10QSB 1 accelr8-10qsb103102.txt FORM 10-QSB (10-31-2002) U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2002 ----------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________________ to ____________________ Commission file number 0-11485 -------- ACCELR8 TECHNOLOGY CORPORATION --------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) COLORADO 84-1072256 ------------------------------ ----------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203 ------------------------------------- (Address of principal executive office) (303) 863-8088 ------------------------- (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares outstanding of the issuer's Common Stock: Class Outstanding at October 31, 2002 ----- ------------------------------- Common Stock, no par value 9,411,210 Accelr8 Technology Corporation INDEX ----- Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - as of October 31, 2002 (unaudited) and July 31, 2002 3 Statements of Operations for the three months ended October 31, 2002 and 2001 (unaudited) 4 Statements of Cash Flows for the three months ended October 31, 2002 and 2001 (unaudited) 5 Notes to Unaudited Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 See note 6 to unaudited financial statements. Item 2. Changes in Securities and Use of Proceeds 16 Not applicable. Item 3. Defaults of Senior Securities 16 Not applicable Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 17 Not applicable. Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 -2-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements ---------------------------- Accelr8 Technology Corporation Balance Sheets October 31, July 31, ASSETS 2002 2002 ------------ ------------ (Unaudited) Current Assets: Cash and cash equivalents $ 8,641,482 $ 8,631,192 Accounts receivable, net 48,712 24,767 Prepaid expenses and other current assets 40,615 61,665 Insurance recovery receivable (Note 6) 825,000 825,000 Income tax receivable and deferred tax asset 145,523 336,500 ------------ ------------ Total current assets 9,701,332 9,879,124 Property and equipment, less accumulated depreciation of $55,485 and $49,335, respectively 70,470 76,620 Investments 511,731 445,286 Intellectual property, less accumulated amortization of $218,741 and $158,801, respectively (Note 4) 4,573,288 4,622,904 ------------ ------------ Total assets $ 14,856,821 $ 15,023,934 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 128,511 $ 87,599 Accrued liabilities 24,977 29,489 Accrued settlement loss (Note 6) 450,000 450,000 Deferred maintenance revenue 154,225 164,879 Other deferred revenue 20,000 2,200 ------------ ------------ Total current liabilities 777,713 734,167 ------------ ------------ Long-Term Liabilities: Deferred tax liabilities 24,833 24,833 Deferred compensation 530,481 520,286 ------------ ------------ Total long-term liabilities 555,314 545,119 Total liabilities 1,333,027 1,279,286 ------------ ------------ Shareholders' Equity Common stock, no par value; 11,000,000 shares authorized; 9,411,210 shares issued and outstanding 12,342,020 12,342,020 Stock to be issued (Note 6) 375,000 375,000 Contributed capital 332,059 329,809 Retained earnings 748,315 971,419 Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600) ------------ ------------ Total shareholders' equity 13,523,794 13,744,648 ------------ ------------ Total liabilities and shareholders' equity $ 14,856,821 $ 15,023,934 ============ ============ See accompanying notes to unaudited financial statements. -3-
Accelr8 Technology Corporation Statements of Operations (Unaudited) Three Months Ended October 31, October 31, 2002 2001 ----------- ----------- Revenues: Product license and customer support fees $ 30,412 $ 29,758 Resale of purchased software and customer support fees 154,677 62,274 Other Revenue 5,374 -- ----------- ----------- Net revenues 190,463 92,032 ----------- ----------- Costs and Expenses: Cost of services 9,819 51,684 Cost of software purchased for resale 30,590 9,658 General and administrative 167,338 162,372 Marketing and sales 74,542 53,293 Research and development 88,573 69,608 Amortization 59,940 6,345 Depreciation 6,150 5,325 ----------- ----------- Total costs and expenses 436,952 358,285 ----------- ----------- Loss from operations (246,489) (266,253) ----------- ----------- Other income (expense): Interest income 33,433 75,015 Unrealized holding loss on investments (8,605) (55,701) Realized loss on sale of investments (1,443) (3,034) Gain on disposal of fixed assets -- 8,419 Abandoned trademark -- (3,929) ----------- ----------- Total other income 23,385 20,770 ----------- ----------- Net loss $ (223,104) $ (245,483) =========== =========== Basic and diluted net loss per share $ (.02) $ (.03) =========== =========== Weighted average shares outstanding - basic and diluted 9,411,210 7,630,360 =========== =========== See accompanying notes to unaudited financial statements -4-
