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 January 31, 2004
[ ] 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
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1072256
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
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(Address of principal executive office)
(303) 863-8088
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(Issuer's telephone number)
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(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 March 11, 2004
----- -----------------------------
Common Stock, no par value 9,679,960
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
January 31, 2004 (unaudited) and July 31, 2003 3
Statements of Operations
for the three months and six months ended
January 31, 2004 and 2003 (unaudited) 4
Statements of Cash Flows
for the six months ended January 31, 2004
and 2003 (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 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
See note 8 to unaudited financial statements.
Item 2. Changes in Securities and Use of Proceeds 20
Not applicable.
Item 3. Defaults of Senior Securities 20
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATION OF OFFICERS 23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
Accelr8 Technology Corporation
Balance Sheets
ASSETS
January 31, July 31,
2004 2003
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,803,285 $ 8,711,951
Accounts receivable 115,044 5,809
Inventory (Note 10) 68,555 --
Prepaid expenses and other current assets 64,987 55,313
------------ ------------
Total current assets 8,051,871 8,773,073
Property and equipment, net (Note 4) 127,376 141,967
Investments, net 692,361 574,399
Intellectual property, net (Note 5) 4,152,653 4,255,934
------------ ------------
Total assets $ 13,024,261 $ 13,745,373
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160,086 $ 177,309
Accrued compensation and other liabilities 39,698 39,155
Deferred revenue 5,025 --
Deferred maintenance revenue 157,984 150,366
------------ ------------
Total current liabilities 362,793 366,830
------------ ------------
Long-term liabilities:
Deferred compensation 729,861 649,399
------------ ------------
Total long-term liabilities 729,861 649,399
------------ ------------
Total liabilities 1,092,654 1,016,229
------------ ------------
Commitments and Contingencies (Notes 3 and 8)
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, 281,250 and 375,000 shares, respectively (Note 3) 281,250 375,000
Contributed capital 541,716 544,132
Accumulated deficit (1,199,529) (404,408)
Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600)
------------ ------------
Total shareholders' equity 11,931,607 12,729,144
------------ ------------
Total liabilities and shareholders' equity $ 13,024,261 $ 13,745,373
============ ============
See accompanying notes to unaudited financial statements.
3
Accelr8 Technology Corporation
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
January 31, January 31, January 31, January 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Consulting fees $ -- $ 20,000 $ -- $ 20,000
Product license and customer support fees 25,350 85,320 43,977 115,732
Resale of purchased software and customer
support 92,511 85,448 178,370 242,125
OptiChem(TM)revenue 36,968 13,227 59,252 18,601
Provision for returns & allowances (2,090) (1,955) (2,890) (3,955)
----------- ----------- ----------- -----------
Net revenues 152,739 202,040 278,709 392,503
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of product license and customer
support revenues 6,292 11,851 13,964 21,671
Cost of purchased software and
customer support for resale 24,337 8,173 35,811 38,763
Cost of sales - OptiChem 16,163 4,698 24,257 6,636
General and administrative 254,676 214,588 529,917 381,925
Marketing and sales 60,082 69,425 125,058 143,968
Research and development 137,532 135,649 280,365 222,284
Depreciation 10,041 6,150 20,082 12,300
Amortization 58,128 59,940 116,256 119,880
----------- ----------- ----------- -----------
Total costs and expenses 567,251 510,474 1,145,710 947,427
----------- ----------- ----------- -----------
Loss from operations (414,512) (308,434) (867,001) (554,924)
----------- ----------- ----------- -----------
Other (expense) income
Interest income 15,988 28,034 32,276 61,467
Unrealized holding gain (loss) on investments 26,401 (18,935) 37,630 (27,539)
Realized gain (loss) on sale of investments -- (1,150) 1,974 (2,593)
----------- ----------- ----------- -----------
Total other income 42,389 7,949 71,880 31,335
----------- ----------- ----------- -----------
Loss before income taxes (372,123) (300,485) (795,121) (523,589)
Income tax benefit -- 19,431 -- 19,431
----------- ----------- ----------- -----------
Net loss $ (372,123) $ (281,054) $ (795,121) $ (504,158)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (.04) $ (.03) $ (.08) $ (.05)
=========== =========== =========== ===========
Weighted average shares outstanding
- basic and diluted 9,961,210 9,411,210 9,961,210 9,411,210
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements.
