U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______________ to ________________
Commission file number 0-11485
ACCELR8 TECHNOLOGY CORPORATION
------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1072256
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
--------------------------------------------------------------
(Address of principal executive office)
(303) 863-8088
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(Issuer's telephone number)
----------------------------------------------------
(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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at October 31, 2003
----- -------------------------------
Common Stock, no par value 9,679,960
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
October 31, 2003 (unaudited) and July 31, 2003 3
Statements of Operations
for the three months ended October 31, 2003 and 2002 (unaudited) 4
Statements of Cash Flows
for the three months ended October 31, 2003 and 2002 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
See note 8 to unaudited financial statements.
Item 2. Changes in Securities and Use of Proceeds 18
Not applicable.
Item 3. Defaults of Senior Securities 18
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders 18
Not applicable
Item 5. Other Information 18
Not applicable.
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATION OF OFFICERS 20-24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
Accelr8 Technology Corporation
Balance Sheets
ASSETS
October 31, July 31,
2003 2003
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 8,171,456 $ 8,711,951
Accounts receivable 18,668 5,809
Inventory (Note 10) 68,991 --
Prepaid expenses and other current assets 33,302 55,313
------------ ------------
Total current assets 8,292,417 8,773,073
Property and equipment, net (Note 4) 131,926 141,967
Investments, net 664,054 574,399
Intellectual property, net (Note 5) 4,205,177 4,255,934
------------ ------------
Total assets $ 13,293,574 $ 13,745,373
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 173,373 $ 177,309
Accrued compensation and other liabilities 27,628 39,155
Deferred maintenance revenue 103,623 150,366
------------ ------------
Total current liabilities 304,624 366,830
------------ ------------
Long-term liabilities:
Deferred compensation 682,804 649,399
------------ ------------
Total long-term liabilities 682,804 649,399
------------ ------------
Total liabilities 987,428 1,016,229
------------ ------------
Commitments and Contingencies (Notes 3, 8 and 12)
Shareholders' equity (Notes 3, 6 and 9)
Common stock, no par value; 11,000,000 shares
authorized; 9,679,960 and 9,586,210 shares
issued and outstanding, respectively 12,581,770 12,488,020
Stock to be issued (Note 3) 281,250 375,000
Contributed capital 544,132 544,132
Accumulated deficit (827,406) (404,408)
Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600)
------------ ------------
Total shareholders' equity 12,306,146 12,729,144
------------ ------------
Total liabilities and shareholders' equity $ 13,293,574 $ 13,745,373
============ ============
See accompanying notes to unaudited financial statements.
3
Accelr8 Technology Corporation
Statements of Operations
For the Three Months Ended October 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Revenues:
Product license and customer support fees $ 18,628 $ 30,412
Resale of purchased software and customer support fees 85,858 156,677
OptiChem(TM)revenue 22,284 5,374
Provision for returns & allowances (800) (2,000)
----------- -----------
Net revenues 125,970 190,463
----------- -----------
Costs and Expenses:
Cost of product license and customer support revenues 7,672 9,819
Cost of purchased software and customer support for resale 11,473 30,590
Cost of sales - OptiChem(TM) 8,094 --
General and administrative 275,242 167,338
Marketing and sales 64,976 74,542
Research and development 142,833 88,573
Depreciation 10,041 6,150
Amortization 58,128 59,940
----------- -----------
Total costs and expenses 578,459 436,952
----------- -----------
Loss from operations (452,489) (246,489)
----------- -----------
Other (expense) income
Interest income 16,287 33,433
Unrealized holding gain (loss) on investments 11,229 (8,605)
Realized gain (loss) on sale of investments 1,975 (1,443)
----------- -----------
Total other income 29,491 23,385
----------- -----------
Net loss $ (422,998) $ (223,104)
=========== ===========
Basic and diluted net loss per share $ (.04) $ (.02)
=========== ===========
Weighted average shares outstanding - basic and diluted 9,961,210 9,411,210
=========== ===========
See accompanying notes to unaudited financial statements.
