Description
Accelr8 Technology Corporation. Director, 10% Owner JACK W SCHULER bought 14,000,000 shares on 6-26-2012 at $ 1.03
BUSINESS OVERVIEW
Business Strategy
Our vision is to develop and commercialize an innovative, integrated system to rapidly identify bacteria and their mechanisms of antibiotic resistance in critically ill patients. Our business strategy for primary products in vertical markets is to prove the validity of our technology and recruit an industry leader as a commercial partner or licensee. We also plan to spin off specific OEM technology components through additional licensed applications that do not compete with our platform licensees.
We envision our continuing role as licensor and alliance partner as one of leading the technical development of new technology, validating the application methods, expanding platform applications, and integrating additional capabilities into our proprietary platforms.
Application: Hospital-Acquired Infection (HAI)
Every 6 minutes another American dies from a hospital-acquired infection (HAI). The US Centers for Disease Control and Prevention estimates that 98,987 HAI fatalities occur annually that are attributable to bacterial infections acquired in a US healthcare facility. HAI occurs when a patient enters the hospital for some reason other than an infectious disease, then contracts infection more than two days after admission. The HAI mortality rate is more than double that from auto fatalities, far more than any type of cancer except lung cancer, and more than seven and one-half times that from AIDS. Despite intensive efforts to improve prevention and care, mortality has remained the same for more than ten years.
Yet, in theory, none of these patients should die. An effective antibiotic exists for almost every one of them. Even though bacterial strains exist that resist any particular drug, strains that resist all antibiotics remain fortunately rare.
Lab delay is a major culprit. Medical experts believe that inadequate initial therapy substantially elevates the risk of severe morbidity and mortality in critically ill patients. For critically ill patients, the physician must start adequate antibiotics within 2-4 hours of symptom onset. But lab cultures typically take 2-3 days to identify organisms and assess their antibiotic susceptibility. The physician has no choice but to start therapy without knowing the organism or its drug susceptibility. Most often, the physician must choose a combination of two or three broad-spectrum antibiotics, based on the patient’s history, clinical indicators, and the hospital’s recent history of antibiotic effectiveness in similar infections. Unfortunately, widespread and increasingly complex multiple antibiotic resistance typically causes such “empiric therapy” to prove inadequate in 20% to 40% of cases.
Further, switching to adequate therapy as soon as the next day fails to improve outcomes. Once an infection passes a critical point, antibiotics have little to no impact on its condition.
Popular news media have reported widely about methicillin-resistant Staphylococcus aureus (“MRSA”) as a multi-resistant "superbug." Organizations such as the US Centers for Disease Control and Prevention (“CDC”) and the Infectious Diseases Society of America have also identified other multi-drug resistant organisms as presenting even greater threats. They include Pseudomonas, Acinetobacter, and Klebsiella. In the hospital intensive care unit (“ICU”), “Staph” infections (including MRSA) typically cause approximately 30% of mortality from acquired infections. The other organisms together account for a much higher percentage.
Management believes that the development of new classes of antibiotics has almost stopped. Improved prevention and infection control have limited potential. In the meantime, bacteria continue to evolve and share emerging mechanisms of drug resistance. Bacteria have become so well adapted to the hospital that even the best preventive efforts do not eradicate them. Hospitals that lead in best preventive practices still suffer from endemic hospital-adapted strains that continue to cause high rates of attributable morbidity and mortality. Such examples suggest that each passing year sees a reduction in the number of cases that can be treated successfully with any particular drug.
Management believes that dramatically speeding up laboratory diagnostics will help to improve the success rate for initial therapy.
Products
BACcel™ System Development
Since 2007, we have focused our efforts on the development of an innovative rapid diagnostic platform, the BACcel™ system, intended for rapid diagnosis in life-threatening bacterial infections. Our goal is to reduce the failure rate of initial therapy by shortening the lab turnaround time to less than 8 hours, rather than the 2-3 days now required. Rapid testing would provide guidance in time to influence initial therapy.
The BACcel™ system applies our proprietary technology to eliminate time-consuming bacterial culturing, thus eliminating the major source of delay with current testing methods. Proprietary technologies include our patented “Quantum Microbiology” analytical methods, and our patented OptiChem® surface coatings. The BACcel™ system includes a fixed instrument and proprietary single-use (disposable) test cassettes. Each cassette tests a single patient specimen and then must be discarded.
