-----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, T4C+nFMuneHTf7GKZDktgWC+Z67ZOzFI7iJSQo00DAegzBDaISSojU6Xq2Q87Ply ubDTUUFe8pOBzwoehOK9zw== 0001170918-04-000181.txt : 20040319 0001170918-04-000181.hdr.sgml : 20040319 20040319164030 ACCESSION NUMBER: 0001170918-04-000181 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040319 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14257 FILM NUMBER: 04680451 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 10KSB 1 fm10ksb2003.txt FORM 10-KSB 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 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, BROOMFIELD, COLORADO 80020 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number (including area code) (303) 466-4424 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: TITLE OF EACH CLASS Common Stock, par value $.01 per share Common Stock Purchase Rights Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State Issuer's revenues for its most recent fiscal year: $1,191,000. The aggregate market value of Xtrana, Inc. Common Stock, $.01 par value, held by non affiliates, computed by reference to the average of the closing bid and asked prices as reported by OTCBB on December 31, 2003, was $1,938,992. Number of shares of Common Stock of Xtrana, Inc., $.01 par value, issued and outstanding as of February 8, 2004: 16,533,269. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for the 2004 Annual Meeting are incorporated by reference into Part III of this Form 10-KSB. Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X] ================================================================================ INDEX TO ANNUAL REPORT ON FORM 10-KSB PART I PAGE Item 1. Business.........................................................3 Item 2. Properties.......................................................9 Item 3. Legal Proceedings...............................................10 Item 4. Submission of Matters to a Vote of Security-Holders.............10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................................10 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11 Item 7. Financial Statements and Supplementary Data.....................23 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...........................23 Item 8A. Controls and Procedures.........................................23 PART III Item 9. Directors and Executive Officers................................24 Item 10. Executive Compensation..........................................24 Item 11. Security Ownership of Certain Beneficial Owners and Management................................................24 Item 12. Certain Relationships and Related Transactions..................24 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................24 Item 14. Principal Accountant and Fees...................................25 SIGNATURES....................................................................26 2 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This 2003 Annual Report on Form 10-KSB contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among other things, whether the closing of the proposed sale of our intellectual property to Applera will occur in a timely manner, if at all; our ability to settle our remaining obligations following the sale of our intellectual property; our ability to find a merger partner; our ability to continue as a going concern; and other risks and uncertainties that may be detailed herein. See "Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors." PART I ITEM 1. BUSINESS OVERVIEW Xtrana, Inc. ("we," "us," "Xtrana" or the "Company") develops and commercializes technologies to simplify the analysis of DNA and 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 identity testing, human and animal diseases, genetic predisposition to disease, and other applications. However, subsequent to year end, we entered into an agreement to sell our intellectual property (see below). We were initially incorporated in Delaware in 1987. The name of the Company was changed from Biopool International, Inc., to Xtrana, Inc., in June of 2001. Our corporate headquarters is located in Broomfield, Colorado, where we conduct manufacturing operations as well as research and development activities. On August 10, 2000, we completed a merger with the former Xtrana, Inc., a company based in Denver, Colorado, and primarily engaged in the development of new proprietary nucleic acid (DNA/RNA) testing technology. On December 21, 2001, we completed our strategy of divesting ourselves of our Hemostasis business segment by selling substantially all of the assets of that business to Trinity Biotech plc, an Irish corporation, for total consideration of US$6,250,000 plus the assumption of certain of our liabilities associated with that business. The assets sold included the operations of Xtrana located in Ventura, California, and a wholly owned Swedish subsidiary, Biopool AB. The total consideration of US$6,250,000 consisted of cash and notes as follows: (a) US$3,658,500 in cash which was paid on December 21, 2001; (b) a note in the amount of US$855,200 due on December 21, 2002, which was paid subsequent to December 31, 2002; (c) a note in the amount of US$1,166,200 due on December 21, 2003; and (d) a note in the amount of US$570,100 due December 21, 2004. The notes carry interest at a rate of 5% per annum, and are secured by a second position on substantially all of the assets of Trinity Biotech plc that are located in the United States. As a result of a settlement agreement in 2003 all notes were paid, net of a $225,000 discount. RECENT DEVELOPMENTS On January 26, 2004, we entered into an Assignment Agreement with Applera Corporation through its Applied Biosystems Group. Pursuant to the Assignment Agreement, we agreed to sell substantially all of our intellectual property, including all patents and know-how, but excluding our trademarks and trade names, to Applera for total consideration of US$4,000,000. In exchange for our intellectual property, Applera agreed to 3 pay and deliver to us total cash consideration of $4,000,000 in the following manner: $3,600,000 in cash at closing ($100,000 of which has already been received in the form of a non-refundable deposit); and $400,000 in cash ninety (90) days after closing subject to our providing certain consulting services as provided in the Assignment Agreement. Completion of the transaction is subject to a number of closing conditions, including approval of our stockholders. We have scheduled a special meeting of our stockholders for March 24, 2004, at which the stockholders will be asked to vote on the sale of our intellectual property to Applera. The sale of our intellectual property pursuant to the Assignment Agreement will result in the receipt of net proceeds of approximately $3,600,000, after payment of all expenses associated with the transaction. We could distribute that cash as a dividend to our stockholders as part of liquidation, after satisfaction of all of our liabilities and payment of all costs associated with the liquidation. If we were to make a distribution to stockholders before the expiration of certain representations and warranties we made under the Assignment Agreement (18 months from the date of closing), we would be required to reserve and hold back $1,000,000 for possible settlement of potential claims by Applera against us for our breaches of those representations and warranties. Alternatively, the Board of Directors believes that we could attract interest from other businesses that might benefit from access to those funds, as well as our status as a public company with a clean reporting history. Such interest could result in us merging or otherwise joining together with an existing business that could create much greater long-term stockholder value than simply liquidating the Company. After closing the contemplated Sale of Assets and complying with the requirements of the Assignment Agreement to provide consulting services, we anticipate that we would terminate all of our remaining employees and terminate our existing lease pursuant to an early termination agreement (see Item 2 - Properties). Consequently, following the transaction, after payment of employee severance and lease terminations costs, we would have limited overhead costs of operation, but would remain a reporting company under the rules and regulations of the Securities and Exchange Commission. It is the intention of the Board of Directors to spend a reasonable period of time exploring opportunities to find a merger candidate and, if it is unable to conclude a transaction that it believes would provide long-term stockholder value, to propose that the stockholders