4
Accelr8 Technology Corporation
Statements Of Cash Flows
For the Three Months Ended October 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (422,998) $ (223,104)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation 10,041 6,150
Amortization 58,128 59,940
Issuance of stock options for consulting services -- 2,250
Unrealized holding gain (loss) on investments (11,229) 8,605
Realized gain on sale of investments, interest
and dividends reinvested (3,426) (50)
Net change in assets and liabilities:
Accounts receivable (12,859) (23,945)
Inventory (68,991) --
Prepaid expenses and other 22,011 21,050
Income tax receivable and deferred tax asset -- 190,977
Accounts payable (3,936) 40,912
Accrued liabilities (11,527) (4,512)
Deferred maintenance revenue (46,743) (10,654)
Other deferred revenue -- 17,800
Other long-term liabilities 33,405 10,195
----------- -----------
Net cash (used in) provided by operating activities (458,124) 95,614
----------- -----------
Cash flows from investing activities:
Purchase of intellectual property (7,371) (10,324)
Purchase of investments (75,000) (75,000)
----------- -----------
Net cash used in investing activities (82,371) (85,324)
----------- -----------
Net (decrease) increase in cash and cash equivalents (540,495) 10,290
Cash and cash equivalents, beginning of period 8,711,951 8,631,192
----------- -----------
Cash and cash equivalents, end of period $ 8,171,456 $ 8,641,482
=========== ===========
Supplemental information:
Cash received from income tax refunds $ -- $ 190,977
=========== ===========
See accompanying notes to unaudited financial statements.
5
Accelr8 Technology Corporation
Notes to Unaudited Financial Statements
For the three months ended October 31, 2003 and 2003
Note 1. Basis of Presentation
The financial statements included herein have been prepared by Accelr8
Technology Corporation (the "Company") without audit, pursuant to the rules and
regulations of the United States Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted as allowed by such rules and regulations. We
believe that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with our
annual audited financial statements dated July 31, 2003, included in our annual
report on Form 10-KSB as filed with the SEC.
Management believes that the accompanying unaudited financial statements
are prepared in conformity with generally accepted accounting principles, which
require the use of management estimates, and contain all adjustments (including
normal recurring adjustments) necessary to present fairly the operations and
cash flows for the periods presented. The results of operations for the three
month period ended October 31, 2003 may not be indicative of the results of
operations for the year ended July 31, 2004.
Note 2. Reclassification
Certain reclassifications have been made in the fiscal 2003 financial
statements to conform to the classifications used in fiscal 2004. Such
reclassifications have no effect on net income (loss) as previously reported.
Note 3. Shareholders' Equity
Common Stock Options
At October 31, 2003, there were 755,000 stock options outstanding at prices
ranging from $1.45 to $3.25 with expiration dates between November 30, 2003 and
August 1, 2011. The remaining number of option shares available for issuance
under the Company's stock option plans is 167,500. For the three months ended
October 31, 2003 and 2002, stock options exercisable into 755,000 and 840,000
shares of common stock were not included in the computation of diluted earnings
per share because their effect was antidilutive.
Stock to be Issued
In connection with the final settlement of the Consolidated Amended Class
Action Complaint, agreed to in principle in October 2002 and finalized by the
court in May 2003, the Company agreed to contribute to a Settlement Fund
$450,000 and 375,000 shares of common stock. In accordance with instructions
received on August 5, 2003, 93,750 shares of common stock were issued in the
names of plaintiffs' counsel. To date, the Company has not received instructions
for issuing the balance of 281,250 shares of common stock to the Settlement
Fund.
6
Note 4. Property and Equipment
Property and equipment are recorded at cost and consisted of the following.
