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, 2002
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________________ to ____________________
Commission file number 0-11485
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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
incorporation or organization) Identification No.)
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)
(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
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Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at October 31, 2002
----- -------------------------------
Common Stock, no par value 9,411,210
Accelr8 Technology Corporation
INDEX
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Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - as of
October 31, 2002 (unaudited) and July 31, 2002 3
Statements of Operations
for the three months ended October 31, 2002
and 2001 (unaudited) 4
Statements of Cash Flows
for the three months ended October 31, 2002
and 2001 (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 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
See note 6 to unaudited financial statements.
Item 2. Changes in Securities and Use of Proceeds 16
Not applicable.
Item 3. Defaults of Senior Securities 16
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Not applicable.
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Accelr8 Technology Corporation
Balance Sheets
October 31, July 31,
ASSETS 2002 2002
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 8,641,482 $ 8,631,192
Accounts receivable, net 48,712 24,767
Prepaid expenses and other current assets 40,615 61,665
Insurance recovery receivable (Note 6) 825,000 825,000
Income tax receivable and deferred tax asset 145,523 336,500
------------ ------------
Total current assets 9,701,332 9,879,124
Property and equipment, less accumulated depreciation of
$55,485 and $49,335, respectively 70,470 76,620
Investments 511,731 445,286
Intellectual property, less accumulated
amortization of $218,741 and $158,801, respectively (Note 4) 4,573,288 4,622,904
------------ ------------
Total assets $ 14,856,821 $ 15,023,934
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 128,511 $ 87,599
Accrued liabilities 24,977 29,489
Accrued settlement loss (Note 6) 450,000 450,000
Deferred maintenance revenue 154,225 164,879
Other deferred revenue 20,000 2,200
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Total current liabilities 777,713 734,167
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Long-Term Liabilities:
Deferred tax liabilities 24,833 24,833
Deferred compensation 530,481 520,286
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Total long-term liabilities 555,314 545,119
Total liabilities 1,333,027 1,279,286
------------ ------------
Shareholders' Equity
Common stock, no par value; 11,000,000 shares authorized;
9,411,210 shares issued and outstanding 12,342,020 12,342,020
Stock to be issued (Note 6) 375,000 375,000
Contributed capital 332,059 329,809
Retained earnings 748,315 971,419
Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600)
------------ ------------
Total shareholders' equity 13,523,794 13,744,648
------------ ------------
Total liabilities and shareholders' equity $ 14,856,821 $ 15,023,934
============ ============
See accompanying notes to unaudited financial statements.
-3-
Accelr8 Technology Corporation
Statements of Operations
(Unaudited)
Three Months Ended
October 31, October 31,
2002 2001
----------- -----------
Revenues:
Product license and customer support fees $ 30,412 $ 29,758
Resale of purchased software and customer support fees 154,677 62,274
Other Revenue 5,374 --
----------- -----------
Net revenues 190,463 92,032
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Costs and Expenses:
Cost of services 9,819 51,684
Cost of software purchased for resale 30,590 9,658
General and administrative 167,338 162,372
Marketing and sales 74,542 53,293
Research and development 88,573 69,608
Amortization 59,940 6,345
Depreciation 6,150 5,325
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Total costs and expenses 436,952 358,285
----------- -----------
Loss from operations (246,489) (266,253)
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Other income (expense):
Interest income 33,433 75,015
Unrealized holding loss on investments (8,605) (55,701)
Realized loss on sale of investments (1,443) (3,034)
Gain on disposal of fixed assets -- 8,419
Abandoned trademark -- (3,929)
----------- -----------
Total other income 23,385 20,770
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Net loss $ (223,104) $ (245,483)
=========== ===========
Basic and diluted net loss per share $ (.02) $ (.03)
=========== ===========
Weighted average shares outstanding - basic and diluted 9,411,210 7,630,360
=========== ===========
See accompanying notes to unaudited financial statements
-4-
Accelr8 Technology Corporation
Statements Of Cash Flows
(Unaudited)
Three Months Ended
-------------------
October 31, October 31,
2002 2001
--------------------------
Cash flows from operating activities:
Net loss $ (223,104) $ (245,483)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization 59,940 6,345
Depreciation 6,150 5,325
Issuance of stock options for consulting services 2,250 --
Unrealized holding loss on investments 8,605 55,701