The BACcel™ system uses long-accepted bacteriological testing principles, but applies our proprietary technology to adapt them to analyze live bacteria extracted directly from a patient specimen. The instrumentation uses an automated digital microscope to measure the responses of extracted live bacterial cells to various test conditions. The system analyzes thousands of these individual cells to arrive at organism identification and antibiotic resistance characteristics.
Based on internal lab data, Management believes that the BACcel™ system will identify the organisms present in a patient's specimen and count the number of organisms of each type in less than 2 hours after receiving a specimen. Management believes that the BACcel™ system will then additionally report major categories of antibiotic resistance mechanism present for each type of organism within a total of 4-6 hours after receiving a specimen. The clinical purpose of this version is to narrow the drug choices available for initial therapy by rapidly reporting presumptive identification and major resistance types, thus ruling out antibiotic classes that are most likely to fail.
Quantitative identification in less than 2 hours also enables near-real-time assessment of the effects of therapy, and monitoring for emerging resistance or secondary infection.
Management believes that the BACcel™ system is the only new diagnostic technology under development that will address a clinically adequate range of species and antibiotic resistance mechanisms needed to help manage critical infectious diseases. Management also believes that other rapid technologies, such as gene detection, are better suited to screening non-infected carriers of a small number of species and resistance mechanisms, but are too limited to compete with the BACcel™ platform for managing infected patients.
Research and Development
We have used two developmental instruments in our laboratory since 2006. In March 2011 we upgraded one of the systems to test engineering improvements. In April 2011, we installed a completely upgraded third system that substantially increases analytical sensitivity and scanning speed. We have used the latest prototype for formal proof of concept testing under independent outside observation of testing and outside performance assessment.
During the fiscal year ended July 31, 2008, the Company placed two identical development systems in collaborating research institutions: Denver Health Medical Center, and Barnes-Jewish Hospital at Washington University in St. Louis. The two institutions have replicated and extended the Company’s own pre-clinical research using analytical methods developed by the Company. Both institutions have also begun pilot clinical studies on specimens from ICU patients using experimental protocols authorized by their respective Institutional Review Boards.
Management believes that joint studies will expand and continue and will be presented periodically to the relevant scientific and medical communities. Since 2006, we have made 18 technical presentations at major peer-reviewed national scientific and clinical congresses. The ten most recent were co-authored with principal investigators at Denver Health Medical Center, and Barnes-Jewish Hospital. At the annual meeting of the American Thoracic Society in March 2011, our principal investigators at Denver Health presented preliminary results from a prospective clinical pilot study with ICU patients under informed consent. This was our first presentation of a clinical study solely to specialists in Critical Care Medicine. We intend to continue our presentation and publication program as a permanent part of our business development program. (See the section Subsequent Events) In May 2008 we began a technical development project with funding from Becton, Dickinson and Company (“BD,” NYSE: BDX). BD is an industry leader in manufacturing diagnostic products used in hospital laboratories for Clinical Microbiology. Project test results exceeded the milestone criteria. BD declined to exercise a licensing option, however, in September 2009 citing reasons unrelated to platform technology performance.
In June 2010, the Company entered into an Evaluation Agreement and Letter of Intent with Novartis Vaccines and Diagnostics, Inc. (“Novartis”), a division of Novartis Corporation. Pursuant to the Evaluation Agreement, Novartis evaluated the results of the Company’s BACcel™ system in identifying the type and quantity of bacterial pathogens in clinical specimens. Pursuant to the Letter of Intent, the Company and Novartis agreed to negotiate in good faith a formal business relationship and definitive agreement regarding the design, development, commercialization and support strength of each party. The Letter of Intent is non-binding and grants Novartis the exclusive right (the “Exclusive Right”) to evaluate and negotiate a license or other comparable agreement for access to the Company’s BACcel™ system intellectual property.
In connection with the Evaluation Agreement, the Company performed a series of technical studies with Novartis that demonstrated performance of the advanced BACcel™ laboratory prototype. Further, Novartis independently tested Accelr8’s key business assumptions and found general concurrence.
Pursuant to the Evaluation Agreement and the Letter of Intent, Novartis made up-front payment and has funded the project on a monthly basis until September 30, 2011. Novartis has also funded additional activities within its own organization, funded independent engineering firms to advance the product technology, and retained other outside providers to perform due diligence investigations on relevant business areas.
The evaluation agreement with Novartis expired on September 30, 2011 without Novartis exercising its option for licensing the Company’s BACcel™ system intellectual property.
