-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KjSJ5xzKEIJMLALWAXf70pvtJz8+DhTorVXR3d3n+PXmFH/d9+81UkN/pt4cWh5L kW+Zx50xeL7hhXul1vqFtA== 0001170918-03-000208.txt : 20030514 0001170918-03-000208.hdr.sgml : 20030514 20030514141030 ACCESSION NUMBER: 0001170918-03-000208 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XTRANA INC CENTRAL INDEX KEY: 0000830736 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 581729436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14257 FILM NUMBER: 03698274 BUSINESS ADDRESS: STREET 1: 590 BURBANK STREET STREET 2: SUITE 205 CITY: BROOMFIELD STATE: CO ZIP: 80020 BUSINESS PHONE: 3034664424 MAIL ADDRESS: STREET 1: 590 BURBANK STREET STREET 2: SUITE 205 CITY: BROOMFIELD STATE: CO ZIP: 80020 FORMER COMPANY: FORMER CONFORMED NAME: BIOPOOL INTERNATIONAL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CYTRX BIOPOOL LTD DATE OF NAME CHANGE: 19890716 10QSB 1 xtr10q033103.txt FORM 10-QSB - 3/31/2003 ================================================================================ U.S.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 For the quarterly period ended March 31, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------- COMMISSION FILE NUMBER 001-14257 ---------- XTRANA, INC. (Exact name of Registrant as specified in its charter) DELAWARE 58-1729436 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 590 BURBANK STREET, SUITE 205, (303) 466-4424 BROOMFIELD, COLORADO 80020 (Registrant's telephone number (Address of principal executive offices) including area code) Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Outstanding at April 23, 2003, Common Stock, $.01 par value per share, 16,533,269 shares. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XTRANA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 2003 2002 (Unaudited) *** - -------------------------------------------------------------------------------- (in thousands except share data) ASSETS CURRENT ASSETS Cash ........................................ $ 917 $ 568 Accounts receivable, net .................... 27 71 Inventories ................................. 33 35 Note receivable and accrued interest ........ 1,188 2,053 Prepaid expenses and other current assets ... 86 101 -------- -------- TOTAL CURRENT ASSETS ............................. 2,251 2,828 Restricted Cash .................................. 110 110 PROPERTY AND EQUIPMENT ........................... 1,104 1,104 Less accumulated depreciation ............... (378) (319) -------- -------- PROPERTY AND EQUIPMENT, NET ...................... 726 785 NOTES RECEIVABLE ................................. 570 570 Patents net of amortization ...................... 220 218 -------- -------- TOTAL ASSETS ..................................... $ 3,877 $ 4,511 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY TOTAL CURRENT LIABILITIES ........................ $ 753 $ 630 LONG TERM LIABILITY .............................. 14 40 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 16,533,269 shares issued and outstanding in 2003 and 2002 ..... 165 165 Other stockholders' equity ....................... 19,446 19,438 Accumulated deficit .............................. (16,501) (15,762) -------- -------- TOTAL STOCKHOLDERS' EQUITY ....................... 3,110 3,841 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 3,877 $ 4,511 ======== ======== *** Amounts derived from the audited financial statements for the year ended December 31, 2002. See accompanying notes to condensed consolidated financial statements. 2 XTRANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDING MARCH 31, 2003 2002 - -------------------------------------------------------------------------------- (in thousands except per share data) SALES .............................................. $ 262 $ 190 Cost of sales ...................................... 213 112 -------- -------- GROSS PROFIT ....................................... 49 78 Operating expenses: Selling, general and administrative ........... 720 561 Research and development ...................... 94 201 -------- -------- Total Operating Expenses ........................... 814 762 Other income, net .................................. 26 40 -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ....... (739) (644) Income tax expense ................................. -- -- -------- -------- LOSS FROM CONTINUING OPERATIONS .................... (739) (644) -------- -------- NET LOSS ........................................... $ (739) $ (644) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic ......................................... 16,533 17,323 Effect of dilutive shares ..................... -- -- -------- -------- Diluted ....................................... 16,533 17,323 ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Net loss ...................................... $ (0.04) $ (0.04) See accompanying notes to condensed consolidated financial statements. 3 XTRANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) THREE MONTHS ENDING MARCH 31, 2003 2002 - -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES ....................... $ 354 $ (814) INVESTING ACTIVITIES ....................... (5) (70) NET INCREASE (DECREASE) IN CASH ............ 349 (884) CASH, BEGINNING OF PERIOD .................. 568 3,616 ------- ------- CASH, END OF PERIOD ........................ $ 917 $ 2,732 ======= ======= See accompanying notes to condensed consolidated financial statements. 4 XTRANA, INC. MARCH 31, 2003 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, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. 