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AXK > SEC Filings for AXK > Form 10-K on 27-Oct-2011All Recent SEC Filings

Show all filings for ACCELR8 TECHNOLOGY CORP

Form 10-K for ACCELR8 TECHNOLOGY CORP


27-Oct-2011

Annual Report


Item 7. Management's Discussion and Analysis and Results of Operation

Overview

On January 18, 2001, Accelr8 purchased the OpTest portfolio of technology assets 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 rapid assessment of medical diagnostics, food-borne pathogens, water-borne pathogens and bio-warfare agents. The Company sells advanced microarray slides coated with its proprietary OptiChem® activated surface chemistry for use in academic research, drug discovery and molecular diagnostics through their license agreement with SCHOTT. This surface coating has the 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 reproducibility, and higher throughput by virtue of simplified application methods.

The Company originally signed a licensing agreement for microarraying slides using OptiChem® coatings with Schott Jenaer Glas GmbH ("SCHOTT") on November 4, 2004. Since this time, SCHOTT and the Company have extended this license. On August 15, 2011 Schott Technical Glass Solutions GmbH (Jena, Germany) renewed and expanded its licenses for OptiChem® microarray slide products, designated as Schott Nexterion Slide H and Slide HS. The terms remain substantially the same as in previous agreements, with the expansion to include microarray slide products intended for use in medical diagnostic devices. Previous agreements excluded medical applications. This expansion makes Schott the second company that intends to use OptiChem® coatings on medical devices, subsequent to our agreement with Nanosphere.

The new agreement extends the non-exclusive license through November 24, 2014. Schott paid the Company $150,000 as a one-time license fee ($50,000) and non-refundable prepaid royalties ($100,000). Royalties consist of 5% of Schott's net product sales. For medical applications, Schott agrees to refer individual customers directly to Accelr8 for licensing if annual purchases by a customer exceed 20,000 units.

The Company entered into an exclusive seven-year license with NanoString Technologies Inc. on October 5, 2008. The license grants to NanoString the right to apply OptiChem® coatings to NanoString's proprietary molecular detection products. Pursuant to the license agreement, NanoString paid the Company a non-refundable fee of $100,000 of which $50,000 was credited against future royalties. Under the royalty-bearing license, NanoString is to pay the Company a royalty at the rate of eight percent (8%) of net sales for sales up to $500,000 of NanoString licensed products. The royalty rate on the second $500,000 of net sales is six percent (6%), and the royalty thereafter is four percent (4%). During the fiscal year 2011, we recorded deferred revenues of $10,428.

On July 9, 2010 the Company entered into a non-exclusive patent-life OptiChem® license to Nanosphere, Inc. The license grants to Nanosphere the right to apply OptiChem® coatings to Nanosphere's proprietary analytical products. The products may include FDA-regulated diagnostics devices, unlike the other current licensees. Pursuant to the license agreement, Nanosphere paid the Company a non-refundable first-year fee of $150,000 plus a $15,000 technology transfer fee. On each anniversary of the agreement date, Nanosphere will pay to the Company the amounts of $350,000 in 2011; $600,000 in 2012, and $750,000 in 2013 in order to complete the payments for rights under the remaining patent life. Pursuant to the Company's revenue recognition policy and generally accepted accounting policies, all of the amounts due from Nanosphere were recognized as OptiChem revenue during the fiscal year ended July 31, 2010.

On June 14, 2010 the Company entered into an Evaluation Agreement and Letter of Intent with Novartis for a technical evaluation project with the Company's BACcel™ rapid diagnostic technology. The agreement includes a first right of refusal option for the diagnostics company to license the BACcel™ technology and commercialize clinical diagnostics instruments using Accelr8's technology. Under the agreement, Accelr8 received initial payments of $220,000 during the fiscal year ended July 31, 2010 and will continue to receive monthly funding until completion of data evaluation. Since the initial agreement, there were three amendments to the Letter of Intent extending the evaluation period to September 30, 2011. The evaluation agreement with Novartis expired on September 30, 2011 without Novartis exercising its option for licensing the Company's BACcel™ system intellectual property.

Subject to the receipt of capital, during the fiscal year ending July 31, 2012 we intend to continue technical validation of the BACcel™ system methods, continue field studies including pilot clinical studies at Denver Health and Barnes-Jewish Hospital, continue to publish the results of internal and collaborative studies, and seek a strategic partner or licensee for BACcel™ product commercialization.

Changes in Results of Operations: Year ended July 31, 2011 compared to year ended July 31, 2010

Technical development fees were $842,408 for the year ended July 31, 2011 as compared to $290,000 for the year ended July 31, 2010, an increase of $552,408 or 190.49%. The technical development fees during the fiscal year ended July 31, 2011 and 2010 were the result of the development agreement with Novartis that began in June of 2010.