The Company is now seeking another strategic partner to assist in the development and marketing of the BACcel™ system. The Company had previously initiated or responded to inquiries to other companies not in conflict with Novartis in applications such as pharmaceutical development. As a result of the expiration of the Novartis agreement for clinical diagnostics, the Company has begun to initiate discussions with other companies concerning clinical diagnostics.
In ongoing technical development of the BACcel™ system, our internal technical team designs the analytical methods and validates them through well-controlled experiments. Studies include comparisons of results between standard methods and the BACcel™ system using well-characterized bacterial strains and clinical patient specimens. Examples of patient specimens tested to date include lower respiratory tract specimens (endotracheal aspirates, bronchoscopic bronchoalveolar lavage – BAL-, and mini-BAL,) urine and cerebrospinal fluid. We have also tested positive blood cultures that originally contained extremely low numbers of infectious pathogens.
In addition to developing analytical methods, our internal team proactively guides outside engineering development and originates additional new technology. As one example, we internally conceived and proved feasibility of a rapid specimen preparation method that appears to enable complete and practical automation for all BACcel™ associated operations. We filed a patent application for this technology in March 2011. This subsystem can also stand alone as a product, and integrate into other medical devices that require specimen pre-processing by automated methods. We created specifications for an outside engineering firm to provide test fixtures and advance toward product development.
We are also developing OptiChem® coating methods for use in BACcel™ cassette production. We plan to use OptiChem® to prevent bacteria from adhering to flow channel walls and being lost to analysis, and to immobilize the bacteria in the area of the cassette where the system's automated microscope views them.
During the fiscal years ended July 31, 2011 and 2010, we spent $454,997 and $501,600 respectively, on research and development activities.
Sales, Licensing, and Alliances
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.
On October 5, 2007, the Company additionally entered into an exclusive seven-year license with NanoString Technologies, Inc. (“NanoString”). The license grants NanoString the right to apply OptiChem® coatings to NanoString's proprietary molecular detection products.
Effective June 14, 2010, the Company entered into the Evaluation Agreement and Letter of Intent with Novartis discussed above. For additional information on the Evaluation Agreement and Letter of Intent, see Research and Development above. During the fiscal years ended July 31, 2011 and 2010, total revenues from Novartis were $842,408 and $290,000, respectively or 75.1% and 12.9% of total revenues.
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 have been recognized as OptiChem revenue during the fiscal year ended July 31, 2010. During the fiscal years ended July 31, 2011 and 2010, total revenues from Nanosphere were $0 and $1,842,596, respectively or 0% and 82.05% of total revenues.
In addition, from time to time we may enter into other types of funded development agreements for custom OptiChem® coatings. Part of such relationships may include supply agreements for prototype and pilot manufacturing of the resulting products.
Management believes that microarray substrate and other OptiChem® related sales will continue at or near levels experienced in the past, and that there will be nominal royalties and licensing fees with SCHOTT in the next fiscal year; however, there can be no assurance that sales will occur or that revenues will be generated.
Competition
To the best of Management's knowledge, no other company now has a product or is developing a product intended for the same clinical application as the BACcel™ system. Therefore we are not aware of any actual or impending competitor. However, the industry in which we compete is subject to rapid technological changes, and we may face competition for the BACcel™ system.
MANAGEMENT DISCUSSION FROM LATEST 10K
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.
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.
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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Our vision is to develop and commercialize an innovative, integrated system to rapidly identify bacteria and their mechanisms of antibiotic resistance in critically ill patients. Our business strategy for primary products in vertical markets is to prove the validity of our technology and recruit an industry leader as a commercial partner or licensee. We also plan to spin off specific OEM technology components through additional licensed applications that do not compete with our platform licensees.
We envision our continuing role as licensor and alliance partner as one of leading the technical development of new technology, validating the application methods, expanding platform applications, and integrating additional capabilities into our proprietary platforms.
Since 2007, we have focused our efforts on the development of an innovative rapid diagnostic platform, the BACcel™ system, intended for rapid diagnosis in life-threatening bacterial infections. Our goal is to reduce the failure rate of initial therapy by shortening the lab turnaround time to less than 8 hours, rather than the 2-3 days now required. Rapid testing would provide guidance in time to influence initial therapy from the first day.
The BACcel™ system applies our proprietary technology to eliminate time-consuming bacterial culturing, thus eliminating the major source of delay with current testing methods. Proprietary technologies include our patented analytical methods, and our patented OptiChem® surface coatings. The BACcel™ system includes a fixed instrument and proprietary single-use (disposable) test cassettes. Each cassette tests a single patient specimen and then must be discarded.