Accelr8 Technology Corporation Statements Of Cash Flows (Unaudited) Three Months Ended ------------------- October 31, October 31, 2002 2001 -------------------------- Cash flows from operating activities: Net loss $ (223,104) $ (245,483) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization 59,940 6,345 Depreciation 6,150 5,325 Issuance of stock options for consulting services 2,250 -- Unrealized holding loss on investments 8,605 55,701 Realized (gain) loss on sale of investments, interest and dividends reinvested (50) 328 Gain from disposal of assets -- (8,419) Loss on abandoned trademarks -- 3,929 Net change in assets and liabilities: Accounts receivable (23,945) 40,078 Prepaid expenses and other 21,050 19,366 Income tax receivable and deferred tax asset 190,977 -- Accounts payable 40,912 617 Accrued liabilities (4,512) (194,305) Deferred maintenance revenue (10,654) 13,223 Other deferred revenue 17,800 (825) Other long-term liabilities 10,195 (37,279) ----------- ----------- Net cash provided by (used in) operating activities 95,614 (341,399) ----------- ----------- Cash flows from investing activities: Disposal of assets, net of depreciation -- 1,160 Proceeds from disposal of assets -- 8,419 Purchase of intellectual property (10,324) (7,197) Purchase of investments (75,000) (75,000) ----------- ----------- Net cash used in investing activities (85,324) (72,618) ----------- ----------- Cash flows from financing activities: Repurchase of common stock -- (15,805) Employee stock options exercised -- 1,800 ----------- ----------- Net cash used in financing activities -- (14,005) ----------- ----------- Net increase (decrease) in cash and cash equivalents 10,290 (428,022) Cash and cash equivalents, beginning of period 8,631,192 9,522,343 ----------- ----------- Cash and cash equivalents, end of period $ 8,641,482 $ 9,094,321 =========== =========== Supplemental information: Cash received from income tax refunds $ 190,977 $ -- =========== =========== See accompanying notes to unaudited financial statements. -5-
Accelr8 Technology Corporation Notes to Unaudited Financial Statements Note 1. Basis of Presentation The financial statements included herein have been prepared by Accelr8 Technology Corporation (the "Company") without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's annual audited financial statements dated July 31, 2002, included in the Company's annual report on Form 10-KSB as filed with the SEC. The management of the Company believes that the accompanying unaudited financial statements are prepared in conformity with generally accepted accounting principles, which require the use of management estimates, and contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations and cash flows for the periods presented. The results of operations for the three months ended October 31, 2002 may not be indicative of the results of operations for the year ended July 31, 2003. Note 2. Reclassification Certain reclassifications have been made in the 2001 financial statements to conform to the classifications used in 2002. Note 3. Shareholders' Equity Repurchase of Common Stock On July 30, 1998 the Board of Directors authorized the repurchase of up to 500,000 shares of the Company's common stock. The Repurchase of the Company's common stock was based upon the Board of Directors' belief that the Company's common stock was undervalued considering the Company's potential earnings and prospects for future operations. Repurchases may be made periodically in the open market, block purchases or in privately negotiated transactions, depending on market conditions and other factors. The Company has no commitment or obligation to repurchase all or any portion of the shares. Between August 1, 2002 and October 31, 2002 the Company did not repurchase any shares of its common stock. During the three month period ended October 31, 2001, the Company repurchased a total of 6,500 shares of its common stock at a cost of $15,805. -6- Common Stock Options At October 31, 2002, there were 840,000 option shares outstanding at prices ranging from $.36 to $4.00 with expiration dates between July 31, 2003 and August 2, 2011. Included in the 840,000 options are 100,000 options that do not expire as long as the recipient remains an employee of the Company. The remaining number of option shares available for issuance under the Company's stock option plans are 257,500. Five thousand stock option shares, at a price of $.36 and totaling $1,800 were exercised during the three months ended October 31, 2001. On May 7, 2002, the Company issued options to purchase 100,000 shares of its common stock to consultants for services to be provided at an exercise price of $2.25 per share, expiring four years from date of issuance. The consultant options vest 50% after one year and 50% after two years. The incremental increase in the fair value of the options of $2,250 during the three months ended October 31, 2002 was recorded as a charge to operations. Stock to be Issued See Note 6 to unaudited financial statements for discussion. Note 4. Intellectual Property Intellectual property consisted of the following: October 31, July 31, 2002 2002 ---------- ---------- OpTest Technologies $4,614,872 $4,614,872 Patents 135,379 128,434 Trademarks 