SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to ____________.
Commission File number 0-935
-------------------------------
MOLECULAR DIAGNOSTICS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 36-4296006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 North Orleans Street, Suite 800
Chicago, IL 60610
(Address of Principal Executive Offices)
(312) 222-9550
-------------------------------
(Issuer's Telephone Number)
N/A
--------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter periods that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes No X
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
COMMON STOCK, $0.001 PAR VALUE 36,442,180
(Class) Outstanding shares as of June 30, 2003
Transitional Small Business Disclosure Format (Check One): Yes No X
---- ----
MOLECULAR DIAGNOSTICS, INC.
QUARTERLY REPORT ON FORM 10-QSB
MARCH 31, 2003
TABLE OF CONTENTS
PAGE
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets -- March 31, 2003 and
December 31, 2002............................................ 3
b) Consolidated Statements of Operations -- Three
months ended March 31, 2003 and March 31, 2002............... 4
c) Consolidated Statements of Cash Flows -- Three
months ended March 31, 2003 and March 31, 2002............... 5
d) Notes to Consolidated Financial Statements --
March 31, 2003............................................... 6
Item 2. Management's Discussion and Analysis or Plan of
Operation.................................................... 14
Item 3. Controls and Procedures....................................... 18
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings............................................. 19
Item 2. Changes In Securities and Use of Proceeds..................... 21
Item 3. Defaults upon Senior Securities............................... 21
Item 4. Submission of Matters to a Vote of Security Holders........... 21
Item 5. Other Information............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 21
SIGNATURES............................................................ 22
EXHIBIT INDEX......................................................... 23
2
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 6 $ 42
Accounts receivables, net of allowance for doubtful
accounts of $ 155 and $145 at March 31, 2003 and
December 31, 2002, respectively............................ 499 307
Inventories................................................. 232 427
Refundable taxes............................................ 40 56
Prepaid financings costs.................................... 115 288
Prepaid expenses and other current assets................... 117 69
----------- -----------
Total current assets.................................. 1,009 1,189
Fixed Assets, net.............................................. 591 666
Other Assets:
Licenses, patents, and technology, net of amortization...... 7,356 7,521
Goodwill, net of amortization............................... 283 283
----------- -----------
Total assets.......................................... $ 9,239 $ 9,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................................ $5,414 $5,202
Customer and other deposits................................. 55 24
Accrued payroll costs....................................... 1,892 1,856
Accrued expenses............................................ 2,081 1,143
Deferred revenue............................................ 552 630
Revolving line of credit.................................... 214 207
Due to stockholder.......................................... 242 127
Lease obligation............................................ 278 279
Notes payable--related party................................ 100 65
Notes payable............................................... 4,491 4,585
----------- -----------
Total current liabilities............................. 15,319 14,118
Deferred revenue, less current portion......................... 105 120
----------- -----------
Total liabilities..................................... 15,424 14,238
----------- -----------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value; shares authorized--
10,000,000; shares issued and outstanding - 2,580,068
and - 2,781,024, at March 31, 2003 and December 31, 2002,
respectively................................................. 13,164 16,958
Common stock, $0.001 par value; shares authorized--100,000,000;
shares issued and outstanding-42,929,118 and 36,440,700, at
March 31, 2003 and December 31, 2002, respectively........... 43 37
Additional paid-in-capital..................................... 24,417 19,557
Treasury stock; 192,088 shares at March 31, 2003 and December
31, 2002..................................................... (327) (327)
Deferred compensation.......................................... -- (11)
Accumulated deficit............................................ (43,303) (40,642)
Accumulated comprehensive loss--
Cumulative translation adjustment........................ (179) (151)
----------- -----------
Total stockholders' equity (deficit).................. (6,185) (4,579)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 9,239 $ 9,659
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
MOLECULAR DIAGNOSTICS, INC.
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2003 2002
----------- -----------
(Unaudited)
Net revenues............................................ $ 597 $ 656
Operating expenses
Cost of revenues.................................. 276 195
Research and development.......................... 231 933
Selling, general, and administrative expenses..... 2,088 2,383
----------- -----------
Total operating expenses..................... 2,595 3,511
----------- -----------
Operating loss.......................................... (1,998) (2,855)
Other income (expense):
Interest (expense) -related party................. (3) (1)
Interest (expense) ............................... (238) (104)
Interest income -related party.................... -- --
Interest income................................... -- --
Gain on litigation settlement..................... -- 150
Other, net........................................ 2 --
----------- -----------
Total other income (expense)................... (239) 45
----------- -----------
Loss before income taxes................................ (2,237) (2,810)
Income tax expense...................................... -- --
----------- -----------
Net loss............................................. $ (2,237) $ (2,810)
=========== ===========
Preferred stock dividend................................ (424) (122)
Deemed dividend upon issuance of convertible preferred stock -- --
----------- -----------
Total dividends...................................... (424) (122)
----------- -----------
Net loss available to common stockholders............... $ (2,661) $ (2,932)
=========== ===========
Basic and fully diluted net loss per common share....... $ (0.07) $ (0.11)
=========== ===========
Weighed average number of common shares outstanding..... 40,177,291 25,561,429
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
MOLECULAR DIAGNOSTICS, INC.
(FORMERLY AMPERSAND MEDICAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
----------- -----------
(Unaudited)
Operating Activities:
Net loss............................................. $ (2,237) $ (2,810)
Adjustments to reconcile net loss to net cash used
for operating activities:
Amortization of debt discount..................... 153 45
Depreciation and amortization..................... 240 270
Amortization of fees.............................. 202 --
Stock, warrants, and options issued to
non-employees for services -- 770
Licensing fees recognized on preferred stock sale. 111 (298)
Compensation expense related to Stock Appreciation
Rights.......................................... 3 24
Interest expense paid with stock.................. -- 8
Changes in assets and liabilities:
Accounts receivable, net....................... (181) 239
Inventories.................................... 201 (15)
Due from stockholder........................... 115 10
Prepaid expenses and other current assets...... (59) (157)
Accounts payable............................... 292 338
Deposits....................................... 30 --
Deferred revenue............................... (100) 12
Accrued expenses............................... 958 280
----------- -----------
Net cash used for operating activities.................. (272) (1,284)
----------- -----------
Cash used in investing activities:
Expenditures for license, patents, and technology.... -- (1)
Capital purchases.................................... -- (42)
----------- -----------
Net cash used for investing activities............... -- (43)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable.. 350 500
Proceeds from issuance of convertible notes payable,
related party...................................... 100 --
Note issued in payment of an expense................. 21 --
Proceeds from issuance of common stock, net of costs
incurred........................................... -- 4
Payment of notes payable............................. (236) (83)
Proceeds from revolving line of credit, net.......... -- (46)
----------- -----------
Net cash provided by financing activities............... 235 375
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents........................................... 1 (70)
----------- -----------
Net increase (decrease) in cash and cash equivalents.... (36) (1,022)
Cash and cash equivalents at the beginning of period.... 42 1,025
----------- -----------
Cash and cash equivalents at end of period.............. $ 6 $ 3
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.......................................... $ 15 $ 65
Non-cash transactions during the period for:
Deferred financing costs.......................... $ 173 $ --
Preferred stock and cumulative dividends converted
into common stock............................... $ 4,218 $ 106
The accompanying notes are an integral part of these consolidated financial
statements.
5
MOLECULAR DIAGNOSTICS, INC.
(FORMERLY AMPERSAND MEDICAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(Unaudited)
NOTE 1. ORGANIZATION
Molecular Diagnostics, Inc, ("MDI") was incorporated as Ampersand Medical
Corporation in Delaware on December 15, 1998, as the successor to Bell National
Corporation ("Bell National"). Bell National was incorporated in California in
1958.
On September 25, 2001, the Company changed its corporate name to
Molecular Diagnostics, Inc. in order to better represent its operations and
products. The name change was effected through a merger with a wholly-owned
subsidiary. Molecular Diagnostics, Inc. has retained its Certificate of
Incorporation, except as amended to reflect the new name, bylaws and
capitalization.