The BACcel™ system uses long-accepted clinical microbiology principles, but applies our proprietary technology to adapt them to analyze live bacteria extracted directly from a patient specimen. The instrumentation uses an automated digital microscope to measure the responses of extracted live bacterial cells to various test conditions. The system analyzes thousands of these individual cells to arrive at organism identification and antibiotic resistance characteristics.
Based on data obtained during development, Management believes that the BACcel™ system will identify the organisms present in a patient's specimen and count the number of organisms of each type in less than 2 hours after receiving a specimen. Management believes that the BACcel™ system will then additionally report major categories of antibiotic resistance mechanism present for each type of organism within a total of 4-6 hours after receiving a specimen. The clinical purpose is to narrow the drug choices available for initial therapy by rapidly reporting presumptive identification and major resistance types, thus ruling out antibiotic classes that are most likely to fail.
Management believes that the BACcel™ system is the only new diagnostic technology under development that will address a clinically adequate range of species and antibiotic resistance mechanisms needed to help manage critical infectious diseases. Management also believes that other rapid technologies, such as gene detection, are better suited to screening non-infected carriers of a small number of species and resistance mechanisms, but are too limited to compete with the BACcel™ platform for managing infected and especially critically ill ICU patients.
During the nine months ended April 30, 2012 the Company applied the latest prototype version of the automated BACcel(tm) system to define technical specifications needed for product design and market launch in international clinical markets and research markets in the US.
Accelr8 also began to expand the diagnostic scope of the BACcel™ system with studies on additional specimen types and medical indications. In particular, the Company began studies for rapid analysis of positive blood cultures. Feasibility studies showed that the BACcel™ system has the potential to reduce the typical 3-4 day turnaround time for cultures to second-day results.
In addition, the Company demonstrated feasibility for an innovative specimen preparation method that can reduce specimen handling time from 45 minutes to 10 minutes. The new BAC-Xtrax™ technology can be fully automated and integrated into the BACcel™ system for full “specimen-to-answer” performance. The BAC-Xtrax™ technology could also enable a stand-alone product for hospital and research labs and integrate into other analytical platforms.
The Company received notice of abstract acceptance to make two technical presentations at the annual General Meeting of the American Society for Microbiology on June 17, 2012. One of the presentations, co-authored with investigators at Denver Health, will disclose rapid analysis in positive blood cultures of a complex, major type of antibiotic resistance known as "extended-spectrum beta-lactamase" or "ESBL." This resistance phenotype has proven problematic in hospital laboratories and is continually increasing in prevalence. The second presentation will describe performance of the BAC-Xtrax™ rapid specimen preparation method that Accelr8 has now demonstrated in its automated laboratory prototype. The BAC-Xtrax™ preparation method is the subject of a new patent filed during the 9-month period.
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. . Under the agreements with Novartis, Accelr8 received technical development fees of $ 842,408 during the fiscal year ended July 31, 2011 and $140,000 in the quarter ended October 31, 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.
On April 20, 2012, the Company entered into a Securities Purchase Agreement with Abeja Ventures, LLC (“Investor”) pursuant to which the Company agreed to sell and issue to Investor (1) 14,000,000 shares of the Company’s common stock at a purchase price of $1.03 per share for an aggregate purchase price of $14,420,000 (the “Purchase Price”); (2) a warrant to purchase 7,000,000 shares of the Company’s common stock at an exercise price of $1.03 per share; and (3) another warrant to purchase 7,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share, with each warrant exercisable prior to the fifth anniversary of the closing of the transactions contemplated by the Securities Purchase Agreement (collectively, the “Investment”). See Note 7 to the condensed financial statements, above.
The purpose is to complete the product development and market introduction of the Company’s BACcel™ culture-free, diagnostic system for same-shift identification and antibiotic resistance testing of bacterial and fungal pathogens. Subsequent to shareholder approval and closing, Larry Mehren will become CEO and David Howson will become the Chief Scientific Officer of the Company.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments result in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs), and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments in this update are effective during interim and annual periods beginning after December 15, 2011. Adoption of the new requirement in the current quarter did not have an effect on the Company’s financial position, results of operations or cash flow.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this update, FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective for fiscal years, and interim periods within these years, beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the Company’s financial position, results of operations or cash flow.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350). ASU No. 2011-08 redefines the approach to goodwill impairment testing by providing companies with the option to qualitatively evaluate the likelihood of impairment before proceeding to Step 1 of the impairment test (i.e. comparison of the fair value of a reporting unit to its carrying value). The amendment also provides more guidance on the types of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued, or for nonpublic entities, that have not been made available for issuance. Adoption of the new requirement is not expected to have an effect on the Company’s financial position, results of operations, cash flow and the annual goodwill impairment test.