approve a liquidation. In either event, the Board of Directors does not anticipate taking any action without further stockholder approval. NUCLEIC ACID (DNA/RNA) TESTING INDUSTRY The growing understanding of genetics and the genetic basis of biological activity is driving renewed growth in the research and commercial testing markets. Genomic research is being applied to identify specific genes and to use the identity of the gene to identify its source, as in forensics, paternity and pathogen testing, or to reveal possible linkages between the gene and biologic activity and disease, as in diagnostic testing. Highly specific detection tests and, where applicable, precisely targeted therapeutic approaches are being designed to address not only human disorders but also veterinary, environmental, food safety, forensics, and other applications. These new tests and approaches require specialized research reagents, supplies, tools, and instruments. Currently, demand for these reagents, supplies, tools, and instruments arise from both academic and industrial researchers and from commercial testing applications, such as forensics, paternity, and diagnostic testing. In order to capitalize on increasing demand generated by both the research and commercial markets, the Company, along with other industry participants, are developing a wide range of products and services, including genomic information, diagnostic tests and assays, testing services, drugs and gene therapies, and environmental services. We are already participating in both the commercial and research segments of the genetics market. Further, one segment of the commercial market--human diagnostic testing--offers particular opportunities due to the size of the market and the limited development of nucleic acid-based testing products to date. Historically, the analysis of nucleic acid has been a very expensive and time-consuming process, requiring extensive and well-equipped microbiology laboratories and highly trained personnel. The process can be segmented into three independent steps. First, the DNA or RNA must be extracted from the sample, which could be blood, tissue, urine, food products, or other organic materials, and isolated from contaminants. This process is also referred to as sample preparation. Second, the specific gene sequence related to the 4 target to be analyzed is amplified, making thousands of copies of the sequence if it is present in the sample. Lastly, the gene sequence must be detected and analyzed. We have developed proprietary technologies in sample preparation and detection, and are pursuing the license of an amplification technology. Each of the technologies, once commercialized, could be marketed as standalone products. When combined, the technologies could permit the development of rapid, easy-to-use, and cost-effective nucleic acid testing devices that can be employed either in a laboratory setting or at the point of sample collection in place of the current complex and time-consuming laboratory-based procedures. STRATEGY Since the acquisition of the nucleic acid technologies in August of 2000, we have worked to continue the development of these technologies with the ultimate goal of moving them into commercial products. The first of these products were the Xtra Amp(TM) nucleic acid extraction kits. These reagent kits were marketed primarily to the research laboratory marketplace through a distributor network. The market for nucleic acid extraction kits is a fairly mature market, and is dominated by a few large firms. The majority of the customers in this market operate under tightly regulated quality systems, which require them to go through a rigorous validation of all new products. This validation process can be quite time consuming and costly. Even though customers who evaluated the Xtra Amp(TM) product liked its ease of use, it was not enough to convince them to make the investment in the validation process and change over to Xtra Amp(TM) from the products they were currently using. As a result, our sales of these products did not meet expectations. The primary product that we were focused on developing was our SCIP diagnostic platform. This device would reduce DNA testing to a simple-to-use, sample-in, result-out device that could be used outside of a traditional laboratory. Although our SCIP product and our technologies had been funded primarily through government research grants, we needed additional funding to complete development and move into the commercial market. As our cash flow received from the Xtra Amp(TM) products was much lower than anticipated, the Board of Directors made the decision to seek outside capital to fund continued operations and development of our SCIP technology. Our cash flow problems were exacerbated when we were sued by Trinity Biotech, plc. In December 2002, Trinity filed suit against us 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 alleged 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, and Trinity sought $1.2 million in damages and $3 million in punitive damages. We 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 also sought a declaratory judgment that Trinity's suit was 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. We settled this litigation in June 2003, but the cost of defending the litigation forced us to radically reduce the investment in our product development. Based on these factors, and advice from our financial advisor, the Board of Directors determined that the best way to maximize stockholder value was to examine other alternatives, including the sale of the Company or our assets. Working with our financial advisor, we conducted an extensive solicitation process to obtain proposals for transactions ranging from a financing to the sale of our Company or our assets. This process resulted in us entering into the Assignment Agreement with Applera, as previously discussed. TECHNOLOGIES Xtra Bind(TM) is a family of nucleic acid extraction matrices that we have developed, representing the foundation technologies for our current and potential commercial products. These matrices capture and stabilize DNA and RNA and allow for enzymatic manipulation of the nucleic acid, resulting in an extremely rapid and efficient extraction protocol. The Xtra Bind(TM) matrices are unique in that they not only serve to selectively bind DNA and RNA, but also interface with multiple amplification technologies and downstream applications. For example, DNA can 5 be amplified by Polymerase chain reaction (PCR), and RNA can be copied and amplified by a similar process known as RT-PCR, directly off of the solid phase bound nucleic acid without elution. This permits the use of our Xtra Bind(TM) material to create an extremely rapid extraction protocol and eliminates the need for the vacuum filtration, centrifugation, or hazardous chemicals commonly associated with other extraction methods. The protocol merely requires pipetting or liquid handling steps for the addition of the sample, lysis buffer, and a wash buffer - thus making it ideally suited for automated platforms and high throughput screening or sample processing. Nucleic acid is highly stable when bound to the Xtra Bind(TM) matrix and can be stored at room temperature for extended periods rather than using valuable freezer space. Additionally, Xtra Bind(TM) provides both multiplex and re-amplification capabilities. The multiplex protocol requires no primer optimization and can be used to amplify up to 25 targets in a single reaction. The Xtra Bind(TM) material also acts as an archival platform, allowing the user to re-amplify either the same target or different targets from the original Xtra Amp(TM) tube. This ability to re-amplify when combined with Xtra Amp(TM)'s multiplex capability provides researchers with a powerful and efficient tool. The Xtra Bind(TM) matrix can be coated on many different surfaces. This capability, combined with the simple and efficient extraction protocol, makes this material ideal for incorporating sample preparation onto diagnostic platforms. We also have several detection technologies that we have developed. Our primary detection methodology is a lateral flow strip for nucleic acid detection. This patented method is similar in function to the detection strip utilized in home pregnancy tests. The sample is added to the lateral flow strip post-amplification and, in less than one minute, a blue line will appear on the strip if the sample is present. This qualitative detection method is much more rapid than traditional agarose gel methods and, when used with Xtra Bind(TM) extraction, can provide higher levels of sensitivity. SCIP(TM) (Self-Contained Integrated Particle) is a strategy that we have developed