OptiChem(R) slide revenues for the year ended July 31, 2011 were $34,279 as compared to $113,032 for the year ended July 31, 2010, a decrease of $78,753, or 69.7%. The decrease in OptiChem(R) revenues was primarily due to a decrease in sales of slides by SCHOTT to NanoString, which are now manufactured by Nanostring pursuant to license agreements.

License fees for the year ended July 31, 2011 were $0 as compared to $1,842,596 during the fiscal year ended July 31, 2010. The decrease in license fees was the result of the licensing agreement with Nanosphere. Pursuant to the Company's revenue recognition policy and generally accepted accounting policies, all of the amounts due from Nanosphere were recognized as OptiChem revenue during the fiscal year ended July 31, 2010.

During the fiscal year ended July 31, 2011 and 2010, there were no cost of sales due to the fact that the slides are manufactured by SCHOTT and NanoString pursuant to license agreements.

Research and development expenses for the year ended July 31, 2011, were $454,997 as compared to $501,600 during the year ended July 31, 2010, a decrease of $46,603 or 9.29 %. This decrease was primarily the result of reductions in salaries to research and development staff from $233,344 to $182,783 during the year ended July 31, 2011, a decrease of $50,561 or 21.67%, an increase in clinical trial expenditures to $35,871 for the year ended July 31, 2011 from $31,917 for the year ended July 31, 2010, an increase of $3,954 or 12.39% and a reduction of costs related to the BACelr8 program of $6,736 or 81.70% from $8,245 in 2010 to $14,981 in 2011.

General and administrative expenses for the year ended July 31, 2011 were $810,078 as compared to $869,348 during the year ended July 31, 2010, a decrease of $59,270 or 6.82%. The following summarizes the major components of the changes:

                                                                            Increase
                                                 2011          2010        (Decrease)
      Audit and Accounting                    $  49,538     $  49,600     $      (62 )

       Consulting Fees                           90,021        52,910         37,111

      Corporate and Shareholder                  84,598       102,959         18,361

      Corporate Insurance                        34,704        32,838          1,866

      Deferred Compensation                      95,985       104,701         (8,716 )

      Employee Benefits                           3,402        71,214        (67,812 )

      Payroll Taxes                              32,804        36,997         (4,193 )

      Salaries                                  316,422       316,154            268

      Travel                                      3,489         8,615         (5,126 )

      Legal                                      21,770        23,414         (1,644 )

      Other General Administrative Expenses      47,345        69,946        (22,601 )
                                              $ 810,078     $ 869,348        (59,270 )

The increase in consulting fees of $37,111 was primarily due to an increase in the charge against operations, as calculated using the Black-Scholes method, for the cost of stock options granted or extended.

The increase in amortization for the year ended July 31, 2011 was negligible.

Depreciation for the year ended July 31, 2011 was $2,396 as compared to $10,480 during the year ended July 31, 2010 a decrease of $8,804 or 77.14%. The decreased depreciation was primarily due to equipment becoming fully depreciated.

Marketing and sales expenses were $9,621 for the year ended July 31, 2011 as compared to $1,400 during the year ended July 31, 2010, an increase of $8,221 or 587.2%. The increase was primarily the result of increased travel during the fiscal year 2011 to industry trade shows.

As a result of these factors, loss from operations for the year ended July 31, 2011 was $409,425 as compared to a gain of $611,793 for the year ended July 31, 2010, resulting in decreased income of $1,021,218 or 166.9%.

Interest and dividend income for the year ended July 31, 2011 was $16,092 as compared to $6,053 for the year ended July 31, 2010, an increase of $10,039 or 165.8%. The increase was due to amounts recorded in connection with our account receivable from Nanosphere which was recorded at discounted present value during the prior fiscal year.

Unrealized gains on marketable securities held in the deferred compensation trust for the year ended July 31, 2011 was $14,572 as compared to an unrealized gain of $23,901 during the year ended July 31, 2010. The decreased unrealized gain was a result of market fluctuations on the securities that are held in the deferred compensation trust.

As a result of these factors, net loss for the year ended July 31, 2011 was $378,761 as compared to a net income of $641,747 during the year ended July 31, 2010, a decreased in income of $1,020,508 or 159.02%.

Capital Resources and Liquidity

During the fiscal year ended July 31, 2011, we generated positive cash flows from operating activities, as compared with cash used in operations for fiscal year 2010. The primary sources of capital have been from revenues from operations, including technical development fees, and collection of our receivables. Our agreement with Nanosphere provides for annual payments through 2013 which will contribute to our future operating liquidity. As of July 31, 2011, the Company had $775,856 in cash and cash equivalents, an increase of $492,583 from $283,273 at July 31, 2010. The primary reasons for the change in cash and cash equivalents were cash provided by operating activities of $448,481 plus $194,438 net cash from financing activities provided by the exercise of options and warrants, less the use of cash for patent costs and contributions to deferred compensation totaling $150,336.