Changes in Results of Operations: three months ended April 30, 2012 compared to three months ended April 30, 2011.
During the three months ended April 30, 2012, OptiChem(R) revenues were $13,207 as compared to $25,772 during the three month period ended April 30, 2011, a decrease of $12,565 or 48.8%. The decrease was due to the decreased royalties earned from sales of slides H and HS sold by Schott .
Technical development fees during the three-month period ended April 30, 2012 were $0 as compared to $214,500 during the three-month period ended April 30, 2011, a decrease of $214,500 or 100%. The decrease in technical development fees were the result of the Evaluation Agreement and the Letter of Intent, each as amended, with Novartis which expired on September 30, 2011.
Research and development expenses for the three months ended April 30, 2012 were $109,860 as compared to $126,918 during the three months ended April 30, 2011, a decrease of $17,058 or 13.4%. This decrease was primarily due to decreased laboratory supplies totaling $23,883.
During the three months ended April 30, 2012, general and administrative expenses were $248,207 as compared to $181,881 during the three months ended April 30, 2011, an increase of $66,326 or 36.7%. The increase was primarily due to an increase in stock based and deferred compensation costs totaling $97,793.
The increase in amortization was negligible for the three months ended April 30, 2012 as compared to the three month period ended April 30, 2011.
Marketing and sales expenses for the three months ended April 30, 2012 were $344 as compared to $1,246 during the three months ended April 30, 2011, a decrease of $902. Marketing related charges consist of costs incurred to attend business meetings.
Depreciation for the three months ended April 30, 2012 was $516 as compared to $599 during the three months ended April 30, 2011, a decrease of $83 or 13.86%. The decreased depreciation was the result of assets becoming fully depreciated, coupled with no new purchases of on-site lab equipment during the quarter ended April 30, 2012.
As a result of the above factors, loss from operations for the three months ended April 30, 2012 was $410,217 as compared to a loss of $133,835 during the three months ended April 30, 2011, an increased loss of $276,382 or 206.5%.
Interest and dividend income during the three months ended April 30, 2012 was $4,061 as compared to $4,077 during the three months ended April 30, 2011, a decrease of $16 Interest income decreased primarily as a result of the interest that accrued on the Company’s long term receivable.
An unrealized holding gain on investments held in the deferred compensation trust for the three months ended April 30, 2012 was $17,773 as compared to an unrealized gain of $5,764 during the three months ended April 30, 2011, an increase of $12,009 or 208.3%. The change was a result of market fluctuations in the price of marketable securities held in the deferred compensation trust for employee benefit.
As a result of these factors, net loss for the three months ended April 30, 2012 was $388,383 as compared to $123,994 during the three months ended April 30, 2011, an increased loss of $264,389 or 213.2%.
Changes in Results of Operations: Nine months ended April 30, 2012 compared to nine months ended april 30, 2011 .
During the nine months ended April 30, 2012, OptiChem(R) revenues were $33,543 as compared to $40,813 during the nine month period ended April 30, 2011, a decrease of $7,270 or 17.8%. The decrease was due to reduced royalties earned from sales of slides H and HS sold by Schott. Of the $33,543 of OptiChem(R) revenues, $16,343 was applied toward deferred revenue from pre-paid royalties.
Technical development fees during the nine-month period ended April 30, 2012 were $140,000 as compared to $734,908 during the nine-month period ended April 30, 2011, a decrease of $594,908 or 81%. Technical development fees were the result of the Evaluation Agreement and the Letter of Intent, each as amended, with Novartis which expired on September 30, 2011.
During the nine months ended April 30, 2011, the Company received a grant in the amount of $244,479 as part of a new Internal Revenue Code 48D program created by the Patient Protection and Affordable Care Act. No such grants were obtained during the nine months ended April 30, 2012.
Research and development expenses for the nine months ended April 30, 2012 were $302,900 as compared to $345,602 during the nine months ended April 30, 2011, a decrease of $42,702 or 12.4%. This decrease was primarily the result of a reduction in laboratory wages and laboratory supplies and other research and development costs associated with the Novartis evaluation agreement.