Realized (gain) loss on sale of investments, interest
and dividends reinvested (50) 328
Gain from disposal of assets -- (8,419)
Loss on abandoned trademarks -- 3,929
Net change in assets and liabilities:
Accounts receivable (23,945) 40,078
Prepaid expenses and other 21,050 19,366
Income tax receivable and deferred tax asset 190,977 --
Accounts payable 40,912 617
Accrued liabilities (4,512) (194,305)
Deferred maintenance revenue (10,654) 13,223
Other deferred revenue 17,800 (825)
Other long-term liabilities 10,195 (37,279)
----------- -----------
Net cash provided by (used in) operating activities 95,614 (341,399)
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Cash flows from investing activities:
Disposal of assets, net of depreciation -- 1,160
Proceeds from disposal of assets -- 8,419
Purchase of intellectual property (10,324) (7,197)
Purchase of investments (75,000) (75,000)
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Net cash used in investing activities (85,324) (72,618)
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Cash flows from financing activities:
Repurchase of common stock -- (15,805)
Employee stock options exercised -- 1,800
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Net cash used in financing activities -- (14,005)
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Net increase (decrease) in cash and cash equivalents 10,290 (428,022)
Cash and cash equivalents, beginning of period 8,631,192 9,522,343
----------- -----------
Cash and cash equivalents, end of period $ 8,641,482 $ 9,094,321
=========== ===========
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
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 the Company's annual audited financial statements dated July
31, 2002, included in the Company's annual report on Form 10-KSB as filed with
the SEC.
The management of the Company 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 months ended October 31, 2002 may not be
indicative of the results of operations for the year ended July 31, 2003.
Note 2. Reclassification
Certain reclassifications have been made in the 2001 financial
statements to conform to the classifications used in 2002.
Note 3. Shareholders' Equity
Repurchase of Common Stock
On July 30, 1998 the Board of Directors authorized the repurchase of up
to 500,000 shares of the Company's common stock. The Repurchase of the Company's
common stock was based upon the Board of Directors' belief that the Company's
common stock was undervalued considering the Company's potential earnings and
prospects for future operations. Repurchases may be made periodically in the
open market, block purchases or in privately negotiated transactions, depending
on market conditions and other factors. The Company has no commitment or
obligation to repurchase all or any portion of the shares.
Between August 1, 2002 and October 31, 2002 the Company did not
repurchase any shares of its common stock. During the three month period ended
October 31, 2001, the Company repurchased a total of 6,500 shares of its common
stock at a cost of $15,805.
-6-
Common Stock Options
At October 31, 2002, there were 840,000 option shares outstanding at
prices ranging from $.36 to $4.00 with expiration dates between July 31, 2003
and August 2, 2011. Included in the 840,000 options are 100,000 options that do
not expire as long as the recipient remains an employee of the Company. The
remaining number of option shares available for issuance under the Company's
stock option plans are 257,500.
Five thousand stock option shares, at a price of $.36 and totaling
$1,800 were exercised during the three months ended October 31, 2001.
On May 7, 2002, the Company issued options to purchase 100,000 shares
of its common stock to consultants for services to be provided at an exercise
price of $2.25 per share, expiring four years from date of issuance. The
consultant options vest 50% after one year and 50% after two years. The
incremental increase in the fair value of the options of $2,250 during the three
months ended October 31, 2002 was recorded as a charge to operations.
Stock to be Issued
See Note 6 to unaudited financial statements for discussion.
Note 4. Intellectual Property
Intellectual property consisted of the following:
October 31, July 31,
2002 2002
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OpTest Technologies $4,614,872 $4,614,872
Patents 135,379 128,434
Trademarks 41,778 38,399
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4,792,029 4,781,705
Accumulated amortization (218,741) (158,801)
---------- ----------
$4,573,288 $4,622,904
========== ==========
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 patents and trademarks application life of the OpTest
Technologies.
Effective August 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
In accordance with SFAS No. 142, the Company completed an impairment test of its
intangible assets and determined that no impairment existed as of August 1, 2001
or July 31, 2002. Intangible assets will be tested annually and whenever events
and circumstances occur indicating that the assets may be impaired.
-7-
Upon the adoption of SFAS No. 142, the Company evaluated the estimated
useful lives of the existing intangible assets and determined that the existing
useful lives were appropriate.