For the year ended July 31, 2011, we spent $454,997 on research and development expenses. As of the date of this annual report, we have only realized nominal revenues from the sale of our products and have received a limited amount of technical development fees from our strategic partners. The Evaluation Agreement with Novartis expired on September 30, 2011 without Novartis exercising its option for licensing the Company's BACcel™ system intellectual property. As a result, we will not be receiving any additional technical development fees from Novartis. Notwithstanding our investments in research and development, there can be no assurance that the BACcel™ system or any of our other products will be successful, or even if they are successful, will provide sufficient revenues to continue our current operations. As of July 31, 2011, management believes that current cash balances will be sufficient to fund our capital and liquidity needs for the next fiscal year.

The continued operation of our business will require a capital infusion and we will need to seek additional capital, likely through debt or equity financings, to continue operations. We can give no assurance that we will be able to raise such capital on such terms and conditions we deem reasonable, if at all. We have limited financial resources until such time that we are able to generate such additional financing or additional cash flow from operations. Our ability to achieve profitability and positive cash flow is dependent upon our ability to find a strategic partner to assist in the development, marketing and bring the BACcel system to market, to generate revenue from our business operations and control our costs. Should we be unable to raise adequate capital or to meet the other above objectives, it is likely that we would have to substantially curtail our business activity or cease operating.

The following summarizes the Company's capital resources at July 31, 2011 compared with July 31, 2010:

      Increase (Decrease)
                                     July 31, 2011       July 31, 2010      Amount of change       % of Change
Cash and cash equivalents           $      775,856      $     283,273      $         492,583            173.89

Accounts Receivable                 $    1,341,568      $   1,753,045               (411,477 )          (23.47 )

Current assets                      $    1,422,839      $     751,095               (757,345 )            99.2

Total assets                        $    6,264,338      $   6,268,966                 (4,628 )             .07

Current liabilities                 $       69,340      $      75,651                 (6,311 )           (8.34 )

Working capital                     $    1,353,499      $     675,444               (678,055 )         (100.39 )

Net cash (provided by) operating
  activities                        $      448,481        ($$789,600)      $       1,238,081            156.80

Net cash (used in) provided by
  investing activities              $     (150,336 )    $    (124,203 )    $         (26,133 )          (21.04 )

Net cash (used) provided by

Financing activities                $      194,438      $     335,000      $        (140,562 )          (41.96 )

Our primary use of capital has been for the research and development of the BACcel™ system. We have no lines of credit or other bank or off balance sheet financing arrangements. We believe our capital requirements will continue to be met with our existing cash balance, technological development fees and revenues provided by potential licensors of our products, additional issuance of equity or debt securities and/or a capital infusion from potential partners in the development of the BACcel™ system. Further, if capital requirements vary materially from those currently planned, we may require additional capital sooner than expected. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to us, if at all. Additional issuances of equity or convertible debt securities will result in dilution to our current Common Stockholders.

Recent Accounting Pronouncements

In October 2009, the FASB issued ASU-2009-13, Multiple-Deliverable Revenue Arrangements. We adopted this standard on August 1, 2010 for revenue arrangements entered into or materially modified after that date. The standard requires an allocation of revenue among separate deliverables using the relative fair value method. The adoption of this standard did not have a material effect on the financial statements for the year ended July 31, 2011.

In June 2011, the FASB issued new accounting standards which require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity. The new accounting rules will be effective for the Company in fiscal 2013. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company's financial condition or results of operations.

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 recognize revenue in accordance with ASC 605, "Revenue Recognition," when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered.

From time to time, we may enter into collaborative arrangements with multiple deliverable elements including items such as licensing rights, development milestones and royalties from product sales. If we determine that such deliverables can be separated, the associated revenue is allocated among the separate units based on relative fair value. We recognize revenue as follows:

· OptiChem® revenue is recognized upon shipping of the product to the customer or receipt of the applicable royalty.

· Deferred revenue represents amounts billed but not yet earned under licensing agreements.

· Technical development fees are recorded as received.

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, 2011 and July 31, 2010, we have established a valuation 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 under performance 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. Management believes that the amounts carried on our balance sheet are recoverable, and that our intangible assets are not impaired at this time. Our intangibles constitute a significant portion of our assets, and as a result, any resulting impairment loss could have a material adverse impact on our financial condition and results of operations in the future. We also evaluate the remaining estimated useful lives of each asset each reporting period and determine whether events or circumstances require revised useful lives.

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 table sets forth information with respect to our contractual
obligations and commercial commitments as of July 31, 2011.



                 Contractual Obligations
Payments Due By Period
                                       1 to 3    3 to 5 More than
                            Total       years    years   5 years
Thomas V. Geimer (1)      $340,000    $340,000     $0      $0

(1) Includes the $75,000 payment of the deferred compensation for the fiscal year ended July 31, 2011, which payment was made on October 20, 2011. Mr. Geimer's employment agreement provides for an annual base salary of $165,000 with annual deferred compensation of $75,000 and expires on December 31, 2012. See "Item 10-Executive Compensation."

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