FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: July 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to ________________
Commission file number 0-11485
ACCELR8 TECHNOLOGY CORPORATION
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(Name of small business issuer in its charter)
Colorado 84-1072256
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
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(Address of principal executive offices)
Issuer's telephone number: (303) 863-8088
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
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Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended July 31, 2003 were $850,570.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of October 15, 2003 was approximately $ 32,592,637 based upon the
last reported sale on that date.
For purposes of this disclosure, Common Stock held by persons who hold more than
5% of the outstanding voting shares and Common Stock held by officers and
directors of the Registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933, as amended. This
determination is not necessarily conclusive.
The number of shares of the Registrant's Common Stock outstanding as of July 31,
2003, was 9,586,210.
Documents incorporated by reference None
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business ....................................1
Glossary - Chemistry ......................................20
Item 2. Description of Property ...................................24
Item 3. Legal Proceedings .........................................24
Item 4. Submission of Matters to a Vote of Security Holders........25
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...26
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................27
Item 7. Financial Statements ......................................38
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure......................38
Item 8A. Controls and Procedures ...................................39
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act.............................................39
Item 10. Executive Compensation ....................................44
Item 11. Security Ownership of Certain Beneficial Owners and
Management ..............................................48
Item 12. Certain Relationships and Related Transactions.............49
Item 13. Exhibits and Reports on Form 8-K...........................49
Item 14. Principal Accountant Fees and Services.....................50
SIGNATURES ..................................................................51
Financial Statements .......................................................F-1
Notes to Financial Statements ..............................................F-7
Accelr8 Technology Corporation ii Fiscal Year Ended July 31, 2003
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains forward-looking statements.
These forward-looking statements could involve known and unknown risks,
uncertainties, and other factors that might materially alter the actual results
suggested by the statements. In other words, our performance might be quite
different from what the forward-looking statements imply. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below under "Factors That May Affect Future Results," as well as those
discussed elsewhere in this Form 10-KSB.
You should rely only on the forward-looking statements that reflect
management's view only as of the date of this Report. We undertake no obligation
to publicly revise these forward-looking statements to reflect subsequent events
or circumstances. You should also carefully review the risk factors described in
other documents we file from time to time with the Securities and Exchange
Commission (the "SEC").
Certain capitalized terms used in this Form 10-KSB are defined in the
Glossary beginning on page 20.
PART I
Item 1 - Description of Business
--------------------------------
History And Development Of The Company
We were incorporated on May 26, 1982, under the laws of the State of
Colorado. Our executive offices are located at 303 East 17th Avenue, Suite 108,
Denver, Colorado 80203, and our telephone number is (303) 863-8088. Prior to the
acquisition of the OpTestTM suite of technologies ("OpTest") which occurred in
January of 2001, Accelr8 Technology Corporation ("Accelr8" or the "Company") was
primarily a provider of software tools and consulting services. Since the
acquisition of the OpTest, we have focused primarily upon research and
development relating to the technologies acquired, and the development of
revenue producing products related to that technology.
On January 18, 2001, we acquired OpTest from DDx, Inc. ("DDx"). The
purchase of the assets of DDx provided us with the surface chemistry and
quantitative instruments. Our vision is to compete in the general area of
biosciences, including DNA/RNA assays, protein-based assays and biosensors. We
expect that our proprietary surface chemistry and quantitative instruments
support real-time analysis of medical diagnostic markers, pathogens and
bio-warfare agents.
Before our entry into the surface chemistry and quantitative instruments
industries, we provided software tools and consulting services for system
modernization solutions for VMS legacy systems. We are not currently developing
any additional software tools to complement our existing tools. Further, we have
taken steps to limit the costs associated with the conduct of our software tools
and consulting services business. We intend to operate this segment of our
business at a level that is sufficient to service the needs of existing
customers and to support future sales of software tools. We do not expect to
Accelr8 Technology Corporation 1 Fiscal Year Ended July 31, 2003
continue our consulting activities, although if such opportunities arise, we
believe that we may be able to subcontract for the performance of the necessary
services from third parties or former employees. We are also investigating the
possibility of selling these business operations to another party, although we
have no arrangements or understandings with respect to the sale of these assets.
However, we continue to resell software from CIM Team GmbH, Inc. and a/Soft
Development, Inc. The resale of software provided approximately $604,323 in
revenues during the fiscal year ended July 31, 2003.
During the fiscal year ended July 31, 2003, our primary focus was on the
development of our OptiChemTM surface chemistry ("OptiChem") and QuanDxTM light
scattering quantitative assay instrumentation ("QuanDx"). We have introduced
OptArray(TM) microarraying slides ("OptArray") and OptiPlate(TM) arrayable
microtiter plates ("OptiPlate") to the market. We also acquired new technology
and improvements related to the QuanDx detection platform. We intend to
customize our technologies to the specific requirements of large licensees, with
the potential of bundling product licensing with an option to purchase equity in
the stock of Accelr8. Management believes that substrate sales will grow
markedly in the next fiscal year; however, there can be no assurance that the
sales will occur or that the anticipated revenues will be generated. OptiChem
revenues were $52,794 during the fiscal year ended July 31, 2003.
The Microarray Market Opportunity
Shortly after acquiring the OpTest assets, we decided to use the technology
to develop new products for the microarray market. Microarrays typically consist
of a microscopic grid of thousands of spots of a test chemistry on a glass
slide. Each spot is made of a different variation of a test probe molecule, such
as a unique short length of synthetic DNA that has a particular gene sequence.
The researcher exposes a sample, such as extracts from a cell culture or serum,
to the microarray. After incubation, washing and labeling, a computerized
scanner measures the amount of dye or label on each spot. The researcher can
then compare the array pattern between two different samples, such as a tumor
biopsy against normal tissue.
Microarrays are important because they allow the researcher to determine
which genes or biochemical pathways become more or less active during a disease
or after exposure to a potential new drug. They allow the scientist to conduct
thousands of analytical experiments at one time. This can reveal clues to
disease processes or help determine whether a potential new drug has the
expected biochemical effects in living tissues.
We decided to enter the microarray market because it has been in existence
long enough to prove the value of microarraying, but we believe that it still
has most of its growth ahead of it. Although the current research market is
attractive in itself, management believes that emerging market segments in drug
discovery and molecular diagnostics offer much greater potential. In particular,
management believes that research trends suggest that new array-based methods
for cancer diagnostics may drive market growth faster than was generally
believed just two years ago. In addition, we believe that microarray technology
has reached a crucial juncture, and that our unique technology has the potential
to resolve critical issues that now retard the next phase of market evolution.
Accelr8 Technology Corporation 2 Fiscal Year Ended July 31, 2003
OptiChem Surface Coatings
OptiChem coatings are based on a discovery made by a surface chemist at DDx
in the late 1990's, who developed an improved proprietary surface coating for
the assay substrates to be used with a new highly sensitive assay instrument.
Our scientific team has taken the original technology acquired from DDx and
has improved upon it, advancing the discovery with the objective of bringing it
to commercialization. Since acquiring OpTest, we have conducted research and
development as described below.
o First, the scientific team materially improved upon the basic surface
chemistry discovery in order to make it highly reproducible. They
identified critical materials and processes needed to make OptiChem robust
and consistent in a production environment as well as scalable. They
eliminated the need for unusual equipment or conditions that could limit
OptiChem's commercial attractiveness. Quality control data now show that
the production processes yield product consistency that management believes
is at least as high as that of the next-best competitor.
o Second, the scientific team adapted the product's chemistry to provide
uniformity and consistently high coating performance on glass and plastic
substrates. This expanded OptiChem's applicability substantially beyond its
original silicon base material coating formulation. Our commercial products
are coated glass substrates, and we have proven success with a variety of
plastics and with gold surfaces that are used in certain biosensors.
o Third, the scientific team added reactive functionality to the surface
chemistry. The original test system used a base coating matrix including
biotin as a linking agent. Our scientists have developed additional
reactive groups incorporated within the coatable matrix. Examples include
amine-reactive, thiol-reactive and streptavidin surfaces. Our primary
commercial product is an amine-reactive surface used for immobilizing
nucleic acids and proteins. On special order, we also sell streptavidin and
thiol-reactive surfaces.
OptiChem coatings exhibit exceptionally low non-specific binding of
interfering molecules such as proteins and unbound dyes. Non-specific binding
(also referred to as "adsorption" or "fouling") is a dominant noise factor that
limits the sensitivity of biomolecular assays. Management believes that OptiChem
has demonstrated superior non-fouling properties as compared with those of
competitors. In addition, OptiChem coatings provide high capacity for specific
probe attachment.
In creating a microarray, the assay designer attaches probe molecules at
desired locations on the activated substrate surface in any useful pattern such
as a microarray grid. These reactive patches or spots provide "islands" of
specific analyte binding zones surrounded by a "sea" of extremely low
non-specific binding surface. This contrast of low noise and high specific
binding provides a very high signal-to-noise ratio that improves detection
sensitivity.
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Examples of the types of products that we believe would benefit from having
OptiChem coatings include:
o Nucleic acid microarrays ("gene chips") on slides or microtiter plates.
o Protein and peptide microarrays for proteomics and micro-immunoassays.
o Substrates for cell and tissue arrays.
o "Lab-On-A-Chip" devices.
o Biosensors.
o Laboratory instrumentation such as high-performance liquid chromatography,
capillary electrophoresis, and related separation columns.
Vertical markets that consume such supplies, in addition to laboratory
research markets, include:
o Drug candidate screening and characterization.
o Medical molecular diagnostics (e.g., disease diagnostics, patient
predisposition, "personalized medicine").
o Food and water pathogen testing.
o Bio-Defense (detecting weaponized pathogens and diagnosing recent infection
while still treatable).
As the market evolves away from its original research basis that uses
purified laboratory materials, we believe that demand will shift increasingly
toward new substrate properties. In particular, we believe that it will become
essential to use surfaces that provide consistent results despite exposure to
blood and tissue extracts.
Based upon tests against the leading competitors, management believes that
OptiChem delivers superior performance against these competitors. OptiChem
coatings have been the only surfaces that demonstrate this capability. Therefore
we believe that our marketing strategy should not be to compete for
low-performance applications, but to focus on the needs of emerging applications
such as drug discovery and diagnostics, paying particular attention to new
developments in cancer diagnostics.
We also believe that OptiChem may offer benefits to mature technologies
such as research immunoassays and medical immuno-diagnostics. For example, in
the most commonly used assay format (ELISA) the end-user must "block" the
surface against non-specific binding by pre-coating the plates with a masking
protein, typically albumin or casein from animal sources. Management believes
that OptiChem shows better performance without blocking. This ability saves
Accelr8 Technology Corporation 4 Fiscal Year Ended July 31, 2003
substantial time for the user in preparing the assays and avoids the need for
animal products (proteins) that carry the risk of contaminating a sensitive
assay with prions, virus fragments, DNA or RNA or protein fragments, or other
low-level interfering materials.
In essence, any surface that is needed for biochemical, immunological,
histological, or tissue growth or attachment is a potential candidate for
improvement with a species of OptiChem coating. Conversely, any surface intended
to inhibit the attachment or adsorption of biological materials is also a
candidate, e.g., implanted medical devices for which tissue adhesion can cause
problems.
On the basis of testing conducted to date (both internal and external), we
believe that OptiChem coatings enjoy a number of competitive advantages over
other coatings, including the following:
o OptiChem coatings without blocking (a time-consuming step) out-perform
other coatings, with or without blocking, in reducing non-specific
adsorption of interfering molecules. In stringent tests using whole serum,
OptiChem coatings yield substantially higher signal to noise ratios than
any other surface tested. We believe that this will prove to be a decisive
factor as microarraying migrates into diagnostics and proteomics.
o Our scientists have also discovered that OptiChem coatings make it possible
to eliminate certain important sources of error in sample preparation. The
coatings have a unique ability to shed free dye molecules left over from
sample labeling. In independent direct comparisons, OptiChem surfaces
without sample cleanup yield microarray results that are at least as good
as those of the next-best competing product with sample cleanup. As a
result, microarray labs can significantly reduce materials and labor, and
increase throughput while gaining OptiChem's superior performance.
o OptiChem coatings enable high-density arraying, and the user can readily
optimize spotting properties to suit a specific application. In particular,
the coatings enable very large "genome-wide" arrays that are becoming a
competitive battleground for major array producers.
o Coatings are available with several different types of reactive groups for
binding to probes, currently including amine-reactive, biotin,
streptavidin, and thiol-reactive coatings. They are readily modified to
enable rapid development of additional types of binding activity.
o OptiChem coatings have broad applicability. Many surface coatings work well
only within a narrow range of reactants and conditions. Customer testing
has shown that OptiChem coatings work extremely well over a broad range of
reactants and conditions. Our coatings survive and continue to yield high
performance under conditions that damage or destroy other coatings.
o The manufacturing history shows that OptArray slides demonstrate excellent
lot-to-lot consistency. This uniformity provides important competitive
advantages as attention is shifting to concerns about microarray
reproducibility.
Accelr8 Technology Corporation 5 Fiscal Year Ended July 31, 2003
o The coatings are compatible with a wide range of base materials including
glass, plastic, silicon, and metallic surfaces. This enables a choice of
base material that minimizes other sources of interference, such as
background fluorescence. We believe that plastic substrates will become
important as the microarray market evolves into molecular diagnostics,
driven by price pressure from medical insurers. OptiChem has proven
successful on low-cost base materials.
QuanDx and YoDx Quantitative Assay Instrumentation
QuanDx instrumentation counts individual bound nanoparticles by imaging the
light scattered from sub-microscopic particles that attach to biochemical assay
components. This strategy provides extremely high sensitivity and low background
noise.
Conventional assays calculate the average intensity of a detectable signal
across a field of observation. Whether the detector measures photons or
electrons, the principles are similar. Real electrical circuits, such as the
detectors and amplifiers used in most assay instruments, have finite
thermo-electric noise. This noise places an unavoidable limit on assay precision
and sensitivity.
QuanDx eliminates electrical and thermal noise by converting each
nanoparticle binding event into a discrete identifiable image and then counting
only individual light scattering images while ignoring all other images and
background. The only noise that enters in is the non-specific binding of the
nanoparticle to the assay substrate. OptiChem coated substrates reduce
non-specific background noise and maximize QuanDx's performance.
High sensitivity has become increasingly important for at least two
reasons. First, researchers are tending to work more often with rare analyte
materials in dilute forms. Second, assays that use very small quantities of
reagents and analytes tend to be faster. Since QuanDx is based on microscopic
observation, its ability to work with extremely small spots therefore maximizes
the advantages of small scale.
At present, the standard method for scanning microarrays is to attach
fluorescent dyes to the reactants and then to scan the assay grid with an
automated confocal fluorescence microscope. The confocal optics restrict the
focal plane to a very thin layer and thus reduce background interference.
However, the dyes themselves are well-recognized for adsorbing to surfaces and
creating high non-specific background noise. In addition, many materials used as
substrates or assay components emit their own fluorescence ("autofluorescence")
and add to the interference.
We believe that QuanDx has the potential to substantially out-perform
standard fluorescence-based technology because of its ability to reject
background. In addition, QuanDx uses automated high-speed image analysis and
therefore supports high throughput-an essential property when scanning arrays
containing thousands of reactive spots.
Chemiluminescence offers an alternative to fluorescence, but requires even
more sophisticated instrumentation and has more stringent chemical requirements.
With chemiluminescence, the reporter is a compound that emits light in
proportion to the amount of reporter that reacts. It can provide sensitivity and
background superior to those for fluorescence, but is much more difficult to
apply, and more sensitive to environmental variables.
Accelr8 Technology Corporation 6 Fiscal Year Ended July 31, 2003
During the fiscal year ended July 31, 2003, we retained an expert
scientific consultant to improve certain aspects of the original QuanDx methods.
We believe that the improvements will further simplify QuanDx operation and
significantly reduce assay turnaround time. We have constructed a portable
laboratory test system that incorporates the new improvements.
Also during the fiscal year we acquired the rights to innovative technology
that complements QuanDx. The new YoDx(TM) ("YoDx") technology extends the
detection system to include assay processing prior to the detection itself, and
we expect the novel processing to enhance detection sensitivity as well. We have
set major objectives for the combined YoDx/QuanDx platform, when used with
OptiChem coated substrates, to increase sensitivity by at least 100-fold
relative to fluorescence detection and increase assay speed by at least 10-fold
relative to conventional processing.
In addition, we believe that the new instrumentation platform will be
inherently lower in cost, and more robust and field-practical than competing
technology. QuanDx can easily be engineered for hand-portable field use, which
is not practical with current fluorescence technology.
We expect portability and low cost to enable new applications in medical
diagnosis and portable field applications such as food safety and bio-defense.
The new systems will be able to use either gene probes or immunoassays for
target molecule detection. The current portable laboratory test fixture that
contains the QuanDx improvements also includes YoDx components. The unit is
field portable for demonstration to prospective licensees.
We believe that QuanDx with YoDx stands alone as an assay processing and
digital detection system that offers the competitive advantages of:
o Counting discrete images of individual reporter events, thereby eliminating
analog background.
o Simple structure and readily available components that permit low-cost
production.
o Small size, amenable to bench-top or hand-held application.
o High speed, allowing rapid scanning of dense arrays and adaptable to high
throughput laboratory robotic platforms.
o Compatibility with very small microarray spot size, permitting use with
large high density arrays.
Accelr8 Technology Corporation 7 Fiscal Year Ended July 31, 2003
Systems That Combine QuanDx, YoDx, and OptiChem
We expect that our customers will be able to use QuanDx, YoDx, and OptiChem
products in existing applications independently of each other. However, using
the combination of these products optimizes total assay performance. We already
have customers who purchase or license OptiChem alone, for use with existing
microarray systems. However we expect that once demonstrated in a compelling
application, a significant market will develop for the instrumentation as a
means to maximize OptiChem's performance benefits. Readers are cautioned that
there can be no assurance that the statements in this paragraph with regard to
development of a significant market or customers will be achieved.
OptiChem Competitors
Approximately 20 companies around the world sell activated slides for use
in microarray printing. However only a few of these produce high-performance
products that we view as competing with OptiChem coated microarraying
substrates.
Although Corning (NYSE:GLW) commands market leadership in activated
microarray slides, we do not compete directly with Corning.
In August 2002, Amersham PLC, a United Kingdom company, purchased Motorola
Life Sciences which has the exclusive rights to re-sell microarraying slides
produced by SurModics Inc. (NASDAQ:SRDX). On October 10, 2003, General Electric
and Amersham announced their agreement on the terms of an acquisition by GE of
Amersham, subject to shareholder approval. Amersham markets activated slides and
manufactured microarrays under the CodeLink(TM) brand. The coating on CodeLink
slides is a hydrogel polymer that competes with our OptArray slides. However, we
view Amersham as a potential customer and SurModics as our competitor in surface
coatings.
PerkinElmer, Inc. (NYSE:PKI) offers a different type of gel slide intended
for protein arraying.
Apogent (NYSE:AOT) produces microarraying slides and plates in its Matrix
division. This is the only current competitor to our OptiPlate(TM) arrayable
microtiter plates.