October 31, July 31,
2003 2003
--------- ---------
Computer equipment $ 30,060 $ 30,060
Laboratory and scientific equipment 177,255 177,255
Furniture and fixtures 11,114 11,114
--------- ---------
Total property and equipment 218,429 218,429
Accumulated depreciation (86,503) (76,462)
--------- ---------
Net property and equipment $ 131,926 $ 141,967
========= =========
Note 5. Intellectual Property
Intellectual property consisted of the following:
October 31, July 31,
2003 2003
----------- -----------
OpTest(TM) Technologies $ 4,454,538 $ 4,454,538
Patents 136,341 134,066
Trademarks 50,901 45,805
----------- -----------
Total intellectual property 4,641,780 4,634,409
Accumulated amortization (436,603) (378,475)
----------- -----------
Net intellectual property $ 4,205,177 $ 4,255,934
=========== ===========
Intellectual properties are recorded at cost and are being amortized on a
straight-line basis over their estimated useful lives of 20 years, which
approximates the patent and patent application life of the OptiChem(TM)
Technologies. Amortization expense was $58,128 and $59,940, respectively, for
the three months ended October 31, 2003 and 2002.
During the fiscal year ended July 31, 2003, the Company acquired the rights
to innovative technology that complements QuanDx(TM). The new YoDx(TM)
technology extends the detection system to include assay processing prior to the
detection itself, and the Company expects this process to enhance detection
sensitivity as well. When used with OptiChem(TM) coated substrates, it is
expected to increase sensitivity by at least 100-fold, relative to fluorescence
detection and increase assay turnaround time by at least 10-fold, relative to
conventional processing. The Company issued 50,000 stock options on July 12,
2003 for the purchase of the YoDx(TM) technology. The options have an exercise
price of $2.25 per share and expire five years from the grant date. In addition,
the Company agreed to issue an additional 200,000 stock options with the same
terms upon the earlier of (a) the Company achieving certain accumulated revenue
levels associated with the YoDx(TM) technology, as defined in the agreement, or
(b) a change in control of the Company prior to the expiration date of the
options. To date, no additional options have been issued in connection with this
agreement.
7
The Company routinely evaluates the recoverability of its long-lived assets
based upon estimated future cash flows from and estimated fair value of such
long-lived assets. If in management's judgment, the anticipated undiscounted
cash flows or estimated fair value are insufficient to recover the carrying
amount of the long-lived asset, the Company will determine the amount of the
impairment and the value of the asset will be written down. Management believes
that the fair value of the technology exceeds the carrying value. However, it is
possible that future impairment testing may result in intangible asset
write-offs, which could adversely affect the Company's financial condition and
results of operations.
Future amortization expense for the intangible assets is estimated as
follows:
Years Ending July 31,
---------------------
2004 (9 months) $ 174,384
2005 232,394
2006 232,394
2007 232,394
2008 232,394
Thereafter 3,101,217
----------
Total future amortization $4,205,177
==========
Note 6. Employee Stock Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results in both annual and interim
financial statements. The Company accounts for employee stock-based compensation
arrangements using the intrinsic value method in accordance with APB No. 25 and
related interpretations and has adopted the disclosure-only provisions of SFAS
No. 123 as amended by SFAS No. 148. The following table illustrates the effect
on net loss if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
compensation.