On December 4, 1998, Bell National (then a shell corporation without any
business activity) acquired InPath, LLC, a development-stage company engaged in
the design and development of medical instruments and related tests. In the
acquisition, Bell National issued 4,288,790 shares of common stock and warrants
to purchase 3,175,850 shares of common stock to the members of InPath in
exchange for their units of membership interest in InPath and the senior
executives of InPath assumed management control of MDI.
Based upon the terms of the acquisition agreement, for financial
reporting and accounting purposes the acquisition was accounted for as a
reverse acquisition whereby InPath is deemed to have acquired Bell National.
However, Bell National was the continuing legal entity and registrant for both
Securities and Exchange Commission filing purposes and income tax filing
purposes, until its merger into MDI in May 1999. Because Bell National was a
non-operating public shell company with nominal assets and InPath was a private
operating company, the acquisition was recorded as the issuance of stock for
the net monetary assets of Bell National, accompanied by a recapitalization and
no goodwill or other intangible assets were recorded.
On September 17, 2001, Molecular Diagnostics, Inc. completed an
acquisition transaction whereby AccuMed International, Inc. was merged into a
wholly-owned subsidiary of MDI. The value of the transaction was approximately
$14,178,000. Accordingly, the consolidated financial statements presented
hereunder include the operations of InPath from March 16, 1998 (inception), the
operations of Bell National and Molecular Diagnostics, Inc. from December 4,
1998, and the operations of AccuMed International, Inc. from September 17,
2001, the date of acquisition.
Molecular Diagnostics, Inc. is focused on the design, development and
marketing of the InPath System, Samba software and related image analysis
systems, including the AcCell instrument platforms. The InPath System and
related products are intended to detect cancer and cancer related diseases.
These products may be used in a laboratory, clinic, or doctor's office.
Molecular Diagnostics, Inc. has another wholly owned subsidiary, Samba
Technologies, Sarl ("Samba"). MDI acquired all of the assets of Samba in
January 1999 from Unilog Regions, SA for approximately $500,000 in cash. Samba
designs, develops, and markets web-enabled software based systems for image
analysis, image capture, and image transmission and management for clinical and
industrial applications. Samba is also developing software used in the InPath
System. A majority of reported revenues prior to 2002 and since inception of
Molecular Diagnostics, Inc. have been generated by Samba. Since December 20,
2002, Samba has operated under the protection of the French Commercial Court in
compliance with the bankruptcy laws of France. Samba continues to maintain
normal operations under the supervision of an Administrator appointed by the
French Commercial Court. Samba will continue to operate under the current
format until the Commercial Court approves a plan of reorganization and
continuation. The Court must act by December 2003 unless an extension of time
is granted. In consort with Samba managers, MDI anticipates filing a
Continuation Plan with the French Commercial Court during the third quarter of
2003.
Molecular Diagnostics, Inc. has incurred significant operating losses
since its inception. Management expects that significant on-going operating
expenditures will be necessary to successfully implement MDI's business plan
6
and develop, manufacture and market its products. These circumstances raise
substantial doubt about MDI's ability to continue as a going concern.
Implementation of its plans and its ability to continue as a going concern
depend upon its securing substantial additional financing. During the first
quarter of 2003, MDI raised $450,000 through the sale of convertible debt.
Management's plans include substantial efforts to obtain additional capital. If
Molecular Diagnostics, Inc. is unable to obtain adequate additional financing
or generate profitable sales revenues, management may be required to curtail
its product development and other activities and may be forced to cease
operations.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements included herein were prepared by us
without audit according to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant
to such rules and regulations. The consolidated 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 three months ended March 31, 2003,
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, Inc. and its wholly owned subsidiaries. All inter-
company 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 2002 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission.
NOTE 3. LICENSES, PATENTS, TECHNOLOGY AND GOODWILL
(in thousands)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Licenses............................................. $ 996 $1,028
Patent costs......................................... 18 133
MDI Technology Agreement............................. 7,230 7,230
Dianon Technology Agreement.......................... 260 260
------ ------
Subtotal............................................. 8,504 8,651
Less accumulated amortization........................ (1,148) (1,130)
------ ------
Total....................................... $7,356 $7,521
====== ======
Goodwill............................................. $ 283 $ 283
====== ======
AGGREGATE AMORTIZATION EXPENSE
For the three months ended March 31, 2003...... $164
NOTE 4. ACCRUED EXPENSES
Accrued expenses includes the following at March 31 and December 31
(in thousands):
2003 2002
---- ----
Accrued interest..................................... $ 238 $ 155
Accrued interest--related party...................... 115 111
Accrued professional fees............................ 146 146
Accrued financing costs.............................. 834 --
Accrued taxes........................................ 429 412
Reserve for warranty................................. 20 21
Other accrued expenses............................... 299 298
------ ------
Total....................................... $2,081 $1,143
====== ======
At March 31, 2003, MDI accrued financing costs of $834,000
related to the settlement of the RVC loan on April 2, 2003.
7
MDI is delinquent in filing certain Federal and State Income Tax returns
for 2002 and 2001. MDI is also delinquent in paying a portion of Federal and
State employee and employer payroll taxes for 2001. The Company owed $635,000
and $678,000 as of March 31, 2003 and December 31, 2002, respectively, in
past-due payroll taxes, including $207,000 and $250,000 respectively in
assessed and estimated statutory penalties and interest. The Internal Revenue
Service has filed a lien against the Company's assets to secure the unpaid
payroll taxes. MDI is currently in the process of communicating through counsel
with the Internal Revenue Service to resolve this matter. The amount is
included in accrued payroll costs in the accompanying balance sheet. MDI is
also delinquent in paying various state franchise taxes.
NOTE 5. NOTES PAYABLE--RELATED PARTIES
Notes payable to related parties at March 31 and December 31 (in
thousands) consisted of:
2003 2002
---- -----
Northlea Partners, Ltd., $25,000 Promissory Note issued
August 6, 2001; interest rate 15% per annum............ $ 25 $ 25
Northlea Partners, Ltd., $15,000 Promissory Note
issued September 20, 2001; interest rate 9% per annum.. 15 15
Robert Shaw, $25,000 Promissory Note issued September
20, 2001; interest rate 9% per annum.................... 25 25
Suzanne M. Gombrich note payable represents initial
cash proceeds of a $1,000,000 convertible promissory
note dated April 2, 2003, on which date the remaining
$900,000 in cash proceeds were received by MDI; due
April 2, 2005 or earlier; interest rate 12% per annum;
convertible into common stock at $0.10 per share;
1,000,000 warrants at exercise price of $0.15 per share;
first priority security interest in all MDI assets..... 35 --
---- -----
$100 $ 65
==== =====
NOTE 6. NOTES PAYABLE
Notes payable to unrelated parties at March 31 and December 31 (in
thousands) consisted of:
2003 2002
---- -----
Bridge I Convertible Promissory Notes; due December 31,
2002; interest rate 7% per annum; convertible into
common stock at 75% of the market price on date of
conversion; beneficial conversion feature valued at
$1,042,000; Bridge I warrants at an exercise price
of $0.25 per share; Private Warrants at an exercise
price equal to 150% of note conversion price........... $2,125 $3,185
Bridge II Convertible Promissory Notes; due July 31,
2003; interest rate 12% per annum; convertible into
common stock at $0.10 or $0.15 per share; beneficial
conversion feature valued at $792,000 and $330,000 at
March 31, 2003 and December 31, 2002, respectively;
Bridge II warrants at an exercise price of $0.15 or
$0.20 per share........................................ 1,458 293
Round Valley Capital, LLC $825,500 Promissory Note,
including unearned interest dated August 30, 2002;
interest rate 36% per annum; warrants at an exercise
price of $0.20 per share; 711,364 shares of common
stock.................................................. 64 300
Monsun, AS, $500,000 Promissory Note issued November 1,
2000; interest rate 15% per annum, compounded into
principal amount; beneficial conversion feature valued
at $125,000; 1st extension of maturity date for
issuance of 100,000 warrants at an exercise price of
$0.60 per share; 2nd extension of maturity date for
the issuance of 200,000 warrants at an exercise price
of $0.30 per share; 3rd extension of maturity date for
the issuance of 200,000 warrants at an exercise price
of $0.70 per share; stock issuance of 200,000 shares of
common stock in lieu of default penalty................ 574 552
Trek Diagnostic Systems $80,000 Promissory Note issued
July 31, 2002; due in equal installments on September
1, 2002 and December 1, 2002........................... 40 40
Xillix Technologies Corporation, $361,000 Promissory Note
issued June 26, 1998; interest rate Canadian Prime plus
6% per annum; represents a debt of AccuMed
International.......................................... 34 34
8
Western Economic Diversification, $221,000 Promissory
Note issued June 1989; no interest; represents a debt
of Oncometrics......................................... 196 182
------ ------
$4,491 $4,585
====== ======
Between March 22, 2002 and June 28, 2002, MDI issued $3,185,000 in series
Bridge I Convertible Promissory Notes to accredited investors. The notes bear
interest at the rate of 7% per annum and are convertible at any time into the
common stock of MDI at a conversion price equal to 75% of the market price of
the common stock on the date of conversion. In addition, MDI issued a warrant,
which entitled each holder to purchase one share of common stock, at an
exercise price of $0.25 per share, for each dollar principal amount of notes.