4
Accelr8 Technology Corporation
Statements Of Cash Flows
For the Six Months Ended January 31, 2004 and 2003
(Unaudited)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (795,121) $ (504,158)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation 20,082 12,300
Amortization 116,256 119,880
Increase (decrease) in fair value of stock options
granted for consulting services (2,416) 19,260
Unrealized holding (gain) loss on investments (37,630) 27,539
Realized gain on sale of investments, interest
and dividends reinvested (5,332) (371)
Net change in assets and liabilities:
Accounts receivable (109,235) (56,140)
Insurance recovery receivable -- 825,000
Inventory (68,555) --
Prepaid expenses and other (9,674) (34,674)
Income tax receivable and deferred tax asset -- 171,545
Accounts payable (17,223) 58,028
Accrued liabilities 543 1,263
Deferred revenue 5,025 1,090
Deferred maintenance revenue 7,618 (2,417)
Deferred compensation 80,462 10,332
----------- -----------
Net cash (used in) provided by operating activities (815,200) 648,477
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (5,491) (13,985)
Purchase of intellectual property (12,975) (13,950)
Purchase of investments (75,000) (75,000)
----------- -----------
Net cash used in investing activities (93,466) (102,935)
----------- -----------
Net (decrease) increase in cash and cash equivalents (908,666) 545,542
Cash and cash equivalents, beginning of period 8,711,951 8,631,192
----------- -----------
Cash and cash equivalents, end of period $ 7,803,285 $ 9,176,734
=========== ===========
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 six months ended January 31, 2004
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. The
Company believes 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 six
month and three month periods ended January 31, 2004 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 January 31, 2004, there were 960,000 stock options outstanding at prices
ranging from $1.45 to $3.25 with expiration dates between July 30, 2004 and
August 1, 2011. There are no additional option shares available for issuance
under the Company's stock option plans. For the six months ended January 31,
2004 and 2003, stock options exercisable into 960,000 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
6
$450,000 and 375,000 shares of common stock. The $450,000 was paid on March 2,
2003. In accordance with instructions received on August 5, 2003, 93,750 shares
of common stock were issued in the names of plaintiffs' counsel. In January of
2004 the Company received instructions for issuing the balance of 281,250 shares
of common stock to the Settlement Fund. The shares were issued on February 2,
2004 and have been delivered to plaintiffs' counsel, but remain undistributed as
of this filing.
Note 4. Property and Equipment
Property and equipment are recorded at cost
and consisted of the following:
January 31, 2004 July 31, 2003
---------------- -------------
Computer equipment $ 30,060 $ 30,060
Laboratory and scientific equipment 182,746 177,255
Furniture and fixtures 11,114 11,114
--------- ---------
Total property and equipment 223,920 218,429
Accumulated depreciation (96,544) (76,462)
--------- ---------
Net property and equipment $ 127,376 $ 141,967
========= =========
Note 5. Intellectual Property
Intellectual property consisted of the following:
January 31, 2004 July 31, 2003
---------------- -------------
OptiChem technologies $ 4,454,538 $ 4,454,538
Patents 139,515 134,066
Trademarks 53,331 45,805
----------- -----------
Total intellectual property 4,647,384 4,634,409
Accumulated amortization (494,731) (378,475)
----------- -----------
Net intellectual property $ 4,152,653 $ 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 $116,256 and $119,880, respectively, for
the six months ended January 31, 2004 and 2003.