8
Three Months Ended October 31
2003 2002
--------- ---------
Net loss - as reported $(422,998) $(223,104)
Add: Stock-based compensation
included in reported net loss -- 2,250
Deduct: Total stock-based compensation expense
determined under fair value based
method for all awards (5,595) --
--------- ---------
Pro forma net loss $(428,593) $(220,854)
========= =========
Earnings per share:
Basic and diluted - as reported $ (.04) $ (.02)
========= =========
Basic and diluted - pro forma $ (.04) $ (.02)
========= =========
Note 7. Business Segment Information
The Company operates in two business segments: (i) selling software tools
for legacy code modernization and the resale of third party software and (ii)
selling surface chemistry within a the general area of microarraying, which
includes DNA/RNA assays, protein-based assays and biosensors. Operating results
and other financial data for the three months ended October 31, 2003 and 2002 is
presented for the principal business segments as follows:
9
Three Months Ended Biosciences
October 31, 2003 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 103,686 $ 22,284 $ 125,970
Costs and expenses 256,442 322,017 578,459
Interest income 16,287 -- 16,287
Segment loss (123,265) (299,733) (422,998)
Total assets 8,883,936 4,409,638 13,293,574
Intellectual property, net -- 4,205,177 4,205,177
Depreciation and
amortization expense 1,176 66,993 68,169
Three Months Ended Biosciences
October 31, 2002 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 185,089 $ 5,374 $ 190,463
Costs and expenses 205,403 231,549 436,952
Interest income 33,433 -- 33,433
Segment profit (loss) 3,071 (226,175) (223,104)
Total assets 10,220,058 4,636,763 14,856,821
Intellectual property, net -- 4,573,288 4,573,288
Depreciation and
amortization expense 1,800 64,290 66,090
Note 8. Legal Proceedings
Pending legal matters
On November 20, 2002, the Company initiated an action against Deloitte &
Touche, LLP, ("Deloitte"), the Company's former auditors, captioned Accelr8
Technology Corporation v. Deloitte & Touche, LLP, Case No. 02CV8102, District
Court, City and County of Denver, State of Colorado. In that action, the Company
seeks damages from Deloitte for breach of contract. On January 13, 2003,
Deloitte answered the Complaint and filed a counterclaim against the Company,
and third-party claims against Thomas V. Geimer and Harry J. Fleury. The
counter-claim asserts claims for breach of contract, deceit based on fraud, and
negligent misrepresentation and seeks unspecified damages. Third-party claims
alleged deceit based on fraud and negligent misrepresentation, and also sought
unspecified damages. On February 18, 2003, the Company, as Counter-claim
Defendant, and Messrs. Geimer and Fleury, as Third-party Defendants, moved to
dismiss the counterclaims and third-party complaint. On May 29, 2003, the Court
denied the motion to dismiss the counterclaims against the Company, but granted
the motion to dismiss the third party claims against Messrs Geimer and Fleury.
On October 9, 2003, Accelr8 filed a timely Motion to Amend its Complaint adding
10
a claim for breach of contract based upon Deloitte's failure to provide
"quality" audit service as represented in the engagement contract. On October
10, 2003 Deloitte moved for a Protective Order, to halt the deposition of the
engagement partner, to allow time to "carefully review and analyze" the proposed
Amended Complaint. As of December 9, 2003, the court has not ruled on the motion
for the Company's request to amend its Complaint. While the Company believes it
has substantial defenses to the counterclaims, and intends to contest those
claims vigorously, there can be no assurance that the resolution of the
counterclaims will not have a material adverse effect on the Company.
Note 9. Non-Cash Financing And Investing Activity
On October 30, 2002, the Company agreed to issue 375,000 shares of common
stock valued at $375,000 under a settlement agreement as discussed in Note 3. In
accordance with instructions received on August 5, 2003, 93,750 shares of common
stock were issued in the names of plaintiffs' counsel. To date, the Company has
not received instructions for issuing the balance of 281,250 shares of common
stock to the Settlement Fund.
Note 10. Inventory
The Company purchased raw materials (custom chemicals and glass substrates)
inventory for producing OptArray(TM) slides during the quarter ended October 31,
2003. The inventory is priced at cost based on the first in first out method.
There was no work in process or finished goods inventory at October 31, 2003, as
slides currently are made for specific orders and shipped as produced. A raw
materials inventory was created during the quarter as the Company is moving past
the state of designing and testing pre-production prototypes and offering slides
for evaluation. Sales continue to increase as the Company prepared to deliver a
minimum of 5,000 slides under a supply contract with SCHOTT Nexterion AG. See
Note 12. Also, a purchase order was received from a repeat customer for 1,100
slides at the end of the quarter.
Note 11. Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments, with Characteristics of Both Liabilities and Equity",
which provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope, which may have previously been classified as equity, as a liability
(or as an asset in some circumstances). This statement is effective for
financial instruments entered into or modified after May 21, 2003, and otherwise
is effective August 1, 2003 for the Company. At the time of the filing of the
Form 10-KSB for the year ended July 31, 2003, the Company disclosed that upon
adoption, the amounts for stock to be issued currently reflected as a component
of shareholders' equity will be classified as a liability and carried at fair
value in the balance sheet. Upon further review, it was determined that the
classification of the stock to be issued is not affected by SFAS No. 150;
therefore, the stock to be issued will continue to be classified in
shareholders' equity and carried at its carrying value.