41,778 38,399 ---------- ---------- 4,792,029 4,781,705 Accumulated amortization (218,741) (158,801) ---------- ---------- $4,573,288 $4,622,904 ========== ========== Intellectual properties are recorded at cost and are being amortized on a straight-line basis over their estimated useful lives of 20 years, which approximates the patents and trademarks application life of the OpTest Technologies. Effective August 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". In accordance with SFAS No. 142, the Company completed an impairment test of its intangible assets and determined that no impairment existed as of August 1, 2001 or July 31, 2002. Intangible assets will be tested annually and whenever events and circumstances occur indicating that the assets may be impaired. -7-
Upon the adoption of SFAS No. 142, the Company evaluated the estimated useful lives of the existing intangible assets and determined that the existing useful lives were appropriate. Future amortization expense for the intangible assets is estimated as follows: Years Ending July 31, --------------------- 2003 (9 months) $ 179,450 2004 239,390 2005 239,390 2006 239,390 2007 239,390 Thereafter 3,436,278 --------- $ 4,573,288 =========== Note 5. Business Segment Information The Company operates in two business segments: software tools and related consulting services and the general area of biosciences, which includes DNA/RNA assays, protein-based assays and biosensors. Operating results and other financial data for the three months ended October 31, 2002 and 2001 are presented for the principal business segments as follows: --------------------------------------- -------------------- -------------- --------------- Three Months Ended Software Tools and Biosciences October 31, 2002 Consulting Business Total --------------------------------------- -------------------- -------------- --------------- --------------------------------------- -------------------- -------------- --------------- Revenues $ 185,089 $ 5,374 $ 190,463 --------------------------------------- -------------------- -------------- --------------- Costs and expenses 205,403 231,549 436,952 --------------------------------------- -------------------- -------------- --------------- Interest income 33,433 -- 33,433 --------------------------------------- -------------------- -------------- --------------- Segment gain (loss) 3,071 (226,175) (223,104) --------------------------------------- -------------------- -------------- --------------- --------------------------------------- -------------------- -------------- --------------- Total assets 10,220,058 4,636,763 14,856,821 --------------------------------------- -------------------- -------------- --------------- Intellectual property, net -- 4,573,288 4,573,288 --------------------------------------- -------------------- -------------- --------------- Depreciation and amortization expense 1,800 64,290 66,090 --------------------------------------- -------------------- -------------- --------------- --------------------------------------- -------------------- -------------- --------------- Three Months Ended Software Tools and Biosciences Total October 31, 2001 Consulting Business --------------------------------------- -------------------- -------------- --------------- --------------------------------------- -------------------- -------------- --------------- Revenues $ 92,032 $ -- $ 92,032 --------------------------------------- -------------------- -------------- --------------- Costs and expenses 235,827 122,458 358,285 --------------------------------------- -------------------- -------------- --------------- Interest income 75,015 -- 75,015 --------------------------------------- -------------------- -------------- --------------- Segment loss (119,096) (126,387) (245,483) --------------------------------------- -------------------- -------------- --------------- --------------------------------------- -------------------- -------------- --------------- Total assets 9,713,285 540,402 10,253,687 --------------------------------------- -------------------- -------------- --------------- Intellectual property, net -- 482,117 482,117 --------------------------------------- -------------------- -------------- --------------- Depreciation and amortization expense 1,890 9,780 11,670 --------------------------------------- -------------------- -------------- --------------- -8-
