10QSB 1 xtrn10q033102.txt 1ST QTR. 2002 10-QSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF 1934 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2002 ------------------------------ COMMISSION FILE NUMBER 0-17714 ------------------------------ XTRANA, INC. (Exact name of Registrant as specified in its charter) DELAWARE 58-1729436 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 590 BURBANK STREET, SUITE 205, (303) 466-4424 BROOMFIELD, COLORADO 80020 (Registrant's telephone number (Address of principal executive offices) including area code) ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 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 [_] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Outstanding at May 10, 2002, Common Stock, $.01 par value per share, 17,470,215 shares. ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XTRANA, INC. (FORMERLY BIOPOOL INTERNATIONAL, INC.) CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 2002 2001 (UNAUDITED) -------- -------- (in thousands except share data) ASSETS CURRENT ASSETS Cash ........................................ $ 2,842 $ 3,726 Accounts receivable, net .................... 99 46 Inventories ................................. 53 66 Note receivable and accrued interest ........ 880 855 Prepaid expenses and other current assets ... 95 56 -------- -------- TOTAL CURRENT ASSETS ............................. 3,969 4,749 PROPERTY AND EQUIPMENT ........................... 933 862 Less accumulated depreciation ............... (154) (98) -------- -------- PROPERTY AND EQUIPMENT, NET ...................... 779 764 NOTES RECEIVABLE ................................. 1,736 1,736 Goodwill, net .................................... 8,516 8,516 OTHER ASSETS ..................................... 146 148 -------- -------- TOTAL ASSETS ..................................... $ 15,146 $ 15,913 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY TOTAL CURRENT LIABILITIES ........................ $ 681 $ 809 LONG TERM LIABILITY .............................. 41 36 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 17,323,498 and 17,323,498 shares issued and outstanding in 2002 and 2001 ..... 173 173 Other stockholders' equity ....................... 19,407 19,407 Accumulated deficit .............................. (5,156) (4,512) -------- -------- TOTAL STOCKHOLDERS' EQUITY ....................... 14,424 15,068 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 15,146 $ 15,913 ======== ======== See accompanying notes to condensed consolidated financial statements. 2 XTRANA, INC. (FORMERLY BIOPOOL INTERNATIONAL, INC.) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDING MARCH 31, 2002 2001 -------------------------------------------------------------------------------- (in thousands except per share data) SALES ................................................ $ 190 $ 153 Cost of sales ........................................ 112 41 -------- -------- GROSS PROFIT ......................................... 78 112 Operating expenses: Selling, general and administrative ............. 561 953 Research and development ........................ 201 311 -------- -------- Total Operating Expenses ............................. 762 1,264 Other income, net .................................... 40 35 -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ......... (644) (1,117) Income tax expense ................................... -- -- -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ......... (644) (1,117) DISCONTINUED OPERATIONS: Income from discontinued operations - net of income tax effect ........................... -- 154 -------- -------- NET LOSS ............................................. $ (644) $ (963) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic ........................................... 17,323 17,163 Effect of dilutive shares ....................... -- -- -------- -------- Diluted ......................................... 17,323 17,163 ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Net loss - Continuing operations ................ $ (0.04) $ (0.07) Net Income - Discontinued operations ............ $ -- $ 0.01 Net loss ........................................ $ (0.04) $ (0.06) See accompanying notes to condensed consolidated financial statements. 3 XTRANA, INC. (FORMERLY BIOPOOL INTERNATIONAL, INC.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) THREE MONTHS ENDING MARCH 31, 2002 2001 -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES ......................... $ (814) $ (884) INVESTING ACTIVITIES ......................... (70) (102) DISCONTINUED OPERATIONS ...................... -- 202 EFFECT OF EXCHANGE RATES ..................... -- (180) ------- ------- NET INCREASE (DECREASE) IN CASH .............. (884) (964) CASH, BEGINNING OF PERIOD .................... 3,726 4,011 ------- ------- CASH, END OF PERIOD .......................... $ 2,842 $ 3,047 ======= ======= See accompanying notes to condensed consolidated financial statements. 4 XTRANA, INC. (FORMERLY BIOPOOL INTERNATIONAL, INC.) MARCH 31,2002 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Financial information presented in the notes to the consolidated financial statements excludes discontinued operations except where noted. 2. INVENTORIES March 31, December 31, 2002 2001 ---------- ---------- Raw materials $ 4 $ 10 Finished products 49 56 ---------- ---------- $ 53 $ 66 ========== ========== 3. EARNINGS PER SHARE Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based upon the weighted average number of common shares and dilutive potential common shares outstanding. Potential dilutive shares are outstanding options under the Company's stock option plans and outstanding warrants, which are included under the treasury stock method. 4. COMPREHENSIVE INCOME SFAS No. 130 requires unrealized gains and losses on the Company's foreign currency translation adjustments to be included in other comprehensive income. However, the adoption of this statement had no impact on the Company's net income or stockholders' equity. Total comprehensive loss for the three months ended March 31, 2002, was $644,000, compared to $1,142,000 for the same period in 2001. 