In October 2003, the Company entered into a supply agreement with SCHOTT
Nexterion AG of Mainz, Germany ("Nexterion"), a wholly-owned division of SCHOTT
Glas ("SCHOTT"), and the Company negotiated a letter of intent for a technology
license with SCHOTT. Negotiations for this technology license are ongoing, but
have not been concluded. 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 an additional
5,000 slides may be purchased at $10.50 each. As of January 31, 2004, 1,000
slides have been delivered under the supply agreement. The Company continues to
optimize the OptiChem technology for the SCHOTT supply contract.
7
During the remaining months of the fiscal year ending July 31, 2004, the
Company intends to continue customizing its technologies to the specific
requirements of large licensees. The Company's efforts will be directed towards
the creation of revenue from the sale and licensing of its technology and
continued research and development.
The Company routinely evaluates the recoverability of its long-lived assets
based upon estimated future cash flows from or 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 (6 months) $ 116,256
2005 232,394
2006 232,394
2007 232,394
2008 232,394
Thereafter 3,106,821
----------
Total future amortization $4,152,653
==========
Note 6. Employee Stock Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 Accounting Principals Board ("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 to stock-based compensation.
8
Six Months Ended January 31,
2004 2003
----------------------
Net loss - as reported $(795,121) $(504,158)
Add: Stock-based compensation
expense included in reported net loss -- --
Deduct: Total stock-based compensation expense
determined under fair value based
method for all awards (5,595) (1,950)
--------- ---------
Pro forma net loss $(800,716) $(506,108)
--------- ---------
Earnings per share:
Basic and diluted - as reported $ (.08) $ (.05)
========= =========
Basic and diluted - pro forma $ (.08) $ (.05)
========= =========
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 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 and six months ended January 31,
2004 and 2003 is presented for the principal business segments as follows:
9
Three Months Ended Biosciences
January 31, 2004 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 115,771 $ 36,968 $ 152,739
Costs and expenses 178,185 389,066 567,251
Interest income 7,994 7,994 15,988
Segment loss (62,414) (352,098) (414,512)
Total assets 8,664,664 4,359,597 13,024,261
Intellectual property, net -- 4,152,653 4,152,653
Depreciation and amortization expense 1,176 66,993 68,169
Three Months Ended Biosciences
January 31, 2003 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 188,813 $ 13,227 $ 202,040
Costs and expenses 154,739 355,735 510,474
Interest income 14,017 14,017 28,034
Segment profit (loss) 42,022 (342,507) (300,485)
Tax benefit -- 19,431 19,431
Total assets 9,759,615 4,822,884 14,582,499
Intellectual property, net -- 4,516,974 4,516,974
Depreciation and amortization expense 1,800 64,290 66,090
Six Months Ended Biosciences
January 31, 2004 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 219,457 $ 59,252 $ 278,709
Costs and expenses 356,218 789,492 1,145,710
Interest income 16,138 16,138 32,276
Segment loss (136,761) (730,240) (867,001)
Total assets 8,664,664 4,359,597 13,024,261
Intellectual property, net -- 4,152,653 4,152,653
Depreciation and amortization expense 2,352 133,986 136,338
Six Months Ended Biosciences
January 31, 2003 Software Tools Business Total
---------------- -------------- ------------ ------------
Revenues $ 373,902 $ 18,601 $ 392,503
Costs and expenses 312,943 634,484 947,427
Interest income 30,734 30,733 61,467
Segment profit (loss) 92,294 (615,883) (523,589)
Tax benefit -- 19,431 19,431
Total assets 9,759,615 4,822,884 14,582,499
Intellectual property, net -- 4,516,974 4,516,974
Depreciation and amortization expense 3,600 128,580 132,180
10
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 in excess of $2 million from Deloitte for breach of contract,
arising from its resignation from the Company's fiscal year 1999 audit, and the
withdrawal of its opinion on the financial statements for fiscal year 1998. 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 damages of approximately
$350,000. The third-party claims alleged deceit based on fraud and negligent
misrepresentation. On May 29, 2003, the Court granted a motion to dismiss the
third party claims against Messrs. Geimer and Fleury. While the Company believes
it has a valid claim against Deloitte, there is no assurance that the Company
will obtain a judgment for all, or any, of the damages it seeks. 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. In January 2004, the
Company received instructions for issuing the balance of 281,250 shares of
common stock to the Settlement Fund. The shares were issued on February 2, 2004
and have been delivered to plaintiffs' counsel, but remain undistributed as of
this filing.