Note 6. Legal Proceedings The Company is a party to certain legal proceedings, the outcome of which management believes will not have a significant impact upon the financial position of the Company. The Company is not able to predict the outcome of the pending legal matters described below with any degree of certainty, and there can be no assurance that the resolution of one or more of the cases described below may not have a material adverse effect on the Company. Concluded legal matters On November 16, 1999, the United States Securities and Exchange Commission ("SEC") filed suit in the United States District Court for the District of Colorado against Accelr8 Technology Corporation, Thomas V. Geimer, Harry J. Fleury, and James Godkin, captioned Securities and Exchange Commission v. Accelr8 Technology Corporation, et al., and Civil Action No. 99-D-2203. The SEC sought an injunction permanently restraining and enjoining each defendant from violating Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; Section 13(a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder, and, in addition, that Mr. Geimer and Mr. Godkin be enjoined from future violations of Section 13(b)(2) of the Securities Exchange Act of 1934, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder related to securities fraud, Section 13 of the Exchange Act and the rules thereunder relate to reporting and record keeping. The SEC alleged that the Defendants made material misrepresentations of fact regarding the capability of certain of the Company's products, and the Company's financial condition, including its revenues and earnings. The SEC also alleged that Mr. Geimer and Mr. Godkin failed to implement, or circumvented, a system of internal accounting controls, falsified books and records, and made misrepresentations to the Company's accountants. On July 12, 2001, the Defendants, without admitting or denying the allegations of the Third Amended Complaint filed by the SEC, consented to the entry of Final Orders in which the court dismissed the securities fraud claims against all Defendants with prejudice, made no findings that any violation of law occurred, and enjoined the Defendants from future violations of Section 13 of the Exchange Act, and the regulations thereunder referred to above. In addition, Mr. Geimer paid a civil penalty of $65,000, Mr. Fleury paid a civil penalty of $20,000, and Mr. Godkin paid a civil penalty of $20,000. All costs, expenses, civil penalties, and liabilities incurred by the Defendants in defending and settling this matter were borne by the Company. No further action is anticipated in this matter. On May 24, 2000, William Dews, an alleged shareholder of Accelr8, filed a derivative action on behalf of the Company, against Thomas Geimer, A. Alexander Arnold III and David Wilhelm, captioned John William Dews v. Thomas V. Geimer, et al., Civil Action No. 00-CV-2785 (District Court, City and County of Denver, Colorado). That action alleged various breaches of fiduciary duty arising out of Accelr8's accounting and public reporting during 1997 through 1999. On January 4, 2002, the Court approved a settlement between the parties pursuant to which the complaint was dismissed without prejudice, with no payments to be made by or on behalf of the defendants. -9- On July 14, 2000, the Agricultural Excess and Surplus Insurance Company ("AESIC"), which is the carrier of Accelr8's director and officer liability policy, filed in the United States District Court for the District of Colorado an action for a declaratory judgment seeking to rescind Accelr8's directors and officers liability policy, captioned Agricultural Excess and Surplus Insurance Company v. Accelr8 Technology Corporation, Civil Action No. 00-B-1417. That policy has a $1 million limit with a $100,000 deductible. The Company and certain individuals made demand for coverage under that policy relating to third party claims involving the Company's accounting and public reporting from 1997 to 1999. AESIC alleged that it was fraudulently induced to enter into the contract of insurance through knowing material misrepresentations made by the Company in its Form 10-KSB filed with the SEC, concerning the capabilities of certain of the Company's products. The defendants answered the Complaint, in which they denied the claim for rescission, and filed a counterclaim seeking damages for the insurer's refusal to provide the benefits of insurance. Subsequent to July 31, 2002, the parties settled this lawsuit and AESIC paid $825,000 to the Company on November 5, 2002 in full satisfaction of all claims. Pending legal matters On May 4, 2000, Harley Meyer filed in the United States District Court for the District of Colorado a putative class action against Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June 2, 2000, Charles Germer filed in the United States District Court for the District of Colorado a putative class action against Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June 8, 2000, William Blais filed in the United States District Court for the District of Colorado a putative class action against Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June 20, 2000, Diana Wright filed in the United States District Court for the District of Colorado a putative class action against Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On August 14, 2000, Derrick Hongerholt filed in the United States District Court for the District of Colorado a shareholder derivative action against Thomas V. Geimer, David C. Wilhelm, A. Alexander Arnold III, Harry J. Fleury, James Godkin and Accelr8 Technology Corporation as a nominal defendant. These actions have been consolidated under the caption In re Accelr8 Technology Corporation Securities Litigation, Civil