11
Note 12. Pending License and Supply Agreement
On October 15, 2003, the Company signed a supply agreement and a letter of
intent with SCHOTT Nexterion AG of Mainz, Germany ("Nexterion"). Nexterion is a
wholly-owned division of SCHOTT Glas ("SCHOTT"), which is a leading European
manufacturer of precision glass. SCHOTT had sales of about 2 billion euros in
2002. SCHOTT formed the Nexterion division in 2002 to enter the microarray
market. In 2003, Nexterion acquired the microarray products of Quantifoil (Jena,
Germany), which is a market leader in the European microarray slide market.
Nexterion also made investments in two development stage companies in the
microarray market.
The supply agreement with Nexterion has a term of six months from October
15, 2003 and provides for the purchase of 5,000 slides at $10.50 each. The
supply agreement may be extended for 90 days and additional 5,000 slides may be
purchased at $10.50 each. Nexterion will purchase and resell Accelr8's OptArray
microarray slides under the Nexterion brand and Accelr8 will continue to
manufacture the microarraying products in its Denver facility. Accelr8 will be
Nexterion's sole supplier of permeable hydrogel microarraying slides during the
term of the supply agreement and will provide sales training and also technical
support to SCHOTT's customers.
The letter of intent calls for negotiation of an exclusive technology
transfer license for Accelr8's OptiChem(TM) surface chemistry on microarraying
slides. Under the intended technology transfer license, SCHOTT will become the
exclusive outsource manufacturer for OptArray products starting in the third
quarter of 2004. SCHOTT will then manufacture the OptArray slides and have
exclusive global distribution rights to those products. The two companies will
cooperatively market the products. Management anticipates that there will be
three potential sources of revenue in the Technology transfer agreement to be
entered into with SCHOTT: (i) a one-time payment of an up front licensing fee
(upon signing), (ii) consulting services relating to the technology transfer
process, and (iii) royalties on sales. The specific terms and conditions of the
proposed licensing agreement have not yet been negotiated or finalized, and it
is possible that a definitive agreement will not be reached with SCHOTT.
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations
------------------------------------------------------------------------------
Forward Looking Information
Information contained in the following discussion of results of operations
and financial condition and in certain of the notes to the financial statements
included in this document contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which can be identified
by the use of words such as "may," "will," "expect," "anticipate," "estimate,"
or "continue," or variations thereon or comparable terminology. In addition, all
statements other than statements of historical facts that address activities,
events, or developments the Company expects, believes, or anticipates will or
may occur in the future, and other such matters, are forward-looking statements.
The following discussion should be read in conjunction with the Company's
12
unaudited financial statements and related notes included elsewhere herein. The
Company's future operating results may be affected by various trends and factors
which are beyond the Company's control. These include, among other factors,
general public perception of issues and solutions, and other uncertain business
conditions that may affect the Company's business. The Company cautions the
reader that a number of important factors discussed herein, and in other reports
filed with the Securities and Exchange Commission, including its 10-KSB for the
year ended July 31, 2003, could affect the Company's actual results and cause
actual results to differ materially from those discussed in forward-looking
statements.
Overview
Prior to January 2001, Accelr8 was primarily a provider of software tools
and consulting services. Since the acquisition of the OpTest(TM) suite of
technologies, the Company has focused primarily upon research and development
relating to the technologies acquired, and the development of revenue producing
products related to that technology. The potential market opportunity in the
growing area of biosciences, coupled with unique patented technology that was
beyond initial development stage, led the Company to pursue a purchase agreement
with DDx.