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, 2002. The balance sheet at December 31, 2002, 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. STOCK OPTION PLANS The Company has three stock option plans (the "Plans") for the benefit of employees, officers, directors, and consultants of the Company. Under the Plans, a total of 5,226,639 shares of the Company's common stock were reserved for issuance. Options granted under the Plans are generally exercisable for a period of ten years from the date of grant at an exercise price that is not less than the closing price of the common stock on the date of grant. Options granted under the Plans generally vest over a one- to five-year period from the date of the grant. Stock option activity for 2002 and 2003 was as follows: WEIGHTED AVERAGE SHARES EXERCISE OUTSTANDING PRICE RANGE PRICE ----------- ----------- ----- Balance at January 1, 2002 ..... 1,941,757 0.4800 - 2.6800 1.14 Granted ........................ 37,500 0.4900 - 0.7800 0.60 Exercised ...................... -- -- -- Cancelled ...................... (560,993) 0.9375 - 2.5000 1.19 --------- Balance at March 31, 2002 ...... 1,418,264 0.4800 - 2.6800 1.09 Granted ........................ 630,250 0.2300 - 0.5000 0.34 Exercised ...................... -- -- -- Cancelled ...................... (157,335) 0.3200 - 2.6800 1.22 --------- Balance at December 31, 2002 ... 1,891,179 0.2300 - 2.5000 0.92 Granted ........................ -- -- -- Exercised ...................... -- -- -- Cancelled ...................... (58,330) 1.0300 1.03 --------- Balance at March 31, 2003 ...... 1,832,849 0.2300 - 2.5000 0.82 5 The following information summarizes stock options outstanding at March 31, 2003: OUTSTANDING EXERCISABLE ----------------------------------- ----------------------- Weighted Average --------------------- Remaining Weighted Contractual Average Number Life in Exercise Number Exercise Exercise Price Outstanding Months Price Exercisable Price - --------------- ----------------------------------- ----------------------- $ 0.00 - $ 0.31 112,750 113 $ 0.231 64,166 0.230 $ 0.32 - $ 0.62 553,500 108 $ 0.386 367,993 0.376 $ 0.63 - $ 0.93 430,500 92 $ 0.711 215,911 0.731 $ 0.94 - $ 1.25 326,634 78 $ 0.998 297,151 0.995 $ 1.26 - $ 1.56 355,715 76 $ 1.472 243,213 1.459 $ 1.57 - $ 1.87 12,500 52 $ 1.687 12,500 1.687 $ 2.19 - $ 2.50 41,250 48 $ 2.395 41,250 2.395 ----------- ----------- 1,832,849 91 $ 0.827 1,242,184 0.871 At March 31, 2003, 3,058,076 shares were available for future grants under the Plans. The weighted average remaining contractual life of outstanding options at March 31, 2003, was 7.6 years. At March 31, 2003 and 2002, respectively, there were 1,242,184 and 675,490 options exercisable with weighted average exercise prices of $0.87 and $1.26. Pro forma information regarding net loss and earnings per share shown below was determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of approximately 4.0% for 2002; dividend yields of 0.0% for 2002; volatility factors of the expected market price of the Company's common stock of 167% for 2002; and expected life of the options of one to five years as grouped by specific employee classifications. These assumptions resulted in weighted average fair values of $0.32 per share for stock options granted in 2002. The Company did not grant options during the quarter ending March 31, 2003. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. The Company's employee stock options have characteristics significantly different from those of traded options such as vesting restrictions and extremely limited transferability. The Company's pro forma information is as follows (in thousands except per share data): THREE MONTHS ENDED MARCH 31, ------------------ 2003 2002 ------- ------- Loss from continuing operations, as reported ............. $ (739) $ (644) Deduct stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects .................. (63) (51) ------- ------- Pro forma net loss from continuing operations ............ $ (802) $ (695) ======= ======= Loss per share from continuing operations Basic - as reported ...................................... (0.04) (0.04) Basic - pro forma ........................................ (0.05) (0.04) Diluted - as reported .................................... (0.04) (0.04) Diluted - pro forma ...................................... (0.05) (0.04) 6 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. LITIGATION 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. On December 19, 2002, Trinity Biotech plc filed suit against the Company in U.S. District Court Southern District of New York alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, unjust enrichment, and violation of the Delaware Consumer Fraud Act in conjunction with the Company's sale of its Hemostasis business to Trinity. The suit alleges that the Company misrepresented the status of a single product that was the subject of the Instrumentation Laboratory patent infringement suit settled by the Company in January 2002. Trinity is seeking $1.2 million in damages, and $3 million in punitive damages. The Company believes that the suit brought by Trinity has no merit, as the product in question and the patent infringement issues surrounding it, including settlement discussions with Instrumentation Laboratory, were fully disclosed by the Company during Trinity's due diligence and in the Asset Purchase Agreement. As a part of the settlement negotiations with Instrumentation Laboratory the Company agreed to stop selling the product more than 90 days prior to Trinity's purchase of the business and settled the patent infringement suit in early 2002. The