Action No. 00-K-938. On October 16, 2000, a Consolidated Amended Class Action Complaint was filed which added James Godkin as a defendant. The Consolidated Amended Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, relating to the Company's accounting and public disclosure from October 1997 to November 1999. The Defendants have answered the Amended Complaint, in which they denied liability and raised affirmative defenses. On January 23, 2001, the Court granted the Plaintiff's Motion for Class Certification. The defendants have answered the Hongerholt derivative complaint, and have denied all claims. In connection with this proceeding, Accelr8's Board of Directors appointed David G. Palmer, Esquire, as independent counsel to serve as a Special Litigation Committee to investigate the claims and circumstances relating to the derivative action filed by Derrick Hongerholt and to determine whether the derivative action should be terminated. On September 10, 2002, the Special Litigation Counsel determined, after investigation, that the derivative claims were without factual merit, and should be dismissed. -10- On October 30, 2002, the parties agreed to a settlement of the derivative action, under which that action would be dismissed with prejudice upon an exchange of releases, with no payments made by or on behalf of any of the Defendants. The settlement is subject to Court approval, and while the Company believes that approval is probable, there can be no assurance that the settlement will be approved. A hearing on the approval of the settlement has been set for December 19, 2002. In the event that the settlement is not approved, and the litigation proceeds, the Company is bearing the costs of defense in accordance with indemnification agreements for all Defendants, which costs may be material to the Company. No claims are asserted against the Company in the derivative action. On October 30, 2002, the parties to the Consolidated Amended Class Action Complaint ("Class Action") executed a Memorandum of Understanding setting out an agreement in principle to settle the Class Action against all parties. Under the contemplated settlement, the Company will contribute to a settlement fund $450,000, and 375,000 shares of common stock in the Company. The settlement fund will be distributed in a manner over which the Company has no control. This agreement in principle is subject to formal documentation and Court approval. Although the Company believes that it is probable that the parties will complete formal documentation of the settlement agreement, and that the settlement will be approved, there can be no assurance that completion of the settlement, and Court approval will occur. In the event that the settlement is not completed, the litigation will continue. While the Company believes it has substantial defenses to the Class Action claims, there is no assurance that the resolution of the Class Action will not have a material adverse effect on the Company. SFAS No. 5, "Accounting for Contingencies," requires loss contingencies to be accrued if it is probable an asset has been impaired or a liability incurred at the balance sheet date and the amount of loss can be reasonably estimated. Since the settlement terms discussed above satisfy the criteria for accrual of a loss contingency under SFAS No. 5, the $450,000 cash settlement has been accrued as a current liability and the value of the 375,000 shares of stock to be issued have been recorded in the statement of shareholders' equity as of October 31, 2002 and July 31, 2002. The stock to be issued was valued using the market price of the Company's common stock on the date the parties agreed to the terms of the settlement. If the final settlement terms are amended from those stated above, adjustments to the Company's financial statements would be necessary in the year ended July 31, 2003. Furthermore, the $825,000 settlement receivable from AESIC was recorded as a current receivable in the Company's financial statements as of October 31, 2002 and July 31, 2002. Payment was received on November 5, 2002 Note 7. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of -11- fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company adopted this statement on August 1, 2002 and it had no material impact on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The Company adopted this statement August 1, 2002 and it had no material impact on its financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in with the current GAAP criteria for extraordinary classification. In addition, SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sale-leaseback accounting rules. The statement also contains other nonsubstantive corrections to authoritative accounting literature. The Company adopted this standard August 1, 2002 and it had no effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. Adoption of this standard will not have any effect on the Company's financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Result -------------------------------------------------------------------------------- of