to combine all three aspects of nucleic acid analysis, extraction, amplification, and detection, into a self-contained, point-of-care device. We have several device patents surrounding the SCIP(TM) concept, and it is envisioned that SCIP(TM) will be a family of diagnostic platforms, each specific to the requirements of various applications. We have numerous other technologies in various areas of nucleic acid analysis. PRODUCTS Our initial commercial product, the Xtra Amp(TM) Extraction System, utilizes our proprietary Xtra Bind(TM) material, and provides the user with a rapid and easy-to-use extraction kit. The Xtra Amp(TM) System is sold for use with amplification and detection products and processes currently available in the marketplace. This system enables the extraction of nucleic acid with only three minutes of hands-on time and the elimination of centrifugation, vacuum filtration, product transfer, or elution steps, all of which are currently necessary with competing technologies. This saves valuable laboratory time and minimizes the risks of cross-contamination, as the entire extraction and amplification process takes place in the same tube. Additionally, the Xtra Amp(TM) kits provide for long-term dry storage of the nucleic acid sample that can be used later for tracking or follow-up testing. Xtra Amp(TM) Extraction Kits are sold in 8x12 PCR tubes, 96-well plate and 384-well plate formats. The kits come in three series for various applications: o SERIES I - For the extraction and isolation of DNA from whole blood, buccal swab, buffy coat fraction, and E. coli cells. o SERIES II - For the extraction and isolation of RNA from tissue culture cells. o SERIES III - For the extraction and isolation of DNA from whole tissues, tissue culture cells, rodent tails, yeast, blood stains and plant. 6 CUSTOMERS Because of the limited nature of our sales of nucleic acid-based products to date, none of our current customers account for more than 10% of our revenue. RESEARCH AND DEVELOPMENT All of our research and development activities are focused on the development of technologies that can be brought to market in the form of commercialized products. These research and development activities have been funded by internal capital as well as by various government grants. The major projects under development in 2003 were: o Additional Xtra Amp(TM) applications, including DNA and RNA from viruses, thus continuing to broaden the product line. o SCIP(TM)for infectious disease - Intended to be a point of care diagnostic device for the doctor's office. Provides a highly simple device: sample in, result out. The test is processed during the patient visit, thus allowing for more effective treatment. Device design is a base unit with disposable cartridges. The first cartridge under development is a test for chlamydia/gonorrhea. Additionally, work has begun on the development of assay chemistries for the detection of respiratory viruses, which will also run on the platform. During the first quarter of 2003, we completed work on a functional SCIP prototype. This prototype automates the extraction, amplification and detection of chlamydia and gonorrhea from clinical urine samples. This prototype has demonstrated the ability to detect targets down to a single copy (single cell) of the target organism. On November 8, 2000, we were issued U.S. patent 6,153,425, entitled "Self-Contained Device Integrating Nucleic Acid Extraction, Amplification, and Detection." This patent is a continuation, in part, of an earlier patent, expanding upon our development strategy for a self-contained nucleic acid detection system to include a modular design that will interface with multiple amplification technologies. On September 18, 2001, we were issued U.S. patent 6,291,166 entitled "Nucleic Acid Archiving." This patent covers the Xtra Bind(TM) family of nucleic acid extraction matrices representing the foundation technologies for the Company's current and future commercial products. These matrices capture and stabilize DNA and RNA and allow for enzymatic manipulation of the nucleic acid, resulting in an extremely rapid and efficient extraction protocol. On August 12, 2003, we were issued U.S. Patent 6,605,451, entitled "Methods and Devices for Multiplexing Amplification Reactions." This patent covers our Xtra Plex(TM) method, which is a multiplex protocol requiring no primer optimization that can be used to amplify up to 25 targets in a single reaction. On November 18, 2003, we were issued U.S. patent 6,649,378, entitled "Self-Contained Device Integrating Nucleic Acid Extraction, Amplification, and Detection." This patent is a continuation, in part, of an earlier patent, expanding upon our development strategy for a self-contained nucleic acid detection system to include the method for solid phase capture, isothermal amplification and lateral flow detection in an integrated device. In 2002, we spent $1,794,000 on research and development. In 2003, research and development expenses decreased approximately $535,000, or 30% from 2002 levels, to $1,259,000. Due to the proposed sale of our intellectual property to Applera, all research and development spending will be eliminated after closing. In nucleic acid detection, we utilize the expertise of advisors. Two of these are Michael P. Doyle, Ph.D., and James Mahony, Ph.D. Dr. Doyle is well known in the food microbiology industry and provides consultation regarding our food pathogen detection assays, including E. COLI 0157:H7, LISTERIA MONOCYTOGENES, SALMONELLA, Coliforms, and Campylobacter. He received his B.S. degree in Bacteriology in 1973, an M.S. in Food Microbiology in 1975, and a Ph.D. in Food Microbiology in 1977, all from the University of Wisconsin-Madison. After working for the Ralston Purina Co. from 1977-80, he accepted an Assistant Professor position at the Food Research Institute at the University of Wisconsin- 7 Madison in 1980. He remained there, advancing to full Professor in the Department of Food Science, until 1991. In 1991, Dr. Doyle moved to Griffin, Georgia, where he remains as Professor and Director of the Center for Food Safety and Quality Enhancement, and Head, Department of Food Science and Technology, University of Georgia. Dr. Mahony is well known in clinical virology and chlamydiology. He is consulting and collaborating on the development of a SCIP(TM)-based assay for urine detection of chlamydia and gonorrhea. He is Professor and Director at McMaster University Virology and Chlamydiology Laboratory, Hamilton, Ontario, Canada. Dr. Mahony has authored 104 publications, most of which deal with either chlamydia or gonorrhea. He has also published 25 articles in books, all discussing STD's and chlamydia. His lab frequently conducts and publishes validation studies of new methods for detection of sexually transmitted disease infectious agents. In August 2002, Dr. Mahony became a Director of the Company. MANUFACTURING AND QUALITY CONTROL During 2002, we completed the transfer of Xtra Amp(TM) product manufacturing to our Broomfield, Colorado facility. All of our products are manufactured in accordance with Good Manufacturing Practices for Medical Devices as promulgated by the FDA. SALES AND MARKETING During 2003 the sales of our nucleic acid-based products were worldwide. The U.S. typically accounts for approximately 35% of the total worldwide diagnostics market, Europe approximately 35%, Japan approximately10%, and approximately 20% for the rest of the world. As a result of the proposed sale of the Company's intellectual property to Applera, the Company is no longer actively marketing its commercial products. COMPETITION We compete on a worldwide basis against a number of companies, some of which are subsidiaries of large pharmaceutical, chemical, and biotechnology firms whose financial resources and research and development facilities are substantially greater than ours. Specifically, in the area of nucleic acid extraction, we compete with, among others, Applied Biosystems, Qiagen, Promega, and Aclara Biosciences. Competition is based upon a number of factors, including product quality, customer service, price, continuous availability of product, breadth of product range, and the strength and effectiveness of the sales and marketing organization. We believe our test kits and reagents compete on the basis of relative ease of use, quality, accuracy, and precision. SUPPLIERS We obtain raw materials from numerous outside vendors. Key raw materials include PCR tubes, microtiter plates, and enzymes. We generally have more than one source for our key raw materials. We continually evaluate additional suppliers and are not dependent on any single vendor. PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION We consider the protection of discoveries in connection with our research and development on test kits important to our business. We seek patent protection for technology when deemed appropriate and, to date, have been issued six patents in the United States and foreign jurisdictions specific to nucleic acid diagnostics. We also have five patents pending for additional nucleic acid-related technologies. We are also reliant on trade secrets, unpatented proprietary know-how, and continuing technological innovation to develop our competitive position. We require that all of our employees and consultants enter into 8 confidentiality agreements and agree to assign to us any inventions relating to our business made by them while in our employ, or in the course of services performed on our behalf. We perform an ongoing assessment of the value of our intangible assets. We have established rights in the trademarks "XTRANA," "Xtra Amp," "Xtra Bind," and "SCIP." GOVERNMENT REGULATIONS The manufacture and sale of diagnostic products are subject to regulation by the FDA in the United States and by comparable regulatory agencies in certain foreign countries in which our diagnostic products are sold. The FDA has established guidelines and safety standards that are applicable to the pre-clinical evaluation and clinical investigation of diagnostic products and regulations that govern the manufacture and sale of such products. The FDA and similar agencies in foreign countries have substantial regulations that apply to the testing, marketing (including export), and manufacturing of products to be used for the diagnosis of disease. In the United States, many diagnostic products may be accepted by the FDA pursuant to a 510(k) notification, which must contain information that establishes that the product in question is "substantially equivalent" to similar diagnostic products already in general use. Our manufacturing facility, as well as any additional manufacturing operations that may be established within or outside the United States, are subject to compliance with the FDA's Good Manufacturing Practices regulations. We are registered as a medical device manufacturer with the FDA and as a manufacturer with the U.S. Drug Enforcement Administration. We may also be subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substance Control Act, Export Control Act, and other present and future laws of general application. We believe that the manufacture and use of our products have no material adverse environmental impact. Except as we indicated above, we are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate, including those governing the handling and disposal of hazardous wastes and other environmental matters. Our research and development activities involve the controlled use of small amounts of hazardous materials and chemical compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with applicable regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for resulting damages. This liability could have a material adverse effect on us. EMPLOYEES As of December 31, 2003, we had 8 regular employees, of whom 7 were full-time and 1 was part-time. ITEM 2. PROPERTIES The Company leases a 14,671 square-foot corporate office, research and development, and manufacturing facility in Broomfield, Colorado. The lease commenced in April 2001 and has a term of five years. Base rent for this facility is $214,894 per year, increasing 3% per year. On November 11, 2003, the Company entered into an early termination agreement with the landlord. The agreement provides for rent abatement and an early termination option. The gross rent is reduced by $5,000 per month for the period of December 2003 through May 2004. The abated gross rent carries an accrued interest charge at 6% per annum. The early termination agreement stipulates that the Company will pay 50% of the remaining base rent plus the abetted gross rent plus any unpaid interest. We believe that our facilities are in good condition, are adequately covered by insurance, and will be adequate for our occupancy needs for the foreseeable future. 9 ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various routine legal proceedings incidental to the conduct of our business. Management does not believe that any of these legal proceedings will have a material adverse impact on our business, financial condition or results of operations, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of our insurance coverage. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this Report to a vote of stockholders, through the solicitation of proxies, or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock currently trades on the OTC Bulletin Board(R) (OTCBB) under the symbol XTRN. The following sets forth the high and low trade prices for our common stock for the periods indicated as reported by the OTCBB. The quotations provided by the OTCBB reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. We have not paid any dividends since our inception and do not contemplate payment of dividends in the foreseeable future. 2003 2002 HIGH LOW HIGH LOW ---- --- ---- --- First quarter $ 0.210 $ 0.100 $ 0.800 $ 0.400 Second quarter 0.300 0.090 0.610 0.270 Third quarter 0.220 0.100 0.450 0.170 Fourth quarter 0.180 0.090 0.360 0.140 (a) On March 16, 2004, the closing trade price of our common stock, as reported by the OTCBB, was $0.12. (b) As of March 16, 2004, we had 229 holders of record of our common stock. A large number of shares are held in nominee name. Based upon information provided by our transfer agent, American Stock Transfer and Trust Company, we had approximately 2,056 beneficial stockholders on the same date. 10 EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information regarding our equity compensation plans as of December 31, 2003.
----------------------- ------------------------- ---------------------------- NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING REMAINING AVAILABLE FOR OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY WARRANTS AND RIGHTS RIGHTS COMPENSATION PLANS - ----------------------- ----------------------- ------------------------- ---------------------------- Equity compensation plans approved by security holders....... 1,689,047 $0.82 2,257,587 Equity compensation plans not approved by security holders....... 684,755 $0.91 -- Total.................. 2,373,802 $0.85 2,257,587 - ----------------------- ----------------------- ------------------------- ----------------------------
As of December 31, 2003, the Company had 684,755 warrants to purchase common stock outstanding, which are shown in the table above as equity compensation plans not approved by security holders. These warrants are exercisable for prices ranging from $0.01 to $1.875 with a weighted average exercise price of $0.9105 per share. The weighted average remaining contractual life of these warrants at December 31, 2003, was 3.9 years. These warrants have expiration dates ranging from 2004 to 2011. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We develop and market nucleic acid-based tests for use in drug discovery, detection of environmental and food contaminants, forensics and identity testing, human and animal diseases, genetic predisposition to disease, and other applications. On January 26, 2004, we entered into an Assignment Agreement with Applera Corporation through its Applied Biosystems Group. Pursuant to the Assignment Agreement, we will sell substantially all of our intellectual property, including all patents and know-how, but excluding our trademarks and trade names, to Applera for total consideration of US$4,000,000. Applera will pay and deliver to us total cash consideration of $4,000,000 in the following manner: $3,600,000 in cash at closing ($100,000 of which has already been received in the form of a non-refundable deposit); and $400,000 in cash ninety (90) days after closing subject to our providing certain consulting services as provided in the Assignment Agreement. Completion of the transaction is subject to a number of closing conditions, including approval by our stockholders. Our financial statements have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2003, we incurred a loss from continuing operations of approximately $2.8 million, which included an asset impairment charge of $0.5 million, expenses relating to the Trinity litigation of approximately $0.6 million, and sustained negative cash flows from operations of approximately $2.4 million. The negative cash flow from operations is a result of continuing our development of our nucleic acid testing business. The Company is currently consuming cash to fund its operations and the research