5 5. GOODWILL Goodwill and Other Long-Lived Assets. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142"), which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 also requires that these assets be reviewed for impairment at least annually. Under Statement 142, intangible assets with finite lives continue to be to be amortized over their estimated useful lives. The Company adopted Statement 142 on January 1, 2002. Through December 31, 2001, the Company had recorded accumulated goodwill amortization of $1.4 million. Application of the non-amortization provisions of Statement 142 is expected to result in a reduction of operating expenses of approximately $1.0 million ($0.06 per share) for the year ending December 31, 2002. Net loss and net loss per share, adjusted to exclude amortization of goodwill, are as follows (in thousands, except per share amounts): THREE MONTHS ENDING MARCH 31, 2002 2001 -------------------------------------------------------------------------------- (in thousands) Operating expenses: Selling, general and administrative (excludes $252 in goodwill amortization in 2001) ..................... $ 561 $ 701 LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ............... (644) (865) Income tax expense ......................................... -- -- ------ ----- LOSS FROM CONTINUING OPERATIONS ............................ (644) (865) DISCONTINUED OPERATIONS: Income from discontinued operations - net of income tax effect ................................. -- 154 NET LOSS ADOPTING OF FASB 142 .............................. $ (644) $ (711) ====== ====== BASIC AND DILUTED EARNINGS PER SHARE ADOPTING FASB 142 Net loss - continuing operations ...................... $(0.04) $(0.05) Net Income - discontinued operations .................. $ -- $ 0.01 Net loss .............................................. $(0.04) $(0.04) Management plans to test goodwill for impairment using the two-step process described in Statement 142. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. Management expects to perform the first of the required goodwill impairment tests as of January 1, 2002, in the second quarter of 2002. Management has not yet determined what the effect of these tests will be on the results of operations and financial position of the Company. Any impairment charge resulting from these transitional impairment tests would be reflected as a cumulative effect of a change in accounting principle in a restated first quarter 2002. Accordingly, the results of operations and financial position of the Company for the first quarter of 2002 reported in the condensed consolidated financial statements included herein could be restated. 6. SEGMENT REPORTING Statement of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information, establishes standards for the reporting of information about operating segments. The Company's continuing operations are one operating segment. 6 7. INCOME TAXES At December 31, 2001, the Company had available net operating loss carryforwards of approximately $3,674,000 in the United States. The United States carryforwards expire in varying amounts through 2011. Under section 382 of the Internal Revenue Code, the utilization of the federal net operating loss carryforwards may be limited based on changes in the percentage of ownership in the Company. The current quarter ended March 31, 2002, reflects a full valuation allowance on the net operating loss recorded for the quarter. 8. LITIGATION On March 26, 2001, we entered into a settlement agreement with Agen Biomedical Ltd. ("Agen") with regard to a patent infringement action filed against us by Agen on March 10, 2000, relating to products that were included in the discontinued operations. As a part of the settlement, the Company and Agen have entered into a non-exclusive license agreement for the underlying patent and all claims by Agen and counter claims made by us have been dropped. As a part of the sale of the Hemostasis business, the Company signed an amendment to the settlement agreement that consented to the assignment and assumption of the settlement agreement by Trinity Biotech plc. As a part of the agreement, the Company made a lump sum payment of $250,000 to Agen, which is reflected as a transaction cost in the gain on the sale of the discontinued operations as of December 31, 2001. On January 24, 2002, we entered into a settlement agreement with Instrumentation Laboratory Company ("IL") with regard to a patent infringement action filed against us on August 9, 2001 by IL relating to a product that was included in the discontinued operations. As part of the settlement, the Company and IL entered a consent judgment with the court, and we agreed to pay damages and costs in the amount of $20,000, which was included in accrued expenses at December 31, 2001. The Company does not believe that the settlement will have a material impact on the results of continuing operations. 8. MERGER WITH THE FORMER XTRANA, INC. Effective August 10, 2000, the former Xtrana, Inc. was merged with and into the Company pursuant to an Agreement and Plan of Reorganization dated May 3, 2000, between the former Xtrana, Inc. and the Company, as reported on the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2000, and amended October 24, 2000. The Company issued 8,829,461 shares of the Company's common stock in exchange for all the outstanding capital stock of the former Xtrana, Inc. Of the total shares issued, 936,946 shares are held in escrow and are contingently cancelable if certain sales objectives for the former Xtrana, Inc. business are not met. Also, an additional 1,030,641 shares are issuable to the former Xtrana shareholders if certain sales objectives are exceeded. The escrow period for the contingent shares expired on September 30, 2001, without achieving the sales objectives. Pursuant to the Merger