Company has filed a counter suit against Trinity in response to Trinity's suit, seeking $27 million in actual damages, and $30 million in punitive damages for tortious interference with prospective economic advantage, breach of contract, and breach of the covenant of good faith and fair dealing. The Company is also seeking a declaratory judgment that Trinity's suit is an improper attempt to avoid its contractual obligations to the Company because Trinity merely instituted litigation to force the Company to renegotiate the terms of the sale of its Hemostasis business. There can be no guarantee that the Company will be successful in its suit. The litigation with Trinity has had, and will continue to have a material impact on the Company. The cost of defending the litigation has forced us to radically reduce the investment in our commercial products and those in development. In addition, the prospect of raising additional capital, which we disclosed as a possible alternative for the Company in our 10QSB dated September 30, 2002, has been seriously undermined due to the existence of the litigation. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Until recently, Xtrana has been a development-stage, life sciences company that develops, manufactures and markets novel nucleic acid extraction kits and detection systems for use in molecular diagnostics, drug discovery, forensics, research, clinical and life sciences markets. Xtrana's mission and strategy has been 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. However, the litigation with Trinity has had, and will continue to have a material impact on our development. The cost of defending the litigation has forced us to radically reduce the investment we have historically been making in our commercial products and those in development. In addition, the prospects for raising additional capital, which we disclosed as a possible alternative for us in our 10QSB dated September 30, 2002, has been seriously undermined due to the existence of the litigation. We are currently consuming cash to fund our operations and the research and development of our nucleic acid diagnostic technologies and the defense of the Trinity litigation. Although we have slowed our consumption of cash relative to its ongoing operations, as a result of the cost of defending the Trinity litigation and the slower than anticipated growth in Xtra Amp(TM) sales, we may not have tHE ability to sustain our operations through the next 9 months. 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 We had $32,000 in gross trade accounts receivable and $5,000 in allowance for doubtful accounts on the consolidated balance sheet at March 31, 2003. A review of our allowance for doubtful accounts is done timely and consistently throughout the year. As of March 31, 2003, 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 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 8 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. RESULTS OF OPERATIONS Sales were $0.26 million for the three-month period ended March 31, 2003, compared with $0.19 million for the corresponding period of 2002. This increase in revenue is the result of a $0.10 million increase in grant revenue over 2002 levels. This increase was partially offset by a reduction in sales of Xtra Amp(TM) extraction kits of $0.03 million or 66% from the prior year period. The decrease in sales of Xtra Amp(TM) is due to the elimination of product support staff on December 31, 2002 as a part of the overhead reductions undertaken by the Company, combined with concerns on the part of our distributors about the viability of the Company due to the Trinity litigation. We anticipate that our grant revenue will remain at levels consistent with the current quarter through the remainder of 2003. As of March 31, 2003, the available funding under these various grants was $1.0 million. Cost of goods sold was $0.21 million for the three months ended March 31, 2003, compared with $0.10 million for the corresponding period in 2002. Gross margin was 18% for the three-month period ended March 31, 2003, compared with 41% for the corresponding period in 2002. The decline in gross margin was the result of the increase in grant revenues for the period. Management does not believe that this comparison is particularly meaningful at this stage of the development of the Company because gross margins are largely related to government grants that vary depending upon the specific contract. Operating expenses were $0.8 million for the three months ended March 31, 2003, compared with $0.8 million for the same period in 2002. Even though operating expenses remained relatively the same during the first quarter of 2003 when compared to the corresponding quarter in the prior year, the composition of the operating expenses changed. Operating expenses decreased by $0.2 million during the first quarter as a result of (a) the reduction in force implemented on December 31,2002, (b) the reclassification of research and development spending to cost of goods sold relating to the direct expenses for the increase in grant revenues, and (c) other overhead reductions implemented by the Company. The reductions in overhead were offset by litigation costs relating to the Trinity litigation. Other income is primarily interest income. FINANCIAL CONDITION On January 6, 2003, Trinity Biotech, plc made payment under the first secured note that was due on December 21, 2002 in conjunction with the sale of the Hemostasis operations to Trinity in December 2001. This inflow of cash added to the Company's existing liquidity position. As of March 31, 