Future amortization expense for the intangible assets is estimated as follows:
Years Ending July 31,
---------------------
2003 (9 months) $ 179,450
2004 239,390
2005 239,390
2006 239,390
2007 239,390
Thereafter 3,436,278
---------
$ 4,573,288
===========
Note 5. Business Segment Information
The Company operates in two business segments: software tools and
related consulting services and the general area of biosciences, which includes
DNA/RNA assays, protein-based assays and biosensors. Operating results and other
financial data for the three months ended October 31, 2002 and 2001 are
presented for the principal business segments as follows:
--------------------------------------- -------------------- -------------- ---------------
Three Months Ended Software Tools and Biosciences
October 31, 2002 Consulting 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 gain (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
--------------------------------------- -------------------- -------------- ---------------
--------------------------------------- -------------------- -------------- ---------------
Three Months Ended Software Tools and Biosciences Total
October 31, 2001 Consulting Business
--------------------------------------- -------------------- -------------- ---------------
--------------------------------------- -------------------- -------------- ---------------
Revenues $ 92,032 $ -- $ 92,032
--------------------------------------- -------------------- -------------- ---------------
Costs and expenses 235,827 122,458 358,285
--------------------------------------- -------------------- -------------- ---------------
Interest income 75,015 -- 75,015
--------------------------------------- -------------------- -------------- ---------------
Segment loss (119,096) (126,387) (245,483)
--------------------------------------- -------------------- -------------- ---------------
--------------------------------------- -------------------- -------------- ---------------
Total assets 9,713,285 540,402 10,253,687
--------------------------------------- -------------------- -------------- ---------------
Intellectual property, net -- 482,117 482,117
--------------------------------------- -------------------- -------------- ---------------
Depreciation and amortization expense 1,890 9,780 11,670
--------------------------------------- -------------------- -------------- ---------------
-8-
Note 6. Legal Proceedings
The Company is a party to certain legal proceedings, the outcome of
which management believes will not have a significant impact upon the financial
position of the Company. The Company is not able to predict the outcome of the
pending legal matters described below with any degree of certainty, and there
can be no assurance that the resolution of one or more of the cases described
below may not have a material adverse effect on the Company.
Concluded legal matters
On November 16, 1999, the United States Securities and Exchange
Commission ("SEC") filed suit in the United States District Court for the
District of Colorado against Accelr8 Technology Corporation, Thomas V. Geimer,
Harry J. Fleury, and James Godkin, captioned Securities and Exchange Commission
v. Accelr8 Technology Corporation, et al., and Civil Action No. 99-D-2203. The
SEC sought an injunction permanently restraining and enjoining each defendant
from violating Section 10(b) of the Securities Exchange Act of 1934, and Rule
10b-5 promulgated thereunder; Section 13(a) of the Securities Exchange Act of
1934, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder, and, in
addition, that Mr. Geimer and Mr. Godkin be enjoined from future violations of
Section 13(b)(2) of the Securities Exchange Act of 1934, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder related to securities fraud, Section 13
of the Exchange Act and the rules thereunder relate to reporting and record
keeping. The SEC alleged that the Defendants made material misrepresentations of
fact regarding the capability of certain of the Company's products, and the
Company's financial condition, including its revenues and earnings. The SEC also
alleged that Mr. Geimer and Mr. Godkin failed to implement, or circumvented, a
system of internal accounting controls, falsified books and records, and made
misrepresentations to the Company's accountants. On July 12, 2001, the
Defendants, without admitting or denying the allegations of the Third Amended
Complaint filed by the SEC, consented to the entry of Final Orders in which the
court dismissed the securities fraud claims against all Defendants with
prejudice, made no findings that any violation of law occurred, and enjoined the
Defendants from future violations of Section 13 of the Exchange Act, and the
regulations thereunder referred to above. In addition, Mr. Geimer paid a civil
penalty of $65,000, Mr. Fleury paid a civil penalty of $20,000, and Mr. Godkin
paid a civil penalty of $20,000. All costs, expenses, civil penalties, and
liabilities incurred by the Defendants in defending and settling this matter
were borne by the Company. No further action is anticipated in this matter.
On May 24, 2000, William Dews, an alleged shareholder of Accelr8, filed
a derivative action on behalf of the Company, against Thomas Geimer, A.
Alexander Arnold III and David Wilhelm, captioned John William Dews v. Thomas V.