MDI calculated a fair value of $99,950 for these warrants using the fair value
interest rate method and recorded this amount as additional interest expense
during 2002. At the time of conversion of the note, the holder is entitled to
receive a Private Warrant to purchase one share of common stock for each four
shares of common stock into which the note converts at an exercise price equal
to 150% of the conversion price of the note. MDI has not determined a value for
the Private warrants as of March 31, 2003. Since the conversion price of the
note is at a 25% discount to the market price of the common stock of MDI, the
holder is considered to have a beneficial conversion feature. MDI determined
the value of the beneficial conversion feature to be $1,041,666 and recorded
this amount as additional interest expense during 2002. In February 2003, a
note holder, NeoMed Innovations III, converted $1,060,000 in principal amount
of Bridge I notes into Bridge II notes. The remaining $2,125,000 in principal
Bridge I notes remains unconverted and outstanding at March 31, 2003.
Management continues to negotiate an extension of the maturity date or
conversion of the notes with the holders. As of July 31, 2003, these
negotiations are ongoing.
Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. MDI
issued $550,000 in Bridge II notes as of December 31, 2002. During the first
quarter of 2003, MDI issued an additional $350,000 in principal amount of
Bridge II notes. The notes bear interest at a rate of 12% per annum payable at
the maturity date in kind in the form of shares of common stock of MDI. The
Company granted the holders a junior security position in all of its assets.
The notes are convertible at any time into the common stock of MDI. The note
conversion price and the value of common shares paid in kind as interest for
the first $1,000,000 in principal amount of cash subscriptions, determined on a
"first come - first served basis," is $0.10 per share. The note conversion
price and the value of common shares paid in kind as interest for the remaining
$3,000,000 of principal amount of notes in the series is $0.15 per share. The
conversion price of the notes issued during 2002 and those issued during the
first quarter of 2003 was less than the market price of the common stock when
the notes were issued; therefore, the holder is considered to have a beneficial
conversion feature. MDI determined the value of the beneficial conversion
feature to be $792,000 and $330,000 at March 31, 2003 and December 31, 2002,
respectively. The value was recorded as a reduction of the debt and will be
amortized as additional interest over the life of the note. MDI recorded
additional interest expense of $153,481 to reflect amortization of the discount
for the time the notes were issued until March 31, 2003. At the time MDI
completes significant additional funding plans, as outlined in the subscription
agreement, each holder of Bridge II notes is entitled to receive a warrant to
purchase one share of the common stock of the Company for each four shares of
common stock into which the note is convertible at an exercise price of $0.15
per share for notes in the class pertaining to the first $1,000,000 in
subscriptions and $0.20 for the remaining $3,000,000 in note principal
subscriptions. Subsequent to March 31, 2003, MDI issued additional notes in the
Bridge II series. (See Footnote 8: Subsequent Events)
On August 30, 2002, MDI issued a Promissory note to Round Valley Capital,
LLC ("RVC") in the amount of $825,500 representing $650,000 in cash received by
MDI and $175,500 in unearned interest. The note bears a calculated effective
interest rate of 36% per annum and is due June 1, 2003. The note is secured by
all of the assets of MDI. MDI issued a certificate representing 5,750,000
shares of the common stock of the Company to RVC as collateral for the loan and
paid transaction fees including: cash payments of $147,063; 711,364 shares of
common stock of MDI; and warrants to purchase 681,818 shares of common stock of
MDI at an exercise price of $0.20 per share. MDI recorded the note at a value,
net of unearned interest, of $650,000. A fair value of $362,795 was calculated
for the shares of common stock of MDI issued to RVC using the market price of
the common stock on the date the shares were issued. A fair value of $156,000
was calculated for the warrants using the Black-Scholes valuation method. The
total value of the transaction fees was recorded as prepaid financing costs and
is being amortized over the life of the note. On February 17, 2003, MDI made
additional principal payments amounting to $250,000. MDI recorded interest
expense of $16,900 and financing costs, including amortization of prepaid
financing costs, of $1,008,000 during the three-months ended March 31, 2003.
RVC declared MDI to be in default under the terms of the note during 2002 and
the parties were engaged in litigation as of March 31, 2003. On April 2,
9
2003, MDI and RVC settled the litigation and the note, including default
penalties, was paid in full. (See Footnote 8: Subsequent Events)
In July 2002, MDI agreed to settle a claim brought by Trek Diagnostic
Systems, Inc. ("Trek") against AccuMed regarding breach of representation and
warranties in a certain agreement under which Trek purchased the microbiology
business of AccuMed in 2000. MDI issued a promissory note to Trek in the amount
of $80,000, payable in two equal installments on September 1, 2002 and December
1, 2002. MDI made the first payment due on September 1, 2002. MDI did not make
the second payment causing a default on the note. Trek has instituted legal
action against MDI to obtain payment of the remaining amount due under the
note. The unpaid portion of the note accrues interest at the rate of 8% per
annum. MDI recorded interest expense related to this note of $1,100 for the
three-months ended March 31, 2003.
The carrying amounts of notes payable approximates fair value at March
31, 2003.
NOTE 7. STOCKHOLDERS' EQUITY
Summary of the Company's preferred stock capital table as of:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
SHARES ISSUED & SHARES ISSUED &
OFFERING OUTSTANDING OUTSTANDING
-------- ----------- -----------
Series A convertible.......................... 118,092 118,092
Series B convertible, 10% cumulative.......... 799,856 799,856
Series C convertible, 10% cumulative.......... 1,225,833 1,258,833
Series D convertible, 10% cumulative.......... 175,000 175,000
Series E convertible, 10% cumulative.......... 261,287 429,243
----------- -----------
Total Preferred Stock......................... 2,580,068 2,781,024
=========== ===========
During the first quarter of 2003 a holder converted 33,000 shares of
Series C convertible preferred stock, including cumulative dividends due
thereon, into 185,884 shares of common stock.
During the first quarter of 2003 several holders converted 167,956.76
shares of Series E convertible preferred stock, including cumulative dividends
due thereon, into 5,133,617 shares of common stock.