On January 18, 2001, Accelr8 purchased the OpTest(TM) technology assets
from DDx and commenced investment in development and optimization of OpTest's
surface chemistry (OptiChem(TM)) and quantitative instrument (QuanDx(TM)). The
Company's proprietary surface chemistry and its quantitative instruments support
real-time assessment of medical diagnostics, food-borne pathogens, water-borne
pathogens and bio-warfare assessments. Presently the Company holds for sale
advanced microarray slides and specialty microtiter plates coated with its
proprietary OptiChem(TM) activated surface chemistry for use in academic
research, drug discovery and molecular diagnostics. This surface coating has an
extraordinary ability to shed sticky biomolecules that interfere with
bio-analytical assays such as microarrays and immunoassays. Management believes
that this property substantially improves analytical performance by enabling
higher sensitivity, greater reproducibility, and higher throughput by virtue of
simplified application methods.
The Company is currently offering OptArray microarray slides to university
and government labs, pharmaceutical, drug discovery and diagnostic companies
that rely upon customized surface chemistry for their assays. The surface
chemistry will be customized to meet the specific requirements of large
manufacturers, with the intent of licensing our products to users.
The Company believes that the market for DNA/RNA and protein microarrays is
growing because of increased demand for gene analysis and molecular diagnostics
as measured by industry wide growth in unit sales, i.e., Affymetrix
(NASDAQ:AFFX), Agilent, (NYSE:A), and Applied Biosciences (NYSE:ABI).
In July 2003, the Company introduced its OptiPlate(TM) products, which are
96- and 384-well glass bottom microtiter plates for multiplexed microarraying.
These products allow the customers to print a small microarray (as many as 2,000
spots) in each well. As with OptArray(TM) slides, the products support both DNA
and protein arraying. The glass and chemical coatings are identical to those
used in OptArray(TM) slides. This high throughput mode is essential in drug
discovery and diagnostics where a lab must validate an assay over a large number
of individual samples. The Company knows of only one other US company (Apogent
Matrix) that is selling a plate for multiplexed microarraying.
13
On October 15, 2003, the Company signed a supply agreement and a letter of
intent with SCOHOTT Nexterion AG of Mainz, Germany ("Nexterion"). Nexterion is a
wholly-owned division of SCHOTT Glas ("SCHOTT"), which is a leading European
manufacturer of precision glass. SCHOTT had sales of about 2 billion euros in
2002. SCHOTT formed the Nexterion division in 2002 to enter the microarray
market. In 2003, Nexterion acquired the microarray products of Quantifoil (Jena,
Germany), which is a market leader in the European microarray slide market.
Nexterion also made investments in two development stage companies in the
microarray market.
The supply agreement with Nexterion has a term of six months from October
15, 2003 and provides for the purchase of 5,000 slides at $10.50 each. The
supply agreement may be extended for 90 days and additional 5,000 slides may be
purchased at $10.50 each. Nexterion will purchase and resell Accelr8's OptArray
microarray slides under the Nexterion brand and Accelr8 will continue to
manufacture the microarraying products in its Denver facility. Accelr8 will be
Nexterion's sole supplier of permeable hydrogel microarraying slides during the
term of the supply agreement and will provide sales training and also technical
support to SCHOTT's customers.
The letter of intent calls for negotiation of an exclusive technology
transfer license for Accelr8's OptiChem(TM) surface chemistry on microarraying
slides. Under the intended technology transfer license, SCHOTT will become the
exclusive outsource manufacturer for OptArray products starting in the third
quarter of 2004. SCHOTT will then manufacture the OptArray slides and have
exclusive global distribution rights to those products. The two companies will
cooperatively market the products. Management anticipates that there will be
three potential sources of revenue in the Technology transfer agreement to be
entered into with SCHOTT: (i) a one-time payment of an up front licensing fee
(upon signing), (ii) consulting services relating to the technology transfer
process, and (iii) royalties on sales. The specific terms and conditions of the
proposed licensing agreement have not yet been negotiated or finalized, and it
is possible that a definitive agreement will not be reached with SCHOTT.