Generally, our scientists conduct comparative tests on each new
competitor's products as they become available. Since technical performance
advantages directly translate into competitive advantages, our scientists
monitor the market for new product releases.
Companies such as Agilent (NYSE:A) and Affymetrix (NASDAQ:AFFX) produce
microarrays, but do not sell activated slides in competition with our products.
However, either company could become a competitor of ours or a customer.
Accelr8 Technology Corporation 8 Fiscal Year Ended July 31, 2003
QuanDx and YoDx Competitors
Genicon Sciences, a San Diego, California based private company was a
potential competitor for QuanDx instrumentation. Genicon ceased operation in
2003 and its assets were acquired by Invitrogen (NASDAQ:IVGN). Invitrogen is
currently not competing in the microarray market. However there can be no
assurance that Invitrogen will not enter the microarray market in the future or
that Invitrogen will not compete with Accelr8 in some other application of
QuanDx.
A number of other particle-based assays are on the market. However, we
believe that they do not contain the superior qualities of QuanDx and do not
count single particles in an array format. Other alternatives to QuanDx include
conventional assays. However, all of the alternatives identified by us use
conventional analog averaging and are not intended to count discrete particles.
In 2003, Boekel Scientific (a private company) licensed certain
intellectual property from the University of Pennsylvania that is related to
certain aspects of YoDx. Boekel produces hybridization ovens that are used in
research labs, including microarray labs. The licensed technology might be used
in a way that resembles some of the YoDx methods. As far as we can determine,
such a product is not yet on the market.
Accelr8's Business Models
We intend to offer licenses to assay and instrumentation manufacturers. We
intend to offer such licenses in return for an up-front licensing fee plus a
royalty on the net sales price for finished products that contain our licensed
assets, subject to annual minimum royalties. See "Subsequent Events."
Before we commit significant development effort to integrate our
technologies into a customer's products and processes, we intend to require the
customer to fund our non-recurring development costs. This customary joint
development phase should enable us to preserve our cash assets and helps to
qualify the customer's interest. However, there can be no assurance that we will
enter into a joint development agreement with any of our customers.
In addition to our licensing model, we sell stock OptArray and OptiPlate
products to end-users such as manufacturers of proprietary microarrays. While
some companies would prefer to license OptiChem and integrate it into their
production lines, others prefer to purchase coated OptiChem substrated for
application of their proprietary DNA and protein libraries. We intend to serve
the needs of both types of customer.
We continue to evaluate the potential to produce fully integrated systems
for sale to end users in certain mature market niches. We believe the
combination of OptiChem surfaces used with QuanDx and YoDx instrumentation has
good potential in these niches. The projected potential consumption for coated
substrates makes these niches attractive. Based upon our perception of the high
value to customers and low projected production costs, we believe that this type
of business model has attractive margin potential. However, there can be no
assurance that we will be successful in increasing the demand for any of our
products.
Accelr8 Technology Corporation 9 Fiscal Year Ended July 31, 2003
Business Strategy
Our business strategy is to specialize in advancing the technology of
surface coatings used in bio-analytic substrates and to advance the technology
of assay instrumentation by increasing speed and sensitivity while lowering
cost. We intend to pursue this goal by conducting our own research and
development ("R&D") programs and also by seeking to acquire or license important
advances developed outside of the Company.
We intend to offer our industrial customers the highest available
performance in critical materials and subsystems. This will allow our customers
to concentrate their resources on their own core competencies and strategic
assets.
We believe that our intellectual property portfolio of technologies
especially suits the point of care diagnostics opportunity.
For example, current pathogen testing requires "enrichment" or growth of
bacteria isolated from a sample such as blood. Culturing typically requires from
two to six days. During this period, the pathogens continue to grow in the
source, such as an infected patient. Drug-resistant pathogens have become a
growing concern in public health. Over the last decade, the medical community
has publicized the threat of emerging drug resistance with such organisms as
"MRSA" (Methicillin Resistant Staphylococcus Aureus), "VRE" (Vancomycin
Resistant Enterococci), and "MDR-TB" (Multiple-Drug-Resistant Tuberculosis).
Researchers believe that rapid testing for species and strain identification
will be important in preserving treatment options, helping to limit the use of
those antibiotics that have few or nonexistent alternatives.
We believe that we have technology that can substantially reduce the
required enrichment, thereby accelerating the test. In a point of care
application, this means that the physician can begin effective treatment more
quickly and correctly. This is vital in critically ill patients who have
blood-borne infections, for example. The physician might also be able to avoid
using new antibiotics and contributing to the emergence of drug resistant
strains. We believe that some of the point-of-care tests may be able to
determine drug sensitivity as well as pathogen identity.
We are pursuing strategic alliances with other companies with the intent of
jointly developing integrated systems for specific applications such as these.
Certain applications, such as the diagnosis of infectious disease, are likely to
require products that also fit other applications, such as pathogen testing for
bio-defense or food safety.
In order to prove the commercial importance of advanced system designs, we
may decide to produce one or more complete analysis products that incorporate
QuanDx or YoDx instrumentation and OptiChem coated substrates. An example of
this is low cost point-of-care diagnostics.
Accelr8 Technology Corporation 10 Fiscal Year Ended July 31, 2003
Customers
At this time we have received nominal revenues from sale of evaluation
products and sale of products used in the internal development of other
companies. We are still engaged in research and development with respect to the
OptiChem, QuanDx, and YoDx technologies. We believe that the selling process for
a product such as OptiChem will average about nine to twelve months, because of
the need to integrate our products into the customer's production processes.
Applications
Microarraying is a major new technology platform emerging in these market
segments. A microarray consists of a matrix of individual assay "spots" of
active probe molecules, such as short strands of DNA or proteins. For example, a
microarray of the entire human genome contains more than 30,000 spots printed
onto a microscope slide. When an investigator incubates the array with a sample
such as blood, specific target molecules bind to specific probe spots (but not
to other spots). Each spot acts as a single chemical analysis. With thousands of
spots in an array, a single experiment then perform thousands of individual
analyses--one for each probe.
As DNA microarraying has become more widely used, controversies have also
emerged. In particular, low reproducibility has delayed market penetration.
Scientists are now beginning to apply microarraying methods to proteins, which
are much more complex than DNA in terms of physical and chemical properties and
ability to preserve biological function. This complexity brings with it
comparably greater technical difficulty. Management believe protein analyses are
well worth the effort because they will form the backbone of future clinical
molecular diagnostics. OptiChem supports these new initiatives.
High background noise, low sensitivity, and loss of low-abundance sample
targets are significant factors that strongly affect reproducibility.
High-performance surface chemistry is the basis for reliable, consistent
microarray performance. Accelr8 solves the most fundamental problem by providing
a stable, low-interference background and high signal strength. This
breakthrough also brings with it higher sensitivity, target preservation, and
efficient application.
Marketing and Sales
We currently market our technologies to potential industrial customers
through five primary routes:
o Public presentations at scientific symposia attended by key scientific
staff and R&D decision makers from targeted companies and institutions.
o Invited presentations at targeted companies by our own scientists or
consulting academic scientists.
o Telephone calls, emails, express letters, and personal visits to key
executives, business development managers, marketing managers, and R&D
managers at targeted companies.
Accelr8 Technology Corporation 11 Fiscal Year Ended July 31, 2003
o Our web site (www.accelr8.com), the content of which is technical in nature
and targeted at scientists within prospective accounts.
o We may enter into exclusive agreements with well established distributors
who have demonstrated effective marketing and have existing sales channels.
We believe that the "executive selling" process helps to assure that
high-quality, effective information is presented directly to individuals who
have decision making authority or who have strong influence over decisions to
adopt novel technologies in their business's product development programs.
We intend to continue to expand our exposure by means of papers in
technical journals, feature articles in the trade press and advertising.
Operations
We own a laboratory with mid-volume assay substrate production equipment,
and lease approximately 4,970 square feet of space for the laboratory and
related administrative offices. Within the laboratory facility we constructed a
cleanroom pilot production operation. We believe the facility has adequate
capacity to support equipment and staffing to implement the product development
plan.
We have initiated a program to secure second-sources for all materials used
in OptiChem formulation.
We conduct an aggressive R&D program to expand our intellectual property
portfolio and to adapt our licensable technologies to specific applications. R&D
programs include new physical coating methods for production of different
substrate formats, additional methods for linking coatings to base materials,
and additional functionalization for new applications. During the years ended
July 31, 2003 and 2002, we spent approximately $568,873 and $326,582,
respectively, on R&D activities.
QuanDx and YoDx instrumentation require certain components that are
custom-fabricated to our specifications. These components include printed
circuit boards for controller electronics, optical components such as custom
lenses, injection-molded plastic components, and machined mechanical components.
In all applicable cases, we will own the production tooling and are able to
quickly activate secondary sources. We plan to maintain inventory levels
sufficient to bridge any second-source response times and include an adequate
safety factor.
We plan to contract with an established outsource manufacturer to produce
finished goods such as OptArray and OptiPlate products. We will continue to use
the cleanroom pilot operation for ongoing product development and process
engineering. As we approach commercialization for instrumentation, we plan to
engage experienced instrumentation outsources to produce finished goods.
Accelr8 Technology Corporation 12 Fiscal Year Ended July 31, 2003
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws, employee and third party non-disclosure agreements, license agreements and
other intellectual property protection methods to protect our proprietary
rights. We are committed to aggressively develop a continuing stream of
intellectual property and to defend our position in key technologies.
We have two patents that cover certain aspects of OTER technology. Most
recently, we received notice from the U.S. Patent and Trademark Office for the
issuance of patent number 6,274,384 for a "method for specific substance and
molecule detection." The patent claims the analytic methods associated with an
apparatus in previously issued U.S. patent 5,958,704 for a "sensing system for
specific substance and molecule detection." We are also processing additional
divisional OTER patent applications (U.S. and international). While we believe
the OTER technology could be a viable technology with additional development, we
have opted to discontinue development at this time to concentrate our resources
on the technologies that currently have a larger market with greater demand.
Therefore, during the year ended July 31, 2003, the Company recorded an
impairment loss of $188,359, representing the unamortized cost of the OTER
technology purchased from DDx. See "Impairment of Intangible Assets."
We have one patent pending on QuanDx instrumentation and believe that the
patent application covers areas that are critical for QuanDx protection.
In June, 2001, we filed our first provisional patent application for
OptiChem surface chemistry and later converted that provisional application into
a non-provisional application. The full application is now being prosecuted. We
believe the application has the potential to provide relatively broad protection
for the unique surface chemistry. We plan to file a series of new provisional
applications and continuations to expand protection over a broad base related to
surface chemistry.
We also acquired the rights to YoDx and filed a Patent Cooperation Treaty
patent application. The application covers a broad area of novel methods and
device designs for assay incubation and detection of nanoparticles.
Late in 2002, Oxford Gene Technology ("OGT," Oxford, England) launched an
aggressive, industry-wide patent litigation campaign. Although OGT filed suit
against six companies, they appear to also have sent letters to a great many
more companies in an attempt to force licensing.
Accelr8 retained an independent patent counsel at Dorsey & Whitney who has
specific experience in microarray patent litigation. The attorney provided a
written opinion to us stating that our products do not infringe on patents
asserted by OGT. We have provided a copy of this opinion, under confidential
disclosure agreements, to selected customers who have received the OGT letter or
who have been sued by OGT.
Accelr8 Technology Corporation 13 Fiscal Year Ended July 31, 2003
On the basis of customer response, we believe that our patent position
offers a unique competitive advantage while not infringing on OGT claims.
In addition to our own inventions, we review patent filings, commercial
venues, and scientific publications for new opportunities. Where appropriate, we
intend to acquire or license significant new intellectual property that
complements our proprietary positions or that enables us to enter significant
new market niches.
There can be no assurance that third parties will not assert infringement
or other claims against us with respect to any existing or future products. We
cannot assure you that licenses would be available if any of our technology was
successfully challenged by a third party, or if it became desirable to use any
third-party technology to enhance the Company's products. Litigation to protect
our proprietary information or to determine the validity of any third-party
claims could result in a significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation is determined
in our favor.
While we have no knowledge that we are infringing upon the proprietary
rights of any third party, there can be no assurance that such claims will not
be asserted in the future with respect to existing or future products. Any such
assertion by a third party could require us to pay royalties, to participate in
costly litigation and defend licensees in any such suit pursuant to
indemnification agreements, or to refrain from selling an alleged infringing
product or service.
The Company has secured trademarks for its products, which include
OptArray(TM)
OptiChem(TM)
OptiPlate(TM)
QuanDx(TM)
YoDx(TM)
Employees and Consultants
We have twelve employees and employ five consultants. We have not entered
into any collective bargaining agreements.
Subsequent Event
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.
Accelr8 Technology Corporation 14 Fiscal Year Ended July 31, 2003
The supply agreement with Nexterion has a term of six months commencing on
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. Nexterion will purchase and resell Accelr8's
OptArray microarray slides under the Nexterion brand and Accelr8 will continue
to manufacture the microarraying products in its Denver facility. Accelr8 will
be Nexterion's sole supplier of permeable hydrogel microarraying slides during
the term of the supply agreement and will provide sales training and also
technical support to SCHOTT's customers.
The letter of intent calls for negotiation of an exclusive technology
transfer license for Accelr8's OptiChem surface chemistry on microarraying
slides. Under the intended technology transfer license, SCHOTT will become the
exclusive outsource manufacturer for OptArray products starting in the third
quarter of fiscal 2004. SCHOTT will then manufacture the OptArray slides and
have exclusive global distribution rights to those products. The two companies
will cooperatively market the products. Management anticipates that there will
be three potential sources of revenue in the technology transfer agreement to be
entered into with SCHOTT: (i) a one-time payment of an up front licensing fee
(upon signing), (ii) consulting services relating to the technology transfer
process, and (iii) royalties on sales. The specific terms and conditions of the
proposed licensing agreement have not yet been negotiated or finalized, and it
is possible that a definitive agreement will not be reached with SCHOTT. While
there can be no assurance the Company will enter into a definitive agreement for
the technology transfer license, Management is optimistic that an agreement will
be reached with SCHOTT.
Factors That May Affect Future Results
Dependence On Key Employees. Our success depends to a significant extent
upon a number of key management and technical personnel, the loss of one or more
of whom could have a material adverse effect on our results of operations. We
carry key man life insurance in the amount of $5 million on Thomas V. Geimer.
The Board of Directors has adopted resolutions under which one-half of the
proceeds of any such insurance will be dedicated to a beneficiary designated by
the insured. There can be no assurance that the proceeds from such life
insurance policies would be sufficient to compensate us for the loss of Mr.
Geimer, and these policies do not provide any benefits to the Company if Mr.
Geimer becomes disabled or is otherwise unable to render services to the
Company. Further, the loss of any member of our scientific team may have a
significant adverse effect upon the Company and its business. We believe that
our continued success will depend in large part upon our ability to attract and
retain highly skilled technical, managerial, sales and marketing personnel.
There can be no assurance that we will be successful in attracting and retaining
the personnel we require to develop and market new and enhanced products and to
conduct our operations successfully.
Need To Develop Market For Products. We have received only nominal revenue
from sales based on products using the new OptiChem, QuanDx, YoDx, and OTER
technology. Our competitors manufacture and market products that are similar to
ours. Our principal competitors and the areas in which they compete with us are
described more fully in "OptiChem Competitors" and "QuanDx Competitors." While
we have received nominal revenues from sales, there is no assurance that we will
be successful in marketing the new products.
Accelr8 Technology Corporation 15 Fiscal Year Ended July 31, 2003
Our Success Depends Partly On Our Ability To Successfully Introduce New
Products. In a market primarily driven by the need for innovative products, our
revenue growth will depend on overcoming various technological challenges to
successfully introduce new products into the marketplace in a timely manner. Our
technology requires significant knowledge and experience in biochemistry. In
addition, we must continue to develop new applications for our existing
technologies. Market acceptance of these products will depend on many factors,
including, but not limited to, demonstrating that our technologies are superior
to other technologies and products that are currently available or may become
available in the future.
If we are unable to overcome these technological challenges, or even if we
experience difficulties or delays, we may be unable to attract additional
customers for our products, which would seriously harm our business and future
growth prospects.
If We Are Unable To Effectively Protect Our Intellectual Property, We May
Be Unable To Prevent Infringement. Our success depends in part on our ability to
obtain and maintain patent protection for the technology underlying our
products, both in the United States and in other countries. We cannot assure you
that any of the presently pending or future patent applications will result in
issued patents, or that any patents issued to us or licensed by us will not be
challenged, invalidated or held unenforceable. Further, we cannot guarantee that
any patents issued to us will provide us with a significant competitive
advantage.
If we fail to successfully enforce our proprietary technology or otherwise
maintain the proprietary nature of our intellectual property with respect to our
significant current and proposed products, our competitive position and sales
could suffer.
Notwithstanding our efforts to protect our intellectual property, our
competitors may independently develop similar or alternative technologies or
products that are equal to or superior to our technology and products without
infringing on any of our intellectual property rights or design around our
proprietary technologies. If customers prefer these alternative technologies to
our technology, sales could be adversely affected.
Our Products Could Infringe On The Intellectual Property Rights Of Others.
Due to the very significant number of U.S. and foreign patents issued to, and
other intellectual property rights owned by entities operating in the industry
in which we operate, we believe that there is a significant risk of litigation
arising from infringement of these patents and other rights. Third parties may
assert infringement or other intellectual property claims against us or our
licensors. We may have to pay substantial damages, including treble damages, for
past infringement if it is ultimately determined that our products infringe a
third party's proprietary rights. In addition, even if such claims are without
merit, defending a lawsuit may result in substantial expense to us and divert
the efforts of our technical and management personnel.
We may also be subject to significant damages or injunctions against
development and sale of some of our products, which could have a material
adverse effect on our future revenues. Furthermore, claims of intellectual
property infringement may require us to enter into royalty or license agreements
with third parties, and we may be unable to obtain royalty or license agreements
on commercially acceptable terms, if at all.
Accelr8 Technology Corporation 16 Fiscal Year Ended July 31, 2003
Third Parties May Seek To Challenge, Invalidate Or Circumvent Issued
Patents Owned By Or Licensed To Us Or Claim That Our Products And Operations
Infringe Their Patent Or Other Intellectual Property Rights. In addition to our
patents, we possess an array of unpatented proprietary technology and know-how
and we license intellectual property rights to and from third parties. The
measures that we employ to protect this technology and these rights may not be
adequate. Moreover, in some cases, the licensor can terminate a license or
convert it to a non-exclusive arrangement if we fail to meet specified
performance targets.
We may incur significant expense in any legal proceedings to protect our
proprietary rights or to defend infringement claims by third parties. In
addition, claims of third parties against us could result in awards of
substantial damages or court orders that could effectively prevent us from
manufacturing, using, importing or selling our products in the United States or
abroad.