Agreement, the earnout period has been extended automatically to September 30, 2002, to meet certain additional sales objectives. Management does not currently anticipate that such sales objectives will be achieved. If such sales objectives are not achieved on September 30, 2002, the 936,946 shares in escrow will be canceled, and the additional 1,030,641 shares will not be issued. The contingently cancelable consideration would be recorded as additional purchase price when the contingency is resolved. The contingent shares are reflected as outstanding common stock as the holders of these shares have full right to vote the shares while in escrow. Additionally, as a part of the merger, 998,366 warrants with an estimated fair value of $587,000 were issued to warrant holders of the former Xtrana, Inc. and certain financial advisors. At the effective time of the merger, the stockholders of the former Xtrana, Inc. held approximately 50% of the outstanding stock of the Company, on a fully diluted basis. On June 21, 2001 the Company changed its name to Xtrana, Inc. 9. SALE OF HEMOSTASIS BUSINESS On December 20, 2001, the shareholders approved the sale of the Hemostasis business. On December 21, 2001, the Company closed the sale of substantially all of the assets of its Hemostasis business to Trinity Biotech plc for total consideration of US$6,250,000, plus the assumption of certain liabilities. The assets sold included the operations located in Ventura, California, and the Company's wholly owned Swedish subsidiary, 7 Biopool AB. The total consideration paid to the Company of US$6,250,000 consisted of cash and notes as follows: (a) US$3,658,000 in cash at closing; (b) a note in the amount of US$855,200 due one year from the closing date; (c) a note in the amount of US$1,166,200 due two years from the closing date; and (d) a note in the amount of US$570,100 due three years from the closing date. The notes carry interest at a rate of 5% per annum and are secured by a second position on substantially all of the U.S. assets of Trinity Biotech plc. Included in Accrued Expenses is $175,000 related to transaction costs associated with the sale of the Hemostasis business. The total amount in other long-term liabilities of $36,000 is related to transaction costs that are the result of a broker commission payable over 3 years as follows: $24,000 due December 21, 2003, and $12,000 due December 21, 2004. This note bears interest at a rate of 5% per annum. The Hemostasis business was a distinct operating segment, whose sale is accounted for as discontinued operations in accordance with Accounting Principles Board Opinion 30 - Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. As a result, the Company reclassified its prior period financial statements to reflect the appropriate accounting for the sale of the Hemostasis business, as discontinued operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Xtrana's mission is to simplify the analysis of DNA/RNA, so that nucleic acid based detection systems can be utilized in point-of-care, point-of-service applications. The proprietary assays developed by Xtrana are designed to be easy to use outside of a traditional molecular biology laboratory at a cost per test that is competitive with existing rapid test technologies. These diagnostic tests are intended for use in drug discovery, detection of environmental and food contaminants, forensics and testing for identity, human and animal diseases, genetic predisposition to disease, and other applications. The Company's first commercial nucleic acid product is Xtra Amp(TM), DNA or RNA extraction kits that enable high throughput extraction in as little as 3 minutes, versus competing technologies that can take 30 minutes to 3 hours. Through its Hemostasis Business, the Company also developed, manufactured, and marketed a full range of test kits to assess and diagnose disorders of blood coagulation, thrombotic risk factors, fibrinolysis, platelet function, and the vascular system under the Biopool(R) label. However, on December 20, 2001, the shareholders approved the sale of the Hemostasis business; and on December 21, 2001, the Company closed the sale of substantially all of the assets of its Hemostasis business to Trinity Biotech plc for total consideration of US$6,250,000, plus the assumption of certain liabilities. CRITICAL ACCOUNTING POLICIES GENERAL Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Specifically, management must make estimates in the following areas: ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company has $104,000 in gross trade accounts receivable and $5,000 in allowance for doubtful accounts on the consolidated balance sheet at March 31, 2002. A review of our allowance for doubtful accounts is done timely and consistently throughout the year. As of March 31, 2002, we believe our allowance for doubtful accounts is fairly stated. Because of our limited sales of our nucleic acid-based products, we do not believe that a change in the financial condition of any of our current customers could result in the need to create a 8 significant allowance, nor could any such change have a material adverse effect on our financial results for 2002. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements. REVENUE RECOGNITION Product revenues are recorded on the day products are shipped from the Company's facilities. Grant revenues are recorded when earned, pursuant to the respective grant agreements. Shipping costs are included in the cost of sales. Grant revenues and profit on long-term contracts are recorded as the contract progresses using the percentage of completion method of accounting, which relies on estimates of total expected contract revenues and costs. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. Accordingly, favorable changes in estimates result in additional profit recognition, and unfavorable changes in estimates result in the reversal of previously recognized revenue and profits. When estimates indicate a loss under a contract, cost of revenue is charged with a provision for such loss. As work progresses under a loss contract, revenue continues to be recognized, and a portion of the contract costs incurred in each period is charged to the contract loss reserve. The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition," ("SAB 101") provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is consistent with this guidance and in accordance with generally accepted accounting principles. We do not anticipate any changes to our revenue recognition and shipping policies in the future. GOODWILL Goodwill and Other Long-Lived Assets. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142"), which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 also requires that these assets be reviewed for impairment at least annually. Under Statement 142, intangible assets with finite lives continue to be to be amortized over their estimated useful lives. The Company adopted Statement 142 on January 1, 2002. The Company does not believe the adoption of the statements will negatively impact its financial position, results of operations, and cash flows. RESULTS OF OPERATIONS Sales from continuing operations were $0.19 million for the three-month period ended March 31, 2002, compared with $0.15 million for the corresponding period of 2001. This increase in revenue is the result of sales of Xtra Amp(TM) extraction kits, which was partially offset by a 6% reduction in grant revenue to a level of $0.14 million in the 2002 period. Xtra Amp(TM), the Company's first commercial nucleic acid based product, was officially launched through various distributors in the third quarter of 2001. Sales of Xtra Amp(TM) in the first quarter increased 111% over the sales achieved in the fourth quarter of 2001. We believe the sales of our Xtra Amp(TM) kits should continue to increase in subsequent quarters through increased market penetration in existing geographic markets and through an expansion of our geographic markets as we add new distribution partners. We also anticipate that our grant revenue will increase slightly in subsequent quarters as we begin to accelerate our development efforts on new grants that were awarded to the Company in late 2001 and early 2002. As of March 31, 2002, the available funding under these various grants was $1.6 million. Cost of goods sold was $0.1 million for the three months ended March 31, 2002, compared with $0.04 million relating solely to revenue from continuing operations for the corresponding period in 2001. Gross margin was 41% for the three-month period ended March 31, 2002, compared with 73% for the corresponding period in 2001. Gross margin on product sales was 60% during the quarter. Management does not believe that this comparison is particularly meaningful at this stage of the development of the continuing operations because gross margins are largely related to government grants that vary depending upon the specific contract. The 73% gross margin in 2001 was the result of final revenue recognition on certain government grants. 9 Operating expenses from continuing operations were $0.8 million for the three months ended March 31, 2002, compared with $1.3 million for the same period in 2001. Operating expenses decreased by $0.5 million during the first quarter as a result of: (a) the adoption of the change in accounting for amortization of goodwill of $0.2 million (note 5); (b) severance obligations relating to the Company's former CEO of $0.2 million that were recognized in the 2001 period, the payment of which was completed in February 2002; and (c) a reduction of costs associated with our Denver operations through various cost containment measures. Other income is primarily interest income. FINANCIAL CONDITION During the 4th quarter of 2001, the Company sold substantially all of the assets of its Hemostasis business for $6.25 million in cash and notes, which resulted in a $0.8 million gain over net asset value. This inflow of cash added to the Company's existing liquidity position. As of March 31, 2002, working capital was $3.3 million, with a current ratio of 5.9 to 1.0. The Company is currently consuming cash to fund the research and development of its nucleic acid diagnostic technologies. The Company believes that some of this investment will be offset by government grants and revenue from the sale of nucleic acid products over the next twelve months. This revenue combined with the Company's current availability of cash and notes receivable are adequate to meet our ongoing needs for at least the next twelve months. However, should revenues from government grants and the nucleic acid product lines not materialize, it may become necessary for the Company to raise additional capital to fund its ongoing operations in the subsequent 12-month period. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "anticipate," "expect," "believe," and similar expressions), which are based upon management's current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements and include, but are not limited to, competitors' pricing strategies and technological innovations, changes in health care and government regulations, litigation claims, foreign currency fluctuation, product acceptance, as well as other factors discussed in the Company's last Report on Form 10-KSB. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K 1. Form 8-K filed January 7, 2002, disclosing the sale of the Registrant's Hemostasis business to Trinity Biotech plc effective December 21, 2001. 2. Form 8-K/A filed February 15, 2002, disclosing pro forma financial information not filed with the initial report on Form 8-K. 3. Form 8-K filed April 4, 2002, disclosing the Registrant's 2001 year-end and fourth Quarter financial results. 10 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: May 13, 2002 XTRANA, INC. ----------------------- ------------------------------- (Registrant) /s/ Timothy J. Dahltorp ------------------------------- Timothy J. Dahltorp Chief Executive Officer and Chief Financial Officer 11