Note 10. Inventory
The Company purchases raw materials (custom chemicals and glass substrates)
for producing OptArray slides. Raw material on hand at the end of each reporting
period is priced at cost based on the first-in first-out method. There was no
work-in-process or finished goods inventory at January 31, 2004, as slides
currently are made for specific orders and shipped as produced. A raw materials
inventory was created during the previous quarter as the Company is moving past
the stage of designing and testing pre-production prototypes and offering slides
for evaluation. Sales continued to increase as the Company delivered 1,000
slides under a supply contract which provides for a minimum purchase of 5,000
slides by SCHOTT Nexterion AG.
11
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
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 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, Inc.
On January 18, 2001, Accelr8 purchased the OpTest technology assets from
DDx and commenced investment in development and optimization of OpTest's surface
chemistry (OptiChem) and quantitation instrument (QuanDx). The Company's
proprietary surface chemistry and its quantitation 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 activated surface chemistry for use in academic research, drug
discovery and molecular diagnostics. This surface coating has the 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.
12
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 its 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 slides, the products support both DNA and
protein arraying. The glass and chemical coatings are identical to those used in
OptArray 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.
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 an additional 5,000 slides may
be purchased at $10.50 each. As of January 31, 2004, 1,000 slides have been
delivered under the supply contract. 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 as required.
The letter of intent calls for negotiation of an exclusive technology
transfer license for Accelr8's OptiChem 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
calendar quarter of 2004. SCHOTT will manufacture the coated OptArray slides and
may also negotiate an exclusive global distribution agreement to those products.
13
The two companies will cooperatively market the products. Management anticipates
that there may be three potential sources of revenue in the technology transfer
agreement and exclusive distribution agreement to be entered into with SCHOTT:
(i) a one-time payment of an up front licensing fee (upon signing the
distribution agreement), (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.
Changes in Results of Operations: Six months ended January 31, 2004 compared to
six months ended January 31, 2003.
There were no consulting fees for the six months ended January 31, 2004.
This compares to consulting fees of $20,000 for the six months ended January 31,
2003.
Product license and customer support fees for the six months ended January
31, 2004 were $43,977, a decrease of $71,755 or 62.0% as compared to the six
months ended January 31, 2003, and represented 15.8% of net revenues. As
previously indicated there has been a significant decrease in sales of migration
tools and related consulting fees beginning in the fiscal year ended July 31,
2001. This segment of the Company's business is being operated at a level to
service the needs of existing customers and to support future sales of software
tools. Sales of the migration tools and related consulting fees continued to
decrease during the six month period ended January 31, 2004.
Revenues from the resale of purchased software including purchased support
for the six months ended January 31, 2004 were $178,370, a decrease of $63,755
or 26.3% as compared to the six months ended January 31, 2003, and represented
64.0% of net revenues. This decrease largely resulted because a major repeat
customer delayed a large tool purchase during the six months ended January 31,
2004.
OptiChem revenues for the six months ended January 31, 2004 were $59,252,
an increase of $40,651 or 219% as compared to the six months ended January 31,
2003, and represented 21.3% of net revenues. This increase was due to sales to
two major repeat customers plus new customers that are evaluating the Company's
OptArray slides.
14
Due to the above factors, and after an approximate 1% allowance for returns
and adjustments, net revenues for the six months ended January 31, 2004 were
$278,709, a decrease of $113,794 or 29.0% as compared to the six months ended
January 31, 2003.