Operations ------------- Information contained in the following discussion of results of operations and financial condition of the Company contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as may, will, expect, anticipate, estimate, or continue, or variations thereon or comparable terminology. In addition, all statements other than statements of historical facts that address activities, events or developments that the Company expects, believes or anticipates, will or may occur in the future, and other such matters, are forward-looking statements. The following discussion should be read in conjunction with the Company's unaudited financial statements and related -12- notes included elsewhere herein. The Company's future operating results may be affected by various trends and factors which are beyond the Company's control. These include, among other factors, general public perception of issues and solutions, and other uncertain business conditions that may affect the Company's business. The Company cautions the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect the Company's actual results and cause actual results to differ materially from those discussed in forward-looking statements. Overview Accelr8 Technology Corporation ("Accelr8" or the "Company") has been a provider of software tools and consulting services for the modernization of solutions for VMS legacy systems that were developed by Digital Equipment Corporation ("DEC") and which are proprietary to Compaq Computer Corporation ("COMPAQ") as a result of its purchase of DEC. The Company's consulting services and software conversion tools enable the Company's customers to analyze and implement conversions to UNIX, Linux and NT operating systems in a predictable and cost-effective manner. The Company's clients include a number of Fortune 1000 companies and government agencies. Based upon the significant decline in sales of its software tools and related consulting services, the Company has taken steps to limit the costs associated with the conduct of this business. These steps included the reduction of the number of personnel whose efforts are directed towards this business, not renewing the contracts of several members of management whose primary activities related to this business and reducing the amount of space occupied by the Company. Management intends to operate this business at a level that is sufficient to service the needs of existing customers and to support future sales of software tools. The Company does not expect to continue its consulting activities, although if such opportunities arise, management believes that it may be able to subcontract for the performance of the necessary services from third parties or former employees. The Company is also investigating the possibility of selling these business operations to another party although no arrangements or understandings currently exist with respect to the sale of these assets. Management believes that the merger of Hewlett-Packard Company ("HP") and COMPAQ provides an opportunity for the Company to provide a practical strategy for the Digital VMS installed base of customers to adapt their computer software programs to the next generation of HP hardware solutions. On January 18, 2001 the Company purchased the OpTest technology assets ("OpTest") from DDx, Inc. ("DDx") and commenced investment in rapid delivery of testing and optimization of OpTest's surface chemistry and quantitative instruments. The Company's goal is to compete in the general area of biosciences, including DNA/RNA assays, protein-based assays and biosensors. The Company's proprietary surface chemistry and its quantitative instruments (QuanDx (TM) and Oter(TM)) support real-time assessment of medical diagnostics, food-borne pathogens, water-borne pathogens and bio-warfare assessments. The Company has received minimal revenues to date from these products and there is no assurance that the Company will be successful in marketing the new products. -13- Results of Operations: October 31, 2002 compared to October 31, 2001 Revenues for the quarter ended October 31, 2002 were $190,463, an increase of $98,431 or 107% as compared to the quarter ended October 31, 2001. Product license and customer support fees for the quarter ended October 31, 2002, were $30,412, an increase of $654 or 2.2% as compared to the quarter ended October 31, 2001, and represented 16.0% of revenues. Based on the increased number of inquiries that we have received from the Compaq installed base of DEC (VMS) users, we believe that demand for our migration tools and services may increase going into the first half of calendar 2003. This will be influenced by Hewlett Packard's announcement of new operating systems and hardware solutions to be supported in the future. Revenues from the resale of purchased software and customer support for the quarter ended October 31, 2002 were $154,677, an increase of $92,403 or 148% as compared to the quarter ended October 31, 2001, and represented 81.2% of revenues. This increase largely resulted from $81,375 in sales