and development of its nucleic acid diagnostic technologies. The proposed sale of our intellectual property to Applera will result in the receipt of net proceeds of approximately $3,600,000, after payment of all expenses associated with the transaction. After closing the contemplated Sale of Assets and complying with the requirements of the Assignment Agreement to provide consulting services, we anticipate that we would terminate all of our remaining employees and terminate our existing lease pursuant to an early termination agreement. Consequently, following the transaction, after payment of employee severance and lease terminations costs, we would have limited overhead costs of operation. Completion of the transaction is subject to a number of closing conditions, including stockholder approval. There can be no assurance that these conditions will be met. We have scheduled a special meeting of stockholders for March 24, 2004, at which the stockholders will be asked to vote on the sale of our intellectual property to Applera. The following discussion should be read in conjunction with our financial statements provided under Part II, Item 8, of this annual report on Form 10-KSB. Certain statements contained herein may constitute 11 forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this annual report on Form 10-KSB is as of March 19, 2004, and we undertake no duty to update this information. Should events occur subsequent to March 19, 2004, that make it necessary to update the forward-looking information contained in this Form 10-KSB, the updated forward-looking information will be filed with the Securities and Exchange Commission in a quarterly report on Form 10-QSB or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the Securities and Exchange Commission's website at www.sec.gov. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" beginning on page 16 of this Form 10-KSB. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our 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 $7,000 in gross grant accounts receivable on the balance sheet at December 31, 2003. A review of our allowance for doubtful accounts is done timely and consistently throughout the year. As of December 31, 2003, we believe our allowance for doubtful accounts is fairly stated. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. INVENTORY ADJUSTMENTS We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. Additionally, material write-downs in our inventory can occur if competitive conditions or new product introductions by our customers or us vary from our current expectations. Inventories were valued at $35,000 at September 2003. During the fourth quarter of 2003, inventory values were reduced by approximately $35,000 due to the proposed sale of our intellectual property to Applera whereby the inventory on hand at December 31, 2003, was deemed impaired and, therefore, devalued to $0.00. INCOME TAXES Deferred income taxes are recognized for the expected tax consequences in the future years for the differences between the tax bases of assets and liabilities and their financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Our significant deferred tax asset is related primarily to our net operating loss carryforwards and foreign tax credits. We have had net losses in fiscal 2003 and 2002 and received a going concern explanatory paragraph in the Independent Auditors Report of our financial statements for the year ended December 31, 2003. We have concluded that it is more likely than not that our deferred tax assets will not be realized. As a result, we have provided a valuation allowance for the total of our net deferred tax asset at December 31, 2003. The estimates for deferred tax asset and the corresponding valuation allowance require complex judgments. We periodically review those estimates for reasonableness. However, because 12 the recoverability of the deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially form our estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our financial statements. REVENUE RECOGNITION Product revenues are recorded on the day products are shipped from the Company's facilities. The products are warranted; however, to date, no significant returns have occurred. 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. We historically have been able to estimate its percentage of completion on contracts reliably. 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. LONG-LIVED ASSETS In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The standard is effective for fiscal years beginning after December 15, 2001. It is our policy, and consistent with SFAS No. 144, to account for long-lived assets, including intangibles, at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined by a non-discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's long-lived assets would be reduced to its estimated fair value based on discounted cash flows. Long-lived assets consist primarily of leasehold improvements, computer equipment, office furniture, and equipment. As part of its review of its third quarter financial results and entering into an agreement to sell all its intellectual property, the Company performed an impairment assessment of fixed assets. The impairment assessment was performed to determine whether any impairment existed. The impairment indicators included, but were not limited to, the decline in the Company's stock price, the net book value of the assets, and the overall decline in forecasted growth rates which have negatively impacted the Company's revenues and forecasted revenue growth rates, and the impact of the sale of the intellectual property. As a result, the Company recorded a $493,000 impairment charge to reduce fixed assets to reflect their current estimated fair market value. Fair market value was determined based on the estimated fair value of the equipment. The estimates and assumptions used under our assessment may change in the short term resulting in the need to further write-down other long-lived assets. GOODWILL In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after 13 June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. These statements are required to be adopted by the Company on January 1, 2002, and for any acquisitions entered into after July 1, 2001. The Company adopted Statement 142 on January 1, 2002. The Company completed the transitional goodwill impairment test utilizing the present value of future cash flows approach at a 25% discount rate and concluded that no goodwill impairment existed at January 1, 2002. Due to the liquidity issues currently facing us, the methodology for the impairment test at December 31, 2002 was changed to a market approach. Based on that analysis (Note 1), the Company wrote off the entire net goodwill balance of $8.5 million. RESULTS OF OPERATIONS REVENUE Revenue from continuing operations was $1.2 million for the year ended December 31, 2003, compared with $1.4 million for the year ended 2002. This represents a decrease in revenue equal to $0.2 million, or 14%. The decrease was the result of a $0.1 million decrease in grant revenue and a $0.1 million decrease in the sales of Xtra Amp(TM). As a result of the proposed sale of our intellectual property to Applera, we do not anticipate recognizing any material revenue over the next 12 months. COSTS AND EXPENSES Cost of sales, from continuing operations, decreased by $0.1 million, or 10%, to $1.0 million in 2003, as a result of reduced revenue during the period. As a percentage of sales, cost of goods sold from continuing operations was 80% in 2003 compared with 74% in 2002. This increase in cost as a percentage of sales was the result of research and development grants, a portion of which was funded on a cost reimbursement basis by various government grants. Selling, general and administrative expenses of continuing operations decreased by $0.1 million, or 3%, to $2.3 million in 2003 as compared to the prior year. The decline of $0.1 million was due to a reduction in expenses of $0.7 million during the period resulting from the reduction in force implemented on December 31, 2002, and other overhead reductions we implemented during the period. This reduction was partially offset by $0.6 million in costs incurred relating to the Trinity litigation. Research and development expenses of continuing operations decreased $0.5 million in fiscal 2003, or 64%, from 2002 levels. This decrease was due to the decrease in grant revenues, combined with the reduction of internal funded product development INCOME TAXES The difference between our effective tax rate for 2002 and the 34% federal statutory tax rate was primarily due to the effects of state income taxes, non-deductible goodwill amortization, and impairment, as well as the provision for a full valuation allowance on all net deferred tax assets available to us. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2003, we had cash and cash equivalents of $0.9 million. As of December 31, 2003, our working capital position was $0.6 million, with a current ratio of 2.2 to 1.0. The Company used cash of $0.5 million from continuing operations in 2003 compared to $2.7 million in 2002. Net cash used in operating activities is primarily the result of loss form continuing operations, net of depreciation, amortization and impairment charges. In December 2002, Trinity Biotech plc filed suit against us alleging breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation, unjust enrichment, and 14 violation of the Delaware Consumer Fraud Act in conjunction with the sale of our Hemostasis business to Trinity in December 2001. The suit alleged 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, and Trinity sought $1.2 million in damages and $3 million in punitive damages. We 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 also sought a declaratory judgment that Trinity's suit was 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. We settled this litigation in June 2003, but the cost of defending the litigation forced us to radically reduce the investment in our product development. The proposed sale of our intellectual property to Applera will result in the receipt of net proceeds of approximately $3,600,000, after payment of all expenses associated with the transaction. After closing the contemplated Sale of Assets and complying with the requirements of the Assignment Agreement to provide consulting services, we anticipate that we would terminate all of our remaining employees and terminate our existing lease pursuant to an early termination agreement. Consequently, following the transaction, after payment of employee severance and lease terminations costs, we would have limited overhead costs of operation. Completion of the transaction is subject to a number of closing conditions, including shareholder approval. There can be no assurance that these conditions will be met. We have scheduled a special meeting of stockholders for March 24, 2004, at which the stockholders will be asked to vote on the sale of our intellectual property to Applera. Following closing of the sale our intellectual property to Applera, we could distribute our net cash proceeds as a dividend to our stockholders as part of liquidation, after satisfaction of all of our liabilities and payment of all costs associated with the liquidation. If we were to make a distribution to stockholders before the expiration of certain representations and warranties we made under the Assignment Agreement (18 months from the date of closing), we would be required to reserve and hold back $1,000,000 for possible settlement of potential claims by Applera against us for our breaches of those representations and warranties. Alternatively, the Board of Directors believes that we could attract interest from other businesses that might benefit from access to those funds, as well as our status as a public company with a clean reporting history. Such interest could result in us merging or otherwise joining together with an existing business that could create much greater long-term stockholder value than simply liquidating the Company. It is the intention of the Board of Directors to spend a reasonable period of time exploring opportunities to find a merger candidate and, if it is unable to conclude a transaction that it believes would provide long-term stockholder value, to propose that the stockholders approve a liquidation. In August 2001, we entered into an executive employment agreement with Timothy J. Dahltorp. Pursuant to this agreement, Mr. Dahltorp agreed to serve as our Chief Executive Officer and Chief Financial Officer for a period of 3 years. The agreement provides for a base salary of $200,000 per year, plus annual incentive compensation as determined by the Compensation Committee of the Board of Directors. The agreement also provides for severance of up to one year's base salary if the agreement is terminated by us without cause or by Mr. Dahltorp upon a change in control. Pursuant to the employment agreement, our entering into the Assignment Agreement with Applera constituted a "change of control" and, in accordance with the terms of the Agreement, Mr. Dahltorp has notified us that he will terminate the employment agreement effective as of March 19, 2004. As a result, we will be obligated to continue to pay Mr. Dahltorp his current base salary of $200,000 for a period of 12 months following such termination. The Company has never paid dividends on common stock and has no plans to do so in fiscal 2004. Our earnings will be retained for reinvestment in the business. 15 The following table summarizes our contractual obligations as of December 31, 2003: CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD (in thousands) ----------------------- ------------------------------------- 2004 2005 2006 ---- ---- ---- Operating Leases ..................... $235 $242 $61 Contractual Cash Obligations ......... $47 $14 -- On November 11, 2003, we entered into an early termination agreement with the landlord from which we lease or executive offices in Broomfield, Colorado. This agreement provides for rent abatement and grants us an early termination option. The gross rent was reduced by $5,000 per month for the period of December 2003 through May 2004. The abated gross rent carries an accrued interest charge at 6% per annum. If we exercise the early termination agreement, this agreement provides that we will pay 50% of the remaining base rent plus the abated gross rent plus any unpaid interest. We are currently consuming cash to fund our operations and the research and development of our nucleic acid diagnostic technologies. Due to 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 12 months. To address these capital pressures, we have undertaken steps to significantly reduce our operating costs and have entered into the Assignment Agreement with Applera. If the sale of our assets to Applera is not approved by our stockholders or fails to close for any other reason, we intend to pursue alternatives, which could include a financing, a co-development arrangement, the license of our technologies, or the sale of the Company or our assets. There can be no guarantee that these activities will be successful. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. RECENTLY ISSUED ACCOUNTING STANDARDS RECENT PRONOUNCEMENTS - SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, was issued in May 2003 and requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Management believes the adoption of SFAS No. 150 will have no immediate impact on its financial position or results of operations. The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others in November 2002 and FIN No. 46, Consolidation of Variable Interest Entries, in January 2003. FIN No. 45 is applicable on a prospective basis for initial recognition and measurement provisions to guarantees issued after December 2002; however, disclosure requirements are effective immediately. FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee and expands the required disclosures to be made by the guarantor about its obligation under certain guarantees that it has issued. The adoption of FIN No. 45 did not have a material impact on the Company's financial position or results of operations. FIN No. 46 requires that a company that controls another entity through interest other than voting interest should consolidate such controlled entity in all cases for interim periods beginning after June 15, 2003. Management does not believe the adoption of FIN No. 46 will have a material impact on its financial position or results of operations. 16 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 occurs, 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 GOING CONCERN AND LIQUIDITY PROBLEMS. Our auditors have included an explanatory paragraph in their audit opinion with respect to our financial statements as of December 31, 2003. The paragraph states that our recurring losses from operations raise substantial doubts about our ability to continue as a going concern. The proposed sale of our intellectual property to Applera will result in the receipt of net proceeds of approximately $3,600,000, after payment of all expenses associated with the transaction. After closing the contemplated sale of our intellectual property and complying with the requirements of the Assignment Agreement to provide consulting services, we anticipate that we would terminate all of our remaining employees and terminate our existing lease pursuant to an early termination agreement. Consequently, following the transaction, after payment of employee severance and lease terminations costs, we would have limited overhead costs of operation. Completion of the transaction is subject to a number of closing conditions, including stockholder approval. There can be no assurance that these conditions will be met. 