Geimer, et al., Civil Action No. 00-CV-2785 (District Court, City and County of
Denver, Colorado). That action alleged various breaches of fiduciary duty
arising out of Accelr8's accounting and public reporting during 1997 through
1999. On January 4, 2002, the Court approved a settlement between the parties
pursuant to which the complaint was dismissed without prejudice, with no
payments to be made by or on behalf of the defendants.
-9-
On July 14, 2000, the Agricultural Excess and Surplus Insurance Company
("AESIC"), which is the carrier of Accelr8's director and officer liability
policy, filed in the United States District Court for the District of Colorado
an action for a declaratory judgment seeking to rescind Accelr8's directors and
officers liability policy, captioned Agricultural Excess and Surplus Insurance
Company v. Accelr8 Technology Corporation, Civil Action No. 00-B-1417. That
policy has a $1 million limit with a $100,000 deductible. The Company and
certain individuals made demand for coverage under that policy relating to third
party claims involving the Company's accounting and public reporting from 1997
to 1999. AESIC alleged that it was fraudulently induced to enter into the
contract of insurance through knowing material misrepresentations made by the
Company in its Form 10-KSB filed with the SEC, concerning the capabilities of
certain of the Company's products. The defendants answered the Complaint, in
which they denied the claim for rescission, and filed a counterclaim seeking
damages for the insurer's refusal to provide the benefits of insurance.
Subsequent to July 31, 2002, the parties settled this lawsuit and AESIC
paid $825,000 to the Company on November 5, 2002 in full satisfaction of all
claims.
Pending legal matters
On May 4, 2000, Harley Meyer filed in the United States District Court
for the District of Colorado a putative class action against Accelr8 Technology
Corporation, Thomas V. Geimer and Harry J. Fleury. On June 2, 2000, Charles
Germer filed in the United States District Court for the District of Colorado a
putative class action against Accelr8 Technology Corporation, Thomas V. Geimer
and Harry J. Fleury. On June 8, 2000, William Blais filed in the United States
District Court for the District of Colorado a putative class action against
Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June
20, 2000, Diana Wright filed in the United States District Court for the
District of Colorado a putative class action against Accelr8 Technology
Corporation, Thomas V. Geimer and Harry J. Fleury. On August 14, 2000, Derrick
Hongerholt filed in the United States District Court for the District of
Colorado a shareholder derivative action against Thomas V. Geimer, David C.
Wilhelm, A. Alexander Arnold III, Harry J. Fleury, James Godkin and Accelr8
Technology Corporation as a nominal defendant. These actions have been
consolidated under the caption In re Accelr8 Technology Corporation Securities
Litigation, Civil Action No. 00-K-938. On October 16, 2000, a Consolidated
Amended Class Action Complaint was filed which added James Godkin as a
defendant. The Consolidated Amended Complaint alleges violations of Section
10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder,
relating to the Company's accounting and public disclosure from October 1997 to
November 1999. The Defendants have answered the Amended Complaint, in which they
denied liability and raised affirmative defenses. On January 23, 2001, the Court
granted the Plaintiff's Motion for Class Certification. The defendants have
answered the Hongerholt derivative complaint, and have denied all claims.
In connection with this proceeding, Accelr8's Board of Directors
appointed David G. Palmer, Esquire, as independent counsel to serve as a Special
Litigation Committee to investigate the claims and circumstances relating to the
derivative action filed by Derrick Hongerholt and to determine whether the
derivative action should be terminated. On September 10, 2002, the Special
Litigation Counsel determined, after investigation, that the derivative claims
were without factual merit, and should be dismissed.
-10-
On October 30, 2002, the parties agreed to a settlement of the
derivative action, under which that action would be dismissed with prejudice
upon an exchange of releases, with no payments made by or on behalf of any of
the Defendants. The settlement is subject to Court approval, and while the
Company believes that approval is probable, there can be no assurance that the
settlement will be approved. A hearing on the approval of the settlement has
been set for December 19, 2002. In the event that the settlement is not
approved, and the litigation proceeds, the Company is bearing the costs of
defense in accordance with indemnification agreements for all Defendants, which
costs may be material to the Company. No claims are asserted against the Company
in the derivative action.
On October 30, 2002, the parties to the Consolidated Amended Class
Action Complaint ("Class Action") executed a Memorandum of Understanding setting
out an agreement in principle to settle the Class Action against all parties.
Under the contemplated settlement, the Company will contribute to a settlement
fund $450,000, and 375,000 shares of common stock in the Company. The settlement
fund will be distributed in a manner over which the Company has no control. This
agreement in principle is subject to formal documentation and Court approval.
