-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WHcKPYaj5oSHj4o+5fl3PXBg329J5b4TmwVkgDTffwMbesjeN8W+KTvEJpw3V5tL oVRVr5JhW5BgQYkftIWjcw== 0001144204-04-012148.txt : 20040816 0001144204-04-012148.hdr.sgml : 20040816 20040816160913 ACCESSION NUMBER: 0001144204-04-012148 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOLECULAR DIAGNOSTICS INC CENTRAL INDEX KEY: 0000075439 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 364296006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-00935 FILM NUMBER: 04978859 BUSINESS ADDRESS: STREET 1: 900 NORTH FRANKLIN STREET STREET 2: SUITE 210 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 4078490290 MAIL ADDRESS: STREET 1: 900 NORTH FRANKLIN STREET 1 STREET 2: SUITE 210 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: AMPERSAND MEDICAL CORP DATE OF NAME CHANGE: 19990527 FORMER COMPANY: FORMER CONFORMED NAME: BELL NATIONAL CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC COAST HOLDINGS INC DATE OF NAME CHANGE: 19830303 10QSB 1 v05716_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ( ) 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 510 Chicago, IL 60610 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (312) 222-9550 - -------------------------------------------------------------------------------- (Issuer's Telephone Number, including Area Code) 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 period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 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, AT JUly 31, 2004: 81,037,563 ------------ Transitional Small Business Disclosure Format (Check One): Yes No X ----- ----- MOLECULAR DIAGNOSTICS, INC. QUARTERLY REPORT ON FORM 10-QSB JUNE 30, 2004 TABLE OF CONTENTS
PAGE PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements a) Consolidated Balance Sheets -- June 30, 2004 (unaudited) and December 31, 2003.............................................................. 3 b) Consolidated Statements of Operations - Three and six months ended June 30, 2004 and June 30, 2003 (unaudited).................................... 4 c) Consolidated Statements of Cash Flows -- Six months ended June 30, 2004 and June 30, 2003 (unaudited).................................................. 5 d) Notes to Consolidated Financial Statements (unaudited).................................. 6 Item 2. Management's Discussion and Analysis or Plan of Operation...................................................................... 19 Item 3. Controls and Procedures................................................................. 25 PART II. -- OTHER INFORMATION Item 1. Legal Proceedings....................................................................... 25 Item 2. Changes In Securities and Small Business Issuer Purchases of Equity Securities.......... 25 ......... Item 3. Defaults upon Senior Securities......................................................... 27 Item 4. Submission of Matters to a Vote of Security Holders..................................... 28 Item 5. Other Information....................................................................... 28 Item 6. Exhibits and Reports on Form 8-K........................................................ 28 SIGNATURES....................................................................................... 29 EXHIBIT INDEX.................................................................................... 30
2 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MOLECULAR DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2004 2003 --------- -------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents................................................................... $ 410 $ -- Accounts receivables, net of allowance for doubtful accounts of $50 at June 30, 2004 and December 31, 2003......................................................... 30 26 Inventories .............................................................................. 75 94 Prepaid financings costs.................................................................... 69 307 Prepaid expenses and other current assets................................................... 7 7 --------- -------- Total current assets.......................................................... 591 434 Fixed Assets, net........................................................................... 389 374 Licenses, patents and technology, net of amortization....................................... 6,664 6,907 --------- -------- Total assets.................................................................. $ 7,644 $ 7,715 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Checks issued in excess of amounts on deposit............................................... $ -- $ 5 Accounts payable............................................................................ 4,450 5,540 Accrued payroll costs....................................................................... 1,410 1,745 Accrued expenses............................................................................ 1,161 1,401 Deferred revenue............................................................................ -- 50 Due to stockholder.......................................................................... 38 53 Lease obligation............................................................................ 96 279 Notes payable--related party................................................................ 260 1,092 Notes payable .............................................................................. 4,350 6,099 --------- --------- Total current liabilities..................................................... 11,765 16,264 --------- --------- Stockholders' Equity (Deficit): Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,132,919 and 2,511,108 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively (Liquidation value of all classes of preferred stock $9,587,021 at June 30, 2004)...... 7,844 12,894 Common stock, $0.001 par value; 100,000,000 shares authorized; 81,037,610 and 45,830,928 shares issued and 80,845,522 and 45,638,840 shares outstanding at June 30, 2004 and December 31, 2003, respectively .............................................................................. 81 46 Additional paid-in-capital.................................................................. 43,954 29,553 Treasury stock; 192,088 shares at June 30, 2004 and December 31, 2003....................... (327) (327) Accumulated deficit......................................................................... (55,640) (50,673) Accumulated comprehensive loss-- Cumulative translation adjustment.................................................. (33) (42) --------- -------- Total stockholders' equity (deficit).......................................... (4,121) (8,549) --------- -------- Total liabilities and stockholders' equity (deficit) $ 7,644 $ 7,715 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 3 MOLECULAR DIAGNOSTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS FOR THE THREE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Net revenues ...................................... $ 154 $ 232 $ 101 $ 61 Operating expenses Cost of revenues .................................. 25 89 25 3 Research and development ......................... 485 266 328 59 Selling, general, and administrative expenses ..... 3,070 2,807 1,556 970 ------------ ------------ ------------ ------------ Total operating expenses ................. 3,580 3,162 1,909 1,032 ------------ ------------ ------------ ------------ Operating loss .................................... (3,426) (2,930) (1,808) (971) Other income (expense): Interest expense -related party ................... (48) (35) (8) (32) Interest expense .................................. (1,137) (1,254) (477) (1,016) Restructuring settlements ......................... 833 -- 672 -- Gain on sale of fixed assets ...................... 99 -- -- -- Other, net ........................................ 10 7 -- 5 ------------ ------------ ------------ ------------ Total other income (expense) ............. (243) (1,282) 187 (1,043) ------------ ------------ ------------ ------------ Loss from continuing operations before income taxes (3,669) (4,212) (1,621) (2,014) Income tax expense ................................ -- -- -- -- ------------ ------------ ------------ ------------ Loss from continuing operations ................... (3,669) (4,212) (1,621) (2,014) Results from discontinued operations .............. -- (93) -- (54) ------------ ------------ ------------ ------------ Net loss ......................................... (3,669) (4,305) (1,621) (2,068) Preferred stock dividend .......................... (570) (752) (258) (328) ------------ ------------ ------------ ------------ Net loss applicable to common stockholders ........ $ (4,239) $ (5,057) $ (1,879) $ (2,396) ============ ============ ============ ============ Basic and fully diluted net loss per common share . $ (0.07) (0.12) $ (0.03) $ (0.06) ============ ============ ============ ============ Weighed average number of common shares outstanding 64,826,113 40,868,423 73,839,577 41,551,961 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 MOLECULAR DIAGNOSTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------- 2004 2003 ---- ---- (Unaudited) Operating Activities: Net loss ...................................................................... $(3,669) $(4,305) Adjustments to reconcile net loss to net cash used for operating activities: Amortization of debt discount ......................................... 712 1,024 Depreciation and amortization ......................................... 348 470 Amortization of fees .................................................. 238 224 (Gain)/loss on sale of fixed assets ................................... (99) 1 Compensation expense related to stock appreciation rights ............. -- 11 Return of fixed assets in exchange for relief of indebtedness ......... 149 -- Stocks, warrants and options issued to non-employees for services ..... 920 330 Changes in assets and liabilities: Accounts receivable, net ......................................... (5) (31) Inventories ...................................................... 19 298 Refundable taxes ................................................. -- 13 Due to stockholder ............................................... (15) 13 Prepaid expenses and other current assets ........................ -- (111) Checks issued in excess of amounts on deposit .................... (5) -- Accounts payable ................................................. (1,020) 266 Deposits ......................................................... -- (23) Lease obligation ................................................. (183) -- Deferred revenue ................................................. (50) (174) Accrued expenses ................................................. (186) 259 ------- ------- Net cash used for operating activities ......................................... (2,846) (1,735) ------- ------- Investing activities: Expenditures in licenses, patents and technology ............................... (20) -- Purchases of fixed assets ...................................................... (178) (12) ------- ------- Net cash used for investing activities ......................................... (198) (12) ------- ------- Financing activities: Proceeds from issuance of convertible notes .................................... 4,236 1,126 Proceeds from issuance of convertible notes, related party ..................... -- 1,015 Note issued in payment of an expense ........................................... 67 72 Payment of notes payable ....................................................... (877) (300) Proceeds from sale of fixed assets ............................................. 28 8 ------- ------- Net cash provided by financing activities ...................................... 3,454 1,921 ------- ------- Effect of exchange rate changes on cash and cash equivalents ................... -- 6 ------- ------- Net increase in cash and cash equivalents ...................................... 410 180 Cash and cash equivalents at beginning of period ............................... -- 42 ------- ------- Cash and cash equivalents at end of period ..................................... $ 410 $ 222 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ...................................................................... $ 135 $ 17 Non-cash transactions during the period for: Financing costs ................................................................ $ 919 $ 173 Preferred stock and cumulative dividends converted into common stock ........... $ 6,347 $ 4,378
The accompanying notes are an integral part of these consolidated financial statements. 5 MOLECULAR DIAGNOSTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (Unaudited) NOTE 1. ORGANIZATION Molecular Diagnostics, Inc. ("MDI" or the "Company") was incorporated as Ampersand Medical Corporation in Delaware in December 1998 as the successor to Bell National Corporation ("Bell National"). Bell National was incorporated in California in 1958, and was the continuing legal entity following its acquisition of InPath, LLC, a development-stage company engaged in the design and development of medical instruments and related tests, in December 1998. Bell National then merged into the Company in 1999. On September 25, 2001, following the Company's acquisition of AccuMed International, Inc. ("AccuMed") via the merger of AccuMed into a wholly-owned subsidiary of MDI, 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 separate wholly-owned subsidiary. MDI retained its Certificate of Incorporation in the merger, except as amended to reflect its new name, bylaws and capitalization. MDI is a biomolecular diagnostics company engaged in the design, development and commercialization of cost-effective screening systems to assist in the early detection of cancer for use around the world. MDI is currently focused on the design, development and marketing of its InPath(TM) System, and related image analysis systems. The InPath System and related products are intended to detect cancer and cancer-related diseases. These products may be used in a laboratory, clinic, or doctor's office. MDI had 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 designed, developed, and marketed web-enabled, software-based systems for image analysis, image capture, and image transmission and management for clinical and industrial applications. A majority of reported revenues since inception of MDI were generated by Samba. Commencing December 20, 2002, Samba operated under the protection of the French Commercial Court in compliance with the bankruptcy laws of France. During 2003, MDI was unable to raise sufficient capital to enable it to provide funds to Samba to meet its obligations. On December 19, 2003, the French Commercial Court finalized the liquidation sale of Samba's assets. Upon completion of the bankruptcy liquidation sale, MDI lost all rights and title to the Samba assets, including Samba software. MDI has reflected the involuntary liquidation of Samba's assets by the French Commercial Court in its December 31, 2003 financial statements and subsequent financial statements as discontinued operations. The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement MDI's business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about MDI's ability to continue as a going concern. Implementation of the Company's plans and its ability to continue as a going concern depend upon its securing substantial additional financing. During the first six months of 2004, MDI raised $4,236,000 through the sale of convertible debt. Management's plans include substantial efforts to obtain additional capital. If the Company is unable to obtain adequate additional financing or generate profitable sales revenues, it 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 for the periods ended June 30, 2004 and 2003 included herein are unaudited. Such 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 and in order to make the financial statements not misleading. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2004 or for any other period. 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 the rules and regulations of the Securities and Exchange Commission. These financial 6 statements should be read in conjunction with the audited financial statements and the notes thereto included in our 2003 Annual Report on Form 10-KSB, as filed with the SEC. NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES The accounting policies and principles management believes are most critical to aid in understanding and evaluating the Company's reported financial results include the following: Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition. MDI recognizes revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition," when the following criteria are met: shipment of a product or license to customers has occurred and there are no remaining Company obligations or contingencies; 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 12 months. Revenue from prepayments under licenses is recognized over the license period. 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. Implementation and installation services are generally completed within 120 days. Samba calculated 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. All revenue recognition related to Samba ceased on December 19, 2003 in accordance with the liquidation sale of Samba's assets by the French Commercial Court. Research and Development Costs. Research and development costs are charged to operations as incurred. MDI 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 MDI's foreign operations is the local currency. Accordingly, all assets and liabilities are translated into U.S. 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 the Company. Other Comprehensive Income (Loss). Translation adjustments related to MDI's foreign operations are included in other comprehensive loss and reported separately in stockholders' equity (deficit). See also the following Notes to these consolidated financial statements. NOTE 4. LICENSES, PATENTS, TECHNOLOGY AND GOODWILL; IMPAIRMENT Licenses, 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 17 years. The Company assesses licenses, patents, and technology quarterly for impairment. 7 The Company has adopted SFAS No. 142, "Goodwill and Other Intangibles," which sets forth guidelines for discontinuing periodic goodwill amortization costs in results of operations and for establishing an annual (or more frequent) goodwill impairment review and related net realizable value asset write-down methodology. At each annual 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. Licenses, patents, and technology were as follows (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 (unaudited) Licenses ............................... $ 1,033 $ 1,013 Patent costs ........................... 133 133 MDI Technology Agreement ............... 7,230 7,230 Dianon Technology Agreement ............ 260 260 ------- ------- Subtotal .............................. 8,656 8,636 Less accumulated amortization .......... (1,992) (1,729) ------- ------- Total ................. $ 6,664 $ 6,907 ======= =======