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. FAILURE TO CONCLUDE THE PROPOSED SALE OF OUR ASSETS TO APPLERA MAY ADVERSELY EFFECT ON OUR LIQUIDITY. The closing of the proposed sale of our intellectual property to Applera is subject to a number of conditions, or waiver of those conditions, including without limitation: o approval by our stockholders at the special meeting of stockholders currently scheduled for March 24, 2004; o neither party shall be subject to any order, decree or injunction of a court that would delay or prevent total completion of the transaction; o the truth of the representations and warranties of each party contained in the Assignment Agreement; o termination by us of certain license agreements relating to our intellectual property; and o no material adverse change in our intellectual property. There can no assurance that these conditions will be satisfied. In addition, the Assignment Agreement may be terminated, and the transaction abandoned, at any time prior to the closing: o by Applera if we should fail to satisfy certain closing conditions, including obtaining stockholder approval and terminating our license agreements related to the intellectual property; o by us if Applera should fail to satisfy certain closing conditions or if we fail to obtain stockholder approval; 17 o by either us or Applera if the closing has not occurred on or prior to April 13, 2004, and the party electing to terminate the Assignment Agreement has not caused the closing to be delayed due to breach of its obligations thereunder; or o automatically if the transaction is not approved by our stockholders at the special meeting. There can be no guarantee that the sale of our intellectual property to Applera will close. If the transaction with Applera does not close for any reason and is abandoned, we would seek to identify another potential transaction. There can be no assurance that we will be able to identify any other buyer for the Company or its assets. If another potential buyer is identified, there is no guarantee that the terms of such a transaction would be as advantageous to the Company and our stockholders as the Applera transaction. 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 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. WE HAVE LIMITED REVENUE. We had revenues of $1.4 million and $1.2 million in fiscal 2002 and 2003, respectively. Because of our limited revenues, we are dependent upon our current capital resources to fund our overhead and operations. Should sales of our nucleic acid products and government research grants not materialize, it may become necessary for us 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 18 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. WE MAY NOT BE ABLE TO IDENTIFY AND EVALUATE A POTENTIAL MERGER OR REORGANIZATION PARTNER IN A TIMELY MANNER, WHICH MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS. While we have not identified any specific business opportunity, once we do identify a particular entity as a potential acquisition target or merger candidate, management will seek to determine whether the acquisition or merger is warranted or whether further investigation is necessary. Such determination will generally be based on management's knowledge and experience or, with the assistance of outside advisors and consultants, evaluating the preliminary information made available to them. Management may elect to engage outside independent consultants to perform analyses of potential business opportunities. In evaluating such potential business opportunities, we will consider, to the extent relevant to the specific opportunity, several factors including: potential benefits to the Company and its stockholders; similarity of business, such as a business also involved in biotechnology; working capital; financial requirements and availability of additional financing; history of operation, if any; nature of present and expected competition; quality and experience of management; need for further research, development or exploration; potential for growth and expansion; potential for profits; and other factors deemed relevant to the specific opportunity being analyzed. Because we have not located or identified any specific business opportunity as of the date of this report, there are certain unidentified risks that cannot be adequately appreciated or quantified prior to the identification of a specific business opportunity. There can be no assurance following consummation of any acquisition or merger that the business venture will develop into a going concern or, if the business is already operating, that it will continue to operate successfully. Many of the potential business opportunities available for acquisition may involve new and untested products, processes or market strategies that may not ultimately prove successful. OUR STOCKHOLDER MAY EXPERIENCE SUBSTANTIAL DILUTION IN A POTENTIAL ACQUISITION, MERGER OR REORGANIZATION. Presently, we cannot predict the manner in which we might participate in a prospective new business opportunity. Each separate potential opportunity will be reviewed and, upon the basis of that review, a suitable legal structure or method of participation will be chosen. The particular manner in which we participate in a specific business opportunity will depend upon the nature of that opportunity, the respective needs and desires of the Company and management of the opportunity, and the relative negotiating strength of the parties involved. Actual participation in a business venture may take the form of an asset purchase, lease, joint venture, license, partnership, stock purchase, reorganization, merger or consolidation. We may act directly or indirectly through an interest in a partnership, corporation, limited liability company or other form of organization. In the event we do successfully acquire or merge with an operating business opportunity, it is likely that our present stockholders will experience substantial dilution; and, in such event, there will be a probable change in control of the Company. Most likely, the owners of the business opportunity will acquire control of the Company following such transaction. Management has not established any guidelines as to the amount of control it will offer to prospective business opportunities, rather management will attempt to negotiate the best possible agreement for the benefit of our stockholders. 19 FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR 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 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. 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. 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. 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, 20 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. 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 21 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, 2004. 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, 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. 22 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of Xtrana, Inc. are included in the report on the following pages: PAGE NO. Reports of independent auditors................................ 28 Balance sheet as of December 31, 2003.......................... 29 Statements of operations for the years ended December 31, 2003 and 2002..................................... 31 Statements of stockholders' equity for the years ended December 31, 2003 and 2002............................... 32 Statements of cash flows for the years ended December 31, 2003 and 2002..................................... 33 Notes to financial statements.................................. 