Competition. Many of our competitors have greater financial, manufacturing,
marketing and sales resources than we do. In addition, some of our competitors
may, individually or together with companies affiliated with them, have greater
human and scientific resources than we do. Our competitors could develop
technologies and methods for materials that render our technologies and
methodologies less competitive. Accordingly, if new competitors introduce new
materials that are more cost effective than our technologies, we could
experience poor sales, revenues and operating results.
Ability To Respond To Technological Change. Our future success will depend
significantly on our ability to enhance our current products and develop or
acquire and market new products that keep pace with technological developments
and evolving industry standards as well as respond to changes in customer needs.
There can be no assurance that we will be successful in developing or acquiring
product enhancements or new products to address changing technologies and
customer requirements adequately, that we can introduce such products on a
timely basis or that any such products or enhancements will be successful in the
marketplace. Our delay or failure to develop or acquire technological
improvements or to adapt our products to technological change would have a
material adverse effect on our business, results of operations and financial
condition.
Possible Volatility Of Stock Price And Dividend Policy. The market price of
our Common Stock could be subject to significant fluctuations in response to
variations in actual and anticipated quarterly operating results, changes in
earnings estimates by analysts, announcements of new products or technological
innovations by us or our competitors, and other events or factors. In addition,
the stocks of many technology companies have experienced extreme price and
volume fluctuations that have often been unrelated to the companies' operating
performance. We do not intend to pay any cash dividends on our Common Stock in
the foreseeable future.
Control By Management. At October 15, 2003, our officers and directors
owned of record approximately 1,191,200 or 11.96% of the outstanding shares of
Common Stock. If they exercise all of the options that they currently hold, they
will own 1,606,200, shares of our Common Stock or 15.48% of the then outstanding
Accelr8 Technology Corporation 17 Fiscal Year Ended July 31, 2003
shares of Common Stock. Due to their stock ownership, the officers, directors
and key employees may be in a position to elect the Board of Directors and to
control the business and affairs of the Company, including certain significant
corporate actions such as acquisitions, the sale or purchase of assets and the
issuance and sale of the Company's securities.
Shares Eligible For Future Sale. As of July 31, 2003, we had reserved
1,000,000 shares of Common Stock for issuance upon exercise of options which
have been or may be granted pursuant to our stock option plans, of which options
to purchase 755,000 shares were outstanding as of July 31, 2003 ("Plan
Options"). The 1,129,110 warrants exercised by Mr. Geimer ("Geimer Warrants")
were exercised at $0.24 per share on October 14, 1997, and contributed to a
Rabbi Trust. Under the terms of the Rabbi Trust, we will hold the shares in the
trust, and carry them as treasury stock. The Rabbi Trust provides that upon Mr.
Geimer's death, disability or termination of his employment, the shares will be
released ratably over the subsequent ten (10) years, unless the Board of
Directors determines otherwise. See Note 9 to the Financial Statements for
further information. Additionally, DDx owns 1,606,793 shares of our common stock
or 16.13% of the number of outstanding shares of Accelr8 which may be sold
pursuant to Rule 144. Sales of Common Stock underlying Plan Options or by DDx
may adversely affect the price of the Common Stock.
The Loss Of One Or More Of Our Major Clients Could Significantly Reduce Our
Revenue And Earnings. Revenue from the resale of software to our largest client
Kroger Company, in the amount of $182,673 represented 21.9% of our total
revenues. Further, revenues from the sale of OptiChem products to our largest
OptiChem client in the amount of $38,295 represented 4.5% of our total revenues.
Together these clients represented approximately 26% of our total revenue for
the year ended July 31, 2003. There can be no assurance that revenue from any
customer will continue at their historical levels. Loss of one or more of our
current clients, particularly the two companies listed above, could have a
material adverse effect on our business, financial condition and results of
operations. If we cannot broaden our customer base, we will continue to depend
on a few clients for the majority of our revenue.
We Use Hazardous Materials In Some Of Our Research, Development And
Manufacturing Processes. Our research activities sometimes involve the
controlled use of various hazardous materials. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
While we currently maintain insurance in amounts which we believe are
appropriate in light of the risk of accident, we could be held liable for any
damages that might result from any such event. Any such liability could exceed
our insurance and available resources and could have a material adverse effect
on our business, financial condition and results of operations.
We Have A Single Manufacturing Facility And We May Lose Revenue And Be
Unable To Maintain Our Client Relationships If We Lose Our Production Capacity.
We manufacture all of the products we sell in our existing production labs in
Denver, Colorado. If our existing production facility becomes incapable of
Accelr8 Technology Corporation 18 Fiscal Year Ended July 31, 2003
manufacturing products for any reason, we may be unable to meet production
requirements, we may lose revenue and we may not be able to maintain our
relationships with our customers. Without our existing production facility, we
would have no other means of manufacturing products incorporating our coating
technologies until we were able to restore the manufacturing capability at our
facility or develop an alternative manufacturing facility. Although we carry
business interruption insurance to cover lost revenue and profits in an amount
we consider adequate, this insurance does not cover all possible situations. In
addition, our business interruption insurance would not compensate us for the
loss of opportunity and potential adverse impact on relations with our existing
licensees resulting from our inability to produce products for them.
Changes In Governmental Regulations May Reduce Demand For Our Products Or
Increase Our Expenses. We compete in markets in which we or our customers must
comply with federal, state, local and foreign regulations, such as
environmental, health and safety and food and drug regulations. We develop,
configure and market our products to meet customer needs created by these
regulations. Any significant change in these regulations could reduce demand for
our products.
Our Results Of Operations Will Be Adversely Affected If We Fail To Realize
The Full Value Of Our Intangible Assets. As of July 31, 2003, our total assets
included $4,255,934 of net intangible assets. Net intangible assets consist
principally of costs associated with securing patent rights, trademark rights
and technology licenses, net of accumulated amortization. These assets have
historically been amortized on a straight-line basis over their estimated useful
lives. Intangible assets to be held and used by the Company are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the asset may not be recoverable. We continuously evaluate the recoverability of
these items based on estimated future cash flows from and estimated fair value
of such assets, and provide for impairment if such undiscounted cash flows are
insufficient to recover the carrying amount of the asset.
During the fiscal year ended July 31, 2003, we completed our impairment
testing, which resulted in an impairment loss of $188,359, representing the
unamortized cost of the OTER technology purchased from DDx. While we believe the
OTER technology could be a viable technology with additional development, we
have opted to discontinue development at this time to concentrate our resources
on the technologies that currently have a larger market with greater demand.
Future impairment testing may result in additional intangible asset
write-offs, which could adversely affect our financial condition and results of
operations. See "Impairment of Intangible Assets."
Important Factors Related To Forward-Looking Statements And Associated
Risks. This Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements include the plans and objectives of management for future operations,
Accelr8 Technology Corporation 19 Fiscal Year Ended July 31, 2003
including plans and objectives relating to the products and future economic
performance of the Company. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties.
These forward-looking statements are based on assumptions that the Company will
continue to provide services and develop, market and ship products on a timely
basis, that competitive conditions within the software industry will not change
materially or adversely, that demand for the Company's products and services
will remain strong, that the Company will retain key management personnel, that
the Company's forecasts will accurately anticipate market demand and that there
will be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
information will be realized. In addition, as disclosed elsewhere in this
Report, the business and operation of the Company are subject to substantial
risks that increase the uncertainty inherent in such forward-looking statements.
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
Glossary - Chemistry
Analyte: the target material that an analysis or assay is intended to
measure or detect.
Antibody: a specialized protein (immunoglobulin) produced by the immune
response that binds to a particular molecular surface that has previously been
presented to certain cells in the organism's blood. The end-product of the
"humoral" component of the immune response. Key component of immunoassays
detecting as the analyte-specific detection agent.
Antigen: the material used to stimulate immune antibody production in an
organism.
Assay, Qualitative: a chemical test in which the result is expressed as the
presence or absence of an analyte. Also referred to as "detection," as opposed
to measuring the amount of material.
Assay, Quantitative: a chemical test in which the result is expressed as
the quantity of analyte in a sample. Quantitative assays may be used to
determine whether the amount of analyte is above or below a "cut-point" that
distinguishes an acceptable level of the analyte, such as a food pathogen, from
an unacceptable level.
Binding, Affinity: relatively strong attachment of one molecule or reactive
site to another by means of forces other than direct chemical bonding and with
high selectivity such that molecules that are very similar to the analyte are
not attached. Examples include the attachment of an antibody to an antigen,
complementary strands of nucleic acid to each other, and an enzyme to its
substrates, streptavidin with biotin and lectin with sugar. The degree of
binding strength and selectivity may vary from one type of affinity pair to
another (high affinity to low affinity).
Accelr8 Technology Corporation 20 Fiscal Year Ended July 31, 2003
Binding Event: the occurrence of affinity or covalent (chemical) binding
between two molecules or entities. If a conjugated assay component is very large
relative to molecular dimensions (as is a nanoparticle), the capture of a single
reporter entity may actually represent multiple analyte binding events but will
be counted as a single binding event since it is the minimum measurable unit.
Binding, Non-Specific: attachment (typically by physical adsorption) of one
material to another in a way that does not require a specific molecular fit
between the two materials. Typically observed when a scientist attempts to wash
away the un-reacted material from a sample mixture applied to an assay surface.
Residual, adsorbed material that is not the analyte then interferes with
accurate measurement of the amount of attached analyte.
Binding Site Density: the areal density of reactive binding sites,
typically expressed as the number of molecular reactive sites (or moles) per
square centimeter.
Binding, Specific: the ability or capacity of an immobilizing surface or
molecule to attach to a single desired analyte molecule and not to very similar
molecules.
Biomolecule: a natural organic molecule found in biological organisms.
Bio-Defense (or Bio-Terrorism or Bio-Warfare): the defense from deliberate
use of human pathogens to infect enemy troops or civilian populations in order
to kill or incapacitate them. The use of infectious diseases as weapons.
"Bio-Defense" is the use of biosciences to devise strategies and materials to
defend against bio-warfare agents.
Chemiluminescence: reaction of certain chemicals that emit light as a
result of the reaction. Used in assays to react in proportion to the amount of
analyte present in a sample.
Confocal Scanning Microscope: a complex automated microscope used to scan
analytic slides in a very thin optical section in order to reduce background
interference. Typically used with fluorescent dyes conjugated to a sample's
analyte molecules. The workhorse for microarray analysis in genomics and
proteomics.
Conjugate: (verb) to link or bind one chemical or assay component to
another. (Noun) The combined entity created by conjugation of substances. For
example, conjugating a nanoparticle to an antibody. Distinguished from a
chemical reaction in which a single component results that differs chemically
from the starting constituents. Conjugation does not result in a product that
has chemically changed, but one that has two or more components linked together
without having induced a chemical change to either of them.
DNA: the nucleic acid biomolecules that carry an organism's genetic code.
The famous "double helix" molecular model of Watson and Crick.
ELISA: "Enzyme-Linked Immuno-Sorption Assay;" an assay architecture in
which a substrate-immobilized antibody (immunoglobulin) is used as a specific
affinity binding agent to attach to a desired analyte molecule, and then certain
Accelr8 Technology Corporation 21 Fiscal Year Ended July 31, 2003
enzymes are linked to the affinity-bound pair in a way that amplifies and
reports the analyte capture through some means of physical detection such as
optical density of a dye or brightness from chemiluminescence or fluorescence.
Enzyme: a protein that catalyzes a biochemical reaction. As a catalyst, the
enzyme induces the reaction to occur but does not itself change as a result of
the reaction. Enzymes catalyze all of the biochemical reactions responsible for
a cell's life processes.
Fluorescence: emission of light by a molecule in response to illumination
by light of certain wavelengths. The emitted light has a longer wavelength
(red-shifted) than that of the illumination source. Used to react in an assay in
proportion to the amount of analyte present in a sample.
Functionalization: the incorporation of a chemically reactive group at the
surface of a material such as an assay substrate. This group provides an
attachment site for specific types of chemical binding reaction.
Gene: a sequence of DNA or RNA that produces a functional protein product
when translated by the normal biosynthetic route.
Genomics: the study, including sequencing, of molecules that carry an
organism's genetic code (nucleic acids, DNA and RNA).
High-Throughput Screening (HTS): parallel processing of very large numbers
of assays in order to identify interactions between a target substance and a
probe. The most important example is the use of microarrays, combinatorial
libraries, and other materials to discover drug candidates.
Hybridization: the specific affinity linkage between two complementary
nucleic acid strands over a relatively long polymeric sequence. The binding
strength is a function of the degree of complementary homology between the
strands.
Immunoassay: any type of biochemical assay that uses antigen-antibody
affinity as the assay basis of selection and detection.
Lab-On-A-Chip ("LOC"): a very small-scale sequence of mechanized laboratory
processes to capture, clean, separate, and measure one or more defined analytes
in a sample. Practical LOC devices range from relatively large, a few inches in
their longest dimension, to microscopic. They allow relatively complete
laboratory analyses to be performed in a single mass-produced integrated fluidic
component. Typically, LOC uses physical principles that would not be practical
on a larger physical scale but that replace "macro" components that do not work
well on a small scale (such as mechanical valves).
Macromolecule: a large molecule. The size cutoff is arbitrary and depends
on context.
Microarray: a regular geometric array (matrix or grid pattern) of
individual reactive chemical probes affixed to a physical substrate such as a
microscope slide. Used in assays to conduct thousands of analyses at one time on
sample materials presented to the microarray. The high-density evolution of the
microtiter plate.
Accelr8 Technology Corporation 22 Fiscal Year Ended July 31, 2003
Microtiter Plate: a multi-well plate (typically 96 wells) of standard
dimensions in which individual reactions occur near-simultaneously with
different reagents. Analyzed visually or by automated optical plate readers.
Currently the most widely-used standard laboratory assay format.
Nanoparticle: a very small particle whose diameter is (typically) smaller
than the wavelength of light used to illuminate it in an assay system.
Designated "nano" because its dimensions are expressed in nanometers (a
billionth of a meter). Visible light has wavelengths between about 350 and 650
nanometers.
Nucleic Acid: DNA (deoxyribo-nucleic acid) or RNA (ribo-nucleic acid).
Polymeric chains of nucleotides whose particular sequence constitutes an
organism's genetic code (DNA and genomic RNA) or that participate in the
biosynthesis of new protein molecules (other types of RNA such as messenger RNA,
transfer RNA, and ribosomal RNA).
Oligonucleotide, Oligomer, Oligo: a short section of DNA or RNA. A small
nucleic acid polymer.
Pathogen: an infectious organism (bacteria, viruses, prions) that when
infecting a host causes a medical pathology (disease). Pathogens may be
transmitted through food, water, air, and/or contact with infected individuals
or their biological fluids.
Probe (molecular): by convention, the reactive component of an assay that
is immobilized onto a surface and to which its complementary "target" is
presented.
Protein: biological polymeric macromolecules formed by long chains of amino
acids (twenty in humans) and which provide the mechanism for cellular physiology
and metabolism. All life functions are carried out through the mediation of
proteins (typically enzymes).
Peptide: small proteins or protein fragments. There is not a rigid
demarcation since some small whole "proteins" are much smaller than "peptide"
fragments of large proteins.
Proteomics: the study of proteins in a way that measures the degree of
expression and/or degree of variation, or to identify the proteins created by an
organism's genome. Also referred to as "functional genomics" since it examines
the protein products encoded by genes.
RNA: a nucleic acid biomolecule category if single-stranded (as opposed to
the double helix of DNA) that are essential in making protein products from the
master DNA genetic code. Certain micro-organisms have RNA as their genetic
material rather than DNA.
Sandwich Assay: an assay structure that builds up layers of successive
binding reactions from a fixed mechanical base. A sequence of steps creates the
layers such that the final layer provides the reporting mechanism. Intermediate
layers may amplify the fundamental analyte capture or stabilize it to permit
detection that would not otherwise be reliable or sufficiently sensitive.
Accelr8 Technology Corporation 23 Fiscal Year Ended July 31, 2003
Sensitivity: the smallest quantity of analyte that the assay can detect.
Same as "Limit Of Detection." Statistically, the proportion of false negatives
reported for a population sample.
Signal-To-Noise Ratio (SNR or S/N): the ratio of a desired "signal" such as
analyte quantity to background "noise" such as interference by unwanted
substances or detectors or detection circuitry. The higher the SNR, the higher
the possible assay sensitivity.
Specificity: the degree to which an assay measures only the specific
analyte of interest and not chemically similar materials. Statistically, the
proportion of false positives reported for a population sample.
Surface Chemistry: the chemistry of materials that provide a barrier or
contact surface. In the context of biochemical assays, the chemistry of all
exposed surface area that may come into contact with assay reagents.
Target (molecular): by convention, the reactive component of an assay that
is not immobilized, but which is presented to its complementary immobilized
"probe."
Tissue Culture: artificial growth of living cells from multi-cellular
organisms (including humans) in a laboratory medium.
Item 2 - Description of Property
--------------------------------
We lease approximately 3,565 square feet of office space at 303 E. 17th
Avenue, Suite 108, Denver, Colorado, 80203, and approximately 4,970 square feet
of laboratory space at 7000 Broadway, Denver, Colorado, 80221. The combined
monthly rent is approximately $7,065.
Item 3 - Legal Proceedings
--------------------------
Concluded Legal Matter
On November 16, 1999, the SEC filed suit in the United States District
Court for the District of Colorado against the Company, Thomas V. Geimer, Harry
J. Fleury, and James Godkin (collectively the "Defendants"), Civil Action No.
99-D-2203. The SEC sought an injunction permanently restraining and enjoining
each defendant from violating Section 10(b) of the Exchange Act, and Rule 10b-5
promulgated thereunder; Section 13(a) of the Exchange Act, 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
Exchange Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
related to securities fraud. 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 and 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
Accelr8 Technology Corporation 24 Fiscal Year Ended July 31, 2003
which the court dismissed the securities fraud claims against all Defendants
with prejudice. The Court 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. None of the Defendants
were found to have made any misstatement as to the Company's product's
performance or capabilities or misstatements to the Company's accountants nor
did the suit result in any restatement of the Company's financial statements. In
connection with the settlement, 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. The costs of the defense plus the civil penalties were borne by the
Company.
Pending Legal Matter
The Company is party to one current legal proceeding, which is a lawsuit
against Deloitte & Touche LLP and the corresponding Deloitte & Touche LLP
counterclaim against the Company.
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 this action, the Company
seeks damages from Deloitte for breach of contract as a result of Deloitte's
resignation as the Company's auditors. 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 estimated at $349,472. Third-party claims
allege deceit based on fraud and negligent misrepresentation, and also seek
unspecified damages. On February 18, 2003, the Company, as counterclaim
defendant, and Messrs. Geimer and Fleury, as third-party defendants, moved to
dismiss the counterclaims and third-party complaint. On May 29, 2003, the Court
denied the motion to dismiss the counterclaims against the Company, and granted
the motion to dismiss the third-party claims against Messrs Geimer and Fleury.
The Company believes it has substantial defenses to the counterclaims and the
Company intends to contest the counterclaims vigorously. However, there can be
no assurance that the resolution of the counterclaims will not have a material
adverse effect on the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted by us to a vote of our security holders through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this Annual Report.