SUMMARY OF PREFERRED STOCK TERMS
SERIES A CONVERTIBLE PREFERRED STOCK
Liquidation Value:$4.50 per share
Conversion Price: $10.3034 per share
Conversion Rate: 0.4367--Liquidation Value divided by Conversion Price
($4.50/$10.3034)
Voting Rights: None
Dividends: None
Conversion Period:Any time--3 years
SERIES B CONVERTIBLE PREFERRED STOCK
Liquidation Value:$4.00 per share
Conversion Price: $1.00 per share
Conversion Rate: 4.00--Liquidation Value divided by Conversion Price
($4.00/$1.00)
Voting Rights: None
Dividends: 10%--Quarterly--Commencing March 31, 2001
Conversion Period:Any time
Cumulative dividends in arrears at March 31, 2003 were $668,441
SERIES C CONVERTIBLE PREFERRED STOCK
Liquidation Value:$3.00 per share
Conversion Price: $0.60 per share
10
Conversion Rate: 5.00--Liquidation Value divided by Conversion Price
($3.00/$0.60)
Voting Rights: None
Dividends: 10%--Quarterly--Commencing March 31, 2002
Conversion Period:Any time
Cumulative dividends in arrears at March 31, 2003 were $519,887
SERIES D CONVERTIBLE PREFERRED STOCK
Liquidation Value:$10.00 per share
Conversion Price: $1.00 per share
Conversion Rate: 10.00--Liquidation Value divided by Conversion Price
($10.00/$1.00)
Voting Rights: None
Dividends: 10%--Quarterly--Commencing April 30, 2002
Conversion Period:Any time--After April 1, 2002
Cumulative dividends in arrears at March 31, 2003 were $247,397
SERIES E CONVERTIBLE PREFERRED STOCK
Liquidation Value:$22.00 per share
Conversion Price: $0.80 per share
Conversion Rate: 27.50--Liquidation Value divided by Conversion Price
($22.00/$0.80)
Voting Rights: Equal in all respects to holders of common shares
Dividends: 10%--Quarterly--Commencing May 31, 2002
Conversion Period:Any time--After December 1, 2002
Cumulative dividends in arrears at March 31, 2003 were $722,842
ISSUANCE OF RESTRICTED SHARES FOR SERVICES
Beginning in 1999, the Company has, at various times, awarded restricted
shares of common Stock to non-employee consultants for services. Some of the
shares awards were made for past services and their value was fixed. Other
share awards 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 had not been determined as of
March 31, 2002 and 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 these shares $11,000 and
$119,000 was calculated using the Black-Scholes valuation model and the Company
recorded $3,400 and $8,000 as expense during the quarter ended March 31, 2003
and March 31, 2002, respectively.
ISSUANCE OF SHARES FOR SERVICES
During the first quarter 2003, MDI issued 1,000,000 shares of common
stock in exchange for services to a non-employee professional services firm.
MDI calculated a fair value of $100,000 for these shares based on the value of
the shares on the date of the issuance and recorded the amount as investor
relations expense as of March 31, 2003.
APPLICATION OF BLACK-SCHOLES VALUATION MODEL
In applying the Black-Scholes valuation model, the Company has used an
expected dividend yield of zero, a risk-free interest rate of 6% and a
volatility factor of 90% for the three months ended March 31, 2003 and 2002,
and a fair value of the underlying common shares of the closing market price on
the date of the grant. The expected life equaled the term of the warrants,
options, or restricted shares.
NOTE 8. SUBSEQUENT EVENTS
BRIDGE II FINANCING
Beginning in October 2002, MDI began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. The
notes bear interest at 12 % per annum payable at maturity date in kind in the
form of shares of common stock and are due July 31, 2003. The notes are
convertible at any time into the common stock of MDI. The note conversion price
and the value of common shares paid in kind as interest for the first
11
$1,000,000 in cash subscriptions, determined on a "first come - first served
basis," is $0.10 per share. The note conversion price and the value of common
shares paid in kind as interest for the remaining $3,000,000 of principal
amount of notes in the series is $0.15 per share. At the time MDI completes
significant additional funding plans, as outlined in the subscription
agreement, each holder of Bridge II notes is entitled to receive a private
warrant to purchase one share of the common stock of MDI for each four shares
of common stock into which the note is convertible at an exercise price of
$0.15 per share for notes in the class pertaining to the first $1,000,000 in
principal subscriptions and $0.20 for the remaining $3,000,000 in note
principal subscriptions. MDI granted a junior security position in all of the
Company's assets to the holders of the Bridge II convertible promissory notes.
Through March 31, 2003, MDI issued $900,000 in principal amount of Bridge II
convertible promissory notes in exchange for cash. Between April 1, 2003 and
July 29, 2003, MDI issued an additional $1,106,000 principal amount of Bridge
II convertible promissory notes in exchange for cash. MDI is currently working
with holders to amend the notes to extend the due date beyond July 31, 2003.
OTHER FINANCING
On April 2, 2003, MDI issued a $1,000,000 Convertible Promissory Note to
an affiliate, Suzanne M. Gombrich, the wife of Peter Gombrich, MDI's Chairman
and CEO, in exchange for cash. The note bears interest at the rate of 12% per
annum and is convertible into the common stock of MDI at a conversion price of
$0.10 per share. As additional consideration, MDI granted the holder a warrant
to purchase 1,000,000 shares of the common stock of MDI at an exercise price of
$0.15 per share. MDI also granted the holder a first priority security interest
in all of the Company's assets. The initial $100,000 of cash proceeds of the
note was received in March 2003 and to fund the cost of an option to repurchase
all of its assets from Round Valley Capital, LLC. The remaining proceeds
received on April 2, 2003 were used to make the $900,000 payment required to
exercise the purchase option in conjunction with the final settlement of the
loan with Round Valley Capital, LLC.
SETTLEMENT OF ROUND VALLEY CAPITAL, LLC LOAN AND RELATED LITIGATION
On August 30, 2002, MDI issued a promissory note to Round Valley Capital,
LLC ("RVC") in the amount of $825,500 representing $650,000 in cash received in
exchange for the note and $175,500 in unearned interest. The note was due June
1, 2003 and bore interest at a calculated rate of 36% per annum. The note was
secured by all of the Company's assets. MDI paid transaction fees in cash of
$147,063, issued RVC 711,364 shares of the common stock of MDI and warrants to
purchase 681,818 shares of the common stock of MDI at an exercise price of
$0.20 per share. MDI also issued a certificate representing 5,750,000 shares of
the common stock of MDI as additional collateral for the loan. As of December
31, 2002, MDI had made principal and interest payments against the note of
$350,000 and $59,500, respectively. As a result of issues over the value of
collateral, RVC declared the note to be in default under the terms of the note
and attempted to foreclose on the Company's assets and sell them at auction.
MDI instituted legal action against RVC, halting the foreclosure and asset
sale, and immediately entered into settlement negotiations. In early December
of 2002, MDI reached a settlement agreement with RVC under which the Company
was required to pay the remaining $300,000 principal balance of the note plus
an additional amount of $115,000, representing the remaining unearned interest
on the note, by January 4, 2003. The agreement provided that if the payment due
on January 4, 2003 was not made in a timely manner, a default penalty would be
assessed each week payment was not made until a final payment amounting to
$950,000 would be due on February 19, 2003. MDI was not able to make the
payment due on January 4, 2003 and made no further payments until February 17,
2003, when MDI paid RVC $250,000 leaving a remaining balance due under the
settlement agreement of $700,000. At the end of February RVC proceeded with
foreclosure against the Company's assets. At that time MDI agreed to pay RVC
$100,000 for an option to repurchase the Company's assets at any time prior to
the close of business on April 2, 2003. The option prevented RVC from selling
the assets to any party other than MDI before that date. MDI used the proceeds
of Bridge II convertible promissory notes issued in February, as described
above, to make the $250,000 payment to RVC. On April 2, 2003, MDI paid RVC
$900,000 to exercise the purchase option to reacquire all of the Company's
assets. MDI used the proceeds of a convertible promissory note issued to an
affiliate, as described above, to make the payment for the purchase option and
the final payment to RVC. In conjunction with this final payment, RVC returned
5,750,000 shares of the common stock of MDI issued as collateral, 711,364
shares of the common stock of MDI and warrants to purchase 481,818 shares of
the common stock of MDI issued to RVC as payment for transaction fees. MDI
cancelled the shares of common stock and warrants.