In 2003, MDI recorded an impairment loss of $283,000. This loss was the write-off of the full amount of MDI's goodwill recorded on the acquisition of AccuMed. At December 31, 2003, management evaluated several factors, principally that contracts and sales relating to the AccuMed products had failed to materialize, which evaluation indicated that the carrying value of goodwill from the AccuMed acquisition was impaired and no future cash flows would be realized relating to the goodwill. For the six months ended June 30, 2004 and 2003, amortization expense was $263,000 and $331,000, respectively. NOTE 5. ACCRUED EXPENSES Accrued expenses included the following (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 (unaudited) Accrued interest ....................... $ 650 $ 704 Accrued interest--related party ........ 25 115 Accrued franchise taxes ................ 476 476 Other accrued expenses ................. 10 106 ------ ------ Total .......................... $1,161 $1,401 ====== ======
MDI was delinquent in filing certain federal and state income tax returns for 2002 and 2001 and intends to complete the filing requirements within the next 90 to 120 days. The Company does not anticipate a tax liability with respect to these delinquent corporate tax returns. MDI is also delinquent in paying a portion of federal and state employee and employer payroll taxes for 2001. Delinquent federal payroll taxes relating to 2003 and 2002 were paid in full in April 2004. The Company owed $466,000 and $686,000 as of June 30, 2004 and December 31, 2003, respectively, including $85,000 and $258,000, respectively, in assessed and estimated statutory penalties and interest. MDI is currently in the process of communicating through counsel with the Internal Revenue Service regarding payment of the balance due and made a payment of approximately $77,000 on August 12, 2004. The Company has lost all rights of appeal regarding the outstanding payroll tax liability and could be subject to the seizure of its tangible and intellectual property in the event a resolution is not reached with the Internal Revenue Service. These amounts were included in accrued payroll costs in the accompanying balance sheet. 8 NOTE 6. NOTES PAYABLE--RELATED PARTIES Notes payable to related parties consist of (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 (unaudited) 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 Northlea Partners, Ltd., $15,000 Bridge II convertible promissory note issued May 1, 2003; interest rate 12% per annum (see description under Bridge II Notes in Note 7-Notes Payable, for other terms and conditions)........................ 15 15 Peter P. Gombrich, $305,667 Bridge II convertible promissory note issued December 5, 2003; interest rate 12% per annum (see description under Bridge II Notes in Note 7-Notes Payable, for other terms and conditions)..................... -- 251 Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum........................................................................ 15 25 Suzanne M. Gombrich, $1,000,000 convertible promissory note issued April 2, 2003; interest rate 12% per annum; Due April 2, 2004 (see description below for other terms and conditions)..................................... 190 761 ------- ------ TOTAL: $ 260 $1,092 ======= ======
Suzanne Gombrich Note. On April 2, 2004, the Company paid the $1,000,000 Convertible Promissory Note due Suzanne M. Gombrich in full and her first priority security interest in all the Company's assets was released. The Company paid $936,114 in cash towards principal and accrued interest of $126,114 on the note. In addition, Mrs. Gombrich agreed to convert the remaining $190,000 into 1,900,000 shares of common stock of the Company upon stockholder approval of an increase in the number of authorized shares of common stock of the Company. On July 29, 2004, the Company's stockholders approved such increase and, therefore, the 1,900,000 shares will be issued to Mrs. Gombrich in satisfaction of her remaining debt. (See Footnote 10: Subsequent Events) Peter Gombrich Bridge II Note and Other Amounts Due. On March 5, 2004, the Bridge II Convertible Promissory Note (and accrued interest thereon) issued to Peter Gombrich in December 2003 was converted into 2,113,987 common shares. Further, Peter Gombrich was owed $37,936 and $52,953 at June 30, 2004 and December 31, 2003, respectively. MDI has classified the amount due to Mr. Gombrich under the current liabilities heading "Due to stockholder." Carrying Amounts. The carrying amounts of Notes Payable - Related Parties approximated fair value at June 30, 2004 and December 31, 2003. 9 NOTE 7. NOTES PAYABLE Notes payable to unrelated parties consist of (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 (unaudited) 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 at June 30, 2002; Bridge I warrants at an exercise price of $0.25 per share; additional warrants at an exercise price equal to 150% of note conversion price.................. $ 850 $2,075 Bridge II Convertible Promissory Notes; due July 31, 2003; interest rate 12%/15% per annum; convertible into common stock at $0.10 or $0.15 per share; beneficial conversion feature valued at $1,777,000 and $330,000 at December 31, 2003 and December 31, 2002, respectively; warrants at an exercise price of $0.15 or $0.20 per share............................. 1,326 2,845 Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10% per annum; convertible into common stock at $.10 per share; beneficial conversion feature valued at $1,604,000 at June 30, 2004; warrants at an exercise price of $.15 per share...................................................... 97 -- Bridge IV Convertible Promissory Notes; due December 31, 2008; interest rate 10% per annum; convertible into common stock at $.10 per share; beneficial conversion feature valued at $1,791,000 at June 30, 2004; warrants at an exercise price of $.15 per share...................................................... 896 -- Monsun, AS $500,000 Promissory Note issued November 1, 2000; due July 31, 2002; interest rate 20% per annum, compounded into principal amount; beneficial conversion feature valued at $125,000 at November 1, 2000.................. 708 641 Trek Diagnostic Systems $80,000 Promissory Note issued July 31, 2002; due in equal installments on September 1, 2002 and December 1, 2002................................ -- 15 O.P., LLC $29,390 Promissory Note issued May 12, 2003; interest at 7% per annum; monthly principal payments of $1,316 plus interest commencing June 1, 2003; due April 2005........................................................................ 14 24 Ungaretti and Harris $211,368 Secured Promissory Note issued May 8, 2003; interest at 12% per annum; due September 30, 2003.............................................. 149 149 Ernst & Young $30,800 Promissory Note issued July 17, 2003; interest at 12% per annum commencing January 1, 2003; due December 31, 2003..................................... 31 31 Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003; due December 31, 2003; interest at 8% per annum payable after December 31, 2003....... 31 63 Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998; interest rate Canadian Prime plus 6% per annum; represents a debt of AccuMed................... 34 34 Western Economic Diversification $221,000 Promissory Note issued June 1989; no interest; represents a debt of Oncometrics......................................... 214 222 --------- ------- TOTAL: $ 4,350 $ 6,099 ========= =======
Bridge I. In 2002, MDI issued an aggregate $3,185,000 in 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 Company's common stock on the date of conversion. In addition, MDI issued to each holder a warrant, which entitled each such 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. In addition, at the time of conversion of the note, the holder is entitled to receive a 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 warrants as of June 30, 2004. 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. 10 In February 2003, a note holder, NeoMed Innovations III, converted $1,060,000 in principal amount of Bridge I notes into Bridge II notes. In November 2003, two Bridge I note holders converted $50,000 in principal amount of notes and $5,287 in accrued interest into 368,579 shares of unregistered common stock. Management extended a written offer, dated October 10, 2003, to the Bridge I noteholders to convert their notes and accrued interest into common shares at a conversion rate of $0.15 per share. In addition, the Bridge I holders were also offered warrants to purchase one new share for every four shares acquired by the Bridge noteholder upon exercise of such holder's conversion rights under the notes. This offer continues to remain outstanding as of June 30, 2004. For the six months ended June 30, 2004, holders of $1,225,000 principal amount of Bridge I Convertible Promissory Notes elected to convert their notes and related accrued interest of $155,000 into 9,199,218 shares of unregistered common stock. The remaining $850,000 in principal Bridge I notes remained unconverted and outstanding at June 30, 2004. Bridge II. Beginning in October 2002, MDI began an issue of up to $4,000,000 in Bridge II Convertible Promissory Notes to accredited investors. MDI issued $550,000 in Bridge II notes as of December 31, 2002. From January 1, 2003 through the closing of the offering on December 5, 2003, MDI issued Bridge II notes in the principal amount of: $1,980,200 in exchange for cash, $1,060,000 as a conversion of a Bridge I Convertible Promissory Note (see discussion above) and $305,667 in exchange for a note payable to Peter P. Gombrich, the Company's Chairman, for a total issuance during fiscal year 2003 of $3,345,867. 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 prices of the notes issued during 2002 and 2003 were less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,777,200 and $330,000 at December 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 notes. MDI recorded additional interest expense of $320,689 and $1,826,743 to reflect amortization of the discount during the six months ended June 30, 2004 and year ended December 31, 2003, respectively. 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. In September 2003, an amendment to the Bridge II Convertible Promissory Notes was sent to holders requesting an extension of the notes to July 31, 2004. As additional consideration for the extension, holders were offered an increase in the interest rate from 12% to 15%. In addition, an amendment to the indenture also offered an increase in the warrant coverage ratio from 25% to 33%. The Bridge II offering was closed as of December 5, 2003. For the six months ended June 30, 2004, holders of $2,091,000 principal amount of Bridge II Convertible Promissory Notes elected to convert their notes and related accrued interest of $243,000 into 17,200,083 shares of unregistered common stock. Included in the above conversion amounts are amounts due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II principal and $11,431 in accrued interest thereon, which were converted into 2,113,987 shares of unregistered common stock. The remaining $1,340,000 in principal Bridge II notes remained unconverted and outstanding at June 30, 2004. Bathgate Capital Partners, LLC - Bridge III. Beginning in January 2004, Bathgate Capital Partners, LLC began an offering of a maximum of $4,000,000 and a minimum of $1,500,000 in Bridge III Convertible Promissory Notes to accredited investors on behalf of the Company. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until due December 31, 2008. The note conversion price and the value of common shares paid 11 in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted into common shares. The holders were also granted a security interest in all of the Company's assets. MDI granted each note holder the right to receive 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive warrants to purchase 25,000 shares of common stock at an exercise price of $0.15. The warrants expire on December 31, 2008. The Bridge III offering documents provided that funds raised would not be released from escrow until the following requirements were met: o A minimum investment of $1,500,000 had been reached; o The $190,000 Convertible Promissory Note held by Suzanne Gombrich was converted into common shares; o A portion of the Bridge II Convertible Promissory Note holders converted their notes into common shares; and o Peter P. Gombrich, MDI's Chairman and then-current CEO, would resign his position as CEO of the Company. These requirements were satisfied on April 2, 2004 and the Company issued $1,500,000 in convertible promissory notes in exchange for cash. The funds were used for repayment of the Suzanne Gombrich note, payment of IRS taxes, and working capital. On May 21, 2004, the Company issued an additional $162,500 in Bridge III notes in exchange for cash. The conversion prices of the notes issued during 2004 were less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $1,604,000 at June 30, 2004. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the notes. MDI recorded additional interest expense of $38,014 to reflect amortization of the discount during the six months ended June 30, 2004. Through June 30, 2004, the Company had issued $1,662,500 in principal amount of Bridge III Convertible Promissory Notes in exchange for cash. Bridge IV. Beginning in February 2004, MDI began a separate offering of Bridge IV Convertible Promissory Notes to accredited investors. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until the December 31, 2008 maturity date. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The conversion price of the notes issued to date has been less than the market price of the common stock when the notes were issued; therefore, the holders are considered to have a beneficial conversion feature. MDI determined the value of the beneficial conversion feature to be $499,000 and $1,292,000 at June 30, 2004 and March 31, 2004, respectively. The value was recorded as a reduction of the debt and will be amortized as additional interest over the life of the notes. MDI recorded additional interest expense of $113,799 to reflect amortization of the discount during the six months ended June 30, 2004. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale, and the Convertible Promissory Note to an affiliate, Suzanne M. Gombrich, has been paid or converted into common shares. The holders were also granted a security interest in all of the Company's assets. MDI granted each note holder the right to receive 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive warrants to purchase 25,000 shares of common stock at an exercise price of $0.15. The warrants expire on December 31, 2008. Through June 30, 2004, the Company had issued $2,574,000 in principal amount of Bridge IV Convertible Promissory Notes in exchange for cash. Monsun. On November 1, 2000, MDI issued a convertible promissory note to Monsun, AS ("Monsun") in exchange for $500,000 in cash. The note bears interest at the rate of 15% per year and was due 12 months from the date of issue. The note is convertible into common stock, any time after the expiration of the first 180 days of the loan term, at a conversion price of $1.00 per share. On October 31, 2001, Monsun and MDI agreed to the first extension of the maturity date of the note until January 31, 2002. As consideration for the first extension agreement, MDI issued a three-year warrant to Monsun, entitling the holder to purchase 100,000 shares of common stock of MDI at an exercise price of $0.60 per share. On January 31, 2002, Monsun and MDI agreed to the second extension of the maturity date of the note until June 30, 2002. As consideration for the second extension agreement, MDI issued a three-year 12 warrant to Monsun, entitling the holder to purchase 200,000 shares of common stock of MDI at an exercise price of $0.30 per share. A fair value of $4,110 for the warrant was calculated using the fair value interest rate method and was recorded as additional interest expense during 2002. On April 1, 2002, Monsun and MDI agreed to the third extension of the maturity date until July 31, 2002. As consideration for the third extension agreement, MDI issued a five-year warrant to Monsun, entitling the holder to purchase 200,000 shares of common stock of MDI at an exercise price of $0.70 per share. A fair value of $8,287 for the warrant was calculated using the fair value interest rate method and was recorded as additional interest expense during 2002. In November 2002, MDI issued 200,000 shares of common stock of MDI as a default penalty on the note. A fair value of $42,000 for the shares was calculated using the market price of the common stock on the date the shares were issued and was recorded as financing expenses during 2002. MDI made payments against the principal of the note amounting to $117,266 and recorded interest expense, in addition to the amounts mentioned above, of $80,200 during 2002. Monsun has initiated a legal action against Peter Gombrich, MDI's Chairman, as a personal guarantor on the note, in an attempt to collect the unpaid principal balance of the note. The Board of Directors of MDI has agreed to pay Mr. Gombrich's legal costs to defend him against this action. During the first quarter of 2004, Monsun was successful in obtaining a legal judgment against Peter Gombrich as the personal guarantor of the note. The Company continues to negotiate the terms of a settlement of the outstanding balance due. (See Note 11 - Legal Proceedings) Trek Diagnostic Systems. In July 2002, MDI agreed to settle a claim brought by Trek Diagnostic Systems, Inc. against AccuMed regarding alleged breaches of representations 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 but did not make the second payment, causing a default on the note. Through a court ordered action Trek was able to obtain payments totaling $27,692 during the fourth quarter of 2003. In the first quarter of 2004, a final settlement of $12,000 was reached for complete and final settlement of the outstanding note balance. Defaults. Specific events of default have occurred on a significant majority of the outstanding notes payable issued by MDI, including the Bridge I and Bridge II convertible promissory notes, ranging from failure to make principal payments when due to breach of certain warranties and representations. The notes payable require the holder to notify MDI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. There is no guarantee that MDI would be able to cure any event of default if, or when, the holder provides the required written notice. Other than the Monsun convertible promissory note and the Ungaretti and Harris note payable, which are the subject of legal actions described in Note 11 - Legal Proceedings, MDI has not received any written declarations of default from holders of its outstanding notes payable. Carrying Amounts. The carrying amounts of notes payable approximated fair value at June 30, 2004 and December 31, 2003. NOTE 8. STOCKHOLDERS' EQUITY The Company's preferred stock consist of the following:
JUNE 30, DECEMBER 31, 2004 2003 ---- ---- SHARES ISSUED & SHARES ISSUED & ISSUE OUTSTANDING OUTSTANDING (unaudited) Series A convertible.............................................. 82,655 82,655 Series B convertible, 10% cumulative dividend..................... 377,606 799,856 Series C convertible, 10% cumulative dividend..................... 262,833 1,192,833 Series D convertible, 10% cumulative dividend..................... 175,000 175,000 Series E convertible, 10% cumulative dividend..................... 234,825 260,764 ----------- ----------- Total Preferred Stock...................................................... 1,132,919 2,511,108 =========== ===========
During the first six months of 2004, several holders converted 930,000 shares of Series C convertible preferred stock, including cumulative dividends due thereon, into 5,703,816 shares of common stock. In April 2004, holders of 13 Series B Convertible Preferred Stock elected to convert 422,250 of preferred shares and accrued dividends into 2,211,401 shares of unregistered common stock. In June 2004, holders of Series E Convertible Preferred Stock elected to convert 25,939 of preferred shares and accrued dividends into 892,154 shares of unregistered 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 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 June 30, 2001 Conversion Period: Any time Cumulative dividends at June 30, 2004 were $516,596 SERIES C CONVERTIBLE PREFERRED STOCK Liquidation Value: $3.00 per share Conversion Price: $0.60 per share Conversion Rate: 5.00--Liquidation Value divided by Conversion Price ($3.00/$0.60) Voting Rights: None Dividends: 10%--Quarterly--Commencing June 30, 2002 Conversion Period: Any time Cumulative dividends at June 30, 2004 were $210,087 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 Cumulative dividends at June 30, 2004 were $466,506 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 Cumulative dividends at June 30, 2004 were $1,296,658
ISSUANCE OF WARRANTS FOR SERVICES In March 2004, MDI issued warrants to purchase 67,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $13,400 using the Black-Scholes valuation model and recorded the amount as an administrative expense as of March 31, 2004. 14 In March 2004, MDI issued warrants to purchase 500,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $95,000 using the Black-Scholes valuation model and recorded the amount as an administrative expense as of March 31, 2004. In May 2004, MDI issued warrants to purchase an aggregate 119,042 shares of common stock of the Company with exercise prices ranging from $0.15 to $0.16 per share to non-employee service vendors in lieu of payment for unpaid service invoices. MDI valued the warrants at $18,181 using the Black-Scholes valuation model and recorded the amount as a reduction of the outstanding amount due. In June 2004, MDI issued warrants to purchase an aggregate 364,942 shares of common stock of the Company with exercise prices ranging from $0.16 to $0.17 per share to non-employee service vendors in lieu of payment for unpaid service invoices. MDI valued the warrants at $42,368 using the Black-Scholes valuation model and recorded the amount as a reduction of the outstanding amount due. In May 2004, MDI issued warrants to purchase 500,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $76,200 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In June 2004, MDI issued warrants to purchase 780,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $73,320 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In June 2004, MDI issued warrants to purchase 681,625 shares of common stock of the Company with an exercise price of $0.18 per share to a non-employee broker-dealer for past financial services. MDI valued the warrants at $62,914 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. 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 5.33% and 6% for the June 30, 2004 and 2003 periods, respectively, volatility factors of 173% and 90%, respectively, 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 9. EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN On May 25, 1999, MDI stockholders approved the establishment of the 1999 Equity Incentive Plan (the "Plan") effective as of June 1, 1999. The Plan provides that the Board may grant various forms of equity incentives to directors, employees, and consultants, including but not limited to incentive stock options, non-qualified stock options, stock appreciation rights, and restricted stock awards. Grants under the Plan are exercisable at fair market value determined as of the date of grant in accordance with the terms of the Plan. Grants vest immediately or ratably over periods ranging from two to five years, and expire five to ten years from the date of grant. On May 23, 2000, stockholders approved Amendment No. 1 to the Plan, which increased the number of shares of common stock allocated for use under the Plan from 2,000,000 shares to 3,000,000 shares. On June 21, 2002, stockholders approved a second amendment to the Plan, which increased the number of shares allocated for use under the Plan from 3,000,000 shares to 5,500,000 shares. On July 29, 2004, stockholders approved a third amendment to the Plan, which increased the number of shares of common stock allocated for use under the Plan from 5,500,000 shares to 20,000,000 shares. The Board of Directors has also granted options to purchase common stock of MDI that are not covered by the terms of the Plan. 15 MDI applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for options granted to employees under the Plan. No compensation cost was recorded during the six months ended June 30, 2004 or during 2003 for options granted to employees, as the exercise price approximated the fair value of the underlying common stock on the date of the grant. Had stock options been accounted for under the fair value method recommended by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss allocated to common shareholders would have been changed to the pro forma amounts indicated below:
FOR THE SIX MONTHS ENDED, FOR THE THREE MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 (in thousands except for per share amounts) (unaudited) NET LOSS APPLICABLE TO COMMON SHAREHOLDERS AS REPORTED............................... $ (4,239) $ (5,057) $ (1,879) $ (2,426) Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related taxes...... (171) 33 (14) (16) ---------- -------- --------- ---------- PRO FORMA NET LOSS APPLICABLE TO COMMON SHAREHOLDERS..................................... $ (4,410) $ (5,024) $ (1,893) $ (2,442) ========== ========= ========= ========== Basic loss per share applicable to common shareholders - as reported.................................... $ (.07) $ (.12) $ (.03) $ (.06) =========== ========= ========= ========== Basic loss per share applicable to common shareholders - pro forma...................... $ (.07) $ (.12) $ (.03) $ (.06) =========== ========= ========= ==========
The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 5.33% and 6% for the June 30, 2004 and 2003 periods, respectively, volatility factors of the expected market price of the Company's common stock of 173% and 90%, respectively, 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 options or restricted shares. These pro forma amounts are not necessarily indicative of the future effects of applying the fair value based method to, among other things, the vesting period of the stock options and the fair value of the additional stock options issued in future years. The Financial Accounting Standards Board has indicated that it will likely require that companies expense employee options in the future, but has not yet finalized the timing or methods for such a change. A summary of the Company's stock option activity and related information follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OUTSTANDING AT JANUARY 1, 2003.................................... 3,507,517 Granted......................................................... 600,000 $ 0.3144 Forfeited - assumed in acquisition................................ (17,035) $ 4.9169 Forfeited......................................................... (595,834) $ 0.9385 --------- OUTSTANDING AT DECEMBER 31, 2003.................................. 3,494,648 Granted......................................................... 2,500,000 $ 0.1540 Forfeited......................................................... (253,588) $ 0.4845 --------- OUTSTANDING AT JUNE 30, 2004...................................... 5,741,060 ========= EXERCISABLE AT JUNE 30, 2004...................................... 3,955,060 $ 0.9681 =========
At the Annual Meeting on May 25, 1999, the stockholders also approved the Employee Stock Purchase Plan (the "ESPP"). The ESPP offers employees the opportunity to purchase shares of common stock of MDI through a payroll 16 deduction plan at 85% of the fair market value of such shares at specified enrollment measurement dates. The aggregate number of shares available for purchase under the ESPP is 200,000. NOTE 10. SUBSEQUENT EVENTS STOCKHOLDERS' MEETING On July 29, 2004, the Company held its 2004 annual stockholders' meeting. At the meeting, stockholders approved an amendment to the Company's Certificate of Incorporation (as amended to date) to increase the number of authorized shares of common stock, par value $.001, of the Company from 100,000,000 shares to 300,000,000 shares. The approval of such increase will permit the Company to issue shares it was obligated to issue contingent on stockholder approval, including but not limited to 1,900,000 shares to Suzanne Gombrich in complete satisfaction of the Company's note obligation and an aggregate 1,150,000 shares to non-employee professional service firms. As noted above, the stockholders also approved an amendment to the Company's 1999 Equity Incentive Plan to increase the number of shares of common stock available for issuance under the Plan from 5,500,000 shares to 20,000,000 shares. In addition, the stockholders also ratified the appointment of Altschuler, Melvoin and Glasser LLP as independent auditors for the Company for the fiscal year ending December 31, 2004 and elected members to the Company's Board of Directors. NOTE 11. LEGAL PROCEEDINGS Bowne of Chicago, Inc. On January 2, 2003, Bowne of Chicago, Inc. 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 by Bowne during the period October 25, 2001 through November 7, 2002. In May 2004, MDI entered into a settlement agreement with Bowne, which requires 24 payments of $16,667, or a total sum of $200,000. As part of the settlement, MDI agreed to have a judgment in the amount of $342,061 entered against it. As long as MDI honors the agreed-upon monthly payments, Bowne has agreed to refrain from enforcing the entire agreed judgment amount. Garrett Realty. Prior to MDI's acquisition of AccuMed, Garrett Realty, Inc. filed suit against AccuMed for unpaid rent and related expenses under a lease for premises located at 900 and 920 N. Franklin in Chicago, Illinois (Circuit Court of Cook County (Case No. 01 M1 725821)). Garrett originally claimed amounts due of approximately $50,000. Following completion of MDI's acquisition of AccuMed, management vacated AccuMed's leased facility and consolidated its operations into MDI's headquarters facility. However, Garrett continued to claim ongoing rent and amended its complaint in 2002 claiming approximately $148,000 in unpaid rent and related legal costs through July 2002. On July 18, 2002, judgment was entered in favor of Garrett and against AccuMed in the amount of approximately $157,000. On December 20, 2002, pursuant to a court order, Garrett seized approximately $12,500 from an MDI bank account as a partial payment against the judgment amount. The unpaid remainder of the judgment, approximately $136,000 including interest, will continue to accrue interest until paid in full. Since AccuMed had a continuing obligation for the minimum lease payments, MDI recorded a $290,000 lease obligation in accounting for the AccuMed merger based on the present value of the future payments. MDI is contesting the right of Garrett to pursue collection of the judgment against the assets of MDI. Management believes that the amount of the accrued lease obligation recorded as of December 31, 2003 is sufficient to cover any remaining expenses of this litigation and the related judgment. During the first quarter of 2004, MDI reached a preliminary settlement on the outstanding judgment, which required six monthly payments of $13,187 each. MDI has made the first four required monthly payments. MDI also agreed to issue 280,000 shares of its common stock as part of the final settlement. The issuance of the shares was subject to shareholder approval of the increase in the number of authorized shares of common stock of the Company, discussed above. Monsun. On January 9, 2003, Monsun, AS ("Monsun") filed suit against Peter Gombrich, our Chairman and former CEO (United States District Court for the Northern District of Illinois Eastern Division (Case No. 03 C 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, 17 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 common stock at various prices. In November 2002, the board of directors approved the issuance of 200,000 shares of common stock to Monsun to satisfy a default penalty clause in the guaranty. The terms of the guaranty required that Monsun receive registered shares of our common stock; however, in order to comply with securities laws, MDI issued the shares of common stock to Monsun with a restrictive legend, which permits their sale only in compliance with Rule 144 of the Securities Act of 1933, as amended. MDI recorded the principal amount of the note plus accrued and unpaid interest to December 31, 2003 as a note payable on its records. In March 2004, Monsun obtained a judgment against Mr. Gombrich in the amount of $675,000. Monsun is currently seeking to obtain an additional $545,000 to cover legal fees and costs incurred in enforcing the guaranty agreement. Since Mr. Gombrich's potential liability under the suit, including the failure to deliver registered shares of our common stock, is the result of the failure of MDI to pay the principal amount of its convertible promissory note when due, 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, 2004. MonoGen. In July 2002, MonoGen, Inc. initiated an arbitration proceeding against the Company and its subsidiaries, AccuMed and Oncometrics Imaging Corp. (collectively, the "MDI Group"), alleging that the MDI Group had violated MonoGen's rights under certain license agreements (the "License Agreements") separately entered into by the subsidiaries with MonoGen prior to the Company's acquisition of the subsidiaries. In December 2002, the parties to the arbitration entered into an agreement (the "Technology Agreement") that purported to settle the issues that had been raised in the arbitration complaint. However, the Technology Agreement did not have the desired effect of ending the dispute, and in May 2003 the MDI Group filed suit in the Circuit Court of Cook County, Illinois (the "State Court Case") against MonoGen and two individuals affiliated with MonoGen in an attempt to obtain a judicial resolution of the issues that had been raised in the arbitration. The State Court Case also sought