During the nine months ended April 30, 2012, general and administrative expenses were $905,453 as compared to $606,693 during the nine month period ended April 30, 2011, an increase of $298,760 or 49.2%. The increase was primarily due to stock based and deferred compensation costs.
Marketing and sales expenses for the nine months ended April 30, 2012 were $4,560 as compared to $7,739 during the nine months ended April 30, 2011, a decrease of $3,179 or 41.1%. The decreased marketing and sales expenses were primarily due to lower travel related costs in connection with industry conferences and other travel expenses.
Depreciation for the nine months ended April 30, 2012 was $1,546 as compared to $1,797 during the nine months ended April 30, 2011, a decrease of $251 or 13.9%. The decreased depreciation was the result of some assets becoming fully depreciated, coupled with no new purchases of lab equipment during the nine months ended April 30, 2011As a result of the above factors, loss from operations for the nine months ended April 30, 2012 was $1,183,761 as compared to a loss of $131,491 during the nine months ended April 30, 2011, an increase of $1,052,270 or 800.3%.
Investment and dividend income during the nine months ended April 30, 2012 was $11,898 as compared to $11,481 during the nine months ended April 30, 2011 an increase of $417 or 3.6%. Interest income increased primarily as a result of the interest that accrued on the Company’s long term receivable.
Gain on the sale of equipment was the result of the sale of certain laboratory equipment for $1,000 during the nine months ended April 30, 2012 that was not present during the nine months ended April 30, 2011.
An unrealized holding gain on investments held in the deferred compensation trust for the nine months ended April 30, 2012 was a gain of $29,017, as compared to a gain of $36,907 for the nine months ended April 30, 2011, a decreased gain of $7,890 or 21.4%. The change was the result of market fluctuations in the price of marketable securities held in the deferred compensation trust for employee benefit.
As a result of these factors, net loss for the nine months ended April 30, 2012 was $1,141,846 as compared to $83,013 during the nine months ended April 30, 2011.
Capital Resources and Liquidity
During the nine months ended April 30, 2012 we did not generate positive cash flows from operating activities.
At April 30, 2012, as compared to July 31, 2011, cash and cash equivalents decreased by $562,861 from $775,856 to $212,995, or approximately 72.54% and the Company's working capital decreased $672,734 or 49.7% from $1,353,499 to $680,765. During the same period, shareholders' equity decreased from $4,815,476 to $4,021,254.
The net cash used in operating activities was $431,665 during the nine months ended April 30, 2012 compared to cash provided by operating activities of $211,056 during the nine months ended April 30, 2011. The principal element that gave rise to the decrease of cash used in operating activities was the net loss of $1,141,846 adjusted by items not currently requiring the use of cash such as depreciation, amortization, stock based compensation totaling $507,269 and other changes in accruals totaling $202,912.
The Company has historically funded its operations generally through its existing cash balances, cash flow generated from operations and sales of equity securities. Our primary use of capital has been for the research and development of the BACcel(TM) system.
Notwithstanding our investments in research and development, there can be no assurance that the BACcel(TM) 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.
Our working capital requirements are expected to increase in line with the growth of our business. We have no lines of credit or other bank or off balance sheet financing arrangements.
On April 20, 2012, the Company entered into a Securities Purchase Agreement with Abeja Ventures, LLC (“Investor”) pursuant to which the Company agreed to sell and issue to Investor (1) 14,000,000 shares of the Company’s common stock at a purchase price of $1.03 per share for an aggregate purchase price of $14,420,000 (the “Purchase Price”); (2) a warrant to purchase 7,000,000 shares of the Company’s common stock at an exercise price of $1.03 per share; and (3) another warrant to purchase 7,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share, with each warrant exercisable prior to the fifth anniversary of the closing of the transactions contemplated by the Securities Purchase Agreement (collectively, the “Investment”). See Note 7 above.
The Company anticipates this Investment will occur on or about June 26, 2012. Subject to the receipt of the Investment, management believes that current cash balances plus cash flow from operations will be sufficient to fund our capital and liquidity needs for the foreseeable future. However, the closing on the Investment is subject to certain conditions to closing that have not yet occurred and there can be no assurance that they will occur. If the Company did not close on the Investment, it would not have sufficient capital to fund its capital and liquidity needs for the next 12 months and we would be required to obtain additional capital through the issuance of debt or equity securities or other means to execute our plans. There can be no assurance that such capital would be available in sufficient amounts or on terms acceptable to us, if at all.
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Fund Letters