WARRANTS
On July 18, 2003, Mr. Milley, a director, Azimuth Corporation and Cadmus
Corporation, agreed to cancel seven warrants held by Azimuth and one warrant
held by Cadmus, which entitled the holders to purchase a total of 3,125,000
12
shares of common stock at various exercise prices between $0.01 and $1.25 per
share. The warrants, issued between December 1999 and August 2001, contained
anti-dilution clauses which required MDI to increase the number of shares of
common stock the holders were entitled to purchase under the warrants by
approximately 1,500,000 shares as of the date of the agreement, with
commensurate adjustments in individual exercise prices so that gross proceeds
to the Company from exercise of the warrants remained the same. These anti-
dilution provisions could have required the Company to make additional
adjustments in shares and exercise prices in the future based on the Company's
issuance of debt or equity instruments at prices below the adjusted exercise
prices of these warrants. In consideration for the parties agreement to cancel
these warrants, including their individual anti-dilution clauses, and the
forgiveness of approximately $120,000 currently owing to Azimuth and Cadmus,
MDI agreed to issue a new five-year warrant entitling the holders to purchase
6,500,000 shares of common stock at an exercise price of $0.30 per share. MDI
also agreed to issue a 120- day warrant entitling the holder to purchase
500,000 shares of common stock at an exercise price of $0.30. Management
believes that the Company will derive significant additional benefits in the
future as a result of the elimination of the anti dilution provisions in the
original warrants.
NOTE 9. LEGAL PROCEEDINGS
On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999.
Under the settlement agreement, MDI executed an $80,000 promissory note in
favor of Trek. The note required principal payments of $40,000 each on
September 1 and December 1, 2002. MDI made the initial payment and Trek filed
suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03
492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at
8% per annum and legal and other costs. At December 31, 2002, MDI accrued the
remaining amount due on the note. On April 18th, 2003, judgment was entered
against MDI in the amount of $40,000 plus interest. Management is currently
negotiating with Trek representatives to resolve this matter.
On March 28, 2003, The Cleveland Clinic Foundation filed suit against MDI
(United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and attorney fees and costs. The sum in question pertains to remaining unpaid
fees for certain clinical trial work conducted by The Cleveland Clinic
Foundation in the Peoples Republic of China on behalf of MDI. At December 31,
2002, MDI has recorded the full amount owing to The Cleveland Clinic Foundation
as a liability in its accounts. MDI is currently engaged in settlement
discussions with The Cleveland Clinic Foundation.
On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03
L 000009)) claiming approximately $342,000, plus interest and attorney fees and
costs, related to financial printing service fees provided to MDI by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. As of December
31, 2002 and June 30, 2003, management and its counsel are unable to determine
the outcome of this litigation.
On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, MDI's Chairman and CEO, (United States District Court for the
Northern District of Illinois Eastern Division (Case No. 03C 0184)) claiming
$500,000 plus consequential damages for failure to make payment in compliance
with the terms of a personal guaranty signed by Mr. Gombrich in relation to
Monsun's grant of an extension in the maturity date of a convertible promissory
note in the principal amount of $500,000 issued by MDI on November 1, 2000. The
note had an original maturity date of November 1, 2001. The maturity date of
the note was initially extended until January 31, 2002 and subsequently to
April 1, 2002 and finally to July 31, 2002. Monsun granted the maturity date
extensions in exchange for various warrants issued by MDI entitling the holder
to purchase shares of MDI's common stock at various prices. In November 2002,
the Board of Directors approved the issuance of 200,000 shares of MDI's common
stock to Monsun to satisfy a default penalty clause in the guaranty. The terms
of the guaranty required that Monsun receive registered shares of MDI's common
stock, however, in order to comply with securities laws, MDI issued the shares
of its common stock to Monsun with a restrictive legend which permits their
sale only in compliance with Rule 144 of the Securities Exchange Act. MDI has
recorded the principal amount of the note plus accrued and unpaid interest to
December 31, 2002 as a note payable on its records. Since Mr. Gombrich's
potential liability under the suit, including the failure to deliver registered
shares of MDI's common stock, is the result of the failure of MDI to pay the
13
principal amount of its convertible promissory note when due, the Board of
Directors has agreed that MDI will assume responsibility for Mr. Gombrich's
obligations under the guaranty, including legal costs. Management and counsel
are unable to determine the result of this pending litigation as of June 30,
2003.
MDI is a defendant in several lawsuits brought by current or former
unsecured creditors to collect past due amounts for goods and services. MDI has
recorded the amounts due in its records and is attempting to settle these suits
and unfiled claims.
MDI is a defendant in several legal actions brought by former employees
seeking to collect amounts due for unpaid wages. MDI has recorded the amounts
due in its records and is attempting to settle these actions
In May 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court of Cook County, Illinois)). The suit arises out of
two license agreements between AccuMed, Oncometrics and MonoGen in which
certain intellectual property was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements"). At the time of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics by the British
Columbia Cancer Agency ("BCCA") pursuant to a written license agreement.
Pressman was the President of AccuMed and Oncometrics when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position with MonoGen. The Complaint alleges that that the technology was
transferred at a below market price. The Complaint also asserts that AccuMed
and Oncometrics may not have obtained the requisite approval from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.
The Complaint contains claims against Pressman for breach of fiduciary
duty and fraud. To the extent that the requisite approval from BCCA was not
obtained, Pressman breached his fiduciary duty to AccuMed and Oncometrics by
failing to obtain that approval, and falsely representing that he had in fact
obtained the requisite approval. Pressman breached his fiduciary duty further
by failing to negotiate an arms length transaction with MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of fiduciary duty to AccuMed and Oncometrics, fraud in the inducement and
tortuous interference with prospective economic advantage.
The Company's claims against MonoGen have been dismissed from this action
and consolidated in a separate arbitration proceeding involving the Company and
MonoGen. The Company's claims against Pressman remain pending in this action.
In June 2003, the Court dismissed the Company's request for a preliminary
injunction. The denial of preliminary injunctive relief does not affect the
Company's rights to pursue permanent injunctive relief at the conclusion of the
case, if such relief is warranted. The Company is attempting to negotiate a
global settlement of the claims in this action, the arbitration proceeding with
MonoGen and any threatened but unasserted claims by BCCA relating to the
Agreements. The failure to negotiate a favorable settlement could have a
material adverse effect on MDI's business.
On April 14, 2003, we received a notification from the attorney for the
licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development
Agreement covering certain HPV technology, which forms the basis for our In-
Cell HPV test, indicating that the licensor intended to terminate the license
in accordance with a specific clause of the license, which permits termination
in the event the Company makes an assignment for the benefit of creditors or
bankruptcy, or otherwise relinquishes or loses control of all its assets. On
April 15, 2003, we informed the attorney that the facts used by the licensor to
invoke the termination right were incorrect and that we are still in control of
all of our assets and that such assets are pledged as security under debt
instruments and that such pledges are not included under events which would
permit the licensor to terminate the license. We, and our counsel, believe that
MDI would prevail should the licensor attempt to pursue a termination action.
We are also engaged in a dispute with the licensor over completion of the third
milestone of the license under which completion requires process and procedure
verification by an independent third party. This verification requirement has
not been satisfied as yet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
our consolidated financial statements presented in Part I, Item 1 of this
quarterly report and our consolidated financial statements and Management'
14
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31,
2002.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition. Molecular Diagnostics, Inc. recognizes revenue upon
shipment of product or license to customers and no remaining Company
obligations or contingencies exist, or in the case of sales of software by its
wholly owned subsidiary Samba, upon shipment if persuasive evidence of an
arrangement exists; sufficient vendor-specific objective evidence exists to
support allocating the total fee to all elements of the arrangement; the fee is
fixed or determinable; and collection is probable.
Revenue from ongoing client maintenance is recognized ratably over the
post-contract support term, which is generally twelve months. Revenue from
training services and professional services is recognized when the service is
completed. Revenue from implementation and installation services is recognized
using the percentage of completion method. Revenue from prepayments under
licenses is recognized over the license period. Samba calculates percentage of
completion based on the estimated total number of hours of service required to
complete an implementation project and the number of actual hours of service
rendered. Implementation and installation services are generally completed
within 120 days.