During the six months ended January 31, 2004, sales to the Company's three
largest customers were $58,342, $35,150, and $32,650, representing 20.9%, 12.6%,
and 11.7% of the Company's net revenues. During the six months ended January 31,
2003, sales to the Company's three largest customers were $140,781, $67,200, and
$50,725, representing 35.9%, 17.1%, and 12.9% of net revenues. 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 six months ended
January 31, 2004 were $13,964, a decrease of $7,707 or 35.6% as compared to the
six months ended January 31, 2003. This was largely due to decreased customer
support labor and consulting fees.
Cost of software purchased for resale including purchased support for the
six months ended January 31, 2004 was $35,811, a decrease of $2,952 or 7.6% as
compared to the six months ended January 31, 2003. The decrease resulted from
decreased revenue from resale of purchased software including purchased support.
Cost of OptiChem sales for the six months ended January 31, 2004 was
$24,257, an increase of $17,621 or 266% as compared to the six months ended
January 31, 2003. This increase was the result of increased raw material and
labor required to produce a greater number of slides.
General and administrative expenses for the six months ended January 31,
2004 were $529,917, an increase of $147,992 or 38.7% as compared to the six
months ended January 31, 2003. This increase was largely due to increased
deferred compensation of $70,129 resulting from change in market value of
investments held in the deferred compensation trust, consulting fees regarding
intellectual property of $26,510, original listing fee for the American Stock
Exchange of $53,500, and salaries and related payroll costs of $37,268, offset
by a decrease in litigation fees of $45,000 as a result of concluded legal
action in prior periods.
Marketing and sales expenses for the six months ended January 31, 2004 were
$125,058, a decrease of $18,910 or 13.1% as compared to the six months ended
January 31, 2003. This decrease was largely due to a decrease in consultant
stock option expense due to a decreased stock price as compared to July 31, 2003
of $10,838, and decreased expense for trade shows, travel and promotional
material of $16,687, offset by increased salaries of $7,926.
Research and development expenses for the six months ended January 31, 2004
were $280,365, an increase of $58,081 or 26.1% as compared to the six months
ended January 31, 2003. This increase was largely due to two additional
employees whose focus was development of protein microarrays for use in
applications that leveraged the Company's instruments and salary increases, for
a total of $56,725 and travel to assist in marketing of $5,099, offset by a
decrease in consulting fees of $8,059 and consultant stock option expense due to
a decrease in stock price as compared to July 31, 2003 of $10,838.
15
Depreciation for the six months ended January 31, 2004 was $20,082, an
increase of $7,782 or 63.3% compared to the six months ended January 31, 2003.
This increase results from additional laboratory equipment being depreciated.
Amortization for the six months ended January 31, 2004 was $116,256, a
decrease of $3,624 or 3.0% as compared to the six months ended January 31, 2003.
As a result of these factors, loss from operations for the six months ended
January 31, 2004 was $867,001, an increased loss of $312,077 or 56.2% as
compared to loss from operations for the six months ended January 31, 2003.
Interest income for the six months ended January 31, 2004 was $32,276, a
decrease of $29,191 or 47.5% as compared to the six months ended January 31,
2003. This decrease was primarily due to decreased interest rates received for
the amount of money invested.
Unrealized holding gains on marketable securities held in the deferred
compensation trust for the six months ended January 31, 2004 was $37,630, an
increase of $65,169 as compared to the six months ended January 31, 2003. This
gain was the result of changing market value of securities held by the trust.
Realized gain (loss) on marketable securities held in the deferred compensation
trust for the six months ended January 31, 2004 was $1,974, an increase of
$4,567 as compared to the six months ended January 31, 2003. This gain was the
result of selling trust investments plus interest and dividends reinvested. The
total of the change in realized gain (loss) and unrealized gain (loss) in
marketable securities is reflected as increased deferred compensation and
included in general and administrative expenses.