2003, working capital was $1.5 million, with a current ratio of 3.1 to 1.0. The Company is currently consuming cash to fund its operations and the research and development of its nucleic acid diagnostic technologies. Due to the cost of defending the Trinity litigation and the slower than anticipated growth in Xtra Amp(TM) sales, tHE Company may not have the ability to sustain its operations through the next 9 months. To address these capital pressures, the Company has undertaken steps to significantly reduce its operating costs, and has retained an investment banker to pursue strategic alternatives for the Company. These alternatives could include a financing, a co-development arrangement, the license of the Company's technologies, or the sale of the Company or its assets. There can be no guarantee that these activities will be successful. 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' 9 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. RISK FACTORS You should carefully consider the following risk factors and all other information contained in this report before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. If any of the following events or outcomes actually occur, our business, operating results, and financial condition would likely suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of the money you paid to purchase our common stock. RISKS RELATED TO OUR BUSINESS - ----------------------------- THE TRINITY BIOTECH LITIGATION WILL CONTINUE TO HAVE A NEGATIVE IMPACT ON OUR BUSINESS. On December 19, 2002, Trinity Biotech plc filed suit against the Company alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, unjust enrichment, and violation of the Delaware Consumer Fraud Act in conjunction with the Company's sale of its Hemostasis business to Trinity. The suit alleges that the Company misrepresented the status of a single product that was the subject of the Instrumentation Laboratory patent infringement suit settled by the Company in January 2002. Trinity is seeking $1.2 million in damages, and $3 million in punitive damages. The Company believes that the suit brought by Trinity has no merit, as the product in question and the patent infringement issues surrounding it, including settlement discussions with Instrumentation Laboratory, were fully disclosed by the Company during Trinity's due diligence and in the Asset Purchase Agreement. As a part of the settlement negotiations with Instrumentation Laboratory the Company agreed to stop selling the product more than 90 days prior to Trinity's purchase of the business and settled the patent infringement suit in early 2002. The Company has filed a counter suit against Trinity in response to Trinity's suit, seeking $27 million in actual damages, and $30 million in punitive damages for tortious interference with prospective economic advantage, breach of contract, and breach of the covenant of good faith and fair dealing. The Company is also seeking a declaratory judgment that Trinity's suit is an improper attempt to avoid its contractual obligations to the Company because Trinity merely instituted litigation to force the Company to renegotiate the terms of the sale of its Hemostasis business. There can be no guarantee that the Company will be successful in its suit. The litigation with Trinity has had, and will continue to have a material impact on the Company. The cost of defending the litigation has forced us to radically reduce the investment in our commercial products and those in development. In addition, the possibility of closing any type of strategic transaction could be significantly impacted by the existence of the litigation. GOING CONCERN AND LIQUIDITY PROBLEMS. Our auditors have included an explanatory paragraph in their audit opinion with respect to our consolidated financial statements as December 31, 2002. The paragraph states that our recurring losses from operations raise substantial doubts about our ability to continue as a going concern. Due to the cost of defending the Trinity litigation, combined with slower than anticipated growth in Xtra Amp(TM) sales, the company may not have the ability to sustain its operations for the next 9 months. We may not have sufficient working capital to sustain our operations. We have been unable to generate sufficient revenues to sustain our operations. We will have to obtain funds to meet our cash requirements through business alliances, such as strategic or financial transactions with third parties, increase our revenue and/or, the sale of securities or other financing arrangements, or we may be required to curtail our operations or seek a merger partner. Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing stockholders. In addition, no assurance may be given that the Company will be successful in raising additional funds or entering into business alliances. OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO MAINTAIN OR EXPAND OUR BUSINESS IS UNCERTAIN. In the future, in order to expand our business through internal development or acquisitions, we may need to raise substantial additional funds through equity or debt financings, research and development financings, or collaborative relationships. However, this additional funding may not be available or, if available, it may not 10 be available on economically reasonable terms. In addition, any additional funding may result in significant dilution to existing stockholders. If adequate funds are not available, we may be required to curtail our operations or obtain funds through collaborative partners that may require us to release material rights to our products. SALE OF THE HEMOSTASIS BUSINESS SIGNIFICANTLY REDUCED OUR REVENUE. The Hemostasis business was a mature operation that generated a relatively stable revenue base. The sale of this business to Trinity Biotech plc in December 2001 eliminated 94.8% of the Company's revenue for the year ended 2001. As a result, the Company is dependent upon its current capital resources to fund its overhead and operations. Should sales of the Company's nucleic acid products and government research grants not materialize, it may become necessary for the Company to raise additional capital to fund its operations. REDUCTION OR DELAYS IN RESEARCH AND DEVELOPMENT BUDGETS AND IN GOVERNMENT FUNDING MAY NEGATIVELY IMPACT OUR SALES. Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions, and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to numerous factors that are outside our control and are difficult to predict, including changes in available resources, spending priorities and institutional budgetary policies. Our business could be seriously damaged by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, academic institutions, or government and private laboratories. A significant portion of our sales has been to researchers, universities, government laboratories, and private foundations whose funding is dependent upon grants from government agencies such as the U.S. Department of Defense and similar domestic and international agencies. In addition, a significant portion of our own revenue and our anticipated future revenue is from such grants. Although the level of research funding has increased during the past several years, we cannot assure you that this trend will continue. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if we fail to receive a material portion of the grants for which we have applied, or if our customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the Department of Defense and other government agencies that fund research and development activities. A reduction in government funding for the Department of Defense or other government research agencies could seriously damage our business. Many of our customers receive funds from approved grants at particular times of the year, as determined by the federal government. Grants have, in the past, been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds affects the timing of purchase decisions by our customers and, as a result, can cause fluctuations in our sales and operating results. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include: (1) expiration or termination of research contracts with collaborators or government research grants, which may not be renewed or replaced; (2) the timing and willingness of collaborators to commercialize our products; (3) the timing, release, and competitiveness of our products; and (4) general and industry-specific economic conditions, which may affect our customers' research and development expenditures and use of our products. If revenue declines in a quarter, whether due to a delay in recognizing expected revenue or otherwise, our earnings will decline because many of our expenses are relatively fixed in the short-term. In particular, research and development and general and administrative expenses are not affected directly by variations in revenue. Due to fluctuations in our revenue and operating expenses, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In that case, our stock price could fluctuate significantly or decline. 11 FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS. Since we have sold the Hemostasis business, our sales and profitability will increase primarily through the acquisition or internal development of new product lines, additional customers, and new businesses. We expect that future acquisitions, if successfully consummated, will create increased working capital requirements, which will likely precede by several months any material contribution of an acquisition to our net income. Our ability to achieve our expansion objectives and to manage our growth effectively and profitably depends upon a variety of factors, including: (1) our ability to internally develop new products; (2) our ability to make profitable acquisitions; (3) integration of new facilities into existing operations; (4) hiring, training, and retention of qualified personnel; (5) establishment of new relationships or expansion of existing relationships with customers and suppliers; and (6) availability of capital. In addition, the implementation of a growth strategy could place significant strain on our administrative, operational and financial resources and increased demands on our financial systems and controls. Our ability to manage our growth successfully will require us to continue to improve and expand these resources, systems and controls. If our management is unable to manage growth effectively, our operating results could be adversely affected. Moreover, there can be no assurance that we will continue to successfully expand or that growth or expansion will result in profitability. FAILURE TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC OR PRODUCTION PERSONNEL OR LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS. Our continued success depends to a significant extent on the members of our management team. Recruiting and retaining qualified scientific and production personnel in order to perform research and development work and product manufacturing are critical to our success as well. Because the industry in which we compete is very competitive, we face significant challenges attracting and retaining members of our management team and personnel base. Although