to a single customer as compared to no sales to that customer in the comparable quarter ended October 31, 2001. Other revenues for the quarter ended October 31, 2002 were $5,374, as compared to zero revenues for the quarter ended October 31, 2001, and represented 2.8% of revenues. Other revenue represents sales of slides being sold to companies that are evaluating the OpTest technologies. During the quarter ended October 31, 2002, sales to the Company's two largest customers were $81,375 and $50,625, representing 42.7% and 26.6% of the Company's revenues, respectively. In comparison, sales to the Company's two largest customers were $55,744 and $20,372, representing 60.6% and 22.1% of the Company's revenues, respectively, for the quarter ended October 31, 2001. The loss of a major customer could have a significant impact on the Company's financial performance in any given period. Cost of services for the quarter ended October 31, 2002, was $9,819, a decrease of $41,865 or 81.0% as compared to the quarter ended October 31, 2001. This decrease resulted from fewer engineering salaries and other related personnel costs. Cost of software purchased for resale for the quarter ended October 31, 2002, was $30,590, an increase of $20,932 or 217% as compared to the quarter ended October 31, 2001. Software purchased for resale includes cost of maintenance purchased to support previously sold software. The increase in software purchased for resale results from increased revenues from resale of purchased software and customer support and variations in product mix of items sold. General and administrative expenses for the quarter ended October 31, 2002, were $167,338, an increase of $4,966 or 3.1% as compared to the quarter ended October 31, 2001, primarily due to decreased salaries of $6,400, consulting fees of $15,000, legal fees of $12,700 and employee related costs of $7,900 offset by increased deferred compensation of $47,500 due to change in market values of securities held in the deferred compensation trust. -14- Marketing and sales expenses for the quarter ended October 31, 2002, were $74,542, an increase of $21,249 or 39.9% as compared to the quarter ended October 31, 2001. This increase was due to increased consulting fees of $9,600, costs of promotional materials of $6,700, and costs of participating in trade shows, including cost of attending of $12,100. Research and development expenses for the quarter ended October 31, 2002 were $88,573, an increase of $18,965 or 27.3% as compared to the quarter ended October 31, 2001. This increase was largely due to increased salaries of $9,700 and laboratory expense and supplies of $12,000 for the continued development of the OpTest technologies purchased January 18, 2001. Amortization for the quarter ended October 31, 2002 was $59,940, an increase of $53,595 or 845% as compared to the quarter ended October 31, 2001. During the second and third quarters of the year ended July 31, 2002, the gross asset basis of intellectual properties increased significantly due to the purchase of the OpTestTM technologies (see discussion in the Company's Form 10-KSB for the year ended July 31, 2002). The increase in amortization expense results from the amortization of the OpTestTM technologies. Depreciation for the quarter ended October 31, 2002 was $6,150, an increase of $825 or 15.5% compared to the quarter ended October 31, 2001. As a result of these factors, loss from operations for the quarter ended October 31, 2002 was $246,489, a decreased loss of $19,764 or 7.4% as compared to the quarter ended October 31, 2001. Interest income for the quarter ended October 31, 2002 was $33,433, a decrease of $41,582 or 55.4% as compared to the quarter ended October 31, 2001. This decrease was mainly due to an average interest rate decrease during the current quarter of about 1.6% and approximately $725,000 less cash earning interest. Realized loss on marketable securities held in the deferred compensation trust for the quarter ended October 31, 2002 was $1,443, as compared to a realized loss of $3,034 during the quarter ended October 31, 2001. This loss was the result of selling marketable securities held in the deferred compensation trust. Unrealized loss on marketable securities held in the deferred compensation trust for the quarter ended October 31, 2002 was $8,605 a decrease of $47,096 as compared to the quarter ended October 31, 2001. This decreased loss was the result of changing market value of securities held in the trust. There was no gain or loss on asset disposal for the quarter ended October 31, 2002 as compared to a gain on asset disposal of $8,419 for the quarter ended October 31, 2001. -15- There was no loss on abandoned trademarks for the quarter ended October 31, 2002 as compared to a loss of $3,929 for the quarter ended October 31, 2001. As a result of these factors net loss for the quarter ended October 31, 2002 was $223,104 a decrease of $22,379 or 9.1% as compared to the quarter ended October 31, 2001. As of October 31, 2002, a valuation allowance of $196,150 has been recorded on the