No income tax provision or benefit was recorded during the six months ended
January 31, 2004, as compared to a tax benefit of $19,431 for the six months
ended January 31, 2003. 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 January 31, 2004, a valuation allowance
has been recorded for 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 six months ended January 31,
2004 was $795,121, an increased loss of $290,963 or 57.7% as compared to the six
months ended January 31, 2003.
Changes in Results of Operations: Three months ended January 31, 2004 compared
to three months ended January 31, 2003.
There were no consulting fees for the three months ended January 31, 2004.
This compares to consulting fees of $20,000 for the three months ended January
31, 2003.
16
Product license and customer support fees for the three months ended
January 31, 2004 were $25,350, a decrease of $59,970 or 70.3% as compared to the
three months ended January 31, 2003, and represented 16.6% of net revenues. As
previously indicated there has been a significant decrease in sales of migration
tools and related consulting fees beginning in the fiscal year ended July 31,
2001. This segment of the Company's business is being operated at a level to
service the needs of existing customers and to support future sales of software
tools. Sales of the migration tools and related consulting fees continued to
decrease during the three month period ended January 31, 2004.
Revenues from the resale of purchased software including purchased
maintenance for the three months ended January 31, 2004 were $92,511, an
increase of $7,063 or 8.3% as compared to the three months ended January 31,
2003, and represented 60.6% of net revenues.
OptiChem revenues for the three months ended January 31, 2004 were $36,968,
an increase of $23,741 or 180% as compared to the three months ended January 31,
2003, and represented 24.2% of net revenues. This increase was due to sales to
two repeat customers plus new customers that are evaluating the Company's
OptArray slides.
Due to the above factors, and after an approximate 1% allowance for returns
and allowances, net revenues for the three months ended January 31, 2004 were
$152,739, a decrease of $49,301 or 24.4% as compared to the three months ended
January 31, 2003.
During the three months ended January 31, 2004, sales to the Company's four
largest customers were $58,142, $27,275, $23,099, and $22,350, representing
38.1%, 17.9%, 15.1%, and 14.6% of the Company's net revenues. During the three
months ended January 31, 2003, sales to the Company's two largest customers were
$59,406 and $50,000, representing 29.4% and 24.7% of net revenues. 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
January 31, 2004 was $6,292, a decrease of $5,559 or 46.9% as compared to the
three months ended January 31, 2003. This was largely due to decreased customer
support labor and consulting fees.
Cost of software purchased for resale including purchased maintenance for
the three months ended January 31, 2004 was $24,337, an increase of $16,164 or
198% as compared to the three months ended January 31, 2003. The increase
results from variations in the product mix of items purchased.
Cost of OptiChem sales for the three months ended January 31, 2004 was
$16,163, an increase of $11,465 or 245% as compared to the three months ended
January 31, 2003. This increase was due to increased raw material and labor
required to produce a greater number of slides.
General and administrative expenses for the three months ended January 31,
2004 were $254,676, an increase of $40,088 or 18.7% as compared to the three
months ended January 31, 2003. This increase was largely due to increased
deferred compensation of $46,919, resulting from change in market value of
investments in the deferred compensation trust, consulting fees regarding
intellectual property of $9,010, and salaries and related payroll costs of
$17,066, offset by a decrease in litigation fees of $25,503 as a result of
concluded legal action in prior periods.
17
Marketing and sales expenses for the three months ended January 31, 2004
were $60,082, a decrease of $9,343 or 13.5% as compared to the three months
ended January 31, 2003. This decrease was largely due to a decrease in
consultant stock option expense due to a decreased price of the Company's stock
as compared to July 31, 2003.
Research and development expenses for the three months ended January 31,
2004 were $137,532, an increase of $1,883 or 1.4% as compared to the three
months ended January 31, 2003. This increase was largely due to an increase in
salaries due to two additional employees whose focus was development of protein
microarrays for use in applications that leveraged the Company's instruments of
$19,894, offset by a decrease in consulting fees of $8,059, consultant stock
option expense due to a decreased price of the Company's stock as compared to
July 31, 2003 of $9,713, and laboratory supplies and expense of $6,830.