Accelr8 Technology Corporation 25 Fiscal Year Ended July 31, 2003
PART II
Item 5 - Market For Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
Since November 21, 2000 the Company's common stock has traded on the
over-the-counter market on the NASDAQ Electronic Bulletin Board. On October 9,
2003, the Company's common stock began trading on the American Stock Exchange
under the trading symbol AXK.
The table set forth below presents the range, of the high and the low sales
price per share of Common Stock as reported by NASDAQ on a quarterly basis. The
quotations represent prices between dealers and do not include retail markup,
markdown or commissions and may not necessarily represent actual transactions.
Quarter Ended High Low
------------- ---- ---
Fiscal 2003
October 31, 2002 $1.19 $0.60
January 31, 2003 1.69 1.01
April 30, 2003 1.22 0.97
July 31, 2003 6.95 1.07
Fiscal 2002
October 31, 2001 $3.57 $1.43
January 31, 2002 3.50 2.00
April 30, 2002 2.17 1.33
July 31, 2002 1.65 .75
On October 15, 2003, we had approximately 180 shareholders of record, which
does not include shareholders whose shares are held in street or nominee names.
We believe that there are approximately 1,525 beneficial owners of our Common
Stock.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefor. To
date, no dividends have been declared by the Board of Directors, nor does the
Board of Directors anticipate declaring and paying cash dividends in the
foreseeable future.
Accelr8 Technology Corporation 26 Fiscal Year Ended July 31, 2003
Securities Authorized For Issuance Under Compensation Plans
The table set forth below presents the securities authorized for issuance
with respect to compensation plans under which equity securities are authorized
for issuance as of July 31, 2003:
---------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
---------------------------------------------------------------------------------------------------------
Number of securities Weighted-average Number of securities remaining
Plan Category to exercise price of available for future issuance
be issued upon outstanding under equity compensation plans
exercise options, warrants (excluding securities reflected
of outstanding and rights in the 1st column)
options,
warrants and rights
-------------------------- ----------------------- -------------------- ---------------------------------
Equity Compensation
Plans approved by 755,000 $2.36 167,500
security holders
-------------------------- ----------------------- -------------------- ---------------------------------
Equity Compensation
Plans not approved by 200,000 $2.25 N/A
security holders
-------------------------- ----------------------- -------------------- ---------------------------------
Total 955,000 $2.36 167,500
-------------------------- ----------------------- -------------------- ---------------------------------
Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
-------------------------------------------------------------------------
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, we have 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 us to pursue a purchase agreement with DDx.
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 quantitative instrument (QuanDx). Our proprietary
surface chemistry and its quantitative instruments support real-time assessment
of medical diagnostics, food-borne pathogens, water-borne pathogens and
bio-warfare assessments. Presently the Company holds for sale advanced
microarray slides and specialty microtiter plates coated with its proprietary
OptiChem activated surface chemistry for use in academic research, drug
discovery and molecular diagnostics. This surface coating has an extraordinary
ability to shed sticky biomolecules that interfere with bio-analytical assays
such as microarrays and immunoassays. This property substantially improves
analytical performance by enabling higher sensitivity, greater reproducitiility,
and higher throughput by virtue of simplified application methods.
Accelr8 Technology Corporation 27 Fiscal Year Ended July 31, 2003
We are currently offering OptArray microarray slides to university and
government labs, pharmaceutical, drug discovery and diagnostic companies that
rely upon customized surface chemistry for their assays. The surface chemistry
will be customized to meet the specific requirements of large manufacturers,
with the intent of licensing our products to users.
The Company believes that the market for DNA/RNA and protein microarrays is
growing because of increased demand for gene analysis and molecular diagnostics
as measured by industry wide growth in unit sales, i.e., Affymetrix
(NASDAQ:AFFX), Agilent, (NYSE:A), and Applied Biosciences (NYSE:ABI).
On October 15, 2003 we entered into a supply agreement and a letter of
intent with SCHOTT Nexterion AG of Mainz, Germany. Under the terms of the supply
agreement, 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 SCHOTT
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. See "Subsequent Events."
We continue to remain a provider of software tools and modernization
solutions for VMS Legacy Systems. However, we have taken steps to limit the
costs associated with the conduct of our software tools and consulting services
business. We intend 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. We do not expect to continue our consulting activities, although if such
opportunities arise, we believe that we may be able to subcontract for the
performance of the necessary services from third parties or former employees. We
continue to investigate the possibility of selling these business operations to
another party, however we have no arrangements or understandings with respect to
the sale of these assets.
The Company also resells software from CIM Team GmbH, Inc. and a/Soft
Development, Inc. The resale of software provided approximately $604,323 in
revenues during the fiscal year ended July 31, 2003.
Selected Financial Data
The following selected financial data should be read in conjunction with
the financial statements and related notes thereto appearing elsewhere in this
Form 10-KSB. The selected financial data as of July 31, 2003 and 2002 and for
each of the two years in the period ended July 31, 2003 have been derived from
our financial statements which have been audited by our independent auditors and
included elsewhere in this Form 10-KSB. The selected financial data provided
below is not necessarily indicative of our future results of operations or
financial performance.
Accelr8 Technology Corporation 28 Fiscal Year Ended July 31, 2003
Year Ended July 31,
--------------------------------------------------------------------------------
Statement of Operations Data: 2003 2002
---- ----
(In thousands,
except per share data)
Revenue:
Consulting fees $ 25 $ 16
Product license and
customer support fees 169 298
Resale of purchased software
and support fees 604 340
OptiChem Revenue 53 --
----------- -----------
Total revenue 851 654
----------- -----------
Loss from operations (1,547) (762)
Net loss (1,376) (401)
Weighted average shares outstanding 9,510,594 8,363,038
Basic and diluted net loss per share: $ (.14) $ (.05)
Balance Sheet Data: 2003 2002
---- ----
Working capital $ 8,406 $ 9,145
Current assets 8,773 9,879
Current liabilities 367 734
Total assets 13,745 15,024
Total liabilities 1,016 1,279
Shareholders' equity 12,729 13,745
Accelr8 Technology Corporation 29 Fiscal Year Ended July 31, 2003
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations:
Fiscal year ended July 31, 2003 2002
---- ----
Total revenues 100.00% 100.00%
Cost of services (5.28) (19.79)
Cost of software purchased for resale (12.19) (8.38)
General and administrative (96.34) (82.29)
Marketing and sales (43.53) (31.18)
Research and development (66.88) (49.94)
Depreciation (4.17) (3.48)
Amortization (30.32) (22.58)
Loss (gain) on disposal of fixed assets (0.98) 1.71
Impairment loss (22.14) --
Abandoned trademark -- (0.60)
Loss from operations (181.83) (116.53)
Other (expense) income, net 17.79 6.62
Income tax benefit 2.29 48.63
------- -----
Net loss (161.75)% (61.28)%
======= =====
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
audited 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, could affect the Company's
actual results and cause actual results to differ materially from those
discussed in forward-looking statements.
Year Ended July 31, 2003 Compared to Year Ended July 31, 2002
Consulting fees for the year ended July 31, 2003 were $25,000, an increase
of $9,000 or 56.3% as compared to the year ended July 31, 2002, and represented
2.9% of net revenues. This increase was largely due to a code analysis project
for a single customer.
Product license and customer support fees for the year ended July 31, 2003,
were $168,453, a decrease of $129,527 or 43.5% as compared to the year ended
July 31, 2002, and represented 19.8% of net revenues. We believe this decrease
is largely due to decreased expenditures for software by our customers due to
the general slowdown in the economy.
Accelr8 Technology Corporation 30 Fiscal Year Ended July 31, 2003
Revenues from the resale of purchased software including purchased
maintenance for the year ended July 31, 2003 were $604,323, an increase of
$264,326 or 77.7% as compared to the year ended July 31, 2002, and represented
71.1% of net revenues. This increase largely resulted from the sale of
additional software tool sets, to both previous and new customers.
OptiChem revenues for the year ended July 31, 2003 were $52,794 as compared
to none for the year ended July 31, 2002 and represented 6.2% of net revenues.
This product was not available for sale in the year ended July 31, 2002.
OptiChem revenues are made up of sales of slides to approximately twenty
customers.
Due to the above factors, net revenues for the year ended July 31, 2003,
were $850,570, which represented an increase of $196,593 or 30.1% as compared to
the year ended July 31, 2002.
During the year ended July 31, 2003, sales to one customer were $182,673,
representing 21.5% of our net revenues. In comparison, sales to our two largest
customers were $126,469 and $79,500, representing 19.3% and 12.2% of net
revenues for the year ended July 31, 2002. The loss of a major customer could
have a significant impact on our financial performance in any given year.
Cost of services for the year ended July 31, 2003 was $44,855, a decrease
of $84,573 or 65.3% as compared to the year ended July 31, 2002. This decrease
resulted largely from a reduction in software engineering salaries and related
employee costs pertaining to the software operations.
Cost of software purchased for resale including purchased maintenance for
the year ended July 31, 2003 was $103,684, an increase of $48,866 or 89.1% as
compared to the year ended July 31, 2002. The increase results from increased
revenue from resale of purchased software including purchased maintenance and
variations in the product mix of items purchased.
General and administrative expenses for the year ended July 31, 2003 were
$819,451, an increase of $281,283 or 52.3% as compared to the year ended July
31, 2002. This increase was largely due to increased deferred compensation of
$195,724 resulting from change in market value of investments in the deferred
compensation trust, professional fees of $14,861 related to increased accounting
fees, $17,743 in legal fees including the cost of outside experts incurred in
settlement of the class action lawsuit, increased salaries of $38,645 and
increased consulting fees of $7,480.
Marketing and sales expenses for the year ended July 31, 2003 were
$370,282, an increase of $166,385 or 81.6% as compared to the year ended July
31, 2002. This increase was mainly due to increased consulting fees of $50,169,
consultant option expense of $83,662, and expenses related to participation in
trade shows of $29,991, offset by a decrease in telecommunications of $9,400
resulting from a change in telephone system. These increased costs were largely
incurred in attempting to develop a market for OptiChem.
Accelr8 Technology Corporation 31 Fiscal Year Ended July 31, 2003
Research and development expenses for the year ended July 31, 2003 were
$568,873, an increase of $242,291 or 74.2% as compared to the year ended July
31, 2002. This increase was largely due to an increase in salaries for
scientific personnel of $89,815, consultant option expense of $83,661, and
laboratory expense and supplies of $68,933 for the continued development of the
OpTest technologies.
Depreciation for the year ended July 31, 2003 was $35,472, an increase of
$12,742 or 56.1% as compared to the year ended July 31, 2002.
Amortization for the year ended July 31, 2003 was $257,846, an increase of
$110,197 or 74.6% as compared to the year ended July 31, 2002. The increase in
amortization expense results from the increase in the capitalization of
additional cost of intellectual property acquired from DDx during the fiscal
year ended July 31, 2002 based on the fair market value of common stock issued.
There was a loss on asset disposal of $8,345 for the year ended July 31,
2003 as compared to a gain of $11,153 for the year ended July 31, 2002.
There was an impairment loss of $188,359 for the year ended July 31, 2003.
There was no comparable loss for the year ended July 31, 2002. This impairment
loss represents the unamortized cost of the OTER technology purchased from DDx.
While we believe this could be a viable technology with additional development,
we have opted to discontinue development at this time to concentrate our
resources on the technologies that currently have a larger market with greater
demand. Therefore, during the year ended July 31, 2003, the Company recorded the
impairment loss. See "Impairment of Intangible Assets."
There was no loss from abandoned trademarks for the year ended July 31,
2003 as compared to a loss of $3,929 for the year ended July 31, 2002.
As a result of these factors, loss from operations for the year ended July
31, 2003 was $1,546,597, an increased loss of $784,526 or 103%, as compared to
loss from operations for the year ended July 31, 2002.
Interest income for the year ended July 31, 2003 was $103,051, a decrease
of $89,089 or 46.4% as compared to the year ended July 31, 2002. This decrease
was primarily due to decreased interest rates in government money market funds.
Realized loss on marketable securities held in the deferred compensation
trust for the year ended July 31, 2003 was $38,343, an increased loss of $31,725
as compared to the year ended July 31, 2002. This loss was the result of selling
trust investments offset by interest earned. Unrealized gain on marketable
securities held in the deferred compensation trust for the year ended July 31,
2003 was $86,631, compared to unrealized loss of $142,210 for the year ended
July 31, 2002. This loss was the result of changing market value of securities
held by the trust.
Accelr8 Technology Corporation 32 Fiscal Year Ended July 31, 2003
Income tax benefit recorded during the year ended July 31, 2003 was $19,431
compared to an income tax benefit of $318,026 during the year ended July 31,
2002. The number of years available to the Company to carryback a net operating
loss and obtain a refund for taxes previously paid has expired. The inability to
receive a tax refund largely accounts for the decrease in the tax benefit. As of
July 31, 2003, a valuation allowance of $642,594 has been recorded on the
deferred tax asset, as management has not determined that it is more likely than
not that this amount of the deferred tax asset will be realized. See Note 8
"Income Taxes."
As a result of these factors, net loss for the year ended July 31, 2003 was
$1,375,827 an increased loss of $975,094 or 243% as compared to the year ended
July 31, 2002.
Impairment of Intangible Assets
On January 18, 2001, we acquired the OpTest suite of technologies from DDx.
The OpTest suite of technologies, included the surface chemistry and
quantitative instruments (QuanDx and OTER respectively). During the fiscal year
ended July 31, 2002, our primary focus was on the development of our OptiChem
surface chemistry and QuanDx light scattering quantitative assay
instrumentation. During the fiscal year ended July 31, 2003, our focus was on
further research and development relating to OptiChem and QuanDx. Also, during
the fiscal year ended July 31, 2003, we introduced OptArray microarraying slides
and OptiPlate arrayable microtiter plates to the market, and we acquired the
rights to YoDx. Recently, we entered in a supply agreement with Nexterion, and
negotiated a letter of intent for a technology license with SCHOTT. During the
fiscal year ending July 31, 2004, we intend to customize our technologies to the
specific requirements of large licensees, with the potential of bundling product
licensing with an option to purchase equity in the stock of Accelr8. Our efforts
will be directed towards the creation of revenue from the sale and licensing of
our technology, and continued research and development.
We routinely evaluate the recoverability of our long-lived assets based
upon estimated future cash flows from and estimated fair value of such
long-lived assets. If in our judgment, the anticipated undiscounted cash flows
or estimated fair value are insufficient to recover the carrying amount of the
long-lived asset, we will determine the amount of the impairment and the value
of the asset will be written down. During the last fiscal year, we determined
that the carrying amount of $188,359 for the OTER(TM) technology was impaired,
and we wrote down the value of the asset with a charge to operations. At fiscal
year end, we evaluated the recoverability of the remaining amounts recorded on
our balance sheet for our technology. In addition, we obtained an analysis of
our technology from a consultant to assist with our evaluation of the
recoverability of amounts recorded in our balance sheet.
The consultant's report considered key assumptions related to market
potential, operational advantages, new product developments and potential
profitability of our technology. The report also considered the current market
conditions, competition, prospective sales of products, prospective licensing
revenues as well as the Company's strategic relationships.
Accelr8 Technology Corporation 33 Fiscal Year Ended July 31, 2003
We have reviewed the consultant's report and we concur with the
consultant's conclusion that no further impairment of the Company's technology
is appropriate at this time. Management believes that the fair value of the
technology exceeds the carrying value. However, it is possible that future
impairment testing may result in additional intangible asset write-offs, which
could adversely affect the Company's financial condition and results of
operations.
Capital Resources and Liquidity
As of July 31, 2003, the Company had $8,711,951 in cash and cash
equivalents. The primary sources of cash and cash equivalents were cash
generated by operating activities of $151,158 and interest income of $103,051.
Operating Activities.
The Company believes that its existing cash balances of cash and cash
equivalents will be sufficient to satisfy it working capital needs, capital
expenditures and other liquidity requirements with its existing operations over
the next 12 months. Net cash provided by operating activities was $151,158 for
the fiscal year ended July 31, 2003. This primarily resulted from the net loss
of $1,375,827, less significant non-cash items including depreciation,
amortization, stock options issued for services and impairment losses totaling
$649,000, the payment of accrued settlement liabilities of $450,000 offset by
receipt of an insurance recovery receivable of $825,000 and a tax refund of
$336,000.
As compared to the fiscal year ended July 31, 2002, the Company's current
assets decreased 11.2% from $9,879,124 to $8,773,073 and the Company's
liquidity, as measured by cash and cash equivalents, increased by 0.9%. During
the same period, shareholders' equity decreased 7.4% from $13,744,648 to
$12,729,144 primarily as a result of a net loss of $1,375,827 offset by $146,000
received from 175,000 common stock options exercised, $167,323 for value of
options issued to independent consultants, and $47,000 for value of 50,000
options issued for the purchase of additional technology.
The Company has recently entered into a supply agreement with Nexterion
whereby Nexterion will purchase 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. Further, the Company entered into a letter of intent with SCHOTT for
the negotiation of an exclusive technology transfer license for our OptiChem
surface chemistry. While there can be no assurance the Company will enter into a
definitive agreement for the technology transfer license, Management is
optimistic that an agreement will be reached with SCHOTT that will provide the
Company with revenues from three sources, including: (i) a one-time payment of
an up front licensing fee (upon signing), (ii) consulting services relating to
the technology transfer process, and (iii) royalties on sales.
Investing Activities.
Net cash used in investing activities was $216,399 for the fiscal year
ended July 31, 2003, primarily from capital expenditures of $109,164, purchases
of intellectual property of $32,235 and purchases of investments of $75,000.
Accelr8 Technology Corporation 34 Fiscal Year Ended July 31, 2003
Capital Commitments.
As of July 31, 2003, the Company had one outstanding lease commitment in
the amount of $91,534 over the next three years and an employment agreement with
our Chairman and CEO which calls for the aggregate payments of approximately
$1,107,115 over the next five years. See "Employment Agreement." Other than the
items mentioned above, management currently expects minimal capital expenditures
for the next 12 months.
Recent Accounting Pronouncements
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 will continue to account for its stock-based employee compensation plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. See Note
6 for further discussion.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires the consolidation of variable
interest entities, as defined. FIN No. 46 is applicable to the Company's
financial statements to be issued after July 31, 2003. This statement did not
have any effect on the Company's financial statements as of July 31, 2003.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivitative Instruments and Hedging Activities." The statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or
modified after June 30, 2003, for hedging relationships designated after June
30, 2003, and to certain preexisting contracts. The Company adopted SFAS No. 149
in the fiscal fourth quarter. The adoption of SFAS No. 149 did not have an
impact on the Company's results of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments, with Characteristics of Both Liabilities and Equity,"
which provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope, which may have previously been classified as equity, as a liability
(as an asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective August 1, 2003 for the Company. Upon adoption, the amounts for stock
to be issued currently reflected as a component of shareholders equity will be
classified as a liability and carried at fair value in the balance sheet.