Although the Company believes that it is probable that the parties will complete
formal documentation of the settlement agreement, and that the settlement will
be approved, there can be no assurance that completion of the settlement, and
Court approval will occur. In the event that the settlement is not completed,
the litigation will continue. While the Company believes it has substantial
defenses to the Class Action claims, there is no assurance that the resolution
of the Class Action will not have a material adverse effect on the Company.
SFAS No. 5, "Accounting for Contingencies," requires loss contingencies
to be accrued if it is probable an asset has been impaired or a liability
incurred at the balance sheet date and the amount of loss can be reasonably
estimated. Since the settlement terms discussed above satisfy the criteria for
accrual of a loss contingency under SFAS No. 5, the $450,000 cash settlement has
been accrued as a current liability and the value of the 375,000 shares of stock
to be issued have been recorded in the statement of shareholders' equity as of
October 31, 2002 and July 31, 2002. The stock to be issued was valued using the
market price of the Company's common stock on the date the parties agreed to the
terms of the settlement. If the final settlement terms are amended from those
stated above, adjustments to the Company's financial statements would be
necessary in the year ended July 31, 2003. Furthermore, the $825,000 settlement
receivable from AESIC was recorded as a current receivable in the Company's
financial statements as of October 31, 2002 and July 31, 2002. Payment was
received on November 5, 2002
Note 7. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable estimate of
-11-
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company adopted this
statement on August 1, 2002 and it had no material impact on its financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value,
less cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. The Company adopted this statement August 1, 2002 and it had no
material impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the current requirement that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
with the current GAAP criteria for extraordinary classification. In addition,
SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The Company adopted this standard August 1, 2002 and it
had no effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. The
Company will adopt the provisions of SFAS No. 146 for restructuring activities
initiated after December 31, 2002. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized. Adoption of this
standard will not have any effect on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Result
--------------------------------------------------------------------------------
of Operations
-------------
Information contained in the following discussion of results of
operations and financial condition of the Company contains 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 that 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
-12-
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, could affect the Company's actual results and cause actual results
to differ materially from those discussed in forward-looking statements.
Overview
Accelr8 Technology Corporation ("Accelr8" or the "Company") has been a
provider of software tools and consulting services for the modernization of
solutions for VMS legacy systems that were developed by Digital Equipment
Corporation ("DEC") and which are proprietary to Compaq Computer Corporation
("COMPAQ") as a result of its purchase of DEC. The Company's consulting services
and software conversion tools enable the Company's customers to analyze and
implement conversions to UNIX, Linux and NT operating systems in a predictable
and cost-effective manner. The Company's clients include a number of Fortune
1000 companies and government agencies.
Based upon the significant decline in sales of its software tools and
related consulting services, the Company has taken steps to limit the costs
associated with the conduct of this business. These steps included the reduction
of the number of personnel whose efforts are directed towards this business, not
renewing the contracts of several members of management whose primary activities
related to this business and reducing the amount of space occupied by the
Company. Management 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, management believes that it
may be able to subcontract for the performance of the necessary services from
third parties or former employees. The Company is also investigating the
possibility of selling these business operations to another party although no
arrangements or understandings currently exist with respect to the sale of these
assets. Management believes that the merger of Hewlett-Packard Company ("HP")
and COMPAQ provides an opportunity for the Company to provide a practical
strategy for the Digital VMS installed base of customers to adapt their computer
software programs to the next generation of HP hardware solutions.
On January 18, 2001 the Company purchased the OpTest technology assets
("OpTest") from DDx, Inc. ("DDx") and commenced investment in rapid delivery of
testing and optimization of OpTest's surface chemistry and quantitative
instruments. The Company's goal is to compete in the general area of
biosciences, including DNA/RNA assays, protein-based assays and biosensors. The
Company's proprietary surface chemistry and its quantitative instruments (QuanDx
(TM) and Oter(TM)) support real-time assessment of medical diagnostics,
food-borne pathogens, water-borne pathogens and bio-warfare assessments. The
Company has received minimal revenues to date from these products and there is
no assurance that the Company will be successful in marketing the new products.
-13-
Results of Operations: October 31, 2002 compared to October 31, 2001
Revenues for the quarter ended October 31, 2002 were $190,463, an
increase of $98,431 or 107% as compared to the quarter ended October 31, 2001.