License, Patents, Technology and Goodwill. License, patents, and
purchased technology are recorded at their acquisition cost. Costs to prepare
patent filings are expensed when incurred. Costs related to abandoned patents
are written off at the time of abandonment. Amortization is begun as of the
date of acquisition or upon the grant of the final patent. Costs are amortized
over the asset's useful life, which ranges from two to seventeen years. The
Company assesses licenses, patents, and technology quarterly for impairment.
Goodwill. The Company has adopted FAS 142, which sets forth guidelines
for discontinuing periodic goodwill amortization costs in results of operations
and for establishing an annual goodwill impairment review and related net
realizable value asset write-down methodology.
Research and Development Costs. Research and development costs are
charged to operations as incurred. Molecular Diagnostics, Inc. conducts a
portion of its research activities under contractual arrangements with
scientists, researchers, universities, and other independent third parties.
Foreign Currency Translation. The functional currency of Molecular
Diagnostics, Inc.'s foreign operations is the local currency. Accordingly, all
assets and liabilities are translated into United States dollars using period-
end exchange rates, and all revenues and expenses are translated using average
exchange rates during the period. The amount of foreign currency translation is
not material to the results of operations and the financial position of
Molecular Diagnostics, Inc.
Other Comprehensive Income (Loss). Translation adjustments related to
Molecular Diagnostics, Inc.'s foreign operations are included in other
comprehensive loss and reported separately in stockholders' equity (deficit).
Stock Compensation. As permitted by the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), Molecular Diagnostics, Inc. uses the intrinsic value method to
account for stock options as set forth in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25).
Impairment. At each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, management of the Company evaluates recoverability of such assets.
An impairment loss is recognized if the amount of undiscounted cash flows is
less than the carrying amount of the asset in which case the asset is written
down to fair value. The fair value of the asset is measured by either quoted
market prices or the present value of estimated expected future cash flows
using a discount rate commensurate with the risks involved.
15
OVERVIEW OF MOLECULAR DIAGNOSTICS, INC.
The science of medical diagnostics has advanced significantly during the
past decade. Much of this advance has come as a result of new knowledge of the
human genome and related proteins, which form the foundation of cell biology
and the human body. Our goal is to utilize this research as a base to develop
screening and diagnostic testing products for cancer and cancer-related
diseases. We believe that the success of these products will improve patient
care through more accurate test performance, wider availability and cost
effective service delivery. We are developing an initial series of products to
address these criteria including sample collection devices, chemical and
biological tests, and analysis instruments and related software.
Our strategy is to develop products through internal development
processes, strategic partnerships, licenses and acquisitions of companies. This
strategy has required and will continue to require additional capital. As a
result, we will incur substantial operating losses until we are able to
successfully market some, or all, of our products.
RESULTS OF OPERATIONS
REVENUE
Revenues for the three months ended March 31, 2003 decreased $59,000, or
9.0%, to $597,000 from revenues for the same period in 2002. The revenue
decrease results entirely from the fact that during the first quarter of 2002
we recorded the one-time revenue recognition of $298,000 for sale of the
license of Samba software and technology to Ventana Medical Systems, Inc.
("Ventana"). About 75.5% of the net sales for the first quarter March 31, 2003
were derived from contracts generated by Samba in Europe. Samba maintains 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.
COSTS AND EXPENSES
Cost of Goods Sold
Cost of goods sold for the quarter ended March 31, 2003 totaled $276,000,
an increase of $81,000, or 41.5% over the same period in 2002. In the 2002
quarter, no cost of goods sold was attributed to the Ventana license sale since
the research and development costs related to the software and technology
covered by the license were expensed as incurred in prior years
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.
For the quarter ended March 31, 2003, our R&D expenses were $231,000, a
decrease of $702,000, or 75.2% over the same period in 2002 as a result of
reduced operating capacity due to capital and liquidity constraints. This
reduction has led to delays in the finalization of development, completion of
clinical trial validation, FDA submissions, market introduction, and sale of
some of our products. R&D expenses consist of costs related to specific
development programs with scientists and researchers at universities and
hospitals; full scale device development contracts begun during 1999 with
industrial design and manufacturing companies covering the disposable and
instrument components of the InPath System; payments to medical and engineering
consultants for advice related to the design and development of our products
and their potential uses in the medical technology marketplace;
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 FDA clinical trials, and
payroll related costs for in-house engineering, scientific, laboratory,
software development; and research management staff.
16
SELLING, GENERAL AND ADMINISTRATIVE
For the quarter ended March 31, 2003, selling, general and administrative
expenses ("SG&A") were $2,088,000, a decrease of $295,000, or 12.4%, over
similar expenses for the same period in 2002. This decrease, which would have
been significantly larger except that we accrued $1,118,000 in financing costs
related to the settlement of the Round Valley Capital, LLC loan on April 2,
2003, is the result of reduced operating capacity due to capital and liquidity
constraints, and a reduction in legal expenses due to the one-time recording of
$675,000 in legal costs related to a litigation settlement during the 2002
quarter.
Significant components of SG&A are compensation costs for executive,
sales and administrative personnel, professional fees primarily related to
legal and accounting services, travel costs, fees for public and/or investor
relations services, insurance premiums, facilities and office expenses,
marketing related costs, and amortization /depreciation charges, many of which
showed significant declines due to the reduction in overall operations, which
began during the last quarter of 2002.
OTHER INCOME AND EXPENSE
Interest Expense
For the first quarter ended March 31, 2003, our interest expense amounted
to $238,000, an increase of $134,000, or 128.9% over the same period in 2002.
Bridge I convertible promissory notes, in principal amounts totaling $3,185,000
and issued between March 22, 2002 and June 25, 2003, and Bridge II convertible
promissory notes, in principal amounts totaling $900,000, and issued between
October 29, 2002 and February 17, 2003 were outstanding for all or some of the
first quarter of 2003.
Other Income and Expense, Net
For the quarter ended March 31, 2002, we recorded $150,000 gain from the
settlement of the SpectRx litigation judgment. Related SpectRx settlement legal
expenses are included in selling, general and administrative expenses for the
quarter ended March 31, 2002.
NET LOSS
MDI's net loss before preferred dividends for the three months ended
March 31, 2003 totaled $2,237,000. Cumulative dividends on the outstanding
Series B convertible preferred stock, Series C convertible preferred stock,
Series D convertible preferred stock and Series E convertible preferred stock
totaled $424,000. The combined net loss applicable to common stockholders
amounted to $2,661,000, or $0.07 net loss per share on 40,177,291 weighted
average shares outstanding.
The weighted average shares outstanding during the quarter ended March
31, 2003 reflect the conversion of Series B, Series C, and Series E convertible
preferred stock during 2002 and Series C and Series E convertible preferred
shares during the first quarter of 2003. It also reflects, 5,750,000 shares of
common stock issued to RVC as additional loan collateral in September 2002.
The shares were returned to MDI in April of 2003 and cancelled.
Our net loss before preferred dividends for the three months ended March
31, 2002 totaled $2,810,000. Cumulative dividends on the outstanding Series B
convertible preferred stock, Series C convertible preferred stock, Series D
convertible preferred stock, and Series E convertible preferred stock totaled
$122,000. The combined net loss applicable to common stockholders was
$2,932,000, or $0.11 net loss per share on 25,561,429 weighted average shares
outstanding.
The weighted average shares outstanding as of March 31, 2002 reflect a
10,859,688 tender offer reduction in common shares in exchange 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 purchase.
17
LIQUIDITY AND CAPITAL RESOURCES
R&D, clinical trials and other studies of the components of our InPath
System, conversions from designs and prototypes into product manufacturing,
initial sales and marketing efforts, medical consultants and advisors, and
research, administrative, and executive personnel are and will continue to be
the principal basis for our cash requirements. We have provided operating funds
for the business since its inception through private offerings of debt and
equity to limited numbers of U.S. and foreign accredited investors. We may be
required to make additional offerings in the future to support the operations
of the business until some or all of our products are introduced into the
market. We used $272,000 and $1,284,000 for the first quarter ended March 31,
2003 and 2002, respectively, in operating activities.