we believe we have been and will be able to attract and retain these members of management and personnel, there can be no assurance that we will be able to continue to successfully attract such qualified individuals. In addition, we do not maintain insurance on the lives of anyone at the Company. The loss of services of any key employee could have a material adverse effect upon our business. IF WE FAIL TO INTRODUCE NEW PRODUCTS, OR OUR NEW PRODUCTS ARE NOT ACCEPTED BY POTENTIAL CUSTOMERS, WE MAY NOT CAPTURE MARKET SHARE. Rapid technological change and frequent new product introductions are typical for our market. Since we have sold the Hemostasis business, our future success will depend on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and then are reluctant to switch. To the extent we fail to introduce new and innovative products, we may not capture enough market share to be successful. An inability, for technological or other reasons, to successfully develop and introduce new products could limit or reduce our growth rate and damage our business. In the past we have experienced, and are likely to experience in the future, delays in the development and introduction of products. We cannot assure you that we will keep pace with the rapid rate of change in life sciences research, or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of new products include: (1) availability, quality, and price relative to competitive products; (2) the timing of introduction of the product relative to competitive products; (3) scientists' opinion of the product's usefulness; (4) citation of the product in published research; and (5) general trends in life sciences research. The expenses or losses associated with unsuccessful product development activities or lack of market acceptance of our new products could materially adversely affect our business, operating results, and financial condition. INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS. Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. We are aware that patents have been applied for and, in some cases, issued to others, claiming technologies that are closely related to ours. In the event of an intellectual property dispute, we may be forced to litigate. This litigation could involve proceedings declared by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business. 12 If a third party claimed an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees, or cease our affected business activities. Although we might under these circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all. In addition to intellectual property litigation, other substantial, complex, or extended litigation could result in large expenditures by us and distraction of our management. For example, lawsuits by employees, stockholders, collaborators, or distributors could be very costly and substantially disrupt our business. Disputes from time to time with companies or individuals are not uncommon in our industry, and we cannot assure you that we will always be able to resolve them out of court. We regard our trademarks, trade secrets, and similar intellectual property as important to our success. We rely on trademark law and trade secret protection and confidentiality and/or license agreements with employees, customers, partners, and others to protect our proprietary rights. We have pursued the registration of our trademarks in the U.S. and internationally. Effective trademark and trade secret protection may not be available in every country in which our products are available. We cannot be certain that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, third parties may infringe or misappropriate our proprietary rights, and we could be required to incur significant expenses in preserving them. Our success will depend in part on our ability to obtain and maintain meaningful patent protection for our products, both in the United States and in other countries. We rely on patents to protect some of our intellectual property and our competitive position. We own issued patents and pending patent applications, including both domestic and foreign patents and patent applications. We cannot assure you that any of the presently pending or future patent applications will issue as patents, or that any patents issued to us will not be challenged, invalidated, held unenforceable, or circumvented. Further, we cannot assure you that claims in patents that have been issued, or that may be issued to us in the future, will be sufficiently broad to prevent third parties from producing competing products similar in design to our products. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws in the United States. Failure to obtain adequate patent protection for our proprietary technology could have a material adverse effect on our business, operating results, financial condition, and future growth prospects. POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL CONDITION. Despite product testing prior to sale, our products have from time to time experienced performance problems discovered after we sold the products. If a customer experiences performance problems, errors in shipment or product defects, it could result in: o injuries to persons; o loss of sales; o delays in or elimination of market acceptance; o damage to our brand or reputation; and o product returns. Although our distributors and manufacturers have return policies, if we accept a product returned by a customer, but it is not accepted for return by the distributor, we will incur the cost. Because we depend on third parties for certain of the components of our products, if those components are defective, the performance of our products would be reduced or undermined. Any increase in the rate of returns would affect our financial condition, operating results and cash flows. ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS. Portions of our operations require the controlled use of hazardous and radioactive materials. Although we believe our safety procedures comply with the standards prescribed by federal, state, local, and foreign regulations, the risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of an accident, we could be liable for any damages that result, which could seriously damage our business and results of operations. 13 RISKS ASSOCIATED WITH OUR INDUSTRY - ---------------------------------- WE ARE ENGAGED IN A COMPETITIVE INDUSTRY, AND WE MAY BE UNABLE TO CONTINUE TO COMPETE EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE. We are engaged in a segment of the human health care products industry that is highly competitive. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical, and biotechnology companies, and many of them have substantially greater capital resources, marketing experience, research and development staffs, and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may also be more successful than us in producing and marketing their products. Not only do we face intense competition in the marketplace against our competitors, but we also must compete with these same companies for the services of personnel. We expect this competition to continue and intensify in the future. Our industry has also seen substantial consolidation in recent years, which has led to the creation of competitors with greater financial and intellectual property resources than us. In addition, we believe that the success that others have had in our industry will attract new competitors. Some of our current and future competitors also may cooperate to better compete against us. We may not be able to compete effectively against these current or future competitors. Increased competition could result in price reductions for our products, reduced margins, and loss of market share, any of which could adversely impact our business, financial condition, and results of operations. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. We operate in a highly regulated industry. Our business is currently subject to extensive regulation, supervision, and licensing by federal, state, and local governmental authorities. Also, from time to time we must expend resources to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these regulations, we could be subject to disciplinary actions or administrative enforcement actions. These actions could result in penalties, including fines. RISKS ASSOCIATED WITH OUR COMMON STOCK - -------------------------------------- OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS. Our executive officers, directors, and principal stockholders will continue to beneficially own 43% of our outstanding common stock, based upon the beneficial ownership of our common stock as of March 1, 2003. In addition, these same persons also hold options to acquire additional shares of our common stock, which may increase their percentage ownership of the common stock further in the future. Accordingly, these stockholders: (1) will be able to significantly influence the composition of our board of directors; (2) will significantly influence all matters requiring stockholder approval, including change of control transactions; and (3) will continue to have significant influence over our affairs. This concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. OUR STOCK PRICE HAS BEEN VOLATILE. Our common stock is quoted on the OTC Bulletin Board(R), and there can be substantial volatility iN the market price of our common stock. The trading price of our common stock has been, and is likely to continue to be, subject to significant fluctuations due to a variety of factors, including: (1) variations in our quarterly operating results; (2) the gain or loss of significant contracts; (3) changes in management; (4) announcements of technological innovations or new products by us or our competitors; (5) legislative or regulatory changes; (6) general trends in the industry; (7) recommendations by securities industry analysts; (8) biological or medical discoveries; (9) developments concerning intellectual property, including patents and litigation matters; (10) public concern as to the safety of new technologies; (11) developments in our relationships with current or future customers and suppliers; and (12) general economic conditions, both in the United States and abroad. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of our common stock, as well as the stock of many biotechnology companies. Often, 14 price fluctuations are unrelated to operating performance of the specific companies whose stock is affected. In the past, following periods of volatility in the market price of a company's stock, securities class action litigation has occurred against the issuing company. If we were subject to this type of litigation in the future, we could incur substantial costs and a diversion of our management's attention and resources, each of which could have a material adverse effect on our revenue and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND UNDER APPLICABLE LAW COULD IMPAIR THE ABILITY OF A THIRD PARTY TO TAKE OVER OUR COMPANY. We are subject to various legal and contractual provisions that may impede a change in our control, including our adoption of a stockholders' rights plan, which could result in the significant dilution of the proportionate ownership of any person that engages in an unsolicited attempt to take over our company. These provisions, as well as other provisions in our certificate of incorporation and bylaws and under the Delaware General Corporations Law, may make it more difficult for a third party to acquire our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time. ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU. Some investors favor companies that pay dividends, particularly in general downturns in the stock market. We have not declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth, and we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, your return on this investment likely depends on your selling our stock at a profit. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures, which it has designed to ensure that material information related to Xtrana, Inc., including its consolidated subsidiaries, is disclosed in its public filings on a regular basis. In response to recent legislation and proposed regulations, the Company reviewed its internal control structure and its disclosure controls and procedures. The Company believes that its pre-existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations. Within 90 days prior to the filing of this report, members of the Company's management, including Timothy Dahltorp, the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, Mr. Dahltorp concluded that the Company's disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by management of the Company on a timely basis and to ensure that the quality and timeliness of the Company's public disclosures complies with its SEC disclosure obligations. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls after the date of our most recent evaluation. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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. We do not believe that the settlement will have a material impact on the results of continuing operations. On December 19, 2002, Trinity Biotech plc filed suit against us in U.S. District Court Southern District of New York alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, unjust enrichment, and violation of the Delaware Consumer Fraud Act in conjunction with the sale of our Hemostasis business to Trinity. The suit alleges that we misrepresented the status of a single product that was the subject of the Instrumentation Laboratory patent infringement suit settled by us in January 2002. Trinity is seeking $1.2 million in damages, and $3 million in punitive damages. We believe that the suit brought by Trinity has no merit, as the product in question and the patent infringement issues surrounding it, including settlement discussions with Instrumentation Laboratory, were fully disclosed by us during Trinity's due diligence and in the Asset Purchase Agreement. As a part of the settlement negotiations with Instrumentation Laboratory, we agreed to stop selling the product more than 90 days prior to Trinity's purchase of the business and settled the patent infringement suit in early 2002. We have filed a counter suit against Trinity in response to Trinity's suit, seeking $27 million in actual damages, and $30 million in punitive damages for tortious interference with prospective economic advantage, breach of contract, and breach of the covenant of good faith and fair dealing. We are also seeking a declaratory judgment that Trinity's suit is an improper attempt to avoid its contractual obligations to us because Trinity merely instituted litigation to force us to renegotiate the terms of the sale of our Hemostasis business. There can be no guarantee that we will be successful in our suit. The litigation with Trinity has had, and will continue to have a material impact on us. The cost of defending the litigation has forced us to radically reduce the investment in our commercial products and those in development. In addition, the prospect of raising additional capital, which we disclosed as a possible alternative for us in our 10QSB dated September 30, 2002, has been seriously undermined due to the existence of the litigation ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certificate of our Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 1. Current Report on Form 8-K filed January 7, 2003 (reporting Items 5 and 7), disclosing a lawsuit against the Registrant filed by Trinity Biotech, plc, and the Registrant's proposed counter suit and collection action on amounts owed to the Registrant by Trinity. 2. Current Report on Form 8-K filed January 10, 2003 (reporting Items 4 and 7), disclosing a change in Registrant's certifying accountant. 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 13, 2003 XTRANA, INC. /S/ TIMOTHY J. DAHLTORP --------------------------- Timothy J. Dahltorp Chief Executive Officer and Chief Financial Officer 17 CERTIFICATION OF CEO AND CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Timothy Dahltorp, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Xtrana, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /S/ TIMOTHY DAHLTORP --------------------------- Timothy Dahltorp Chief Executive Officer and Chief Financial Officer 18 EX-99 3 ex99-033103.txt EX-99.1 CEO/CFO CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2003 (the "Report") by Xtrana, Inc. ("Registrant"), the undersigned hereby certifies that: 1. to the best of my knowledge, the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. Dated: May 13, 2003 /S/ TIMOTHY DAHLTORP -------------------------------------------- Timothy Dahltorp, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----