Mr. Shaw, Cadmus, and MMI (collectively, the
"Claimants"). (Incorporated herein by reference to Exhibit 2
to the Schedule 13D filed jointly by the InPath Members on
December 14, 1998.)*
4.3 Form of Common Stock Purchase Warrant issued to Holleb &
Coff on July 4, 1999 representing the right to purchase
250,000 shares of Common Stock of the Company in connection
with legal services rendered. (Incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
4.4 Form of Common Stock Purchase Warrant issued to The Research
Works on October 11, 1999 representing the right to purchase
70,000 shares of Common Stock of the Company in connection
with the preparation of an investment research report.
(Incorporated herein by reference to Exhibit 4.4 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.)*
4.5 Form of Common Stock Purchase Warrant issued to Azimuth
Corporation on December 10, 1999 representing the right to
purchase 50,000 shares of Common Stock of the Company as
additional consideration for a 12% Convertible Promissory
Note issued on the same date. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.)*
4.6 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 96,250 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.7 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 75,759 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.8 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 121,313 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.9 Form of Common Stock Purchase Warrant issued to Richard
Doermer on January 3, 2000 representing the right to
purchase 94,697 shares of Common Stock of the Company in
connection with financial advisory services rendered.
(Incorporated by reference to Exhibit 4.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)*
4.10 Form of Common Stock Purchase Warrant issued to William J.
Ritger on May 24, 2000 representing the right to purchase
531,614 shares of Common Stock of the Company in connection
with financial advisory services rendered. (Incorporated by
reference to Exhibit 4.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)*
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.)*
</Table>
23
<Table>
<Caption>
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.)
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.)
</Table>
24
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.)
4.33 Form of Common Stock Purchase Warrant issued in connection
with the Bridge Financing in June 2002. (Incorporated by
reference to Exhibit 4.33 to the Company's S-2 Registration
Statement, File No. 333-83578 filed June 28, 2002.)
10.1 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Raymond O'S. Kelly.
(Incorporated herein by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
10.2 Stock Appreciation Rights Agreement dated as of November 20,
1989 between the Company and Nicholas E. Toussaint.
(Incorporated herein by reference to Exhibit 10.7 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.)*
</Table>
25
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 Form of Promissory Note issued in connection with the Bridge
Financing in June 2002. (Incorporated by reference to
Exhibit 10.10 to the Company's S-2 Registration Statement,
File No. 333-83578 filed June 28, 2002.)
10.11 Lease Agreement between the Company and O.P., L.L.C. dated
September 1, 1999 pertaining to the premises located at
suite 305, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.12 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
10.12 Amendment to Lease Agreement between the Company and O.P.,
L.L.C. dated November 1, 1999 pertaining to the premises at
suite 300, 414 N. Orleans, Chicago, IL 60610. (Incorporated
herein by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999.)*
10.13 Form of Note purchase agreements dated between March 1, 1999
and June 29, 1999 between the Company and several
purchasers. (Incorporated herein by reference to Exhibit
10.14 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.)*
10.14 Form of 6% Convertible Subordinated Note Due 2000, dated
between March 1, 1999 and June 29, 1999 issued by the
Company to several purchasers. (Incorporated herein by
reference to Exhibit 10.15 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.15 Schedule of purchasers of 6% Convertible Notes Due 2000,
including dates and amount purchased. (Incorporated herein
by reference to Exhibit 10.16 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.)*
10.16 Form of Senior Convertible Promissory Note issued to Azimuth
Corporation on December 10, 1999. (Incorporated herein by
reference to Exhibit 10.17 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)*
10.17 Form of Restricted Stock Award of 50,000 shares of Common
Stock issued to David A. Fishman, M.D., on August 10, 1999
as additional compensation under a 36 month Consulting
Agreement dated June 1, 1999. (Incorporated herein by
reference to Exhibit 10.18 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)
</Table>
26
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.)*
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.)*
</Table>
27
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.)
10.36 Form of Voting Agreement between the Company and each of the
officers and directors of AccuMed International, Inc.
(Exhibit A to the Agreement and Plan of Merger included in
Appendix I to the proxy statement-prospectus.)
10.37 $100,000 Promissory Note issued to Cadmus Corporation on
July 26, 2001. (Incorporated by reference to Exhibit 10.39
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.38 $100,000 Promissory Note issued to Azimuth Corporation on
August 6, 2001. (Incorporated by reference to Exhibit 10.40
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.39 $25,000 Promissory Note issued to Northlea Partners, Ltd. on
August 6, 2001. (Incorporated by reference to Exhibit 10.41
to the Company's S-4 Registration Statement, File No.
333-61666, filed August 24, 2001.)
10.40 $118,500 Promissory Note issued to Schwartz, Cooper,
Greenberger & Krauss on February 13, 2002. (Incorporated by
reference to Exhibit 10.40 to the Company's S-2 Registration
Statement, File No. 333-83578 filed June 28, 2002.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for Peter Gombrich.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for Michael Brodeur.
</Table>
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* SEC File NO. 0-935
28