As of the quarter ended March 31, 2003 we had cash on hand of $6,000, a
decrease of $36,000 over cash on hand at December 31, 2002 of $42,000. This
decrease results from delays in the timing of acquiring our bridge financing.
During the first quarter of 2003, we issued an additional $350,000 in
Bridge II convertible notes in exchange for cash. The notes were issued under
the same terms as all other previous Bridge II notes. We used $250,000 of the
proceeds to make principal and interest payments on the RVC loan.
During the first quarter of 2003, Mr. Gombrich, our Chairman and CEO,
loaned the Company an additional $115,000 to meet some of our operating needs.
In March 2003, Suzanne M. Gombrich, the wife of our Chairman, loaned the
Company $100,000 in cash, reflecting the initial proceeds of a $1,000,000
convertible promissory note issued on April 2, 2003. We used the $100,000 to
buy the purchase option related to the RVC loan settlement.
We did not make any capital expenditures during the first quarter of 2003
versus capital expenditures of $39,000 for the first quarter 2002, a reduction
of 100%. Capital expenditures are defined as disbursements for laboratory
equipment, leasehold improvements, software, and furniture/fixtures with a
purchase price in excess of $1,000 per item and useful life in excess of one
year. The decrease in 2003 capital expenditures was the result of our reduction
in operating capacity due to capital and liquidity constraints.
Our operations have been, and will continue to be, dependent upon
management's ability to raise operating capital in the form of debt or equity.
We have incurred significant operating losses since inception of the business.
We expect that significant on-going operating expenditures will be necessary to
successfully implement our business plan and develop, manufacture and market
our products. As a result of capital and liquidity constraints, we
significantly reduced our staff and all other operating expenditures beginning
in the last quarter of 2002 and continuing through the first quarter of 2003
and beyond. 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. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer have
concluded, based upon their evaluation as of a date within 90 days prior to the
date of filing this Quarterly Report on Form 10-QSB, that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by MDI in the reports filed or submitted by us under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Our
former independent auditors, Ernst & Young, LLP, issued a report at the
completion of their audit of our consolidated financial statements for the year
ended December 31, 2001 detailing certain deficiencies in our internal control
systems and procedures. During 2002, we hired an independent consultant, Tatum
CFO Partners, LLP ("Tatum"), to address the issues raised by Ernst & Young,
LLP. In August of 2002, Tatum reported to the Audit Committee that it had
assisted management in developing procedures, forms, checklists and reporting
packages to address these deficiencies, and that progress had been made to
18
improve our system of internal controls. Additional progress in these areas
continued through the end of 2002. In designing and evaluating the controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management was necessarily
required to apply judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
There have been no other significant changes in our internal controls,
with the exception of those which may have temporarily arisen as a result of
the departure of accounting personnel during the first half of 2003 and which
reverted or will revert to their prior status as soon as new personnel are in
place, or in other factors that could significantly affect our internal
controls subsequent to the date we completed our evaluation. Our principal
financial officer has only recently joined MDI and therefore his review of this
filing was somewhat limited, and he was required to rely on our books and
records, on comments from independent auditors regarding their recently
completed audit, and on review and discussions with independent consultants who
participated in the preparation of this report and with other members of
management.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 31, 2002, MDI entered into a settlement and mutual release
agreement with Trek Diagnostic Systems, Inc. ("Trek") related to a claim of
breach of representations and warranties included in an agreement under which
AccuMed sold its microbiology business and related assets to Trek in 1999.
Under the settlement agreement, MDI executed an $80,000 promissory note in
favor of Trek. The note required principal payments of $40,000 each on
September 1 and December 1, 2002. MDI made the initial payment and Trek filed
suit against MDI (Court of Common Pleas Cuyahoga County, Ohio (Case No. CV 03
492582)) on January 23, 2003 to collect the remaining $40,000 plus interest at
8% per annum and legal and other costs. At December 31, 2002, MDI accrued the
remaining amount due on the note. On April 18th, 2003, judgment was entered
against MDI in the amount of $40,000 plus interest. Management is currently
negotiating with Trek representatives to resolve this matter.
On March 28, 2003, The Cleveland Clinic Foundation filed suit against MDI
(United States District Court for the Northern District of Ohio, Easter
Division, (Case No. 1:03CV0561)) seeking approximately $315,000 plus interest
and attorney fees and costs. The sum in question pertains to remaining unpaid
fees for certain clinical trial work conducted by The Cleveland Clinic
Foundation in the Peoples Republic of China on behalf of MDI. At December 31,
2002, MDI has recorded the full amount owing to The Cleveland Clinic Foundation
as a liability in its accounts. MDI is currently engaged in settlement
discussions with The Cleveland Clinic Foundation.
On January 2, 2003, Bowne of Chicago, Inc.("Bowne") filed suit against
MDI (Circuit Court of Cook County, County Department-Law Division (Case No. 03
L 000009)) claiming approximately $342,000, plus interest and attorney fees and
costs, related to financial printing service fees provided to MDI by Bowne
during the period October 25, 2001 through November 7, 2002. While MDI is
actively defending itself against the suit claiming the charges for printing
services provided during the period mentioned above were excessive, management
has taken a conservative position and recorded the entire amount of the Bowne
invoices as outstanding accounts payable on the records of MDI. As of December
31, 2002 and June 30, 2003, management and its counsel are unable to determine
the outcome of this litigation.
On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter
Gombrich, MDI's Chairman and CEO, (United States District Court for the
Northern District of Illinois Eastern Division (Case No. 03C 0184)) claiming
$500,000 plus consequential damages for failure to make payment in compliance
with the terms of a personal guaranty signed by Mr. Gombrich in relation to
Monsun's grant of an extension in the maturity date of a convertible promissory
note in the principal amount of $500,000 issued by MDI on November 1, 2000. The
note had an original maturity date of November 1, 2001. The maturity date of
the note was initially extended until January 31, 2002 and subsequently to
April 1, 2002 and finally to July 31, 2002. Monsun granted the maturity date
extensions in exchange for various warrants issued by MDI entitling the holder
to purchase shares of MDI's common stock at various prices. In November 2002,
the Board of Directors approved the issuance of 200,000 shares of MDI's common
stock to Monsun to satisfy a default penalty clause in the guaranty. The terms
of the guaranty required that Monsun receive registered shares of MDI's common
stock, however, in order to comply with securities laws, MDI issued the shares
of its common stock to Monsun with a restrictive legend which permits their
sale only in compliance with Rule 144 of the Securities Exchange Act. MDI has
19
recorded the principal amount of the note plus accrued and unpaid interest to
December 31, 2002 as a note payable on its records. Since Mr. Gombrich's
potential liability under the suit, including the failure to deliver registered
shares of MDI's common stock, is the result of the failure of MDI to pay the
principal amount of its convertible promissory note when due, the Board of
Directors has agreed that MDI will assume responsibility for Mr. Gombrich's
obligations under the guaranty, including legal costs. Management and counsel
are unable to determine the result of this pending litigation as of June 30,
2003.
MDI is a defendant in several lawsuits brought by current or former
unsecured creditors to collect past due amounts for goods and services. MDI has
recorded the amounts due in its records and is attempting to settle these suits
and unfiled claims.
MDI is a defendant in several legal actions brought by former employees
seeking to collect amounts due for unpaid wages. MDI has recorded the amounts
due in its records and is attempting to settle these actions
In May 2003, the Company, together with its subsidiaries, AccuMed
International, Inc. ("AccuMed") and Oncometrics Imaging Corporation
("Oncometrics"), filed suit against MonoGen, Inc. and Norman Pressman (Case No.