Accelr8 Technology Corporation 35 Fiscal Year Ended July 31, 2003
Application of Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
We generate revenue as follows:
o Consulting revenue is recognized as services are performed.
o Software license contracts ("SLC") revenue is recognized when the Company
substantially completes its obligations under the applicable agreement and
the customer has accepted the product.
o Post contract support ("PCS") revenue is recognized using either the
straight-line method or ratably over the term of the PCS agreement based
upon historical evidence.
o Reseller of purchased software and post contract support ("PSPCS") revenue
is generally recognized upon delivery of the computer software. We
periodically function as a value-added reseller of computer software and
bundled PSPCS agreements to our customers. When the PSPCS agreement extends
over one year or is for maintenance only, the PSPCS revenue is recognized
over the term of agreement.
o Sales returns and allowances are provided for on an accrual basis.
o OptiChem revenue is recognized upon shipping of the product to the
customer.
o Deferred consulting revenue represents amounts billed but not yet earned
under consulting agreements. Deferred maintenance revenue represents
amounts billed but not yet earned under maintenance agreements. Deferred
license fee revenue represents amounts billed but not yet earned under
license agreements.
Deferred Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance based on historical taxable income, projected
future taxable income, and the expected timing of the reversals of existing
temporary differences. As of July 31, 2003, we have established a valuation
Accelr8 Technology Corporation 36 Fiscal Year Ended July 31, 2003
allowance equal to our net deferred tax asset, as we have not been able to
determine that we will generate sufficient future taxable income to allow us to
realize the deferred tax asset.
Intangible Assets
We amortize our intangible assets over the period the asset is expected to
contribute directly or indirectly to our future cash flows. We evaluate the
remaining useful life of each intangible asset that is being amortized each
reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
We review our intangible assets for impairment each reporting period as
discussed below under "Impairment of long-lived and intangible assets." An
impairment loss will be recognized if the carrying amount of an intangible asset
is not recoverable and its carrying amount exceeds its fair value.
Impairment of Long-Lived and Intangible Assets
We assess the impairment of identifiable intangibles and long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
o significant underperformance relative to expected historical or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles and long-lived
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Our
judgments regarding the existence of impairment indicators are also based on
legal factors, market conditions and expected future operational performance of
related product lines of the identifiable intangible. Future events could cause
us to conclude that impairment indicators exist and that our identifiable assets
are impaired. Any resulting impairment loss could have a material adverse impact
on our financial condition and results of operations. We also evaluate the
remaining estimated useful lives of each asset each reporting period and
determine whether events or circumstances require revised useful lives.
Accelr8 Technology Corporation 37 Fiscal Year Ended July 31, 2003
Research and Development
Research and development expenses are expensed as incurred. Research and
development expenses include salaries and related expenses associated with the
development of our technology and include compensation paid to engineering
personnel and fees to consultants.
Contractual Obligations
The following tables set forth information with respect to our contractual
obligations and commercial commitments as of July 31, 2003.
Contractual Obligations(3)
-----------------------------------------------------------------------------------------------------------
Payments due by Period
-----------------------------------------------------------------------------------------------------------
Total 1 to 3 years 4 to 5 years More than 5 years
----------------------- ----------------- ------------------- ------------------------- -------------------
Laboratory Lease $91,534 $91,534 $0 $0
Payments(1)
----------------------- ----------------- ------------------- ------------------------- -------------------
Thomas V. Geimer $1,107,115 $720,000 $387,115 $0
Employment Contract(2)
----------------------- ----------------- ------------------- ------------------------- -------------------
(1) Includes monthly deposits for taxes and assessments, landlords liability
insurance and common facilities charges. We have a three-year lease
agreement that began on October 1, 2002 for our laboratory located at 7000
North Broadway, Unit 307, Denver, Colorado 80221.
(2) Calculated as of July 31, 2003. Mr. Geimer's employment agreement expires
on December 31, 2007. See "Item 10-Executive Compensation."
(3) Excludes accounts payable and accrued liabilities.
Item 7 - Financial Statements
-----------------------------
The response to this item is submitted as a separate section of this report
beginning on page F-1.
Item 8 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
On August 28, 2002, the Company's independent public accountants, Levine,
Hughes & Mithuen, Inc. (" LH&M"), resigned. LH&M advised the Company that it was
resigning as the Company's independent public accountants as a result of a
decision by LH&M's management to limit their involvement with the audit of
public companies filing periodic reports under the Exchange Act.
The reports by LH&M on the Company's financial statements during the
preceding two years contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
Accelr8 Technology Corporation 38 Fiscal Year Ended July 31, 2003
During the preceding two fiscal years and through August 28, 2002, there
were no disagreements between the Company and LH&M on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which, if not resolved to LH&M's satisfaction, would have caused LH&M
to make reference to the subject matter of the disagreements in connection with
LH&M's reports on the Company's financial statements.
During the preceding two fiscal years and through August 28, 2002, there
were no reportable events required to be disclosed pursuant to Item
304(a)(1)(v).
Pursuant to Item 304(a)(3), on August 29, 2002, LH&M furnished the Company
a letter addressed to the SEC stating it agrees with the statements made by the
Company in response to Item 304(a). A copy of the LH&M letter was included on
the Form 8-K filed on August 29, 2002 and is incorporated herein by reference.
On August 29, 2002, the Company engaged Anton Collins Mitchell LLP, an
independent member of the BDO Seidman Alliance, as the new independent public
accountants.
Item 8A - 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 July 31, 2003. Based on that evaluation, Mr.
Geimer concluded that the Company's disclosure controls and procedures were
effective as of such date to ensure that information required to be disclosed in
the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. Such officers also confirm that there was no change in the
Company's internal control over financial reporting during the year ended July
31, 2003 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
----------------------------------------------------------------------
Set forth below is certain information concerning the directors, executive
officers and key employees and consultants of the Company as of the date hereof.
Accelr8 Technology Corporation 39 Fiscal Year Ended July 31, 2003
Directors, Executive Officers, and Key Employees and Consultants
Thomas V. Geimer 56 Secretary, Chief Financial Officer,
Chief Executive Officer
Harry J. Fleury 56 President
Charles E. Gerretson(1) 57 Director
A. Alexander Arnold III(1) 63 Director
Michael J. Lochhead, Ph.D. 38 Senior Scientist
Charles Greef, Ph.D. 45 Senior Scientist
Steven W. Metzger 29 Scientist
David W. Grainger, Ph.D. 42 Chairman, Scientific Advisory Committee
David Howson 60 Consultant, Director of Business
Development-Bioscience
David Goldberg, Ph.D. 48 Consultant
-----------------
(1) Members of the Audit and Compensation Committees
Officers are appointed by and serve at the discretion of the Board of
Directors. Each director holds office until the next annual meeting of
shareholders or until a successor has been duly elected and qualified. All of
our officers devote their full-time to our business and affairs. There are no
family relationships between any directors, executive officers or key employees
or consultants.
Thomas V. Geimer has been the Chairman of the Board of Directors and a
director of Accelr8 since 1987. He currently serves as the Chief Executive
Officer, Chief Financial Officer and Secretary of the Company. Mr. Geimer is
responsible for development of our business strategy, day-to-day operations,
accounting and finance functions. Before assuming full-time responsibilities at
the Company, Mr. Geimer founded and operated an investment banking firm.
Harry J. Fleury has served as President of the Company since June 1995. Mr.
Fleury is responsible for engineering activities, and for domestic and
international sales of software tools and services. From March 1993 until June
1995, Mr. Fleury was Vice President of International Sales of Accelr8,
responsible for developing and directing international sales. Prior to joining
the Company in 1993, Mr. Fleury was employed by Digital Equipment Corporation
serving in a variety of engineering and management positions for over 26 years.
Mr. Fleury managed DEC's European, Asian and Pacific corporate engineering
groups that were responsible for service capability worldwide, for internal and
external products and for strategic, operational and tactical direction. Mr.
Fleury received an electrical engineering degree in 1967 from Vermont Technical
Engineering College.
A. Alexander Arnold III has served as a director of the Company since
September 1992. For the past 25 years Mr. Arnold has served as a Managing
Director of Trainer, Wortham & Co., Inc., a New York City-based investment
counselor firm, which Mr. Arnold co-founded. Mr. Arnold received a Bachelor of
Arts degree from Rollins College in 1964 and a Masters of Business
Administration from Boston University in 1966.
Charles E. Gerretson was appointed a director of the Company on July 19,
2003. For the past 28 years, Mr. Gerretson has served as the President of
Gerretson Realty, Inc., a Denver Colorado based real estate firm, in which Mr.
Gerretson founded. Mr. Gerretson received a Bachelor of Science degree in
Business Administration from the University of Minnesota in 1968.
Accelr8 Technology Corporation 40 Fiscal Year Ended July 31, 2003
Employees and Consultants
Michael J. Lochhead, Ph.D. has been a Senior Scientist with Accelr8 since
April 2001. Dr. Lochhead is responsible for product design and development. From
1998 through 2001, Dr. Lochhead was an Assistant Professor of Chemical
Engineering at the University of New Hampshire. Dr. Lochhead received a Bachelor
of Arts and Science degree from the University of Notre Dame and a Ph.D. in
Chemical Engineering from the University of Wisconsin in 1995. He is a surface
chemist responsible for coating formulations and scalable manufacturing
processes.
Steven W. Metzger has been a research scientist with the Company since
April 2001, and is now a Senior Scientist. From 2000 through 2001, Mr. Metzger
was responsible for the implementation of emerging core technologies at Heska
Corporation. He was previously employed by Geo-Centers Inc. under contract at
the Naval Research Laboratory in Washington, D.C. where he focused on
bio-warfare pathogen detection. Mr. Metzger received a Bachelor of Arts degree
in Chemistry from Colorado College in 1996.
Charles Greef, Ph.D. has been a Senior Scientist with the Company since May
2003. Dr. Greef received his Doctorate in Chemistry from the University of
Colorado at Boulder under the direction of Professor Marvin Caruthers, studying
synthesis and biochemical properties of oligonucleotide analogs. He has held the
position of Research Scientist at Nanogen, Genicon Sciences Corporation, and
SomaLogic, all emphasizing research and product development of microarray
related technologies. He is a specialist in proteins and microarraying.
David W. Grainger, Ph.D. has been a consultant to the Company since January
2001. Since 1994, Dr. Grainger has taught as a Professor and Assistant Professor
of Chemistry at Colorado State University. From 1998 through 1999, Dr. Grainger
was the President and Chief Scientific Officer for Gamma-A Technologies, Inc.
Dr. Grainger received a Bachelor of Arts degree in Engineering from Dartmouth
College in 1983 and a Ph.D. in Pharmaceutical Chemistry from the University of
Utah in 1987. Dr. Grainger chaired the prestigious Gordon Conference on Tissue
Engineering and Biomaterials in 2001. He has been a consultant to companies such
as Novartis, Johnson & Johnson, 3M, Ciba-Geigy, and others.
David Goldberg, Ph.D. has been a consultant to the Company since October
2002. Dr. Goldberg received his Doctorate in Biology from the California
Institute of Technology. He did postdoctoral studies at Harvard and at the
Molecular Biology Laboratory of the MRC, Cambridge. Dr. Goldberg has
wide-ranging expertise in analytical systems and engineering as well as
molecular biology. He is the inventor of YoDx.
David Howson has been a consultant to the Company and acts as the Company's
Director for Bioscience Business Development since January 2001. Mr. Howson is
responsible for the management of operations, product development, and marketing
and sales. Mr. Howson currently serves as the Chief Technology Officer for
Amidex, Inc. Before assuming responsibilities at the Company, Mr. Howson founded
Accelr8 Technology Corporation 41 Fiscal Year Ended July 31, 2003
and operated the Altro Group, LLC, a medical technology consulting firm. From
1966 through 1970, Mr. Howson was enrolled in the Neurobiology Doctoral Program
at Cornell University and received a Bachelor of Science degree from Hobart
College in 1966.
S. Scott Saavedra, Ph.D. has been a consultant to the Company since
February 2002. Dr. Saavedra received his Doctorate in Analytical Chemistry from
Duke University. He is now an Associate Professor in the Department of Chemistry
at the University of Arizona. Dr. Saavedra has expertise in analytical sensing
devices based on biological thin films. His expertise on photonics enhanced our
intellectual property for detection technology.
Daniel A. Buttry, Ph.D. has been a consultant to the Company since
September 2003. Dr. Buttry received his Doctorate in Chemistry from the
California Institute of Technology. He is now the Head of the Department of
Chemistry at the University of Wyoming. Dr. Buttry has expertise in
electrochemistry and plays an active role in our detection technology
development.
Scientific Advisory Board
The Company established a Scientific Advisory Board in 2003. Dr. David
Grainger is Chairman. Additional members include Dr. David Goldberg, Dr. S.
Scott Saavedra and Dr. Daniel A. Buttry.
Involvement in Certain Legal Proceedings
Messrs. Thomas V. Geimer and Harry J. Fleury have been involved in certain
legal proceedings relating to services performed for the Company. For detailed
information concerning these legal proceedings, see "Item 3-Legal
Proceedings-Concluded Legal Matters."
Board Committees
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The members of the Compensation Committee and the Audit Committee are
Messrs. Arnold and Gerretson, the Company's non-management directors. Prior to
Mr. Gerretson's appointment as a Director of the Company, the Compensation
Committee held one meeting during the last fiscal year. The Audit Committee held
four meetings during the last fiscal year. The Audit Committee's financial
expert is Charles E. Gerretson.
Audit Committee Report
The Audit Committee has reviewed and discussed with management the
Company's audited financial statements as of and for the year ended July 31,
2003.
The Audit Committee has also discussed with Anton Collins Mitchell LLP the
matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants.
Accelr8 Technology Corporation 42 Fiscal Year Ended July 31, 2003
The Audit Committee has received and reviewed the written disclosures and
the letter from Anton Collins Mitchell LLP required by Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees, as
amended, and has discussed with Anton Collins Mitchell LLP their independence.
Based on the reviews and discussions referred to above, the Audit Committee
has recommended to the Board of Directors that the audited financial statements
referred to above be included in the Company's Annual Report on Form 10-KSB for
the year ended July 31, 2003 filed with the Securities and Exchange Commission.
Audit Committee of The Board of Directors
A. Alexander Arnold III
Charles E. Gerretson
Compliance With Section 16(a) of The Exchange Act
Section 16(a) of the Exchange Act, generally requires the Company's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities ("10% owners") to file with
the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Directors and executive
officers and 10% owners are required by Securities and Exchange Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on review of copies of such
reports furnished to us and verbal representations that no other reports were
required to be filed during the fiscal year ended July 31, 2003, all Section
16(a) filing requirements applicable to its directors, executive officers and
10% owners were met, except that Harry J. Fluery, an officer of the Company
failed to timely file a Form 4 in April disclosing one transaction. Mr. Fluery
filed a Form 4 on May 29, 2003 disclosing this transaction. David C. Wilhelm, a
former director of the Company, failed to timely file a Form 4 in July to report
two transactions. Mr. Wilhelm filed a Form 4 on August 6, 2003 disclosing these
transactions. Further, DDx sold approximately 207,000 shares to individuals
during the fiscal year ended July 31, 2003, and as of the date of this report
has failed to file a Form 4 disclosing the transactions.
Code of Ethics
At this time, the Company has not adopted a formal Code of Ethics that
applies to the Chief Executive Officer and Chief Financial Officer. The Company
expects to adopt a formal Code of Ethics during the current fiscal year.
The Company has followed an informal Code of Ethics requiring Board of
Directors' approval of any material transaction involving the Company's Chief
Executive Officer and the Chief Financial Officer. The Company believes this
procedure reasonably deters material wrongdoing and promotes honest and ethical
conduct.
Accelr8 Technology Corporation 43 Fiscal Year Ended July 31, 2003
Item 10 - Executive Compensation
--------------------------------
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company in the two
fiscal years ended July 31, 2003, of Thomas V. Geimer and Harry J. Fleury, the
Company's most highly compensated executive officers.
Annual Compensation Long Term Compensation
------------------- ----------------------
Other Securities
Name and Fiscal Annual Underlying
Principal Position Year Salary Other Compensation Options
------------------ ---- ------ ----- ------------ -------
Thomas V. Geimer 2003 $142,500 $75,000(1) $ -- --
Chief Executive Officer 2002 $100,507 $75,000(1) $125,000(5) 200,000(2)
and Chief Financial
Officer
Harry J. Fleury 2003 $ 75,000 $16,042(3) $ -- --
President 2002 $ 75,000 $ 5,678(3) $ 35,000(5) 10,000(4)
-------------
(1) Represents deferred compensation for Mr. Geimer pursuant to the Company's
deferred compensation plan, $75,000 of which vested during each of the
fiscal years ended July 31, 2003 and 2002.
(2) Includes 100,000 options previously granted to Mr. Geimer and the
replacement of 200,000 options that were previously granted to Mr. Geimer,
which were canceled pursuant to a stock option exchange agreement during
the fiscal year ended July 31, 2002.
(3) Includes sales commissions earned by Mr. Fleury on revenues from certain
sales.
(4) Represents stock options to purchase 10,000 shares at an exercise price of
$2.50 per share. On October 19, 1998, Mr. Fluery was granted 50,000 options
to purchase our common stock, 40,000 of which had vested as of July 31,
2002. The final 10,000 options expired without vesting.
(5) The Company reimbursed Messrs. Geimer and Fleury on an after tax basis for
civil penalties paid by them in connection with the settlement of the SEC
matter. (See "Item 3-Legal Proceedings" and "Item 12-Certain Relationships
and Related Transactions.")
Accelr8 Technology Corporation 44 Fiscal Year Ended July 31, 2003
Option Values. The following table provides certain information concerning
the fiscal year end value of unexercised options held by Mr. Geimer and Mr.
Fleury.
Aggregated Option Exercises in 2003 Fiscal Year
and Fiscal Year End Option Values
Shares Number of Unexercised Value of Unexercised
Acquired on Value Options at Fiscal Year In-the-Money Options
Name Exercise Realized(1) End Fiscal Year End(2)
--------------------------------------------------------------------------------------------------------
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
------- ------- ------- -------
Thomas V. Geimer 0 0 300,000 0 $655,000 $0
Harry J. Fleury 100,000 $73,000 40,000 0 $ 46,000 $0
------------------------------------
(1) Value calculated by determining the difference between the closing sales
price on the date of exercise, April 22, 2003, of $1.09 per share and the
exercise price of the options.
(2) Value calculated by determining the difference between the closing sales
price on July 31, 2003, of $3.65 per share and the exercise price of the
options. Fair market value was not discounted for restricted nature of any
stock purchased on exercise of these options.