Product license and customer support fees for the quarter ended October
31, 2002, were $30,412, an increase of $654 or 2.2% as compared to the quarter
ended October 31, 2001, and represented 16.0% of revenues. Based on the
increased number of inquiries that we have received from the Compaq installed
base of DEC (VMS) users, we believe that demand for our migration tools and
services may increase going into the first half of calendar 2003. This will be
influenced by Hewlett Packard's announcement of new operating systems and
hardware solutions to be supported in the future.
Revenues from the resale of purchased software and customer support
for the quarter ended October 31, 2002 were $154,677, an increase of $92,403 or
148% as compared to the quarter ended October 31, 2001, and represented 81.2% of
revenues. This increase largely resulted from $81,375 in sales to a single
customer as compared to no sales to that customer in the comparable quarter
ended October 31, 2001.
Other revenues for the quarter ended October 31, 2002 were $5,374, as
compared to zero revenues for the quarter ended October 31, 2001, and
represented 2.8% of revenues. Other revenue represents sales of slides being
sold to companies that are evaluating the OpTest technologies.
During the quarter ended October 31, 2002, sales to the Company's two
largest customers were $81,375 and $50,625, representing 42.7% and 26.6% of the
Company's revenues, respectively. In comparison, sales to the Company's two
largest customers were $55,744 and $20,372, representing 60.6% and 22.1% of the
Company's revenues, respectively, for the quarter ended October 31, 2001. The
loss of a major customer could have a significant impact on the Company's
financial performance in any given period.
Cost of services for the quarter ended October 31, 2002, was $9,819, a
decrease of $41,865 or 81.0% as compared to the quarter ended October 31, 2001.
This decrease resulted from fewer engineering salaries and other related
personnel costs.
Cost of software purchased for resale for the quarter ended October 31,
2002, was $30,590, an increase of $20,932 or 217% as compared to the quarter
ended October 31, 2001. Software purchased for resale includes cost of
maintenance purchased to support previously sold software. The increase in
software purchased for resale results from increased revenues from resale of
purchased software and customer support and variations in product mix of items
sold.
General and administrative expenses for the quarter ended October 31,
2002, were $167,338, an increase of $4,966 or 3.1% as compared to the quarter
ended October 31, 2001, primarily due to decreased salaries of $6,400,
consulting fees of $15,000, legal fees of $12,700 and employee related costs of
$7,900 offset by increased deferred compensation of $47,500 due to change in
market values of securities held in the deferred compensation trust.
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Marketing and sales expenses for the quarter ended October 31, 2002,
were $74,542, an increase of $21,249 or 39.9% as compared to the quarter ended
October 31, 2001. This increase was due to increased consulting fees of $9,600,
costs of promotional materials of $6,700, and costs of participating in trade
shows, including cost of attending of $12,100.
Research and development expenses for the quarter ended October 31,
2002 were $88,573, an increase of $18,965 or 27.3% as compared to the quarter
ended October 31, 2001. This increase was largely due to increased salaries of
$9,700 and laboratory expense and supplies of $12,000 for the continued
development of the OpTest technologies purchased January 18, 2001.
Amortization for the quarter ended October 31, 2002 was $59,940, an
increase of $53,595 or 845% as compared to the quarter ended October 31, 2001.
During the second and third quarters of the year ended July 31, 2002, the gross
asset basis of intellectual properties increased significantly due to the
purchase of the OpTestTM technologies (see discussion in the Company's Form
10-KSB for the year ended July 31, 2002). The increase in amortization expense
results from the amortization of the OpTestTM technologies.
Depreciation for the quarter ended October 31, 2002 was $6,150, an
increase of $825 or 15.5% compared to the quarter ended October 31, 2001.
As a result of these factors, loss from operations for the quarter
ended October 31, 2002 was $246,489, a decreased loss of $19,764 or 7.4% as
compared to the quarter ended October 31, 2001.
Interest income for the quarter ended October 31, 2002 was $33,433, a
decrease of $41,582 or 55.4% as compared to the quarter ended October 31, 2001.
This decrease was mainly due to an average interest rate decrease during the
current quarter of about 1.6% and approximately $725,000 less cash earning
interest.
Realized loss on marketable securities held in the deferred
compensation trust for the quarter ended October 31, 2002 was $1,443, as
compared to a realized loss of $3,034 during the quarter ended October 31, 2001.