to resolve certain allegations of breach of fiduciary duties made by the Company against the President of MonoGen, Norman Pressman, who had been the President of both AccuMed and Oncometrics at the time the License Agreements had been entered into by the parties. MonoGen resisted the State Court Case by, among other things, insisting that the dispute could only be settled in arbitration, as required in the License Agreements. The claim as to MonoGen was dismissed on that basis. MonoGen subsequently filed amended demands against the MDI Group in the arbitration proceeding, which had never been dismissed. In order to avoid unnecessary litigation expenses, the MDI Group subsequently, in February 2004, agreed to a dismissal of the State Court Case, leaving the arbitration proceeding as the principal venue for a resolution of the dispute over the license rights obtained by MonoGen from the Company's subsidiaries. The parties are presently engaged in settlement negotiations, but the Company cannot predict whether those negotiations will be successful. Patterson. On April 14, 2003, the Company received notice 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 that 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, that we were still in control of all of our assets, and that such assets were pledged as security under debt instruments but that such pledges were not included under events which would permit the licensor to terminate the license. MDI believes that MDI would prevail should the licensor attempt to pursue a termination action. Invirion. On July 2, 2003, Dr. Patterson and his company Invirion, Inc. filed suit against MDI in the Circuit Court of Cook County, Illinois (Case No. 03 L 7995). Dr. Patterson seeks approximately $86,000 that he claims is due from MDI under an agreement for his scientific consulting services. This is 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 of yet, and therefore, MDI is contesting this claim. Invirion, in a separate claim, seeks approximately $57,500 for certain HPV test kits that it claims were sold to MDI. MDI is engaged in settlement discussions with Dr. Patterson and Invirion to resolve all outstanding issues, including those discussed above with regard to the License and Development Agreement. Employee Wage and Compensation Claims. On February 18, 2004, current and former employees Daniel Kussworm, Jennifer Kawaguchi, and Susan Keesee filed suit against MDI and one of its officers in the Circuit Court of Cook County, 18 Illinois (04 L 1941). These individuals are seeking to recover wages and other compensation allegedly due them. Mr. Kussworm seeks approximately $68,600, Ms. Kawaguchi seeks approximately $37,200, and Ms. Keesee seeks approximately $124,800; all amounts exclude interest, court costs, and attorney fees. MDI and these plaintiffs have tentatively agreed to monetary settlement terms, but have not yet executed a final settlement agreement. Eric Gombrich. On May 19, 2004, Eric Gombrich filed suit against the Company in the Circuit Court of Cook County, Illinois (04 L 5661). Mr. Gombrich claims that MDI breached a written employment contract and that it owes him approximately $630,000 (plus interest) and 300,000 shares of MDI common stock. Although MDI made initial attempts to resolve this dispute, it is currently contesting Mr. Gombrich's action. Ungaretti & Harris. On May 31, 2004, the law firm Ungaretti & Harris filed an amended complaint against MDI in the Circuit Court of Cook County, Illinois (04 L 1101), to collect fees for services rendered prior to December 31, 2003. Ungaretti & Harris is seeking to collect approximately $182,000, plus interest, attorney fees, and court costs. The parties are currently engaged in settlement discussions. The Lash Group, Inc. On June 10, 2004, The Lash Group, Inc., a healthcare consulting firm, filed a lawsuit against the Company in the General Court of Justice, Superior Court Division, in Mecklenburg County, North Carolina (04 CVS 10367). The Lash Group seeks approximately $94,000, plus interest, attorney fees, and court costs, for the alleged breach of a promissory note. The parties are currently engaged in settlement negotiations. Creditors. 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 also currently negotiating the settlement of a wage claim brought by a former employee seeking to collect for unpaid wages and severance benefits. MDI has recorded the amount due in its records and is attempting to settle this claim. West Virginia Rescission Offer. By letter dated July 26, 2004, the Securities Commission of the West Virginia Office of the State Auditor informed the Company of a violation of the state's registration requirements with respect to sales of MDI securities to residents of West Virginia. Specifically, an individual engaged by the Company who solicited sales of MDI securities from West Virginia investors and received compensation in connection with such sales was not appropriately registered with the state as a broker-dealer or issuer agent. The Company therefore was not entitled to rely on an exemption from state registration for sales in the jurisdiction. After discussions with the Securities Commission, the Company agreed to make an offer to the two West Virginia investors to rescind their purchase of Company securities and receive a full refund. Both investors declined the Company's rescission offer and therefore the Company will not be required to refund their investments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FORWARD-LOOKING STATEMENTS Certain statements contained in this discussion and analysis 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 or implied by such forward-looking statements. These risks are described more fully in our most recent Annual Report on Form 10-KSB under the caption "Risk Factors" and in subsequent reports filed with the Securities and Exchange Commission. Should one or more of those risks or uncertainties materialize or should underlying expectations, projections and assumptions prove 19 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 except as specifically required by law. Accordingly, past results and trends should not be used to anticipate future results or trends. 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's Discussion and Analysis contained in our Annual Report on Form 10-KSB for the year ended December 31, 2003 and in our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004. OVERVIEW OF MOLECULAR DIAGNOSTICS, INC. Molecular Diagnostics, Inc., formerly Ampersand Medical Corporation and successor to Bell National Corporation, is a biomolecular diagnostics company engaged in the design, development and commercialization of cost-effective screening systems to assist in the early detection of cancer for use around the world. MDI is currently focused on the design, development and marketing of the InPath(TM) System, and related image analysis systems. The InPath System and related products are intended to detect cancer and cancer-related diseases. These products may be used in a laboratory, clinic, or doctor's office. 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. The Company has incurred significant operating losses since its inception. Management expects that significant on-going operating expenditures will be necessary to successfully implement MDI's business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about MDI's ability to continue as a going concern. Implementation of the Company's plans and its ability to continue as a going concern depend upon its securing substantial additional financing. During the first six months of 2004, MDI raised $4,236,000 through the sale of convertible debt. Management's plans include substantial efforts to obtain additional capital. If the Company is unable to obtain adequate additional financing or generate profitable sales revenues, it may be required to curtail its product development and other activities and may be forced to cease operations. CRITICAL ACCOUNTING POLICIES AND CHANGES TO ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2003, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Note 3 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-QSB, as well as our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. 20 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 REVENUE Revenue of $101,000 for the three months ended June 30, 2004 represented an increase of $40,000 or 65.6% over revenue of $61,000 for the same period in 2003. This increase was primarily the result of deferred revenue of $50,000 being recorded upon the shipment of two automated microscopy systems in connection with a settlement with a prior customer. COSTS AND EXPENSES Cost of Goods Sold Cost of goods sold for the three months ended June 30, 2004 were $25,000, an increase of $22,000 or 733.3% over the same period in 2003. The increase related to the shipment of the two automated microscopy systems during the period. 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 $269,000 to $328,000 for the three-month period ended June 30, 2004, an increase of 455.9% over the comparable period in 2003. This increase was the result of planning and preparation for the upcoming clinical trial for the Company's biochemical assay that is applied to a sample in order to identify abnormal cells. This assay in conjunction with the Company's proprietary automated microscopy instrument and custom-designed image analysis software, as well as the previously approved FDA sample collection device, comprise the InPath System of products. R&D expenses typically 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. Selling, General and Administrative Selling, general and administrative expenses ("SG&A") increased $586,000 to $1,556,000 for the three-month period ended June 30, 2004, an increase of 60.4% over the period ended June 30, 2003. This increase included increases of $613,000 in financing costs and $70,000 in legal and professional fees, and was offset by a decrease of $97,000 in other general and administrative costs. Significant components of SG&A are compensation costs for executive, sales and administrative personnel; financing costs; 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. 21 OTHER INCOME AND EXPENSE Interest Expense Interest expense, including interest expense to related parties, decreased $563,000 for the quarter ended June 30, 2004 to $485,000, a decrease of 53.7% over the quarter ended June 30, 2003. Bridge I, II, III and IV convertible promissory notes in principal amounts totaled $6,440,000 and $4,876,000 for the periods ended June 30, 2004 and 2003, respectively. The change included an increase in interest expense of $60,000 related to the increase in the notes and a decrease of $623,000 related to the amortization of debt discount arising from the beneficial conversion feature of the notes. The amortized debt discount amount decreased due to an increase in the duration of the new Bridge III and IV notes issued during the period ended June 30, 2004 in relation to the shorter maturity periods of the Bridge I and II notes issued during the period ended June 30, 2003. Restructuring Settlements For the three months ended June 30, 2004, MDI recorded $672,000 as a gain from the settlement of various litigation and credit payment matters. For the same three-month period ended June 30, 2003, the Company did not record any restructuring settlement amounts. NET LOSS The net loss for the three-month period ended June 30, 2004 before preferred dividends totaled $1,621,000, compared with $2,068,000 for the same period in 2003, a decrease of $447,000 or 21.6%. The decrease was primarily the result of reduced operating capacity due to capital and liquidity constraints. In addition, cumulative dividends on the outstanding Series B, Series C, Series D and Series E convertible preferred stock totaled $258,000 for the quarter ended June 30, 2004, compared with $328,000 for the same period in 2003. The combined net loss applicable to common stockholders for the three months ended June 30, 2004 of $1,879,000 or $0.03 per share, on 73,839,577 weighted average common shares outstanding, compared with the net loss and net loss available to common stockholders for the three-month period ended June 30, 2003 of $2,396,000 or $0.06 per share, on 41,551,961 weighted average common shares outstanding. The weighted average shares outstanding during the three months ended June 30, 2004 include the shares issued or issuable upon conversion of Series B, Series C, and Series E convertible preferred stock during the period, and the conversion of Bridge I and Bridge II convertible promissory notes. The Bridge I and II note conversions resulted in the issuance of an aggregate 5,680,883 shares of common stock; the Series B, C and E convertible preferred stock conversions resulted in the issuance of an aggregate 3,230,198 shares of common stock. SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 REVENUES Revenues for the six months ended June 30, 2004 decreased $78,000, or 33.6%, to $154,000 from revenues of $232,000 for the same period in 2003. This decrease primarily was the result of decreases in the sales of AccuMed-related products and services. Revenues and related costs and expenses have been adjusted to reflect the liquidation of MDI's French subsidiary, Samba, and its reclassification as a discontinued operation. COSTS AND EXPENSES Cost of Goods Sold Cost of goods sold for the six months ended June 30, 2004 were $25,000, a decrease of $64,000 or 71.9% over the same period in 2003. The cost of goods sold amount is related to the shipment of the two automated microscopy systems. The overall decrease was due to the receipt of royalty-related income only for the period based on an AccuMed system under a license agreement. 22 Research and Development As noted above, we devote a substantial amount of our resources to 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 $219,000 to $485,000 for the six-month period ended June 30, 2004, an increase of 82.3% over the comparable period in 2003. This increase was the result of planning and preparation for the upcoming clinical trial for the Company's biochemical assay that is applied to a sample in order to identify abnormal cells. This assay in conjunction with the Company's proprietary automated microscopy instrument and custom-designed image analysis software, as well as the previously approved FDA sample collection device, comprise the InPath System of 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. Selling, General and Administrative SG&A increased $263,000 for the six months ended June 30, 2004 to $3,070,000, an increase of 9.4% over the same period ended June 30, 2003. This change included an increase of $272,000 in financing costs, an increase of $188,000 in legal and professional fees and was offset by a decrease of $197,000 in other general and administrative costs. Significant components of SG&A are compensation costs for executive, sales and administrative personnel; financing costs; 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. OTHER INCOME AND EXPENSE Interest Expense Interest expense, including interest expense to related parties, decreased $104,000 for the six-month period ended June 30, 2004 to $1,185,000, a decrease of 8.1% over the same period of 2003. Bridge I, II, III and IV convertible promissory notes in principal amounts totaled $6,440,000 and $4,876,000 for the periods ended June 30, 2004 and 2003, respectively. The change included an increase in interest expense of $208,000 related to the increase in the notes and a decrease of $312,000 related to the amortization of debt discount arising from the beneficial conversion feature of the notes. The amortized debt discount amount decreased due to an increase in the duration of the new Bridge III and IV notes issued during the period ended June 30, 2004 in relation to the shorter maturity periods of the Bridge I and II notes issued during the period ended June 30, 2003. Restructuring Settlements For the six months ended June 30, 2004, MDI recorded $833,000 as a gain from the settlement of various litigation and credit payment matters. For the same six-month period ended June 30, 2003, the Company did not record any restructuring settlement amounts. NET LOSS The net loss for the six-month period ended June 30, 2004 before preferred dividends totaled $3,669,000, compared with $4,305,000 for the same period in 2003, a decrease of $636,000 or 14.8%. The decrease was primarily the result of reduced operating capacity due to capital and liquidity constraints. 23 In addition, cumulative dividends on the outstanding Series B, Series C, Series D and Series E convertible preferred stock totaled $570,000 for the six-month period ended June 30, 2004, compared with $752,000 for the same period in 2003. The combined net loss applicable to common stockholders for the six months ended June 30, 2004 of $4,239,000 or $0.07 per share, on 64,826,113 weighted average common shares outstanding, compared with the net loss and net loss available to common stockholders for the six-month period ended June 30, 2003 of $5,057,000 or $0.12 per share, on 40,868,423 weighted average common shares outstanding. The weighted average shares outstanding during the six months ended June 30, 2004 include the shares issued or issuable upon conversion of Series B, Series C, and Series E convertible preferred stock during the period, and the conversion of Bridge I and Bridge II convertible promissory notes. The Bridge I and II note conversions resulted in the issuance of an aggregate 26,399,311 shares of common stock; the Series B, C and E convertible preferred stock conversions resulted in the issuance of an aggregate 8,807,371 shares of common stock. LIQUIDITY AND CAPITAL RESOURCES Research and development, 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 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 $2,846,000 and $1,735,000 for the first six months ended June 30, 2004 and 2003, respectively, to support our operating activities. As of the six months ended June 30, 2004, we had cash on hand of $410,000, an increase of $410,000 over cash on hand at December 31, 2003 of zero. This increase resulted from the receipt of bridge financing funds during the period, as discussed below. Beginning in January 2004, Bathgate Capital Partners, LLC began an issue of Bridge III Convertible Promissory Notes to accredited investors on behalf of the Company. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until due December 31, 2008. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. For the three months ended June 30, 2004 the Company had issued $1,662,500 in Bridge III convertible promissory notes. Beginning in February 2004, MDI began a separate offering of Bridge IV Convertible Promissory Notes to accredited investors. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until the December 31, 2008 maturity date. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. Through June 30, 2004 and March 31, 2004 the Company had issued $1,281,500 and $1,292,000, respectively, in principal amount of Bridge IV Convertible Promissory Notes in exchange for cash. We incurred approximately $178,000 in capital expenditures during the first six months of 2004 as compared to capital expenditures of $12,000 for the first six months of 2003, an increase of 1,383.3%. Capital expenditures are defined as disbursements for laboratory equipment, leasehold improvements, 24 software, and furniture/fixtures with a purchase price in excess of $1,000 per item and useful life in excess of one year. MDI is striving to keep capital expenditures to a minimum 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. 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 during 2003 and the first half of 2004, and will continue that focus during the remainder of this fiscal year 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 reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report. Our principal executive officer and principal financial officer have concluded, based on that evaluation, which included inquiries made to certain other employees of the Company, 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. We continue to make progress to improve our internal control systems and address any deficiencies. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the quarter to which this report relates, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11 - Legal Proceedings to the Consolidated Financial Statements included herein for a discussion of the most recent events regarding the Company's pending and threatened legal proceedings. ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES CHARTER AMENDMENT At the Company's Annual Meeting of Stockholders on July 29, 2004, stockholders approved an amendment to the Company's Certificate of Incorporation (as amended to date) to increase the number of authorized shares of common stock of the Company from 100,000,000 to 300,000,000 shares. The Company filed a Certificate of Amendment to its charter to effect such increase with the Delaware Secretary of State on August 6, 2004. ISSUANCE OF SECURITIES Bridge III Convertible Promissory Notes. Beginning in January 2004, Bathgate Capital Partners, LLC began an issue of Bridge III Convertible Promissory Notes to accredited investors on behalf of the Company. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until due December 31, 2008. The note conversion price and 25 the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale. The holders were also granted a security position in all of the Company's assets. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. For the three months ended June 30, 2004 the Company had issued $1,662,500 in Bridge III convertible promissory notes. Bridge IV Convertible Promissory Notes. Beginning in February 2004, MDI began a separate offering of Bridge IV Convertible Promissory Notes to accredited investors. The notes bear interest at 10% per annum payable, on a semi-annual basis, in kind in the form of shares of common stock for the first two years and then in cash for the remaining three years until the December 31, 2008 maturity date. The note conversion price and the value of common shares paid in kind as interest is $0.10 per share. The notes are convertible at any time into the common stock of MDI, although the notes will automatically convert if the last sales price of the stock is $0.30 or higher for twenty consecutive trading days, the daily average trading volume is 250,000 shares, the underlying shares are registered for sale. MDI granted each note holder the right to receive a 25% warrant coverage on all money invested; therefore, for every $100,000 invested, an investor will receive 25,000 warrants to purchase common stock at an exercise price of $0.15. The warrants will expire on December 31, 2008. Through June 30, 2004 and March 31, 2004 the Company had issued $1,281,500 and $1,292,000, respectively, in principal amount of Bridge IV Convertible Promissory Notes in exchange for cash. Warrants. In March 2004, MDI issued 67,000 warrants with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $13,400 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In March 2004, MDI issued 500,000 warrants with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $95,000 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In May 2004, MDI issued warrants to purchase an aggregate 119,042 shares of common stock of the Company with exercise prices ranging from $0.15 to $0.16 per share to non-employee service vendors in lieu of payment for unpaid service invoices. MDI valued the warrants at $18,181 using the Black-Scholes valuation model and recorded the amount as a reduction of the outstanding amount due. In June 2004, MDI issued warrants to purchase an aggregate 364,942 shares of common stock of the Company with exercise prices ranging from $0.16 to $0.17 per share to non-employee service vendors in lieu of payment for unpaid service invoices. MDI valued the warrants at $42,368 using the Black-Scholes valuation model and recorded the amount as a reduction of the outstanding amount due. In May 2004, MDI issued warrants to purchase 500,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $76,200 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In June 2004, MDI issued warrants to purchase 780,000 shares of common stock of the Company with an exercise price of $0.17 per share to a non-employee financial consultant for past financial services. MDI valued the warrants at $73,320 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. In June 2004, MDI issued warrants to purchase 681,625 shares of common stock of the Company with an exercise price of $0.18 per share to a non-employee broker-dealer for past financial services. MDI valued the warrants at $62,914 using the Black-Scholes valuation model and recorded the amount as a current quarter administrative expense. Each of the above warrants expires five years from the date of issuance and is exercisable immediately upon issuance, or became exercisable upon stockholder approval of the increase in the number of authorized shares of common stock of the Company. None of the warrants are subject to any vesting schedules or conditions except as set forth in the preceding sentence. The 26 exercise price and number of shares issuable upon exercise of the warrants are subject to anti-dilution protection in the event the Company effects a subdivision or combination of its common stock or declares or pays a dividend or distribution in common stock; the warrants also provide for adjustments in the event the Company declares or pays a dividend or other distribution in other securities or property of the Company or is a party to a reorganization, reclassification, merger or similar event. REPAYMENT OF NOTE Suzanne Gombrich Note. On April 2, 2004, the $1,000,000 Convertible Promissory Note due to Suzanne M. Gombrich was paid in full and her first priority security interest in all the Company's assets was released. As of April 2, 2004, the Company repaid $936,114 of principal and accrued interest of $126,114 on such note. In addition, Mrs. Gombrich agreed to convert the remaining $190,000 into 1,900,000 shares of common stock of the Company, which such shares can now be issued following stockholder approval of an increase in the number of authorized shares of common stock of the Company. (See Note 10 - -Subsequent Events). CONVERSIONS Bridge I Conversions. From January 1, 2004 through June 30, 2004, holders of an aggregate $1,225,000 principal amount of Bridge I Convertible Promissory Notes elected to convert their notes and related accrued interest of $155,000 into 9,199,228 shares of unregistered common stock of the Company. Bridge II Conversions. From January 1, 2004 through June 30, 2004, holders of an aggregate $2,091,000 principal amount of Bridge II Convertible Promissory Notes elected to convert their notes and related accrued interest of $243,000 into 17,200,083 shares of unregistered common stock of the Company. Included in the above conversion amounts are amounts due Peter P. Gombrich, the Company's Chairman, of $305,667 in Bridge II principal and $11,431 in accrued interest thereon, which were converted into 2,113,987 shares of unregistered common stock. Preferred Stock Conversions. During the first six months of 2004, several holders converted 422,250 share of Series B convertible preferred stock, including cumulative dividends due thereon, into 2,211,401 shares of common stock. During the first six months of 2004, several holders converted 930,000 shares of Series C convertible preferred stock, including cumulative dividends due thereon, into 5,703,816 shares of common stock. During the first six months of 2004, several holders converted 25,939 shares of Series E convertible preferred stock, including cumulative dividends due thereon, into 892,154 shares of common stock. MDI is issuing such securities in reliance on the safe harbor and exemptions from registration provided under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales or issuances were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of such act. In addition to representations by the above-referenced persons, the Company has made independent determinations that all of the investors were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, these investors were provided with access to our SEC filings. See also Note 6 - Notes Payable - Related Parties, Note 7 - Notes Payable, Note 8 - Stockholders' Equity, and Note 10 - Subsequent Events for a fuller description of the Company's securities and related events that occurred prior and subsequent to the quarter ending June 30, 2004. ITEM 3. DEFAULTS UPON SENIOR SECURITIES MDI has failed to make the required principal and interest payments, constituting events of default, on the following notes payable: o $850,000 in Bridge I convertible promissory notes; o $1,340,000 in Bridge II convertible promissory notes o $708,000 Monsun AS convertible promissory note; 27 o $148,932 Ungaretti & Harris secured promissory note; o $30,800 Ernst & Young promissory note; and o $31,000 Ventana Medical Systems, Inc. promissory note The notes payable require the holder to notify MDI in writing of a declaration of default at which time a cure period, as specified in each individual note, would commence. There is no guarantee that MDI would be able to cure any event of default if, or when, the holder provides the required written notice. Other than the Monsun AS convertible promissory note and the note payable to Ungaretti & Harris, which are the subject of legal actions described under Part II Item 1 above and in Notes to Consolidated Financial Statements, Note 11 - Legal Proceedings, MDI has not received any written declarations of default from holders of outstanding notes payable. 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 None 28 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/ Denis M. O'Donnell, M.D. --------------------------------- Denis M. O'Donnell, M.D. Chief Executive Officer and President /s/ Dennis L. Bergquist --------------------------------- Dennis L. Bergquist Chief Financial Officer Date: August 16, 2004 29 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Amendment to Certificate of Incorporation. As filed with the Delaware Secretary of State on August 6, 2004. 4.1 Common stock purchase warrant issued to consultant on May 5, 2004 representing the right to purchase 500,000 shares of common stock of the Company. 4.2 Common stock purchase warrant issued to consultant on June 4, 2004 representing the right to purchase 530,000 shares of common stock of the Company. 4.3 Common stock purchase warrant issued to consultant on June 4, 2004 representing the right to purchase 250,000 shares of common stock of the Company. 4.4 Form of common stock purchase warrant issued to private placement agents on June 15, 2004 representing the right to purchase an aggregate 681,625 shares of common stock of the Company. 4.5 Form of common stock purchase warrant issued to vendors as part of our restructuring settlements during the three months ended June 30, 2004 representing the right to purchase an aggregate 483,984 shares of common stock of the Company. 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. 30 EX-3.1 2 v05716_ex3-1.txt CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MOLECULAR DIAGNOSTICS, INC. (Pursuant to Section 242 of the General Corporation Law of the State of Delaware) Molecular Diagnostics, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. That at a meeting of the Board of Directors of the Corporation, resolutions were adopted recommending an amendment of the Corporation's Certificate of Incorporation (as amended to date) and directing that such amendment be considered at the annual meeting of the stockholders of the Corporation. The text of the proposed amendment is as follows: Article FOURTH of the Certificate of Incorporation of the Corporation shall be amended by deleting Section 4.1 thereof in its entirety and substituting therefor the following: "Section 4.1. The total number of shares of stock which the Corporation is authorized to issue is Three Hundred Ten Million (310,000,000), comprised of Three Hundred Million (300,000,000) shares of common stock, $0.001 par value per share, and Ten Million (10,000,000) shares of preferred stock, $0.001 par value per share." 2. That said amendment, having been duly proposed and recommended by the Board of Directors of the Corporation, was considered by the stockholders of the Corporation at the annual meeting of stockholders, duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware. 3. That said amendment was duly adopted, by the holders of a majority of the outstanding stock of each class of stock of the Corporation entitled to vote thereon, in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. The undersigned President of the Corporation hereby makes this certificate, declaring and certifying that the facts stated herein are true, and accordingly has hereunto set his hand this 5th day of August, 2004. MOLECULAR DIAGNOSTOCS, INC. By: /s/ Denis M. O'Donnell, M.D. ---------------------------- Denis M. O'Donnell, M.D., President Attest: /s/ Peter P. Gombrich - ---------------------------- Peter P. Gombrich, Secretary EX-4.1 3 v05716_ex4-1.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREFROM, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF MOLECULAR DIAGNOSTICS, INC. Warrant No. DB5 WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUE DATE: MAY 5, 2004 This certifies that Dan Burns or any valid transferee thereof (the "Holder"), for value received, is entitled to purchase from Molecular Diagnostics, Inc., a Delaware corporation with its principal business office located at 414 North Orleans Street, Suite 510, Chicago, Illinois 60610 (the "Company"), subject to the terms and conditions set forth below, at any time or from time to time on and after the Vesting Date (as defined below) set forth above and before 3:00 p.m. (Central Time) on the fifth anniversary of the Vesting Date (the "Expiration Date"), 500,000 shares of Common Stock, $.001 par value per share, of the Company ("Common Stock"), at a purchase price of $0.17 per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Purchase Price," respectively. As consideration for this Warrant, the Holder named above agrees to forgive all outstanding indebtedness of the Company to such named Holder. The Holder expressly agrees and acknowledges that this Warrant shall not vest, and shall not be exercisable, in whole or in part, until such time as the stockholders of the Company approve an increase in the number of authorized shares of Common Stock of the Company and an amendment to the Company's Certificate of Incorporation is filed with the Secretary of State of the State of Delaware to effect such increase (such date, the "Vesting Date"). 