Employment Agreement
Effective December 1, 2002, we entered into a new employment agreement with
our Chairman, Chief Executive Officer and Chief Financial Officer and Secretary,
Mr. Thomas V. Geimer. The agreement was negotiated and approved by the
Compensation Committee. The new agreement provides for an annual base salary of
$165,000 with annual deferred compensation of $75,000. The new agreement expires
on December 31, 2007. In the event of termination by mutual agreement,
termination "with cause," as defined in the agreement, death or permanent
incapacity or voluntary termination, Mr. Geimer or his estate would be entitled
to the sum of the base salary and unreimbursed expenses accrued to the date of
termination and any other amounts due under the agreement. In the event of
termination "without cause," as defined in the agreement, Mr. Geimer would be
entitled to the sum of the base salary and unreimbursed expenses accrued to the
date of termination and any other amounts due under the agreement and an amount
equal to the greater of Mr. Geimer's annual base salary (12 months of salary) or
any other amounts remaining due to Mr. Geimer under the agreement, which as of
July 31, 2003 would be $1,107,115. Additionally, in the event of a change in
control, any unpaid amounts due under the initial term of the agreement for both
base salary and deferred compensation would be payable plus five times the sum
of the base salary and deferred compensation.
Compensation Pursuant to Plans
Employee Retirement Plan. During fiscal year 1996, we established a
SARSEP-IRA employee pension plan that covers substantially all full-time
employees. Under the plan, employees have the option to contribute up to the
lesser of 15% of their compensation or $10,500. We may make discretionary
Accelr8 Technology Corporation 45 Fiscal Year Ended July 31, 2003
contributions to the plan based on recommendations from the Board of Directors.
We made no contribution for the fiscal years ended July 31, 2003 or 2002. The
plan was terminated during the year ended July 31, 2003.
Deferred Compensation Plan. In January 1996, we established a deferred
compensation plan for our employees. We may make discretionary contributions to
the plan based upon recommendations from the Board of Directors. For each of the
fiscal years ended July 31, 2003 and 2002, we contributed $75,000 to the plan.
The $75,000 contribution for the fiscal year ended July 31, 2003 was made on
October 14, 2003.
1987 Non-Qualified Stock Option Plan. We currently have no outstanding
options issued to employees of the Company pursuant to our 1987 non-qualified
stock option plan (the "1987 Plan"). During the year 100,000 options at a price
of $.36 each were exercised for $36,000 and 6,500 options at a price of $.36
expired. During the 1994 fiscal year, the Board of Directors adopted a
resolution providing that for so long as a recipient of an option grant remains
in the employ of the Company, the options held will not expire and if the
recipient's employment is terminated, the holder will have up to 90 days after
termination to exercise any vested but previously unexercised options. In 1997,
the Board of Directors passed a further resolution clarifying that upon the
death of an optionee, an unexercised option will remain exercisable for a period
of one year by, and only by, the person to whom the optionee's rights have
passed by will or by the laws of descent and distribution. All options
previously granted were administered by our Board of Directors. The options
provide for adjustment of the number of shares issuable in the case of stock
dividends or stock splits or combinations and adjustments in the case of
recapitalization, merger or sale of assets. Since all 300,000 shares originally
reserved had been issued the plan has been terminated.
On October 14, 1997, Thomas V. Geimer exercised an aggregate of 1,140,000
warrants and options to acquire 1,140,000 shares of the Company's Common Stock
at an exercise price of $0.24 per share. Under the terms of the Rabbi Trust, we
will hold the shares in trust and carry the shares as held for employee benefit
by the Company. The Rabbi Trust provides that upon Mr. Geimer's death,
disability, or termination of his employment the shares will be released ratably
over the subsequent ten (10) years, unless the Board of Directors determines
otherwise. See Note 9 to the Financial Statement for further information.
The 1996 Stock Option Plans
The Board of Directors of the Company has adopted an incentive stock option
plan (the "Qualified Plan") which provides for the grant of options to purchase
an aggregate of not more than 700,000 shares of the Company's Common Stock. The
purpose of the Qualified Plan is to make options available to management and
employees of the Company in order to provide them with a more direct stake in
the future of the Company and to encourage them to remain with the Company. The
Qualified Plan provides for the granting to management and employees of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "Code").
Accelr8 Technology Corporation 46 Fiscal Year Ended July 31, 2003
The Board of Directors of the Company has adopted a non-qualified stock
option plan (the "Non-Qualified Plan") which provides for the grant of options
to purchase an aggregate of not more than 300,000 shares of the Company's Common
Stock. The purpose of the Non-Qualified Plan is to provide certain key
employees, independent contractors, technical advisors and directors of the
Company with options in order to provide additional rewards and incentives for
contributing to the success of the Company. These options are not incentive
stock options within the meaning of Section 422 of the Code.
The Qualified Plan and the Non-Qualified Plan (the "Stock Option Plans")
are administered by a committee (the "Committee") appointed by the Board of
Directors which determines the persons to be granted options under the Stock
Option Plans and the number of shares subject to each option. No options granted
under the Stock Option Plans are transferable by the optionee other than by will
or the laws of descent and distribution and each option is exercisable, during
the lifetime of the optionee, only by such optionee. Any options granted to an
employee terminate 90 days after his ceasing to be an employee, except in
limited circumstances, including death of the employee, and where the Committee
deems it to be in the Company's best interests not to terminate the options.
The exercise price of all incentive stock options granted under the
Qualified Plan must be equal to the fair market value of such shares on the date
of grant as determined by the Committee, based on guidelines set forth in the
Qualified Plan. The exercise price may be paid in cash or (if the Qualified Plan
shall meet the requirements of rules adopted under the Exchange Act) in Common
Stock or a combination of cash and Common Stock. The term of each option and the
manner in which it may be exercised will be determined by the Committee, subject
to the requirement that no option may be exercisable more than 10 years after
the date of grant. With respect to an incentive stock option granted to a
participant who owns more than 10% of the voting rights of the Company's
outstanding capital stock on the date of grant, the exercise price of the option
must be at least equal to 110% of the fair market value on the date of grant and
the option may not be exercisable more than five years after the date of grant.
The Stock Option Plans were approved by our shareholders at a special
shareholders meeting held on November 8, 1996. At the annual meeting of
shareholders held on December 12, 2002, shareholders approved the following
amendments to the Qualified Plan and the Non-Qualified Plan: (i) the Committee
was given the power to amend and alter the Qualified Plan and the Non-Qualified
Plan so long as the amendments do not affect any outstanding options; (ii)
provide that any shares cancelled, terminated, or expired pursuant to the
Qualified Plan and the Non-Qualified Plan be made available for purposes of the
Qualified Plan and the Non-Qualified Plan; (iii) provide that the cashless
exercise provision of the Qualified Plan and the Non-Qualified Plan be in the
sole discretion of the Committee; and (iv) extended the expiration date of the
Qualified Plan and the Non-Qualified Plan until December 12, 2012.
As of July 31, 2003, 300,000 options had been granted to the Company's
Board members and certain consultants pursuant to the Non-Qualified Plan with
225,000 options outstanding and 75,000 options exercised. As of July 31, 2003, a
total of 532,500 options had been granted to employees pursuant to the Qualified
Plan with 530,000 options outstanding and 2,500 options exercised. The Company
has 200,000 options outstanding that were issued outside of the Qualified Plan
and Non-Qualified Plan.
Accelr8 Technology Corporation 47 Fiscal Year Ended July 31, 2003
Item 11 - Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of October 15, 2003 by (i) each person who is
known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's executive officers and
directors; and (iii) all executive officers and directors as a group. The
calculation also includes 1,129,110 shares which are held by the Rabbi Trust for
the benefit of Thomas V. Geimer. Common Stock not outstanding but deemed
beneficially owned by virtue of the right of an individual to acquire shares is
treated as outstanding only when determining the amount and percentage of Common
Stock owned by such individual. Except as noted, each person or entity has sole
voting and sole investment power with respect to the shares shown.
Name and Address Shares Beneficially Owned
of Beneficial Owner -------------------------
--------------------
Number Percent
------ -------
Thomas V. Geimer (1) 348,300 3.39%
303 East 17th Avenue, Suite 108
Denver, Colorado 80203
Harry J. Fleury (2), 233,750 2.34%
303 East 17th Avenue, Suite 108
Denver, Colorado 80203
A. Alexander Arnold III(3) 938,000 9.34%
845 Third Ave., 6th Flr
New York, NY 10021
Charles E. Gerretson(4) 86,150 .86%
303 East 17th Avenue, Suite 108
Denver, Colorado 80203
Executive Officers and Directors 1,606,200 15.48%
as a Group (4 persons)
DDx, Inc. 1,606,793 16.13%
7000 Broadway, Suite 3-305
Denver, CO 80221
------------------
(1) Does not include 1,129,110 shares, which were purchased by Mr. Geimer upon
exercise of warrants and options. Mr. Geimer exercised these options and
warrants on October 14, 1997, and simultaneously contributed the shares
acquired to a Rabbi Trust. See Note 9 to Financial Statements for further
information. Includes 300,000 shares, which may be purchased by Mr. Geimer
upon exercise of options.
Accelr8 Technology Corporation 48 Fiscal Year Ended July 31, 2003
(2) Includes 40,000 shares, which may be purchased by Mr. Fleury upon exercise
of options.
(3) Includes 800,000 shares held by four trusts. Mr. Arnold merely serves as
trustee for each of those trusts, but is not a beneficiary of and has no
pecuniary interest in any of those trusts. Also includes 63,000 shares held
in investment advisory accounts for which Mr. Arnold serves as the
investment advisor. Also includes 75,000 shares, which may be purchased by
Mr. Arnold upon exercise of options.
(4) Includes 73,250 shares owned directly by Mr. Gerretson. Also includes
12,900 shares held in brokerage and retirement accounts of individuals in
which Mr. Gerretson has the power and authority to dispose of the shares
held by these accounts. Mr. Gerretson disclaims any beneficial ownership
with respect to such shares.
Item 12 - Certain Relationships and Related Transactions
--------------------------------------------------------
During fiscal year 1996, we established a deferred compensation plan for
our employees. We may make discretionary contributions to the plan based on
recommendations from the Board of Directors. As of July 31, 2003, the Board of
Directors had authorized deferred compensation totaling $600,000 since fiscal
year 1996 of which is fully vested to Mr. Geimer of which $525,000 had been
funded.
In connection with the settlement reached with the SEC on July 12, 2001, we
agreed to indemnify the individual officers with respect to the civil penalties
assessed against the individual officers on an after tax basis. For more
information, please see "Item 3--Legal Proceedings--Concluded Legal Matters."
There were no other transactions or series of transactions for the fiscal
year ended July 31, 2003, nor are there any currently proposed transactions, or
series of the same to which we are a party, in which the amount involved exceeds
$60,000 and in which, to the knowledge of the Company, any director, executive
officer, nominee, 5% shareholder or any member of the immediate family of the
foregoing persons, have or will have a direct or indirect material interest.
Item 13 - Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
1. 16.1 Letter on change in certifying accountant(1)
2. 31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
3. 31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
4. 32.1 Certification of Principal Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Accelr8 Technology Corporation 49 Fiscal Year Ended July 31, 2003
1. 8-K filed on July 30, 2003 disclosing filed a provisional patent
application for microarraying methods.
(1) Filed as an exhibit to Accelr8 Technology Corporation's 8-K filed on
August 29, 2002, and incorporated herein by reference.
Item 14 - Principal Accountant Fees and Services
------------------------------------------------
The aggregate fees billed by Anton Collins Mitchell LLP for professional
services rendered for the audit of the Company's annual consolidated financial
statements for the year ended July 31, 2003 including the reviews of the
unaudited interim financial statements of the Company's Form 10-QSBs was
approximately $39,561. The aggregate fees billed by Levine, Hughes & Mithuen,
Inc. for professional services rendered for the audit of the Company's annual
consolidated financial statements for the year ended July 31, 2003 were $1,500.
(Anton Collins Mitchell LLP and Levine, Hughes & Mithuen professional services
collectively referred to as "Audit Services").
All Other Fees
Anton Collins Mitchell LLP also billed $1,025 for income tax services.
Accelr8 Technology Corporation 50 Fiscal Year Ended July 31, 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ACCELR8 TECHNOLOGY CORPORATION
Date: October 29, 2003 By: /s/ Harry J. Fleury
-----------------------------------
Harry J. Fleury, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: October 29, 2003 By: /s/ Thomas V. Geimer
-----------------------------------
Thomas V. Geimer, Secretary,
Chief Executive Officer and
Chief Financial Officer
Date: October 29, 2003 By: /s/ James Godkin
-----------------------------------
James Godkin, Principal
Accounting Officer
Date: October 29, 2003 By: /s/ A. Alexander Arnold III
-----------------------------------
A. Alexander Arnold III
Date: October 29, 2003 By: /s/ Charles E. Gerretson
-----------------------------------
Charles E. Gerretson
Accelr8 Technology Corporation 51 Fiscal Year Ended July 31, 2003
ACCELR8 TECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF SHAREHOLDERS' EQUITY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7 - F-26
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
Accelr8 Technology Corporation
Denver, Colorado
We have audited the accompanying balance sheets of Accelr8 Technology
Corporation as of July 31, 2003 and 2002 and the related statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Accelr8 Technology Corporation
at July 31, 2003 and 2002 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Anton Collins Mitchell LLP
September 26, 2003, except for
Note 15 which is as of October 15, 2003
F-2
ACCELR8 TECHNOLOGY CORPORATION
BALANCE SHEETS
JULY 31, 2003 and 2002
ASSETS
2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 8,711,951 $ 8,631,192
Accounts receivable 5,809 24,767
Prepaid expenses and other current assets 55,313 61,665
Insurance recovery receivable (Note 13) -- 825,000
Income tax receivable and deferred tax asset (Note 8) -- 336,500
------------ ------------
Total current assets 8,773,073 9,879,124
Property and equipment, net (Note 4) 141,967 76,620
Investments, net (Note 9) 574,399 445,286
Intellectual property, net (Notes 3 and 5) 4,255,934 4,622,904
------------ ------------
Total assets $ 13,745,373 $ 15,023,934
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 177,309 $ 87,599
Accrued compensation and other liabilities 39,155 29,489
Accrued legal settlement (Note 13) -- 450,000
Deferred maintenance revenue 150,366 164,879
Other deferred revenue -- 2,200
------------ ------------
Total current liabilities 366,830 734,167
------------ ------------
Long-term liabilities:
Deferred tax liabilities (Note 8) -- 24,833
Deferred compensation (Note 9) 649,399 520,286
------------ ------------
Total long-term liabilities 649,399 545,119
------------ ------------
Total liabilities 1,016,229 1,279,286
------------ ------------
Commitments and Contingencies (Notes 6, 9, 13, and 15)
Shareholders' equity (Note 6):
Common stock, no par value; 11,000,000 shares
authorized; 9,586,210 and 9,411,210 shares
issued and outstanding, respectively 12,488,020 12,342,020
Stock to be issued (Note 13) 375,000 375,000
Contributed capital 544,132 329,809
Retained (deficit) earnings (404,408) 971,419
Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600)
------------ ------------
Total shareholders' equity 12,729,144 13,744,648
------------ ------------
Total liabilities and shareholders' equity $ 13,745,373 $ 15,023,934
============ ============
See accompanying notes to financial statements.
F-3
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2003 and 2002
2003 2002
----------- -----------
Revenues (Note 7):
Consulting fees and other $ 25,000 $ 16,000
Product license and customer support fees 168,453 297,980
Resale of purchased software and support fees 604,323 339,997
OptiChem(TM) revenue 52,794 --
----------- -----------
Total revenues 850,570 653,977
----------- -----------
Costs and expenses:
Costs of services 44,855 129,428
Cost of software and support purchased for resale 103,684 54,818
General and administrative 819,451 538,168
Marketing and sales 370,282 203,897
Research and development 568,873 326,582
Depreciation 35,472 22,730
Amortization (Note 5) 257,846 147,649
Loss (gain) on disposal of fixed assets 8,345 (11,153)
Impairment loss (Note 5) 188,359 --
Abandoned trademark -- 3,929
----------- -----------
Total costs and expenses 2,397,167 1,416,048
----------- -----------
Loss from operations (1,546,597) (762,071)
----------- -----------
Other (expense) income:
Interest income 103,051 192,140
Unrealized holding gain (loss) on investments (Note 9) 86,631 (142,210)
Realized loss on sale of investments (38,343) (6,618)
----------- -----------
Total other income 151,339 43,312
----------- -----------
Loss before income tax benefit (1,395,258) (718,759)
Income tax benefit (Note 8) 19,431 318,026
----------- -----------
Net loss $(1,375,827) $ (400,733)
=========== ===========
Basic and diluted net loss per share $ (.14) $ (.05)
=========== ===========
Weighted average shares outstanding 9,510,594 8,363,038
=========== ===========
See accompanying notes to financial statements.
F-4
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2003 and 2002
Retained Shares Held Total
Common Stock Stock to Contributed Earnings For Employee Shareholders'
Shares Amount be Issued Capital (Deficit) Benefit Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, July 31, 2001 7,632,817 $ 8,197,795 $ -- $ 315,049 $ 1,372,152 $ (273,600) $ 9,611,396
Cost of repurchasing
common stock (Note 6) (40,400) (74,644) -- -- -- -- (74,644)
Exercise of stock options 5,000 1,800 -- -- -- -- 1,800
Stock options issued for
consulting services
(Note 6) -- -- -- 14,760 -- -- 14,760
Issuance of common stock
(Notes 3 and 6) 1,813,793 4,217,069 -- -- -- -- 4,217,069
Stock to be issued in
legal settlement
(Note 13) -- -- 375,000 -- -- -- 375,000
Net loss -- -- -- -- (400,733) -- (400,733)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, July 31, 2002 9,411,210 12,342,020 375,000 329,809 971,419 (273,600) 13,744,648
Exercise of stock options
(Note 6) 175,000 146,000 -- -- -- -- 146,000
Stock options issued for
consulting services
and purchase of
technology (Note 6) -- -- -- 214,323 -- -- 214,323
Net loss -- -- -- -- (1,375,827) -- (1,375,827)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, July 31, 2003 9,586,210 $ 12,488,020 $ 375,000 $ 544,132 $ (404,408) $ (273,600) $ 12,729,144
============ ============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
F-5
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2003 and 2002
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,375,827) $ (400,733)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 35,472 22,730
Amortization 257,846 147,649
Issuance of stock options for consulting services 167,323 14,760
Stock to be issued (Note 13) -- 375,000
Unrealized holding (gain) loss on investments (86,631) 142,210
Realized loss (gain) on sale of investments, interest and
dividends reinvested 32,518 (600)
Loss (gain) from disposal of assets 8,345 (11,153)
Impairment loss 188,359 --
Loss on abandoned trademarks -- 3,906
Income tax receivable and deferred tax asset 336,500 (336,500)
Deferred income tax liability (24,833) 18,474
Net change in assets and liabilities:
Accounts receivable 18,958 44,603
Prepaid expenses and other 6,352 (974)
Insurance recovery receivable 825,000 (825,000)
Accounts payable 89,710 (65,729)
Accrued liabilities 9,666 (190,248)
Accrued legal settlement (450,000) 450,000
Deferred maintenance revenue (14,513) 11,675
Other deferred revenue (2,200) 1,375
Other long-term liabilities 129,113 (66,610)
----------- -----------
Net cash provided by (used in) operating activities 151,158 (665,165)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (109,164) (18,260)
Proceeds from sale of property and equipment -- 12,336
Purchase of intellectual property (32,235) (72,218)
Purchase of investments (75,000) (75,000)
----------- -----------
Net cash used in investing activities (216,399) (153,142)
----------- -----------
Cash flows from financing activities:
Repurchase of common stock -- (74,644)
Employee stock options exercised 146,000 1,800
----------- -----------
Net cash provided by (used in) financing activities 146,000 (72,844)
----------- -----------
Net increase (decrease) in cash and cash equivalents 80,759 (891,151)
----------- -----------
Cash and cash equivalents,
Beginning of year: 8,631,192 9,522,343
----------- -----------
Cash and cash equivalents,
End of year: $ 8,711,951 $ 8,631,192
=========== ===========
Supplemental information:
Cash received from income tax refunds $ 331,099 $ --
=========== ===========
See accompanying notes to financial statements.