This loss was the result of selling marketable securities held in the deferred
compensation trust. Unrealized loss on marketable securities held in the
deferred compensation trust for the quarter ended October 31, 2002 was $8,605 a
decrease of $47,096 as compared to the quarter ended October 31, 2001. This
decreased loss was the result of changing market value of securities held in the
trust.
There was no gain or loss on asset disposal for the quarter ended
October 31, 2002 as compared to a gain on asset disposal of $8,419 for the
quarter ended October 31, 2001.
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There was no loss on abandoned trademarks for the quarter ended October
31, 2002 as compared to a loss of $3,929 for the quarter ended October 31, 2001.
As a result of these factors net loss for the quarter ended October 31,
2002 was $223,104 a decrease of $22,379 or 9.1% as compared to the quarter ended
October 31, 2001.
As of October 31, 2002, a valuation allowance of $196,150 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 assets will be
realized, no tax benefit was recorded for the quarters ended October 31, 2002 or
October 31, 2001.
Capital Resources and Liquidity
At October 31, 2002, as compared to July 31, 2002, the Company's
current assets decreased 1.8% from $9,879,124 to $9,701,332 and the Company's
liquidity as measured by available cash, increased 0.1% from $8,631,192 to
$8,641,482. Working Capital at October 31, 2002, was $8,923,619 compared to
working capital of $9,144,957 at July 31, 2002. During the same period,
shareholders' equity decreased 1.6% from $13,744,648 to $13,523,794 largely as a
result of the Company's net loss for the quarter ended October 31, 2002.
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.
Contractual Obligations
The following tables set forth information with respect to our
contractual obligations and commercial commitments as of October 31, 2002.
---------------------- ---------- -------------- -------------------------------
Payments due by Period
---------------------- ---------- ------------- --------------------------------
Total 1 to 3 years 4 to 5 years More than 5 years
---------------------- ---------- ------------- -------------- -----------------
Laboratory Lease
Payments(1) $121,208 $121,208 0 0
---------------------- ---------- ------------- -------------- -----------------
Thomas V. Geimer
Employment Contract(2) $189,583 $189,583 0 0
---------------------- ---------- ------------- -------------- -----------------
(1) We have a three year lease agreement that began on October 1, 2002 for our
laboratory located at 7000 Broadway, Denver Colorado 80221.
(2) Calculated as of October 31, 2002. Mr. Geimer's employment agreement
expires on November 30, 2003.
Item 3. Controls and Procedures
--------------------------------
Within the 90-day period prior to the date of this report our Chief
Executive Officer who is also the Company's Chief Financial Officer evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer/Chief
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Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in this quarter report on Form 10-QSB. There have been no significant
changes in our internal controls or in other factors which could significantly
affect internal controls subsequent to the date that the Chief Executive
Officer/Chief Financial Officer carried out the evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
See Note 6 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
12, 2002. The matters considered at the meeting were:
a) The election of Thomas V. Geimer, David C. Wilhelm and A.
Alexander Arnold III to the Company's Board of Directors.
b) To approve certain amendments to the Company's 1996
Non-Qualified Stock Option Plan.
c) To approve certain amendments to the Company's 1996 Incentive
Stock Option Plan.
d) Ratification of the Election of Anton Collins Mitchell LLP as
the Company's independent public accountants for the fiscal
year ending July 31, 2003.
Each of the nominees were elected to the Board of Directors; certain
amendments to the 1996 Non-Qualified Stock Option Plan and the 1996 Incentive
Stock Option Plan were approved; 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:
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For Against Abstain
--- ------- -------
Election of Directors
Thomas V. Geimer 7,786,645 27,120 400
David C. Wilhelm 7,783,845 29,629 700
A. Alexander Arnold III 7,776,844 36,621 700
Approval
Amendments to 1996 Non-
Qualified Stock Option Plan 7,514,123 288,862 11,180
Amendments to 1996 Incentive
Stock Option Plan 7,509,23 298,022 7,020
Ratification
Anton Collins Mitchell LLP 7,759,365 51,041 3,759
Item 5. Other Information
--------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a) Exhibits:
1. Exhibit 99.01 Certification of Officers pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
2. Exhibit 99.02 Certification of Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
3. Exhibit 99.03 Certification of Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K: On August 29, 2002 the Company filed a Form 8-K,
reporting under Item 4, changes in the Company's certifying
accountants.
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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 13, 2002 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
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