The Company continues to remain a provider of software tools and
modernization solutions for VMS Legacy Systems. However, the Company has taken
steps to limit the costs associated with the conduct of its software tools and
consulting services business. The Company intends to operate this business at a
level that is sufficient to service the needs of existing customers and to
support future sales of software tools. The Company does not expect to continue
its consulting activities, although if such opportunities arise, the Company
believes that it may be able to subcontract for the performance of the necessary
services from third parties or former employees. The Company continues to
investigate the possibility of selling these business operations to another
party; however, it has no arrangements or understandings with respect to the
sale of these assets. The Company also resells software and customer support
purchased from third party vendors.
14
Changes in Results of Operations: Three months ended October 31, 2003 compared
to three months ended October 31, 2002
Product license and customer support fees for the three months ended
October 31, 2003 were $18,628, a decrease of $11,784 or 38.8% as compared to the
three months ended October 31, 2002, and represented 14.8% of net revenues. This
decrease was due to fewer license and support sales for the Company's migration
tools.
Revenues from the resale of purchased software including purchased
maintenance for the three months ended October 31, 2003 were $85,858, a decrease
of $70,819 or 45.2% as compared to the three months ended October 31, 2002, and
represented 68.2% of net revenues. This decrease largely resulted because a
major repeat customer purchased three systems and maintenance in the three
months ended October 31, 2002.
OptiChem(TM) revenues for the three months ended October31, 2003 were
$22,284, an increase of $16,910 or 315% as compared to the three months ended
October 31, 2002 and represented 17.7% of net revenues. Nearly 70% of this
increase was due to sales to a single repeat customer plus new customers that
are evaluating the Company's OptArray(TM) slides. See Note 12 for discussion of
commitments for future slide sales.
Due to the above factors, net revenues for the three months ended October
31, 2003, were $125,970, which represented a decrease of $64,493 or 33.9% as
compared to the three months ended October 31, 2002.
During the three months ended October 31, 2003, sales to the Company's two
largest customers were $25,150 and $14,800 representing 20.0% and 11.7% of our
net revenues. In comparison, sales to the Company's two largest customers were
$81,375 and $50,625 representing 42.7% and 26.6% of net revenues for the three
months ended October 31, 2002. The loss of a major customer could have a
significant impact on the Company's financial performance in any given year.
Cost of product license and customer support for the three months ended
October 31, 2003 was $7,672, a decrease of $2,147 or 21.9% as compared to the
three months ended October 31, 2002. This was largely due to decreased customer
support labor.
Cost of software purchased for resale including purchased maintenance for
the three months ended October 31, 2003 was $11,473, a decrease of $19,117 or
62.5% as compared to the three months ended October 31, 2002. The decrease
results from decreased revenue from resale of purchased software including
purchased maintenance and variations in the product mix of items purchased.
Cost of OptiChem(TM) sales for the three months ended October 31, 2003
consisted of raw material and labor. Due to limited sales and early stages of
development, costs associated with sales during the three months ended October
31, 2002 were included with research and development expenses.
15
General and administrative expenses for the three months ended October 31,
2003 were $275,242, an increase of $107,904 or 64.5% as compared to the three
months ended October 31, 2002. This increase was largely due to increased
deferred compensation ($23,000) resulting from change in market value of
investments in the deferred compensation trust; consulting fees regarding
intellectual property ($15,000); original listing fee for the American Stock
Exchange ($55,000); salaries and related payroll costs ($20,000); offset by a
decrease in litigation fees ($20,000) as a result of concluded legal action in
prior periods.
Marketing and sales expenses for the three months ended October 31, 2003
were $64,976, a decrease of $9,566 or 12.8% as compared to the three months
ended October 31, 2002. This decrease was largely due to a decrease in travel
and promotional material ($16,000) offset by increased consulting fees ($3,500)
and salaries ($4,000).
Research and development expenses for the three months ended October 31,
2003 were $142,833, an increase of $54,260 or 61.3% as compared to the three
months ended October 31, 2002. This increase was largely due to three additional
employees whose focus was development of protein microarrays for use in
applications that leveraged the Company's instruments ($37,000) and laboratory
supplies and expense ($9,000).