F-6
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND NATURE OF BUSINESS
Prior to January 2001, Accelr8 Technology Corporation ("Accelr8" or the
"Company") has been a provider of software tools and consulting services
for system modernization 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 enabled 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 periodically functions as a value-added reseller of
purchased software and post contract support to its customers.
Based upon the significant decline in sales of its software tools and
related consulting services beginning in the year ended July 31, 2001, 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. However, we
continue to resell software and support from CIM Team GmbH, Inc. and a/Soft
Development, Inc. The resale of purchased software and support provided
approximately $604,323 in revenues during the fiscal year ended July 31,
2003. We are also investigating the possibility of selling these business
operations to another party, although we have no arrangements or
understandings with respect to the sale of these assets.
On January 18, 2001, the Company acquired the OpTest suite of technologies
from DDx, Inc. ("DDx") (see Note 3). The purchase of the assets of DDx
provided the Company with surface chemistry and quantitative instruments.
The Company's vision is to compete in the general area of biosciences,
including DNA/RNA assays, protein-based assays and biosensors. The Company
expects that its proprietary surface chemistry and quantitative instruments
will support real-time analysis of medical diagnostic markers, pathogens,
and bio-warfare agents.
During the fiscal year ended July 31, 2003, the Company's primary focus was
on the development of OptiChem(TM) surface chemistry and QuanDx(TM) light
scattering quantitative assay instrumentation. The Company has introduced
OptArray(TM) microarraying slides and OptiPlate(TM) arrayable microtiter
plates to the market. The Company also acquired new technology and
improvements related to the QuanDx(TM) detection platform. The Company
intends to customize the technologies to the specific requirements of large
licensees, with the potential of bundling product licensing with an option
to purchase equity in the stock of Accelr8. Management believes that
substrate sales will grow markedly in the next fiscal year; however, there
can be no assurance that the sales will occur or that the anticipated
revenues will be generated. During the year ended July 31, 2003, OptiChem
revenue totaled $52,794. See further discussion in Notes 5 and 15.
F-7
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and
accounts receivable, including accounts receivable from major customers
(see Note 7). The Company places its cash equivalents with a high credit
quality financial institution. The Company grants credit to domestic and
international clients in various industries. Exposure to losses on accounts
receivable is principally dependent on each client's financial position.
The Company performs ongoing credit evaluations of its clients' financial
condition.
Allowances on accounts receivable are recorded when circumstances indicate
collection is doubtful for particular accounts receivable or as a general
reserve for all accounts receivable. Accounts receivable are written off if
reasonable collection efforts prove unsuccessful.
Cash and cash equivalents
All highly liquid investments with an original maturity of three months or
less at time of purchase are considered to be equivalent to cash.
Property and equipment
Property and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred and expenditures for major improvements are
capitalized. Gains and losses from retirement or replacement are included
in costs and expenses. Depreciation of property and equipment is computed
using the straight-line method over the estimated useful life of the
assets, ranging from five to seven years. Depreciation expense for the
years ended July 31, 2003 and 2002 was $35,472 and $22,730, respectively.
Software development costs
Costs incurred internally to develop computer software products and the
costs to acquire externally developed software products (which have no
alternative future use) to be sold, leased or otherwise marketed are
charged to expense until the technological feasibility of the product has
been established. After technological feasibility has been established and
until the product is available for general release, software development,
product enhancements and acquisition costs are capitalized.
The Company did not capitalize any software costs during the years ended
July 31, 2003 and July 31, 2002 and there were no capitalized software
development costs to amortize for the years ended July 31, 2003 and July
31, 2002.
Research and development
Research and development costs charged to operations for the years ended
July 31, 2003 and 2002 were $568,873 and $326,582, respectively.
F-8
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Intellectual property
Intellectual properties are amortized over the period the asset is expected
to contribute directly or indirectly to the Company's future cash flows.
The Company evaluates the remaining useful life of each intellectual
property that is being amortized each reporting period to determine whether
events and circumstances warrant a revision to the remaining period of
amortization.
Included in intellectual property are patents, trademarks and technology.
Intellectual properties are amortized over their estimated useful lives of
20 years.
Long-lived assets
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company continuously evaluates the recoverability of its
long-lived assets based on estimated future cash flows from and the
estimated fair value of such long-lived assets, and provides for impairment
if such undiscounted cash flows are insufficient to recover the carrying
amount of the long-lived asset. The carrying amount of $188,359 of the
OTER(TM) technology was impaired in fiscal 2003 and charged to operations.
As of July 31, 2003 and 2002, management believes there was no additional
impairment of the Company's long-lived assets. See Note 5 for further
discussion.
Revenue recognition
Consulting services:
--------------------
Consulting revenue is recognized as services are performed.
Software license contracts ("SLC"):
-----------------------------------
SLC revenue is recognized when the Company substantially completes its
obligations under the applicable agreement and the customer has accepted
the product.
Post contract support ("PCS"):
------------------------------
The Company recognizes revenue using either the straight-line method or
ratably over the term of the PCS agreement based upon historical evidence.
Reseller of purchased software and post contract support ("PSPCS"):
-------------------------------------------------------------------
The Company periodically functions as a value-added reseller of computer
software and bundled PSPCS agreements to its customers. The Company
generally recognizes revenue upon delivery of the computer software.
However, when the PSPCS agreement extends over one year or is for
maintenance only, the PSPCS revenue is recognized over the term of
agreement.
OptiChem(TM):
-------------
Revenue is recognized when the Company ships the product.
Sales returns and allowances:
-----------------------------
The Company provides for sales returns and allowances on an accrual basis.
Deferred revenue
Deferred consulting revenue represents amounts billed but not yet earned
under consulting agreements. Deferred maintenance revenue represents
amounts billed but not yet earned under maintenance agreements. Deferred
license fee revenue represents amounts billed but not yet earned under
license agreements.
F-9
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement basis and the income tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Such deferred
income tax computations are based on enacted tax laws and rates applicable
to the years in which the differences are expected to affect taxable
income. A valuation allowance is established when necessary to reduce
deferred income tax assets to the amounts expected to be realized.
Earnings per share
The Company follows SFAS No. 128, "Earnings Per Share," which requires
companies to present basic earnings per share and diluted earnings per
share. Basic earnings (loss) per share includes no dilution and is computed
by dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could
share in the earnings of an entity.
The Company's net losses for the periods presented cause the inclusion of
potential common stock instruments outstanding to be antidilutive. During
the years ended July 31, 2003 and 2002, common stock options exercisable
for approximately 755,000 and 853,500 shares of common stock were not
included in diluted loss per share as the effect was antidilutive due to
the Company recording losses in each of those years. In addition, 200,000
contingent options (Note 5) were not included in loss per share during the
year ended July 31, 2003.
Stock based compensation
The Company accounts for stock based compensation to employees and
directors using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company accounts for stock
based compensation to non-employees in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation".
The Company applies SFAS No. 123 in valuing options granted to consultants
and estimates the fair value of such options using the Black-Scholes
option-pricing model. The fair value is recorded as consulting expense as
services are provided. Options granted to consultants for which vesting is
contingent based on future performance are measured at their then current
fair value at each period end, until vested. See "Recent Accounting
Pronouncements" for additional discussion.
Comprehensive income (loss)
The Company follows SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income
(loss) and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. The Company has no other items
that would be included in comprehensive income (loss).
Financial instruments
The Company periodically maintains cash balances at a commercial bank in
excess of the Federal Deposit Insurance Corporation insurance limit of
$100,000. At July 31, 2003, the Company's uninsured cash balance was
approximately $8,511,951.
F-10
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for the reporting of information about operating
segments in annual and interim financial statements. Operating segments are
defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision makers in deciding how to allocate resources and in assessing
performance.
The Company currently 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.
Reclassifications
Certain reclassifications have been made to the fiscal 2002 financial
statements to conform to the fiscal 2003 financial statement presentation.
Such reclassifications have no effect on financial position or net loss as
previously reported.
Recent accounting pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results in both annual and interim financial statements. The
Company will continue to account for its stock-based compensation plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. See
Note 6 for further discussion. The following table illustrates the effect
on net loss if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based compensation.
F-11
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Year Year
Ended Ended
July 31, 2003 July 31, 2002
------------- -------------
Net loss - as reported $(1,375,827) $ (400,733)
Add: Stock-based compensation
included in reported net loss 167,323 14,760
Deduct: Total stock-based compensation
expense determined under fair
value based method for all awards (177,615) (288,346)
----------- -----------
Pro forma net loss $(1,386,119) $ (674,319)
=========== ===========
Earnings per share:
Basic and diluted - as reported $ (.14) $ (.05)
=========== ===========
Basic and diluted - pro forma $ (.15) $ (.08)
=========== ===========
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires the consolidation of variable
interest entities, as defined. FIN No. 46 is applicable to the Company's
financial statements to be issued after July 31, 2003. This statement did
not have any effect on the Company's financial statements as of July 31,
2003.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, for hedging relationships
designated after June 30, 2003, and to certain preexisting contracts. The
Company adopted SFAS No. 149 in the fiscal fourth quarter. The adoption of
SFAS No. 149 did not have an impact on the Company's results of operations,
financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments, with Characteristics of Both Liabilities and
Equity", which provides guidance on how an entity classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope, which may have previously been
classified as equity, as a liability (or as an asset in some
circumstances). This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
August 1, 2003 for the Company. Upon adoption, the amounts for stock to be
issued currently reflected as a component of shareholders equity will be
classified as a liability and carried at fair value in the balance sheet.
F-12
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3 PURCHASE OF OPTEST TECHNOLOGY ASSETS
On January 18, 2001, Accelr8 purchased the OpTest technology assets from
DDx. The terms of the Asset Purchase Agreement (the "Agreement") provided
for Accelr8 to pay DDx $500,000 in cash at closing and to issue 1,813,793
of Accelr8 "restricted" common shares. All shares were held in escrow
pending the completion of an OpTest Technology Transfer event to a third
party within the first year following closing. An OpTest Technology
Transfer event would involve technology licenses, research and development
agreements, government grants or contracts, mergers, acquisitions, joint
ventures, strategic alliances, materials, transfer agreements, and all such
similar arrangements. The shares in escrow were to be released as follows:
(a) 50% upon the consummation of one OpTest Technology Transfer event to a
third party (the "First Event"), and (b) 50% upon the consummation of a
second OpTest Technology Transfer event to a third party (the "Second
Event"); without limitation as to the dollar value of either the First
Event or the Second Event. If no such Technology Transfer events were
consummated within the twelve months following the closing of this
Agreement, then the common stock was to be released from escrow back to the
Company. The First Technology Transfer Event occurred on a timely basis
prior to January 18, 2002. The Company entered into an agreement that
provided for an additional three-month period (i.e., until April 17, 2002)
for the Second Technology Transfer Event to occur (the "Second Technology
Transfer Event"). The Second Technology Transfer Event occurred during the
extended period. As a result, the 1,813,793 shares of common stock were
released from escrow and issued to DDx during fiscal 2002. The Company
recorded the fair market value of the common stock released from escrow as
an addition to intellectual property. The fair market value of $4,217,069
was based on the market price of the Company's common stock at the dates
that each technology transfer event occurred.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consisted of the following
at July 31:
2003 2002
--------- ---------
Computer equipment $ 30,060 $ 28,004
Laboratory and scientific equipment 177,255 86,837
Furniture and fixtures 11,114 11,114
--------- ---------
Total property and equipment 218,429 125,955
Accumulated depreciation (76,462) (49,335)
--------- ---------
Net property and equipment $ 141,967 $ 76,620
========= =========
NOTE 5 INTELLECTUAL PROPERTY
Intellectual property consisted of the following at July 31:
2003 2002
----------- -----------
OptiChem(TM) Technologies $ 4,454,538 $ 4,614,872
Patents 134,066 128,434
Trademarks 45,805 38,399
----------- -----------
4,634,409 4,781,705
Accumulated amortization (378,475) (158,801)
----------- -----------
$ 4,255,934 $ 4,622,904
=========== ===========
F-13
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 $257,846 and $147,649, respectively,
for the years ended July 31, 2003 and 2002.
During the fiscal year ended July 31, 2003 the Company acquired the rights
to innovative technology that complements QuanDx(TM). The new YoDx(TM)
technology extends the detection system to include assay processing prior
to the detection itself, and the Company expects the novel processing to
enhance detection sensitivity as well. When used with OptiChem(TM) coated
substrates, it is expected to increase sensitivity by at least 100-fold
relative to fluorescence and speed assay turnaround time by at least
10-fold relative to conventional processing. The Company issued 50,000
stock options on July 12, 2003 for the purchase of the YoDx(TM) technology.
The options have an exercise price of $2.25 per share and expire five years
from the grant date. The fair value of the options of $47,000 was
determined under the Black-Scholes option-pricing model. In addition, the
Company agreed to issue an additional 200,000 stock options with the same
terms upon the earlier of (a) the Company achieving certain accumulated
revenue levels associated with the YoDx(TM) technology, as defined in the
agreement, or (b) a change in control of the Company prior to the
expiration date of the options.
Effective August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". In accordance with SFAS No. 142, the Company
completed an initial impairment test of its intangible assets as of August
1, 2001 and an annual impairment test as of July 31, 2002. Intangible
assets are tested annually and whenever events and circumstances occur
indicating that the assets may be impaired. Upon the adoption of SFAS No.
142, the Company also evaluated the estimated useful lives of the existing
intangible assets and determined that the existing useful lives were
appropriate. The Company evaluates the amortization period each reporting
period.
An impairment loss of $188,359, representing the unamortized cost of
certain technology purchased from DDx (OTER(TM)), was charged to operations
during the year ended July 31, 2003. While management believes this is a
viable technology , the Company has opted to concentrate its resources on
the technologies that currently have a larger market with greater demand.
On January 18, 2001, the Company acquired the OpTest(TM) suite of
technologies from DDx. The OpTest(TM) suite of technologies, included the
surface chemistry and quantitative instruments (QuanDx(TM) and OTER(TM)
respectively). During the fiscal year ended July 31, 2002, the Company's
primary focus was on the development of OptiChem(TM) surface chemistry and
QuanDx(TM) light scattering quantitative assay instrumentation. During the
fiscal year ended July 31, 2003, the Company's primary focus was on further
research and development relating to OptiChem(TM) and QuanDx(TM)
technologies. Also, during the fiscal year ended July 31, 2003, the Company
introduced OptArray(TM) microarraying slides and OptiPlate(TM) arrayable
microtiter plates to the market, and acquired the rights to YoDx,.(TM) See
Note 15 for further information concerning a recent agreement and letter of
intent. During the fiscal year ending July 31, 2004, the Company intends to
F-14
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
customize its technologies to the specific requirements of large licensees,
with the potential of bundling product licensing with an option to purchase
equity in the Company's stock. The Company's efforts will be directed
towards the creation of revenue from the sale and licensing of technology,
and continued research and development.
The Company routinely evaluates the recoverability of its long-lived assets
based upon estimated future cash flows from and estimated fair value of
such long-lived assets. If in management's judgment, the anticipated
undiscounted cash flows or estimated fair value are insufficient to recover
the carrying amount of the long-lived asset, the Company will determine the
amount of the impairment and the value of the asset will be written down.
During the last fiscal year, the Company determined that the carrying
amount of $188,359 for the OTER(TM) technology was impaired, and wrote down
the value of the asset with a charge to operations. At fiscal year end,
management evaluated the recoverability of the remaining amounts recorded
on the Company's balance sheet for its technology. In addition, management
obtained an analysis of the Company's technology from a consultant to
assist with its evaluation of the recoverability of amounts recorded in the
Company's balance sheet.
The consultant's report considered key assumptions related to market
potential, operational advantages, new product developments and potential
profitability of the Company's technology. The report also considered the
current market conditions, competition, prospective sales of products,
prospective licensing revenues as well as the Company's strategic
relationships.
Management has reviewed the consultant's report and concurs with the
consultant's conclusion that no further impairment of the Company's
technology is appropriate at this time. Management believes that the fair
value of the technology exceeds the carrying value. However, it is possible
that future impairment testing may result in additional 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 $ 232,026
2005 232,026
2006 232,026
2007 232,026
2008 232,026
Thereafter 3,095,804
-----------
$ 4,255,934
===========
NOTE 6 SHAREHOLDERS' EQUITY
Stock option plans
The Company has option agreements with a key executive and three
stock-based compensation plans, which are discussed below:
Option and warrant agreement with key executive
In fiscal 1998, options for the purchase of 1,129,110 shares held by the
Chief Executive Officer ("Executive Options and Warrants") were exercised
and placed into a "Rabbi" Trust as discussed in Note 9. Such shares are
issuable upon the occurrence of retirement, death or termination of the
Chairman's employment over a ten-year period after such occurrence, unless
the Board of Directors determines otherwise.
F-15
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
In accordance with generally accepted accounting principles, the Company
has included the assets and liabilities of the "Rabbi" Trust in its
financial statements, and the shares of the Company's common stock held by
the "Rabbi" Trust have been treated as treasury stock for financial
reporting purposes (see Note 9).
Employee stock option plan
The Employee Stock Option Plan (the "Employee Plan") permits the grant of
non-qualified stock options to employees, officers and directors of the
Company. The exercise price of each option, which does not expire as long
as the recipient remains an employee of the Company, is equal to the market
price of the Company's common stock on the date of grant. The Company had
reserved 106,500 shares of its authorized but unissued common stock for
stock options to be granted under the Employee Plan. Under the terms of the
Employee Plan, options vest at 25% annually. During the years ended July
31, 2003 and 2002, 6,500 and 128,500 options expired and 100,000 and 5,000
options were exercised, resulting in no options outstanding under the
Employee Plan as of July 31, 2003. This plan is now terminated as there are
no additional shares of common stock reserved for issue in this plan, and
management does not intend to issue future options under the Employee Plan.
Incentive stock option plan
The Company has reserved 700,000 shares of its authorized but unissued
common stock for stock options to be granted to officers and employees of
the Company under its Incentive Stock Option Plan (the "Incentive Plan").
The exercise price of each option, which has a maximum ten-year life, is
equal to the market price of the Company's common stock on the date of
grant. Under the terms of the Incentive Plan, options vest 100% upon grant.
During the years ended July 31, 2003 and 2002, the Company granted 55,000
and 312,000 options respectively and 22,000 and 37,000 options expired,
resulting in 530,000 options being outstanding at July 31, 2003.