Depreciation for the three months ended January 31, 2004 was $10,041, an
increase of $3,891 or 63.3% compared to the three months ended January 31, 2003.
This increase results from additional laboratory equipment being depreciated.
Amortization for the three months ended January 31, 2004 was $58,128, a
decrease of $1,812 or 3.0% as compared to the three months ended January 31,
2003.
As a result of these factors, loss from operations for the three months
ended January 31, 2004 was $414,512, an increased loss of $106,078 or 34.4% as
compared to loss from operations for the three months ended January 31, 2003.
Interest income for the three months ended January 31, 2004 was $15,988, a
decrease of $12,046 or 43.0% as compared to the three months ended January 31,
2003. This decrease was primarily due to decreased interest rates received for
the amount of money invested.
Unrealized holding gains on marketable securities held in the deferred
compensation trust for the three months ended January 31, 2004 was $26,401, an
increase of $45,336 as compared to the three months ended January 31, 2003. This
gain was the result of changing market value of securities held by the trust.
There was no realized gain on marketable securities held in the deferred
compensation trust for the three months ended January 31, 2004. The total of the
change in realized gain (loss) and unrealized gain (loss) in marketable
securities is reflected as increased deferred compensation and included in
general and administrative expenses.
No income tax provision or benefit was recorded during the three months
ended January 31, 2004 as compared to a tax benefit of $19,431 for the three
months ended January 31, 2003. 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 January 31, 2004, a valuation
allowance has been recorded for 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.
18
As a result of these factors, net loss for the three months ended January
31, 2004 was $372,123, an increased loss of $91,069 or 32.4% as compared to the
three months ended January 31, 2003.
Capital Resources and Liquidity
At January 31, 2004, as compared to July 31, 2003, the Company's current
assets decreased 8.2% from $8,773,073 to $8,051,871, the Company's liquidity, as
measured by cash and cash equivalents, decreased by 10.4% from $8,711,951 to
$7,803,285, and the Company's working capital decreased by 8.5% from $8,406,243
to $7,689,078. During the same period, shareholders' equity decreased 6.3% from
$12,729,144 to $11,931,607, largely as a result of a net loss of $795,121.
Cash and cash equivalents for the six months ended January 31, 2004
decreased by $908,666. This decrease was largely the result of a net loss of
$795,121, an increase in accounts receivable of $109,235, and an increase in
inventory of $68,555, offset by amortization of $116,256.
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 January 31, 2004. 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
January 31, 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
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
-----------------------------------------------------------
The Annual Meeting of the Company's Shareholders was held on December 16,
2003. The matters considered at the meeting were:
a) The election of Thomas V. Geimer, A. Alexander Arnold III, and Charles E.
Gerretson to the Company's Board of Directors.
b) Ratification of the Selection of Anton Collins Mitchell LLP as the
Company's independent public accountants for the fiscal year ending July
31, 2004.
Each of the nominees was elected to the Board of Directors, and Anton
Collins Mitchell LLP were ratified as the Company's independent public
accountants. The votes cast at the annual meeting upon the matters considered
were as follows:
For Withhold
--- --------
Election of Directors
Thomas V. Geimer 7,640,368 94,755
A. Alexander Arnold III 7,721,968 13,155
Charles E. Gerretson 7,721,968 13,155
For Against Withhold
--- ------- --------
Ratification
Anton Collins Mitchell LLP 7,711,078 17,545 6,500
Item 5. Other Information
-------------------------
On March 16, 2004, the Company issued a press release disclosing its second
quarter 2004 results. A copy of the press release is attached to this quarterly
report as Exhibit 99.1.
20
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
a) Exhibits:
1. Exhibit 31.1 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
2. Exhibit 31.2 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
3. Exhibit 32.1 Certification of Officer Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
4. Exhibit 99.1 Press Release issued March 16, 2004.
b) Reports on Form 8-K:
None.
21
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.
Dated: March 16, 2004 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
22