Depreciation for the three months ended October 31, 2003 was $10,041, an
increase of $3,891, or 63.3% compared to the three months ended October 31,
2002. This increase results from an increased amount of laboratory equipment
being amortized in the current quarter.
Amortization for the three months ended October 31, 2003 was $58,128, a
decrease of $1,812, or 3.0% as compared to the three months ended October 31,
2002.
As a result of these factors, loss from operations for the three months
ended October 31, 2003 was $452,489, an increased loss of $206,000 or 83.6%, as
compared to loss from operations for the three months ended October 31, 2002.
Interest income for the three months ended October 31, 2003 was $16,287, a
decrease of $17,146, or 51.3% as compared to the three months ended October 31,
2002. This decrease was primarily due to decreased interest rates received for
the amount of money invested.
Realized gain on marketable securities held in the deferred compensation
trust for the three months ended October 31, 2003 was $1,975, an increase of
$3,418 as compared to the three months ended October 31, 2002. This gain was the
result of selling trust investments plus interest and dividends reinvested.
Unrealized gain on marketable securities held in the deferred compensation trust
for the three months ended October 31, 2003 was $11,229, an increase of $19,834
as compared to the three months ended October 31, 2002. This gain was the result
of changing market value of securities held by the trust. The total of the
change in realized gain and unrealized gain in marketable securities is
reflected as increased deferred compensation and included in general and
administrative expenses.
16
No income tax provision or benefit was recorded during the three months
ended October 31, 2003 and 2002. Deferred income tax assets and liabilities are
computed to determine differences between the financial statement basis and the
estimated income tax basis of assets and liabilities that will result in taxable
or deductible amounts in the future. As of October 31, 2003, a valuation
allowance has been recorded on the deferred tax asset, as management has not
determined that it is more likely than not that this amount of the deferred tax
asset will be realized.
As a result of these factors, net loss for the three months ended October
31, 2003 was $422,998, an increased loss of $199,894 or 89.6% as compared to the
three months ended October 31, 2002.
Capital Resources and Liquidity
At October 31 2003, as compared to July 31, 2003, the Company's current
assets decreased 5.5% from $8,773,073 to $8,292,417; the Company's liquidity, as
measured by cash and cash equivalents, decreased by 6.2% from $8,711,951 to
$8,171,456 and the Company's working capital decreased by 5.0% from $8,406,243
to $7,987,793. During the same period, shareholders' equity decreased 3.3% from
$12,729,144 to $12,306,146 as a result of a net loss of $422,998.
The Company has historically funded its operations primarily through equity
financing and cash flow generated from operations. The Company anticipates that
current cash balances and working capital plus future positive cash flow from
operations will be sufficient to fund its capital and liquidity needs in the
foreseeable future.
Item 3. Controls and Procedures
-------------------------------
An evaluation was conducted under the supervision and with the
participation of the Company's management, including Thomas V. Geimer, the
Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of October 31, 2003. Based on that evaluation, Mr.
Geimer concluded that the Company's disclosure controls and procedures were
effective as of such date to ensure that information required to be disclosed in
the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Such officers also confirm that there was no change in the
Company's internal control over financial reporting during the quarter ended
October 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
See Note 8 to unaudited financial statements.
Item 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
Not applicable.
Item 3. Defaults of Senior Securities
-------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
Not applicable.
Item 5. Other Information
-------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
a) Exhibits:
1. Exhibit 32.1 Certification of Officers Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
2. Exhibit 31.1 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
3. Exhibit 31.2 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K:
1. 8-K filed on October 15, 2003 disclosing a supply agreement and letter
of intent with Schott Nexterion AG.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 15, 2003 ACCELR8 TECHNOLOGY CORPORATION
/s/ Thomas V. Geimer
------------------------------------------
Thomas V. Geimer, Secretary, Chief
Executive Officer and Chief Financial
Officer
/s/ James Godkin
------------------------------------------
James Godkin, Principal Accounting Officer
19