Non-qualified stock option plan
The Company has reserved 300,000 shares of its authorized but unissued
common stock for stock options to be granted to employees, independent
contractors, technical advisors and directors of the Company under its
Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). The exercise
price of each option, which has a maximum ten-year life, is established by
the Company's compensation committee on the date of grant. Under the terms
of the Non-Qualified Plan, options vest 100% upon grant, unless otherwise
specified in the grant. 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 exercise prices of $2.25 per share. The consultant options
vest 50% after one year and 50% after two years and expire two years after
vesting provided the consultant is still employed. The fair value of the
options of $167,323 and $14,760 have been recorded as a charge to
operations as of July 31, 2003 and July 31, 2002, respectively. On July 12,
2003, the Company issued 50,000 options at an exercise price of $2.25 each,
to purchase all rights in technology known as YoDx which will be integrated
into the Company's existing technology (see Note 5). The fair market value
based on immediate vesting and expiring in five years was determined by
using the Black-Scholes valuation model computation to be $47,000 and was
capitalized as intellectual property. During the year ended July 31, 2003,
50,000 and 25,000 options were exercised at a price of $1.45 and $1.50
respectively for a total price of $110,000. As of July 31, 2003, 225,000
options have been granted and remain outstanding under the Non-Qualified
Plan.
Accounting for employee based option plans
The Company accounts for employee stock-based compensation arrangements
using the intrinsic value method in accordance with APB No. 25 and related
F-16
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
interpretations and has adopted the disclosure-only provisions of SFAS No.
123 as amended by SFAS No. 148. Accordingly, no compensation expense has
been recognized for options issued to employees in conjunction with the
stock option agreements and stock-based compensation plans discussed above.
The fair value of options granted under the stock option agreements and
stock-based compensation plans discussed above is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 2003: no dividend
yield; risk free interest rate of 4.0%; expected life of 4 years; and
expected volatility of 87.43%. The weighted average fair value of options
granted in fiscal 2003 was $0.52. The weighted average remaining
contractual life of options outstanding at July 31, 2003 was 4.90 years.
The following weighted-average assumptions were used for grants in fiscal
2002: no dividend yield; risk free interest rate of 4.0%; expected life of
10 years; and expected volatility of 134.7%. The weighted average fair
value of options granted in fiscal 2002 was $1.79. The weighted average
remaining contractual life of options outstanding at July 31, 2002 was 5.20
years. The following table summarizes information on stock option activity
for the Executive Options, the Employee Plan, the Incentive Plan and the
Non-Qualified Plan:
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
------ --------- ---------
Options outstanding, July 31, 2001 512,000 $ 0.36 - $ 5.00 $ 1.34
Options granted 512,000 1.45 - 3.00 1.79
Options exercised (5,000) 0.36 0.36 0.36
Options expired or cancelled (165,500) 0.36 - 5.00 1.19
--------
Options outstanding, July 31, 2002 853,500 $ 0.36 - $ 4.00 $ 1.64
Options granted 105,000 2.25 - 2.25 2.25
Options exercised (175,000) 0.36 - 1.50 0.83
Options expired or cancelled (28,500) 0.36 - 4.00 2.36
--------
Options outstanding, July 31, 2003 755,000 $ 1.45 - $ 3.25 $ 1.89
========
As of July 31, 2003 and 2002, 600,000 and 643,500 options outstanding were
currently exercisable and carried weighted average exercise prices of $1.79
and $1.44 respectively.
The following table summarizes information about stock options outstanding
and exercisable at July 31, 2003:
Outstanding Exercisable
---------------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life (Years) Price Number Price
--------------- --------------------------------- -------------------
$1.45 - $1.50 385,000 3.3 $1.47 385,000 $1.47
$2.25 - $2.50 355,000 2.7 $2.29 200,000 $2.31
$3.00 - $3.25 15,000 1.0 $3.17 15,000 $3.17
-------- --------
$1.45 - $3.25 755,000 2.9 $1.89 600,000 $1.42
======== ========
F-17
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 belief of the Board of Directors
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, as 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.
During the year ended July 31, 2003, the Company did not repurchase any
shares of its common stock. During the year ended July 31, 2002, the
Company repurchased a total of 40,400 shares of its common stock at a cost
of $74,644.
Common stock
The 375,000 shares of common stock to be issued as part of the class action
settlement (see Note 13) have been treated as outstanding since the date of
the final settlement order (May 29, 2003) in computing the weighted average
shares outstanding.
During the year ended July 31, 2002 the Company completed the purchase of
the DDx technologies with the issuance of shares of common stock held in
escrow as of July 31, 2001. A total of 1,813,793 shares of stock was issued
which had a total value of $4,217,069 based on the market prices of the
Company's stock at the dates that the technology was transferred (see Note
3 for discussion).
NOTE 7 MAJOR CUSTOMERS AND FOREIGN REVENUE
In fiscal year 2003, sales of $182,673 (22%),were derived from sales to one
customer. In fiscal year 2002, sales of $126,469 (19%) and $79,500 (12%)
were derived from sales to two separate customers. The Company's operations
are located entirely within the United States. However, in fiscal years
2003 and 2002, $190,816 (22%) and $144,446 (22%) respectively, of the
Company's sales were to foreign customers.
NOTE 8 INCOME TAXES
Income tax benefit consisted of the following for the years ended July 31:
2003 2002
--------- ---------
Current:
Federal $ 140,121 $ 190,977
State -- --
--------- ---------
140,121 190,977
--------- ---------
Deferred:
Asset (145,523) 145,523
--------- ---------
Liability:
Federal 21,384 (15,908)
State 3,449 (2,566)
--------- ---------
24,833 (18,474)
--------- ---------
Income tax benefit $ 19,431 $ 318,026
========= =========
F-18
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following items comprise the Company's net deferred tax assets
(liabilities) as of July 31:
2003 2002
--------- ---------
Deferred tax assets:
Net operating loss $ 431,555 $ 261,912
Deferred revenue 52,485 53,382
Depreciation and amortization 11,182 --
Stock options issued to consultants 65,550 --
General business credit 81,822 26,378
--------- ---------
Total 642,594 341,672
Less valuation allowance (642,594) (196,149)
--------- ---------
Net deferred tax asset $ -- $ 145,523
========= =========
Deferred tax liabilities:
Depreciation and amortization $ -- $ (24,833)
--------- ---------
Net deferred tax liability $ -- $ (24,833)
========= =========
The Company recorded an income tax receivable and deferred tax asset as of
July 31, 2002, which consisted of $190,977 received in August 2002 related
to the fiscal 2001 carry back of net operating losses and $145,523
resulting from the fiscal 2002 operating loss carried back.
As of July 31, 2003, a valuation allowance of $642,594 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 not be
realized.
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal statutory tax rates to pre-tax loss for the years
ended July 31, 2003 and 2002 as follows:
2003 2002
------ ------
Total expense (benefit) computed by:
Applying the U.S. Federal statutory rate (34.0)% (34.0)%
State income taxes, net of federal tax benefit (3.0) (3.0)
Refundable income taxes -- (27.7)
General business credits and other 3.6 --
Valuation allowance 32.0 20.5
------ ------
Effective tax rate (benefit) (1.4)% (44.2)%
====== ======
The Company has unused net operating loss carryforward of $1,198,733 and
general business credits of approximately $81,822 that are available to
offset future income taxes. The net operating loss will expire in 2023 and
the general business tax credits will expire beginning in 2019.
F-19
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 9 COMMITMENTS
Investments and deferred compensation arrangement
During the year ended July 31, 1996, the Company established a deferred
compensation plan for key employees of the Company using a "Rabbi" Trust
(see Note 6). The Company may make discretionary contributions to the plan
based on recommendations from the Board of Directors. Awards of $75,000
were granted for each of the years ended July 31, 2003 and 2002. The funds
are subject to the general claims of creditors and are included in
investments as of July 31, 2003 and 2002.
The following information is provided related to the trust assets, which
consist of cash and equity securities as of July 31, 2003 and 2002. These
assets, which based upon the Company's intended use of the investments,
have been classified as trading securities. Unrealized holding gains or
loss on trading securities are included in other income (expense).
2003 2002
--------- ---------
Cost basis $ 610,545 $ 568,063
Unrealized holding loss (36,146) (122,777)
--------- ---------
Aggregate fair value $ 574,399 $ 445,286
========= =========
Deferred compensation related to the Rabbi Trust was $ 649,399 and $
520,286 as of July 31, 2003 and 2002, respectively. The difference between
the aggregate fair value and the deferred compensation amounts represents
the award of $75,000 for each of the years ended July 31, 2003 and 2002
which was accrued but unpaid by the Company at year end.
Operating leases
The Company leases office space on a month-to-month basis at a monthly cost
of $3,277. The Company has negotiated a three-year lease for its laboratory
space with a term of October 1, 2002 through September 30, 2005. Total rent
expense was approximately $84,768 and $86,024 in fiscal 2003 and 2002,
respectively. Future minimum lease payments on the laboratory lease are as
follows:
Year Ending July 31, Premises Rent
-------------------- -------------
2004 $ 41,561
2005 42,804
2006 7,169
--------
$ 91,534
========
Employment agreement
Effective December 1, 2002, a new employment agreement with Thomas V.
Geimer, CEO and CFO, was negotiated and approved by the Compensation
Committee. The new agreement provides for an annual base salary of $165,000
with annual deferred compensation of $75,000. The new agreement expires on
December 31, 2007. In the event of termination by mutual agreement,
termination "with cause," as defined in the agreement, death or permanent
incapacity or voluntary termination, Mr. Geimer or his estate would be
entitled to the sum of the base salary and unreimbursed expenses accrued to
F-20
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
the date of termination and any other amounts due under the agreement. In
the event of termination "without cause," as defined in the agreement, Mr.
Geimer would be entitled to the sum of the base salary and unreimbursed
expenses accrued to the date of termination and any other amounts due under
the agreement and an amount equal to the greater of Mr. Geimer's annual
base salary (12 months of salary) or any other amounts remaining due to Mr.
Geimer under the agreement, which as of July 31, 2003 would be $1,107,115.
Additionally, in the event of a change in control, any unpaid amounts due
under the initial term of the agreement for both base salary and deferred
compensation would be payable plus five times the sum of the base salary
and deferred compensation.
Employee retirement plan
During the year ended July 31, 1996, the Company established a SARSEP-IRA
employee pension plan that covers substantially all full-time employees.
Under the plan, employees have the option to contribute up to 15% of their
compensation subject to dollar limitations of the Internal Revenue Code.
The Company may make discretionary contributions to the plan based on
recommendations from the Board of Directors. There were no contributions
for the years ended July 31, 2003 and 2002. The plan was terminated during
the year ended July 31, 2003.
NOTE 10 ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments and other
long-term liabilities approximates fair value at July 31, 2003 and 2002.
The carrying value of all other financial instruments potentially subject
to valuation risk, principally consisting of accounts receivable and
accounts payable, also approximate fair value.
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash and Cash Equivalents - The carrying amount approximates fair
value.
Investments - The carrying amount is based on quoted market prices
plus cash.
Other Long-Term Liabilities - The carrying amount approximates fair
value.
NOTE 11 FOURTH QUARTER ADJUSTMENTS
As discussed in Note 8, the Company carried back net operating losses for
the years ended July 31, 2002 and 2001, in accordance with the Job Creation
and Worker's Assistance Act of 2002 (the "Act") issued by the Internal
Revenue Services ("IRS") after September 11, 2001. During the quarterly
periods ended January 31, 2003 and April 30, 2003, as filed on Form 10-QSB,
the Company incorrectly accrued an income tax receivable related to the
carry back of the current estimated period's net loss, as the Act only
applied to years ending in 2002 and 2001.
The Company recorded adjustments in the fourth quarter to reduce the income
tax receivable and related income tax benefit of approximately $139,000. Of
the aggregate adjusted amount, $43,000 and $96,000 relate to the second and
third quarters of the year ended July 31, 2003, respectively. The Company
plans to file amended Form 10-QSBs for the quarterly periods ended July 31,
2003 and April 30, 2003 to reflect this correction.
F-21
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 12 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 fiscal year ended July 31, 2003 and 2002 is
presented for the principal business segments as follows:
F-22
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Software Tools Biosciences
Year Ended July 31, 2003 and Consulting Business Total
------------------------ -------------- -------- -----
Revenues $ 797,776 $ 52,794 $ 850,570
Costs and expenses 904,167 1,493,000 2,397,167
Interest income 103,051 -- 103,051
Segment income (loss), pre-tax 35,810 (1,431,068) (1,395,258)
Income tax benefit -- 19,431 19,431
Total assets 9,354,046 4,391,327 13,745,373
Intellectual property, net -- 4,255,934 4,255,934
Depreciation and
amortization expense 7,394 285,924 293,318
Capital expenditures -- 109,164 109,164
Software Tools Biosciences
Year Ended July 31, 2002 and Consulting Business Total
------------------------ -------------- -------- -----
Revenues $ 652,553 $ 1,424 $ 653,977
Costs and expenses 718,072 697,976 1,416,048
Interest income 192,140 -- 192,140
Segment loss, pre-tax (22,207) (696,552) (718,759)
Income tax benefit 190,977 127,049 318,026
Total assets 10,335,770 4,688,164 15,023,934
Intellectual property, net -- 4,622,904 4,622,904
Depreciation and
amortization expense 7,188 163,191 170,379
Capital expenditures -- 18,260 18,260
NOTE 13 LEGAL PROCEEDINGS
Concluded legal matters
On July 14, 2000, the Agricultural Excess and Surplus Insurance Company
("AESIC"), which was the carrier of the Company'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 had 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 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. The parties settled
this lawsuit and AESIC paid $825,000 to the Company on November 5, 2002 in
full satisfaction of all claims. On January 24, 2003, all claims and
counterclaims were dismissed with prejudice.
F-23
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. The defendants answered the Hongerholt derivative complaint, and
denied all claims. In connection with this proceeding, the Company'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. 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. A hearing on the approval of
the settlement was held December 19, 2002 at which time the Court approved
a settlement between the parties pursuant to which the complaint was
dismissed without prejudice, with no payments made by or on behalf of the
defendants.
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. These
actions were 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
alleged violations of Section 10(b) of the Exchange, and Rule 10b-5
thereunder, relating to the Company's accounting and public disclosure from
October 1997 to November 1999. The Defendants 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 parties to the Consolidated Amended Class Action Complaint ("Class
Action") reached an agreement in October 2002 in principle to settle the
Class Action against all parties. Under the settlement, the Company agreed
to contribute to a Settlement Fund $450,000 and 375,000 shares of common
stock in the Company valued at $375,000. The Settlement Fund will be
distributed in a manner over which the Company has no control.
On February 27, 2003, the Court issued a Preliminary Order Approving
Settlement and Attached Documents, and scheduled a settlement fairness
hearing for May 20, 2003. Under the terms of the agreement, on March 4,
2003 the Company deposited $450,000 into an escrow account pending final
approval of the settlement. In accordance with instructions received on
August 5, 2003, 93,750 shares of common stock were issued in the names of
plaintiffs' counsel. To date, the Company has not received instructions for
issuing the balance of 281,250 shares of common stock to the Settlement
Fund. A hearing on the approval of the settlement was held May 20, 2003, at
which time the Court approved a settlement between the parties pursuant to
which the complaint was dismissed with prejudice. An amended order and
final judgment was issued on May 29, 2003.
F-24
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 satisfied the
criteria for accrual of a loss contingency under SFAS No. 5, the $450,000
cash settlement was accrued as a current liability and the value of the
375,000 shares of stock to be issued was recorded in the statement of
shareholders' equity as of 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. Furthermore, the $825,000
settlement receivable discussed earlier from AESIC was recorded as a
current receivable in the Company's financial statements as of July 31,
2002.
Pending legal matters
On November 20, 2002, the Company initiated an action against Deloitte &
Touche, LLP, ("Deloitte"), the Company's former auditors, captioned Accelr8
Technology Corporation v. Deloitte & Touche, LLP., Case No. 02CV8102,
District Court, City and County of Denver, State of Colorado. In that
action, the Company seeks damages from Deloitte for breach of contract. On
January 13, 2003, Deloitte answered the Complaint and filed a counterclaim
against the Company, and third-party claims against Thomas V. Geimer and
Harry J. Fleury. The counter-claim asserts claims for breach of contract,
deceit based on fraud, and negligent misrepresentation and seeks
unspecified damages. Third-party claims allege deceit based on fraud and
negligent misrepresentation, and also seek unspecified damages. On February
18, 2003, the Company, as Counter-claim Defendant, and Messrs. Geimer and
Fleury, as Third-party Defendants, moved to dismiss the counterclaims and
third-party complaint. On May 29, 2003, the Court denied the motion to
dismiss the counterclaims against the Company, and granted the motion to
dismiss the third party claims against Messrs Geimer and Fleury. 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 14 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
13.
On July 12, 2003, the Company issued 50,000 stock options valued at $47,000
for the purchase of the YoDx technology, as discussed in Note 5.
F-25
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 15 SUBSEQUENT EVENTS
On October 15, 2003, the Company signed a supply agreement and a letter of
intent with SCHOTT Nexterion AG of Mainz, Germany ("Nexterion"). Nexterion
is a wholly-owned division of SCHOTT Glas ("SCHOTT"), which is a leading
European manufacturer of precision glass. SCHOTT had sales of about 2
billion euros in 2002. SCHOTT formed the Nexterion division in 2002 to
enter the microarray market. In 2003, Nexterion acquired the microarray
products of Quantifoil (Jena, Germany), which is a market leader in the
European microarray slide market. Nexterion also made investments in two
development stage companies in the microarray market.
The supply agreement with Nexterion has a term of six months from October
15, 2003 and provides for the purchase of 5,000 slides at $10.50 each. The
supply agreement may be extended for 90 days and additional 5,000 slides
may be purchased at $10.50 each. Nexterion will purchase and resell
Accelr8's OptArray microarray slides under the Nexterion brand and Accelr8
will continue to manufacture the microarraying products in its Denver
facility. Accelr8 will be Nexterion's sole supplier of permeable hydrogel
microarraying slides during the term of the supply agreement and will
provide sales training and also technical support to SCHOTT's customers.
The letter of intent calls for negotiation of an exclusive technology
transfer license for Accelr8's OptiChem surface chemistry on microarraying
slides. Under the intended technology transfer license, SCHOTT will become
the exclusive outsource manufacturer for OptArray products starting in the
third quarter of 2004. SCHOTT will then manufacture the OptArray slides and
have exclusive global distribution rights to those products. The two
companies will cooperatively market the products. Management anticipates
that there will be three potential sources of revenue in the Technology
transfer agreement to be entered into with SCHOTT: (i) a one-time payment
of an up front licensing fee (upon signing), (ii) consulting services
relating to the technology transfer process, and (iii) royalties on sales.
The specific terms and conditions of the proposed licensing agreement have
not yet been negotiated or finalized, and it is possible that a definitive
agreement will not be reached with SCHOTT.
F-26