1. Exercise. (a) Exercise for Cash. The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In no event shall any such exercise be for fewer than 10,000 Warrant Shares unless fewer than an aggregate of 10,000 Warrant Shares are then purchasable under all outstanding Warrants held by the Holder. Payment of the aggregate Purchase Price may be made in cash, certified or bank check, or wire transfer of immediately available funds. (b) Cashless Exercise. (i) The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Holder shall be determined according to the following formula: X = Y(A-B) ------ A Where: X = the number of Warrant Shares that shall be issued to the Holder; Y = the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price); A = the Fair Market Value (as defined below) of one share of Common Stock; and B = the Purchase Price then in effect. (ii) The Fair Market Value per share of Common Stock shall be determined as follows: (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date (as defined in (c) below), the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest and lowest reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date ; provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date, but is quoted on the Over-The-Counter Bulletin Board, the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest bid and lowest asked prices quoted thereon on the trading day immediately preceding the Exercise Date; provided that if no price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). -2- (3) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or another nationally recognized trading system or the Over-the-Counter Electronic Bulletin Board as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the "Board") to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 business days after such request, notify the Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 business days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Holder. (c) Exercise Date and Status as Holder of Shares. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the "Exercise Date"), which Exercise Date(s) shall not be prior to the Vesting Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price). -3- (e) Warrant Shares. The Warrant Shares issued upon any such exercise of this Warrant shall be validly issued, fully paid and non-assessable. 2. Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issue Date as set forth on the first page hereof (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (either such date being referred to as the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -4- (d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Holder. (e) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)) (collectively, a "Reorganization"), then, following such Reorganization, the Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 business days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Holder (but in any event not later than 10 business days thereafter), furnish or cause to be furnished to the Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant. -5- (g) No Adjustments in Certain Cases. No adjustment in the number of Warrant Shares purchasable pursuant to this Warrant shall be required unless the adjustment would require an increase or decrease of at least one percent (1.0%) in the number of Warrant Shares then purchasable upon the exercise of this Warrant. Except as provided in this Section 2, no other adjustments in the number, kind or price of shares constituting Warrant Shares shall be made during the term, or upon the exercise, of this Warrant. Further, no adjustments shall be made pursuant to this Section 2 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under, the Company's director or employee benefit or option plans. (h) Treasury Stock. For purposes of this Section 2, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments herein described. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay in cash to the Holder an amount equal to such fraction multiplied by the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above. 4. Investment Representations. The initial Holder represents and warrants to the Company as follows: (a) Investment. The Holder is acquiring this Warrant, and (if and when such Holder exercises this Warrant) will acquire the Warrant Shares, for such Holder's own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. (b) Accredited Investor. The Holder is an "accredited investor" as defined in Rule 501(a) under the Act. (c) Experience. The Holder has made such inquiry concerning the Company and its business and personnel as the Holder has deemed appropriate; and the Holder has sufficient knowledge and experience in finance and business that the Holder is capable of evaluating the risks and merits of an investment in the Company. 5. Transfers, etc. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act and any applicable state securities laws, or (ii) the Company first shall have been furnished with an opinion of legal counsel, satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and any applicable state securities laws. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: -6- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. (c) The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change the Holder's address as shown on the warrant register by written notice to the Company requesting such change. (d) Subject to the provisions of clauses (a) and (b) of this Section 5, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency). Upon the presentation and surrender of such items to the Company, the Company shall execute and deliver to the transferee or transferees of this Warrant a new Warrant or Warrants, in the name of the transferee or transferees named in the assignment, and this Warrant shall at that time be canceled to the extent transferred. 6. No Impairment; Adjustment of Par Value. (a) The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (b) Before taking any action that would cause an adjustment reducing the Purchase Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Warrant Shares at such adjusted price. 7. Record Date, etc. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or -7- (b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice. 8. Acknowledgment and Reservation of Stock. Commencing the Vesting Date, the Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Holder expressly agrees and acknowledges that the Company currently does not have for reservation or issuance upon exercise of this Warrant a sufficient number of authorized shares of its Common Stock. 9. Exchange or Replacement of Warrants. (a) Upon the surrender by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. (b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -8- 10. Notices. All notices and other communications from the Company to the Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Holder. All notices and other communications from the Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) three business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery. 11. No Rights as Stockholder; No Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 12. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of this Warrant or the shares of Common Stock comprising the Warrant Shares; provided, however, the Company shall not be required to pay any tax that may be payable in respect of any transfer of this Warrant or Warrant Shares. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 14. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 15. Severability. If any provision of this Warrant shall be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant and, to this end, the provisions hereof are severable. 16. Assignment. This warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 17. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of Illinois (without reference to the conflicts of law provisions thereof). -9- 18. Facsimile Signatures. This Warrant may be executed by facsimile signature. EXECUTED as of the Issue Date indicated above. MOLECULAR DIAGNOSTICS, INC. By:________________________________ Title:_______________________________ ATTEST: - ------------------------- -10- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby elects to purchase (check applicable box): [_] ____ shares of the Common Stock of Molecular Diagnostics, Inc. by such Warrant; or [_] the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b). The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation) ; and/or [_] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b). Signature: ______________________ Address: ________________________ ----------------------------------- -11- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock of Molecular Diagnostics, Inc. covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:_____________________________ Signature Guaranteed: By: _______________________ The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. -12- EX-4.2 4 v05716_ex4-2.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREFROM, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF MOLECULAR DIAGNOSTICS, INC. Warrant No. DB6 WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUE DATE: JUNE 4, 2004 This certifies that Dan Burns or any valid transferee thereof (the "Holder"), for value received, is entitled to purchase from Molecular Diagnostics, Inc., a Delaware corporation with its principal business office located at 414 North Orleans Street, Suite 510, Chicago, Illinois 60610 (the "Company"), subject to the terms and conditions set forth below, at any time or from time to time on and after the Vesting Date (as defined below) set forth above and before 3:00 p.m. (Central Time) on the fifth anniversary of the Vesting Date (the "Expiration Date"), 530,000 shares of Common Stock, $.001 par value per share, of the Company ("Common Stock"), at a purchase price of $0.17 per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Purchase Price," respectively. As consideration for this Warrant, the Holder named above agrees to forgive all outstanding indebtedness of the Company to such named Holder. The Holder expressly agrees and acknowledges that this Warrant shall not vest, and shall not be exercisable, in whole or in part, until such time as the stockholders of the Company approve an increase in the number of authorized shares of Common Stock of the Company and an amendment to the Company's Certificate of Incorporation is filed with the Secretary of State of the State of Delaware to effect such increase (such date, the "Vesting Date"). 1. Exercise. (a) Exercise for Cash. The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In no event shall any such exercise be for fewer than 10,000 Warrant Shares unless fewer than an aggregate of 10,000 Warrant Shares are then purchasable under all outstanding Warrants held by the Holder. Payment of the aggregate Purchase Price may be made in cash, certified or bank check, or wire transfer of immediately available funds. (b) Cashless Exercise. (i) The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Holder shall be determined according to the following formula: X = Y(A-B) ------ A Where: X = the number of Warrant Shares that shall be issued to the Holder; Y = the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price); A = the Fair Market Value (as defined below) of one share of Common Stock; and B = the Purchase Price then in effect. (ii) The Fair Market Value per share of Common Stock shall be determined as follows: (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date (as defined in (c) below), the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest and lowest reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date ; provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date, but is quoted on the Over-The-Counter Bulletin Board, the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest bid and lowest asked prices quoted thereon on the trading day immediately preceding the Exercise Date; provided that if no price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). -2- (3) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or another nationally recognized trading system or the Over-the-Counter Electronic Bulletin Board as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the "Board") to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 business days after such request, notify the Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 business days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Holder. (c) Exercise Date and Status as Holder of Shares. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the "Exercise Date"), which Exercise Date(s) shall not be prior to the Vesting Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price). -3- (e) Warrant Shares. The Warrant Shares issued upon any such exercise of this Warrant shall be validly issued, fully paid and non-assessable. 2. Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issue Date as set forth on the first page hereof (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (either such date being referred to as the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -4- (d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Holder. (e) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)) (collectively, a "Reorganization"), then, following such Reorganization, the Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 business days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Holder (but in any event not later than 10 business days thereafter), furnish or cause to be furnished to the Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant. -5- (g) No Adjustments in Certain Cases. No adjustment in the number of Warrant Shares purchasable pursuant to this Warrant shall be required unless the adjustment would require an increase or decrease of at least one percent (1.0%) in the number of Warrant Shares then purchasable upon the exercise of this Warrant. Except as provided in this Section 2, no other adjustments in the number, kind or price of shares constituting Warrant Shares shall be made during the term, or upon the exercise, of this Warrant. Further, no adjustments shall be made pursuant to this Section 2 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under, the Company's director or employee benefit or option plans. (h) Treasury Stock. For purposes of this Section 2, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments herein described. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay in cash to the Holder an amount equal to such fraction multiplied by the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above. 4. Investment Representations. The initial Holder represents and warrants to the Company as follows: (a) Investment. The Holder is acquiring this Warrant, and (if and when such Holder exercises this Warrant) will acquire the Warrant Shares, for such Holder's own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. (b) Accredited Investor. The Holder is an "accredited investor" as defined in Rule 501(a) under the Act. (c) Experience. The Holder has made such inquiry concerning the Company and its business and personnel as the Holder has deemed appropriate; and the Holder has sufficient knowledge and experience in finance and business that the Holder is capable of evaluating the risks and merits of an investment in the Company. 5. Transfers, etc. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act and any applicable state securities laws, or (ii) the Company first shall have been furnished with an opinion of legal counsel, satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and any applicable state securities laws. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: -6- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. (c) The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change the Holder's address as shown on the warrant register by written notice to the Company requesting such change. (d) Subject to the provisions of clauses (a) and (b) of this Section 5, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency). Upon the presentation and surrender of such items to the Company, the Company shall execute and deliver to the transferee or transferees of this Warrant a new Warrant or Warrants, in the name of the transferee or transferees named in the assignment, and this Warrant shall at that time be canceled to the extent transferred. 6. No Impairment; Adjustment of Par Value. (a) The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (b) Before taking any action that would cause an adjustment reducing the Purchase Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Warrant Shares at such adjusted price. 7. Record Date, etc. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or -7- (b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice. 8. Acknowledgment and Reservation of Stock. Commencing the Vesting Date, the Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Holder expressly agrees and acknowledges that the Company currently does not have for reservation or issuance upon exercise of this Warrant a sufficient number of authorized shares of its Common Stock. 9. Exchange or Replacement of Warrants. (a) Upon the surrender by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. (b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -8- 10. Notices. All notices and other communications from the Company to the Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Holder. All notices and other communications from the Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) three business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery. 11. No Rights as Stockholder; No Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 12. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of this Warrant or the shares of Common Stock comprising the Warrant Shares; provided, however, the Company shall not be required to pay any tax that may be payable in respect of any transfer of this Warrant or Warrant Shares. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 14. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 15. Severability. If any provision of this Warrant shall be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant and, to this end, the provisions hereof are severable. 16. Assignment. This warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 17. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of Illinois (without reference to the conflicts of law provisions thereof). -9- 18. Facsimile Signatures. This Warrant may be executed by facsimile signature. EXECUTED as of the Issue Date indicated above. MOLECULAR DIAGNOSTICS, INC. By:________________________________ Title:_______________________________ ATTEST: - ------------------------- -10- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby elects to purchase (check applicable box): [_] ____ shares of the Common Stock of Molecular Diagnostics, Inc. by such Warrant; or [_] the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b). The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation) ; and/or [_] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b). Signature: ______________________ Address: ________________________ ---------------------------------- -11- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock of Molecular Diagnostics, Inc. covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:______________________________ Signature Guaranteed: By: _______________________ The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. -12- EX-4.3 5 v05716_ex4-3.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREFROM, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF MOLECULAR DIAGNOSTICS, INC. Warrant No. DH1 WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUE DATE: JUNE 4, 2004 This certifies that DON HANCOCK or any valid transferee thereof (the "Holder"), for value received, is entitled to purchase from Molecular Diagnostics, Inc., a Delaware corporation with its principal business office located at 414 North Orleans Street, Suite 510, Chicago, Illinois 60610 (the "Company"), subject to the terms and conditions set forth below, at any time or from time to time on and after the Vesting Date (as defined below) set forth above and before 3:00 p.m. (Central Time) on the fifth anniversary of the Vesting Date (the "Expiration Date"), 250,000 shares of Common Stock, $.001 par value per share, of the Company ("Common Stock"), at a purchase price of $0.17 per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Purchase Price," respectively. As consideration for this Warrant, the Holder named above agrees to forgive all outstanding indebtedness of the Company to such named Holder. The Holder expressly agrees and acknowledges that this Warrant shall not vest, and shall not be exercisable, in whole or in part, until such time as the stockholders of the Company approve an increase in the number of authorized shares of Common Stock of the Company and an amendment to the Company's Certificate of Incorporation is filed with the Secretary of State of the State of Delaware to effect such increase (such date, the "Vesting Date"). 1. Exercise. (a) Exercise for Cash. The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In no event shall any such exercise be for fewer than 10,000 Warrant Shares unless fewer than an aggregate of 10,000 Warrant Shares are then purchasable under all outstanding Warrants held by the Holder. Payment of the aggregate Purchase Price may be made in cash, certified or bank check, or wire transfer of immediately available funds. (b) Cashless Exercise. (i) The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Holder shall be determined according to the following formula: X = Y(A-B) ----- A Where: X = the number of Warrant Shares that shall be issued to the Holder; Y = the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price); A = the Fair Market Value (as defined below) of one share of Common Stock; and B = the Purchase Price then in effect. (ii) The Fair Market Value per share of Common Stock shall be determined as follows: (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date (as defined in (c) below), the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest and lowest reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date ; provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date, but is quoted on the Over-The-Counter Bulletin Board, the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest bid and lowest asked prices quoted thereon on the trading day immediately preceding the Exercise Date; provided that if no price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). -2- (3) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or another nationally recognized trading system or the Over-the-Counter Electronic Bulletin Board as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the "Board") to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 business days after such request, notify the Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 business days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Holder. (c) Exercise Date and Status as Holder of Shares. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the "Exercise Date"), which Exercise Date(s) shall not be prior to the Vesting Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price). -3- (e) Warrant Shares. The Warrant Shares issued upon any such exercise of this Warrant shall be validly issued, fully paid and non-assessable. 2. Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issue Date as set forth on the first page hereof (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (either such date being referred to as the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -4- (d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Holder. (e) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)) (collectively, a "Reorganization"), then, following such Reorganization, the Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 business days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Holder (but in any event not later than 10 business days thereafter), furnish or cause to be furnished to the Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant. -5- (g) No Adjustments in Certain Cases. No adjustment in the number of Warrant Shares purchasable pursuant to this Warrant shall be required unless the adjustment would require an increase or decrease of at least one percent (1.0%) in the number of Warrant Shares then purchasable upon the exercise of this Warrant. Except as provided in this Section 2, no other adjustments in the number, kind or price of shares constituting Warrant Shares shall be made during the term, or upon the exercise, of this Warrant. Further, no adjustments shall be made pursuant to this Section 2 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under, the Company's director or employee benefit or option plans. (h) Treasury Stock. For purposes of this Section 2, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments herein described. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay in cash to the Holder an amount equal to such fraction multiplied by the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above. 4. Investment Representations. The initial Holder represents and warrants to the Company as follows: (a) Investment. The Holder is acquiring this Warrant, and (if and when such Holder exercises this Warrant) will acquire the Warrant Shares, for such Holder's own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. (b) Accredited Investor. The Holder is an "accredited investor" as defined in Rule 501(a) under the Act. (c) Experience. The Holder has made such inquiry concerning the Company and its business and personnel as the Holder has deemed appropriate; and the Holder has sufficient knowledge and experience in finance and business that the Holder is capable of evaluating the risks and merits of an investment in the Company. 5. Transfers, etc. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act and any applicable state securities laws, or (ii) the Company first shall have been furnished with an opinion of legal counsel, satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and any applicable state securities laws. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: -6- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. (c) The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change the Holder's address as shown on the warrant register by written notice to the Company requesting such change. (d) Subject to the provisions of clauses (a) and (b) of this Section 5, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency). Upon the presentation and surrender of such items to the Company, the Company shall execute and deliver to the transferee or transferees of this Warrant a new Warrant or Warrants, in the name of the transferee or transferees named in the assignment, and this Warrant shall at that time be canceled to the extent transferred. 6. No Impairment; Adjustment of Par Value. (a) The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (b) Before taking any action that would cause an adjustment reducing the Purchase Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Warrant Shares at such adjusted price. 7. Record Date, etc. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or -7- (b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice. 8. Acknowledgment and Reservation of Stock. Commencing the Vesting Date, the Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Holder expressly agrees and acknowledges that the Company currently does not have for reservation or issuance upon exercise of this Warrant a sufficient number of authorized shares of its Common Stock. 9. Exchange or Replacement of Warrants. (a) Upon the surrender by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. (b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -8- 10. Notices. All notices and other communications from the Company to the Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Holder. All notices and other communications from the Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) three business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery. 11. No Rights as Stockholder; No Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 12. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of this Warrant or the shares of Common Stock comprising the Warrant Shares; provided, however, the Company shall not be required to pay any tax that may be payable in respect of any transfer of this Warrant or Warrant Shares. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 14. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 15. Severability. If any provision of this Warrant shall be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant and, to this end, the provisions hereof are severable. 16. Assignment. This warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 17. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of Illinois (without reference to the conflicts of law provisions thereof). -9- 18. Facsimile Signatures. This Warrant may be executed by facsimile signature. EXECUTED as of the Issue Date indicated above. MOLECULAR DIAGNOSTICS, INC. By:________________________________ Title:_____________________________ ATTEST: - ------------------------- -10- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby elects to purchase (check applicable box): [_] ____ shares of the Common Stock of Molecular Diagnostics, Inc. by such Warrant; or [_] the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b). The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation) ; and/or [_] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b). Signature: _____________________ Address: _______________________ ----------------------- -11- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock of Molecular Diagnostics, Inc. covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:______________________________ Signature Guaranteed: By: _______________________ The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. -12- EX-4.4 6 v05716_ex4-4.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREFROM, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF MOLECULAR DIAGNOSTICS, INC. Warrant No. WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUE DATE: This certifies that _________ or any valid transferee thereof (the "Holder"), for value received, is entitled to purchase from Molecular Diagnostics, Inc., a Delaware corporation with its principal business office located at 414 North Orleans Street, Suite 510, Chicago, Illinois 60610 (the "Company"), subject to the terms and conditions set forth below, at any time or from time to time on and after the Vesting Date (as defined below) set forth above and before 3:00 p.m. (Central Time) on the fifth anniversary of the Vesting Date (the "Expiration Date"), _______ shares of Common Stock, $.001 par value per share, of the Company ("Common Stock"), at a purchase price of _____ per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Purchase Price," respectively. As consideration for this Warrant, the Holder named above agrees to forgive all outstanding indebtedness of the Company to such named Holder. The Holder expressly agrees and acknowledges that this Warrant shall not vest, and shall not be exercisable, in whole or in part, until such time as the stockholders of the Company approve an increase in the number of authorized shares of Common Stock of the Company and an amendment to the Company's Certificate of Incorporation is filed with the Secretary of State of the State of Delaware to effect such increase (such date, the "Vesting Date"). 1. Exercise. (a) Exercise for Cash. The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In no event shall any such exercise be for fewer than 10,000 Warrant Shares unless fewer than an aggregate of 10,000 Warrant Shares are then purchasable under all outstanding Warrants held by the Holder. Payment of the aggregate Purchase Price may be made in cash, certified or bank check, or wire transfer of immediately available funds. (b) Cashless Exercise. (i) The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Holder shall be determined according to the following formula: X = Y(A-B) ------ A Where: X = the number of Warrant Shares that shall be issued to the Holder; Y = the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price); A = the Fair Market Value (as defined below) of one share of Common Stock; and B = the Purchase Price then in effect. (ii) The Fair Market Value per share of Common Stock shall be determined as follows: (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date (as defined in (c) below), the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest and lowest reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date ; provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date, but is quoted on the Over-The-Counter Bulletin Board, the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest bid and lowest asked prices quoted thereon on the trading day immediately preceding the Exercise Date; provided that if no price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). -2- (3) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or another nationally recognized trading system or the Over-the-Counter Electronic Bulletin Board as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the "Board") to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 business days after such request, notify the Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 business days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Holder. (c) Exercise Date and Status as Holder of Shares. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the "Exercise Date"), which Exercise Date(s) shall not be prior to the Vesting Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price). -3- (e) Warrant Shares. The Warrant Shares issued upon any such exercise of this Warrant shall be validly issued, fully paid and non-assessable. 2. Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issue Date as set forth on the first page hereof (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (either such date being referred to as the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -4- (d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Holder. (e) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)) (collectively, a "Reorganization"), then, following such Reorganization, the Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 business days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Holder (but in any event not later than 10 business days thereafter), furnish or cause to be furnished to the Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant. -5- (g) No Adjustments in Certain Cases. No adjustment in the number of Warrant Shares purchasable pursuant to this Warrant shall be required unless the adjustment would require an increase or decrease of at least one percent (1.0%) in the number of Warrant Shares then purchasable upon the exercise of this Warrant. Except as provided in this Section 2, no other adjustments in the number, kind or price of shares constituting Warrant Shares shall be made during the term, or upon the exercise, of this Warrant. Further, no adjustments shall be made pursuant to this Section 2 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under, the Company's director or employee benefit or option plans. (h) Treasury Stock. For purposes of this Section 2, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments herein described. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay in cash to the Holder an amount equal to such fraction multiplied by the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above. 4. Investment Representations. The initial Holder represents and warrants to the Company as follows: (a) Investment. The Holder is acquiring this Warrant, and (if and when such Holder exercises this Warrant) will acquire the Warrant Shares, for such Holder's own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. (b) Accredited Investor. The Holder is an "accredited investor" as defined in Rule 501(a) under the Act. (c) Experience. The Holder has made such inquiry concerning the Company and its business and personnel as the Holder has deemed appropriate; and the Holder has sufficient knowledge and experience in finance and business that the Holder is capable of evaluating the risks and merits of an investment in the Company. 5. Transfers, etc. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act and any applicable state securities laws, or (ii) the Company first shall have been furnished with an opinion of legal counsel, satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and any applicable state securities laws. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: -6- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. (c) The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change the Holder's address as shown on the warrant register by written notice to the Company requesting such change. (d) Subject to the provisions of clauses (a) and (b) of this Section 5, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency). Upon the presentation and surrender of such items to the Company, the Company shall execute and deliver to the transferee or transferees of this Warrant a new Warrant or Warrants, in the name of the transferee or transferees named in the assignment, and this Warrant shall at that time be canceled to the extent transferred. 6. No Impairment; Adjustment of Par Value. (a) The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (b) Before taking any action that would cause an adjustment reducing the Purchase Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Warrant Shares at such adjusted price. 7. Record Date, etc. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or -7- (b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice. 8. Acknowledgment and Reservation of Stock. Commencing the Vesting Date, the Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Holder expressly agrees and acknowledges that the Company currently does not have for reservation or issuance upon exercise of this Warrant a sufficient number of authorized shares of its Common Stock. 9. Exchange or Replacement of Warrants. (a) Upon the surrender by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. (b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -8- 10. Notices. All notices and other communications from the Company to the Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Holder. All notices and other communications from the Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) three business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery. 11. No Rights as Stockholder; No Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 12. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of this Warrant or the shares of Common Stock comprising the Warrant Shares; provided, however, the Company shall not be required to pay any tax that may be payable in respect of any transfer of this Warrant or Warrant Shares. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 14. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 15. Severability. If any provision of this Warrant shall be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant and, to this end, the provisions hereof are severable. 16. Assignment. This warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 17. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of Illinois (without reference to the conflicts of law provisions thereof). -9- 18. Facsimile Signatures. This Warrant may be executed by facsimile signature. EXECUTED as of the Issue Date indicated above. MOLECULAR DIAGNOSTICS, INC. By:________________________________ Title:_____________________________ ATTEST: - ------------------------- -10- EXHIBIT I PURCHASE FORM To:_________________ Dated:__________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby elects to purchase (check applicable box): [_] ____ shares of the Common Stock of Molecular Diagnostics, Inc. by such Warrant; or [_] the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b). The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation) ; and/or [_] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b). Signature: ______________________ Address: ________________________ ---------------------- -11- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock of Molecular Diagnostics, Inc. covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:______________________________ Signature Guaranteed: By: _______________________ The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. -12- EX-4.5 7 v05716_ex4-5.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR APPLICABLE STATE SECURITIES LAWS, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREFROM, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF MOLECULAR DIAGNOSTICS, INC. Warrant No. WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUE DATE: This certifies that ___________________________ or any valid transferee thereof (the "Holder"), for value received, is entitled to purchase from Molecular Diagnostics, Inc., a Delaware corporation with its principal business office located at 414 North Orleans Street, Suite 510, Chicago, Illinois 60610 (the "Company"), subject to the terms and conditions set forth below, at any time or from time to time on and after the Vesting Date (as defined below) set forth above and before 3:00 p.m. (Central Time) on the fifth anniversary of the Vesting Date (the "Expiration Date"), ______ shares of Common Stock, $.001 par value per share, of the Company ("Common Stock"), at a purchase price of _____ per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Purchase Price," respectively. As consideration for this Warrant, the Holder named above agrees to forgive all outstanding indebtedness of the Company to such named Holder. The Holder expressly agrees and acknowledges that this Warrant shall not vest, and shall not be exercisable, in whole or in part, until such time as the stockholders of the Company approve an increase in the number of authorized shares of Common Stock of the Company and an amendment to the Company's Certificate of Incorporation is filed with the Secretary of State of the State of Delaware to effect such increase (such date, the "Vesting Date"). 1. Exercise. (a) Exercise for Cash. The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In no event shall any such exercise be for fewer than 10,000 Warrant Shares unless fewer than an aggregate of 10,000 Warrant Shares are then purchasable under all outstanding Warrants held by the Holder. Payment of the aggregate Purchase Price may be made in cash, certified or bank check, or wire transfer of immediately available funds. (b) Cashless Exercise. (i) The Holder may, at the Holder's option, elect to exercise this Warrant, in whole or in part and at any time or from time to time on or after the Vesting Date but prior to 3:00 p.m. (Central Time) on the Expiration Date, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Holder shall be determined according to the following formula: X = Y(A-B) ------ A Where: X = the number of Warrant Shares that shall be issued to the Holder; Y = the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price); A = the Fair Market Value (as defined below) of one share of Common Stock; and B = the Purchase Price then in effect. (ii) The Fair Market Value per share of Common Stock shall be determined as follows: (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date (as defined in (c) below), the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest and lowest reported sale prices per share of Common Stock thereon on the trading day immediately preceding the Exercise Date ; provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, or another nationally recognized trading system as of the Exercise Date, but is quoted on the Over-The-Counter Bulletin Board, the Fair Market Value per share of Common Stock shall be deemed to be the average of the highest bid and lowest asked prices quoted thereon on the trading day immediately preceding the Exercise Date; provided that if no price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (3). -2- (3) If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or another nationally recognized trading system or the Over-the-Counter Electronic Bulletin Board as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the "Board") to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 business days after such request, notify the Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 business days of a request by the Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Holder. (c) Exercise Date and Status as Holder of Shares. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the "Exercise Date"), which Exercise Date(s) shall not be prior to the Vesting Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 business days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which the Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price). -3- (e) Warrant Shares. The Warrant Shares issued upon any such exercise of this Warrant shall be validly issued, fully paid and non-assessable. 2. Adjustments. (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Issue Date as set forth on the first page hereof (or, if this Warrant was issued upon partial exercise of, or in replacement of, another warrant of like tenor, then the date on which such original warrant was first issued) (either such date being referred to as the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -4- (d) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Holder thereafter, during the period from the date of such event to and including the Exercise Date, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Holder. (e) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(d)) (collectively, a "Reorganization"), then, following such Reorganization, the Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 business days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Holder (but in any event not later than 10 business days thereafter), furnish or cause to be furnished to the Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant. -5- (g) No Adjustments in Certain Cases. No adjustment in the number of Warrant Shares purchasable pursuant to this Warrant shall be required unless the adjustment would require an increase or decrease of at least one percent (1.0%) in the number of Warrant Shares then purchasable upon the exercise of this Warrant. Except as provided in this Section 2, no other adjustments in the number, kind or price of shares constituting Warrant Shares shall be made during the term, or upon the exercise, of this Warrant. Further, no adjustments shall be made pursuant to this Section 2 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under, the Company's director or employee benefit or option plans. (h) Treasury Stock. For purposes of this Section 2, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments herein described. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay in cash to the Holder an amount equal to such fraction multiplied by the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b) above. 4. Investment Representations. The initial Holder represents and warrants to the Company as follows: (a) Investment. The Holder is acquiring this Warrant, and (if and when such Holder exercises this Warrant) will acquire the Warrant Shares, for such Holder's own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. (b) Accredited Investor. The Holder is an "accredited investor" as defined in Rule 501(a) under the Act. (c) Experience. The Holder has made such inquiry concerning the Company and its business and personnel as the Holder has deemed appropriate; and the Holder has sufficient knowledge and experience in finance and business that the Holder is capable of evaluating the risks and merits of an investment in the Company. 5. Transfers, etc. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act and any applicable state securities laws, or (ii) the Company first shall have been furnished with an opinion of legal counsel, satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act and any applicable state securities laws. (b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: -6- "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. (c) The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change the Holder's address as shown on the warrant register by written notice to the Company requesting such change. (d) Subject to the provisions of clauses (a) and (b) of this Section 5, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency). Upon the presentation and surrender of such items to the Company, the Company shall execute and deliver to the transferee or transferees of this Warrant a new Warrant or Warrants, in the name of the transferee or transferees named in the assignment, and this Warrant shall at that time be canceled to the extent transferred. 6. No Impairment; Adjustment of Par Value. (a) The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (b) Before taking any action that would cause an adjustment reducing the Purchase Price per share below the then par value of the shares of Warrant Shares issuable upon exercise of the Warrant, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Warrant Shares at such adjusted price. 7. Record Date, etc. In the event: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or -7- (b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice. 8. Acknowledgment and Reservation of Stock. Commencing the Vesting Date, the Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant. The Holder expressly agrees and acknowledges that the Company currently does not have for reservation or issuance upon exercise of this Warrant a sufficient number of authorized shares of its Common Stock. 9. Exchange or Replacement of Warrants. (a) Upon the surrender by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant. (b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. -8- 10. Notices. All notices and other communications from the Company to the Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Holder. All notices and other communications from the Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) three business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery. 11. No Rights as Stockholder; No Liability. No provision of this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive dividends or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. In the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, no provision hereof shall give rise to any liability of such Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 12. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of this Warrant or the shares of Common Stock comprising the Warrant Shares; provided, however, the Company shall not be required to pay any tax that may be payable in respect of any transfer of this Warrant or Warrant Shares. 13. Amendment or Waiver. Any term of this Warrant may be amended or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 14. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. 15. Severability. If any provision of this Warrant shall be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Warrant and, to this end, the provisions hereof are severable. 16. Assignment. This warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 17. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of Illinois (without reference to the conflicts of law provisions thereof). 18. Facsimile Signatures. This Warrant may be executed by facsimile signature. -9- EXECUTED as of the Issue Date indicated above. MOLECULAR DIAGNOSTICS, INC. By:________________________________ Title:_____________________________ ATTEST: - ------------------------- -10- EXHIBIT I PURCHASE FORM To:_________________ Dated:__________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby elects to purchase (check applicable box): [_] ____ shares of the Common Stock of Molecular Diagnostics, Inc. by such Warrant; or [_] the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b). The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation) ; and/or [_] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b). Signature: _____________________ Address: _______________________ --------------------- -11- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock of Molecular Diagnostics, Inc. covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:_____________________________ Signature Guaranteed: By: _______________________ The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended. -12- EX-31.1 8 v05716_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Denis M. O'Donnell, M.D., certify that: (1) I have reviewed this quarterly report on Form 10-QSB of Molecular Diagnostics, Inc.; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; (4) The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and (5) The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Denis M. O'Donnell, M.D. ------------------------------------- Denis M. O'Donnell, M.D. President and Chief Executive Officer Dated: August 16, 2004 EX-31.2 9 v05716_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Dennis L. Bergquist, certify that: (1) I have reviewed this quarterly report on Form 10-QSB of Molecular Diagnostics, Inc.; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; (4) The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and (5) The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. /s/ Dennis L. Bergquist ------------------------------- Dennis L. Bergquist Chief Financial Officer Dated: August 16, 2004 EX-32.1 10 v05716_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned President and Chief Executive Officer of the Company certifies that, to his knowledge: 1. The Company's Form 10-QSB for the quarter ended June 30, 2004 (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 presents, in all material respects, the financial condition and results of operations of the Company. /s/ Denis M. O'Donnell, M.D. ------------------------------------- Denis M. O'Donnell, M.D. President and Chief Executive Officer Dated: August 16, 2004 EX-32.2 11 v05716_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned President and Chief Executive Officer of the Company certifies that, to his knowledge: 1. The Company's Form 10-QSB for the quarter ended June 30, 2004 (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 presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dennis L. Bergquist ----------------------- Dennis L. Bergquist Chief Financial Officer Dated: August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----