deferred tax asset. As management has not determined that it is more likely than not that this amount of the deferred tax assets will be realized, no tax benefit was recorded for the quarters ended October 31, 2002 or October 31, 2001. Capital Resources and Liquidity At October 31, 2002, as compared to July 31, 2002, the Company's current assets decreased 1.8% from $9,879,124 to $9,701,332 and the Company's liquidity as measured by available cash, increased 0.1% from $8,631,192 to $8,641,482. Working Capital at October 31, 2002, was $8,923,619 compared to working capital of $9,144,957 at July 31, 2002. During the same period, shareholders' equity decreased 1.6% from $13,744,648 to $13,523,794 largely as a result of the Company's net loss for the quarter ended October 31, 2002. The Company has historically funded its operations primarily through equity financing and cash flow generated from operations. The Company anticipates that current cash balances and working capital plus future positive cash flow from operations will be sufficient to fund its capital and liquidity needs in the foreseeable future. Contractual Obligations The following tables set forth information with respect to our contractual obligations and commercial commitments as of October 31, 2002. ---------------------- ---------- -------------- ------------------------------- Payments due by Period ---------------------- ---------- ------------- -------------------------------- Total 1 to 3 years 4 to 5 years More than 5 years ---------------------- ---------- ------------- -------------- ----------------- Laboratory Lease Payments(1) $121,208 $121,208 0 0 ---------------------- ---------- ------------- -------------- ----------------- Thomas V. Geimer Employment Contract(2) $189,583 $189,583 0 0 ---------------------- ---------- ------------- -------------- ----------------- (1) We have a three year lease agreement that began on October 1, 2002 for our laboratory located at 7000 Broadway, Denver Colorado 80221. (2) Calculated as of October 31, 2002. Mr. Geimer's employment agreement expires on November 30, 2003. Item 3. Controls and Procedures -------------------------------- Within the 90-day period prior to the date of this report our Chief Executive Officer who is also the Company's Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer/Chief -16- Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this quarter report on Form 10-QSB. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date that the Chief Executive Officer/Chief Financial Officer carried out the evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings -------------------------- See Note 6 to unaudited financial statements. Item 2. Changes in Securities and Use of Proceeds -------------------------------------------------- Not applicable. Item 3. Defaults of Senior Securities -------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ The Annual Meeting of the Company's Shareholders was held on December 12, 2002. The matters considered at the meeting were: a) The election of Thomas V. Geimer, David C. Wilhelm and A. Alexander Arnold III to the Company's Board of Directors. b) To approve certain amendments to the Company's 1996 Non-Qualified Stock Option Plan. c) To approve certain amendments to the Company's 1996 Incentive Stock Option Plan. d) Ratification of the Election of Anton Collins Mitchell LLP as the Company's independent public accountants for the fiscal year ending July 31, 2003. Each of the nominees were elected to the Board of Directors; certain amendments to the 1996 Non-Qualified Stock Option Plan and the 1996 Incentive Stock Option Plan were approved; and Anton Collins Mitchell LLP were ratified as the Company's independent public accountants. The votes cast at the annual meeting upon the matters considered were as follows: -17- For Against Abstain --- ------- ------- Election of Directors Thomas V. Geimer 7,786,645 27,120 400 David C. Wilhelm 7,783,845 29,629 700 A. Alexander Arnold III 7,776,844 36,621 700 Approval Amendments to 1996 Non- Qualified Stock Option Plan 7,514,123 288,862 11,180 Amendments to 1996 Incentive Stock Option Plan 7,509,23 298,022 7,020 Ratification Anton Collins Mitchell LLP 7,759,365 51,041 3,759 Item 5. Other Information -------------------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- a) Exhibits: 1. Exhibit 99.01 Certification of Officers pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2. Exhibit 99.02 Certification of Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 3. Exhibit 99.03 Certification of Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K: On August 29, 2002 the Company filed a Form 8-K, reporting under Item 4, changes in the Company's certifying accountants. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: December 13, 2002 ACCELR8 TECHNOLOGY CORPORATION ----------------- /s/ Thomas V. Geimer ---------------------------------- Thomas V. Geimer, Secretary, Chief Executive Officer and Chief Financial Officer /s/ James Godkin ---------------------------------- James Godkin, Principal Accounting Officer -19-