03 CH 08532 (Circuit Court of Cook County, Illinois)). The suit arises out of
two license agreements between AccuMed, Oncometrics and MonoGen in which
certain intellectual property was transferred from AccuMed and Oncometrics to
MonoGen for $500,000 (the "Agreements"). At the time of the Agreements, the
Company had not yet acquired AccuMed and Oncometrics. The technology, which was
the subject of the Agreements, had been licensed to Oncometrics by the British
Columbia Cancer Agency ("BCCA") pursuant to a written license agreement.
Pressman was the President of AccuMed and Oncometrics when the Agreements were
negotiated and executed. As soon as the Agreements were signed, Pressman took a
position with MonoGen. The Complaint alleges that that the technology was
transferred at a below market price. The Complaint also asserts that AccuMed
and Oncometrics may not have obtained the requisite approval from BCCA to
transfer the technology to MonoGen pursuant to the Agreements.
The Complaint contains claims against Pressman for breach of fiduciary
duty and fraud. To the extent that the requisite approval from BCCA was not
obtained, Pressman breached his fiduciary duty to AccuMed and Oncometrics by
failing to obtain that approval, and falsely representing that he had in fact
obtained the requisite approval. Pressman breached his fiduciary duty further
by failing to negotiate an arms length transaction with MonoGen. The Complaint
also asserts claims against MonoGen for aiding and abetting Pressman's breaches
of fiduciary duty to AccuMed and Oncometrics, fraud in the inducement and
tortuous interference with prospective economic advantage.
The Company's claims against MonoGen have been dismissed from this action
and consolidated in a separate arbitration proceeding involving the Company and
MonoGen. The Company's claims against Pressman remain pending in this action.
In June 2003, the Court dismissed the Company's request for a preliminary
injunction. The denial of preliminary injunctive relief does not affect the
Company's rights to pursue permanent injunctive relief at the conclusion of the
case, if such relief is warranted. The Company is attempting to negotiate a
global settlement of the claims in this action, the arbitration proceeding with
MonoGen and any threatened but unasserted claims by BCCA relating to the
Agreements. The failure to negotiate a favorable settlement could have a
material adverse effect on MDI's business.
On April 14, 2003, we received a notification from the attorney for the
licensor, Dr. Bruce Patterson, M.D., Ph.D, under the License and Development
Agreement covering certain HPV technology, which forms the basis for our In-
Cell HPV test, indicating that the licensor intended to terminate the license
in accordance with a specific clause of the license, which permits termination
in the event the Company makes an assignment for the benefit of creditors or
bankruptcy, or otherwise relinquishes or loses control of all its assets. On
April 15, 2003, we informed the attorney that the facts used by the licensor to
invoke the termination right were incorrect and that we are still in control of
all of our assets and that such assets are pledged as security under debt
instruments and that such pledges are not included under events which would
permit the licensor to terminate the license. We, and our counsel, believe that
MDI would prevail should the licensor attempt to pursue a termination action.
We are also engaged in a dispute with the licensor over completion of the third
milestone of the license under which completion requires process and procedure
verification by an independent third party. This verification requirement has
not been satisfied as yet.
20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Beginning in October 2002, we began an issue of up to $4,000,000 in
series Bridge II Convertible Promissory Notes to accredited investors. We
issued $550,000 in Bridge II notes as of December 31, 2002. During the first
quarter of 2003, we issued an additional $350,000 in principal amount of Bridge
II notes. The notes bear interest at a rate of 12% per annum payable at the
maturity date in kind in the form of shares of our common stock. We granted the
holders a junior security position in all of our assets. The notes are
convertible at any time into our common stock. The note conversion price and
the value of common shares paid in kind as interest for the first $1,000,000 in
principal amount of cash subscriptions, determined on a "first come - first
served basis," is $0.10 per share. The note conversion price and the value of
common shares paid in kind as interest for the remaining $3,000,000 of
principal amount of notes in the series is $0.15 per share. The conversion
price of the notes issued during 2002 and those issued during the first quarter
of 2003 was less than the market price of the common stock when the notes were
issued; therefore, the holder is considered to have a beneficial conversion
feature. We determined the value of the beneficial conversion feature to be
$792,000 and $330,000 at March 31, 2003 and December 31, 2002, respectively.
The value was recorded as a reduction of the debt and will be amortized as
additional interest over the life of the note. We recorded additional interest
expense of $153,481 to reflect amortization of the discount for the time the
notes were issued until March 31, 2003. At the time we complete significant
additional funding plans, as outlined in the subscription agreement, each
holder of Bridge II notes is entitled to receive a warrant to purchase one
share of our common stock for each four shares of common stock into which the
note is convertible at an exercise price of $0.15 per share for notes in the
class pertaining to the first $1,000,000 in subscriptions and $0.20 for the
remaining $3,000,000 in note principal subscriptions. We issued the notes
pursuant to exemptions under Section 4(2) of the Securities Exchange Act of
1933, as amended. Subsequent to March 31, 2003, we issued additional notes in
the Bridge II series. MDI is currently negotiating with holders to amend the
notes and extend the due date beyond July 31, 2003. (See Footnote 8: Subsequent
Events)
During the first quarter 2003, MDI issued 1,000,000 shares of common
stock in exchange for services to a non-employee professional services firm.
MDI calculated a fair value of $100,000 for these shares based on the value of
the shares on the date of the issuance and recorded the amount as investor
relations expense as of March 31, 2003. We issued the shares pursuant to
exemptions under Section 4(2) of the Securities exchange Act of 1933, as
amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On March 4, 2003 MDI filed Current Report on Form 8-K dated
February 25, 2003, reporting under Item 4, the resignation of the
Company's independent auditors, Ernst & Young LLP effective February 25,
2003.
21
On March 19, 2003 MDI filed a Current Report on Form 8-K dated
January 23, 2003, reporting under Item 2, the disposition and acquisition
of assets related to the RVC settlement agreement and, under Item 5, the
resignation of the President and Chief Operating Officer.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
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 and Chief Executive
Officer
/s/ Dennis L. Bergquist
-----------------------
Dennis L. Bergquist
President and Chief Financial
Officer
Date: August 1, 2003
--------------
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Section 302 certification by principal executive officer.
31.2 Section 302 certification by principal financial officer.
32.1 Section 906 certification by principal executive officer.
32.2 Section 906 certification by principal financial officer.
23
Exhibit 31.1
Section 302 Certification
I, Peter P. Gombrich, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Molecular
Diagnostics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 1, 2003
/s/ Peter P. Gombrich
------------------------------
Peter P. Gombrich
Chairman of the Board and Chief
Executive Officer of
Molecular Diagnostics, Inc.
Exhibit 31.2
Section 302 Certification
I, Dennis L. Bergquist, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Molecular
Diagnostics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 1, 2003
/s/ Dennis L. Bergquist
------------------------------
Dennis L. Bergquist
Chief Financial Officer
of Molecular Diagnostics, Inc.
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Peter P. Gombrich, Chief Executive Officer (principal executive officer) of
Molecular Diagnostics, Inc. (the "Registrant"), certify, to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the
period ended March 31, 2003 of the Registrant (the "Report"), that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly represents, in all
material aspects, the financial condition and results of operations
of the Registrant.
Date: August 1, 2003
/s/ Peter P. Gombrich
-----------------------------
Peter P. Gombrich
NOTE: A signed original of this written statement required by Section 906 has
been provided to Molecular Diagnostics, Inc. and will be retained by Molecular
Diagnostics, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by law,
be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Dennis L. Bergquist, Chief Financial Officer (principal financial officer)
of Molecular Diagnostics, Inc. (the "Registrant"), certify, to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the
period ended March 31, 2003 of the Registrant (the "Report"), that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly represents, in all
material aspects, the financial condition and results of operations
of the Registrant.
Date: August 1, 2003
/s/ Dennis L. Bergquist
-----------------------------
Dennis L. Bergquist
NOTE: A signed original of this written statement required by Section 906 has
been provided to Molecular Diagnostics, Inc. and will be retained by Molecular
Diagnostics, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by law,
be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.