34 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 8, 2003, the Company dismissed Ernst & Young LLP as the Company's principal accountant. The decision to change accountants was recommended by the Audit Committee of the Board of Directors. The report of Ernst & Young LLP on the financial statements of the Company for the year ended December 31, 2001, did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principals. The Company does not believe that there were any disagreements with Ernst & Young LLP on any matter of accounting principals or practices, financial statement disclosure, or auditing scope or procedure during the year ended December 31, 2001 and during the subsequent interim period through January 8, 2003, which, if not resolved to Ernst & Young LLP's satisfaction, would have caused Ernst & Young LLP to make reference to the subject matter of the disagreement(s) in connection with its reports. The Company engaged Hein & Associates LLP as its new principal independent accountant as of January 8, 2003. ITEM 8A. CONTROLS AND PROCEDURES As of December 31, 2003, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer believes that, as of the date of the evaluation, our disclosure controls and procedures are effective in making known to them material information relating to us required to be included in this report. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. 23 There were no significant changes in our internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer and Chief Financial Officer, subsequent to the date of the evaluation. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 29, 2004. ITEM 10. EXECUTIVE COMPENSATION Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 29, 2004. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 29, 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 29, 2004. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits EXHIBIT NO. ------- 2.1 Assignment Agreement dated January 24, 2004 between the Company and Applera Corporation, though its Applied Biosystems Group 3.1 Certificate of Incorporation (1) 3.2 By Laws (1) 4.1 Shareholder Rights Plan (3) 10.1 Executive Employment Agreement of Michael D. Bick, Ph.D. (4) 10.2 1993 Stock Incentive Plan (2) 10.3 2000 Stock Incentive Plan (5) 10.4 Lease Agreement - Broomfield, Colorado (6) 10.4.1 Lease Addendum Two for Modification of Rent and Early Termination of Lease dated November 11, 2003 between the Company and James M. Roswell d/b/a Burbank East Business Park. 10.4.2 Lease Addendum Three for Modification of Rent and Early Termination of Lease dated February 12, 2004 between the Company and James M. Roswell d/b/a Burbank East Business Park. 23.1 Consent of Independent Auditors 24.1 Power of Attorney (included on signature page) 31.1 Certificate of our Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a). 32.1 Certificate of our Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b). 24 (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-20584). (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (3) Incorporated by reference to Registrant's Form 8-A filed June 26, 1998. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. (5) Incorporated by reference to Registrant's Definitive Proxy Statement filed on June 23, 2000. (6) Incorporated by reference to Registrant's Form 8-K filed January 25, 2001. (b) Reports on Form 8-K filed during the fourth quarter of 2003: None ITEM 14. PRINCIPAL ACCOUNTANT AND FEES AUDIT FEES The aggregate fees billed by Hein & Associates LLP for professional services rendered for the audit of our annual financial statements and review of financial statements included in our Form 10-QBS's or services that are normally provided in connection with statutory and regulatory filings were $25,970 for fiscal year 2002 and $25,562 for fiscal year 2003. AUDIT-RELATED FEES Hein & Associates LLP did not bill us for any for professional services rendered for assurance and related services reasonably related to the performance of the audit or review of our financial statements (other than those reported above) for fiscal years 2002 and 2003. TAX FEES The aggregate fees billed by Hein & Associates LLP for professional services rendered for tax compliance, tax advice and tax planning were $3,800 for fiscal year 2002 and $5,150 for fiscal year 2003. ALL OTHER FEES In fiscal years 2002 and 2003, Hein & Associates LLP did not bill us for any other services performed for us during the periods. 25 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Xtrana, Inc. Date: March 19, 2004 BY: /S/ TIMOTHY J. DAHLTORP ----------------------------------- Timothy J. Dahltorp Chief Executive Officer & Chief Financial Officer Each person whose signature appears below constitutes and appoints James H. Chamberlain and Michael Bick, Ph.D., and each of them, as his true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for him and his name, place and stead, in any and all capacities to sign this Form 10-KSB and to file any amendments hereto under the Securities and Exchange Act of 1934 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or their substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ MICHAEL D. BICK Chairman of the Board March 19, 2004 - -------------------------- Michael D. Bick, Ph.D. /S/ TIMOTHY J. DAHLTORP Chief Executive Officer, March 19, 2004 - -------------------------- Chief Financial Timothy J. Dahltorp Officer and Director /S/ DOUGLAS L. AYER Director March 19, 2004 - -------------------------- Douglas L. Ayer /S/ N. PRICE PASCHALL Director March 19, 2004 - -------------------------- Price Paschall /S/ JAMES H. CHAMBERLAIN Director March 19, 2004 - -------------------------- James H. Chamberlain /S/ JAMES MAHONY Director March 19, 2004 - -------------------------- James Mahony, Ph.D. 26 ANNUAL REPORT ON FORM 10-KSB ITEM 13(A)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 2003 XTRANA, INC. BROOMFIELD, COLORADO 27 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Xtrana, Inc. Broomfield, CO We have audited the accompanying balance sheet of Xtrana, Inc. as of December 31, 2003, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xtrana, Inc. as of December 31, 2003 and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered significant losses from operations for the years ended December 31, 2003 and 2002. Management's plans to address these matters are also included in Note 2 to the financial statements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. HEIN & ASSOCIATES LLP Denver, Colorado February 11, 2004 28 XTRANA, INC. BALANCE SHEET DECEMBER 31, 2003 (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents ................................... $ 948 Grant receivable ............................................ 7 Prepaid expenses ............................................ 19 OTHER CURRENT ASSETS ........................................ 35 TOTAL CURRENT ASSETS ............................................. 1,009 RESTRICTED CASH .................................................. 138 FURNITURE AND FIXTURES, NET OF $83 OF DEPRECIATION ............... 60 PATENTS, NET OF AMORTIZATION OF $29 .............................. 283 ------ TOTAL ASSETS ..................................................... $1,490 ====== See accompanying notes to financial statements. 29 XTRANA, INC. BALANCE SHEET DECEMBER 31, 2003 (in thousands except share data) (continued) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ............................................. $ 163 Notes payable Short Term ..................................... 14 Accrued payroll and payroll taxes ............................ 82 OTHER ACCRUED LIABILITIES .................................... 194 TOTAL CURRENT LIABILITIES ......................................... 453 COMMITMENTS AND CONTINGENCIES (see notes 2, 6 and 11) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 16,533,269 shares issued and outstanding .................. 165 Additional paid-in capital ................................... 19,446 ACCUMULATED DEFICIT .......................................... (18,574) -------- TOTAL STOCKHOLDERS' EQUITY ........................................ 1,037 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 1,490 ======== See accompanying notes to financial statements. 30 XTRANA, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 2002 - -------------------------------------------------------------------------------- (in thousands except per share data) REVENUE: Grant revenue .......................................... $ 1,159 $ 1,268 Nucleic acid (DNA/RNA) testing kits .................... 32 141 -------- -------- Total revenue .......................................... 1,191 1,409 COST OF SALES: Grant Cost of Sales .................................... 949 945 Nucleic acid (DNA/RNA) testing kits .................... 4 102 -------- -------- TOTAL COST OF SALES .................................... 953 1,047 -------- -------- GROSS PROFIT ........................................... 238 362 Operating expenses: Selling, general and administrative ............... 2,300 2,361 Research and development .......................... 308 850 Goodwill and fixed asset impairment charges ....... 493 8,516 -------- -------- TOTAL OPERATING EXPENSES ............................... 3,101 11,727 -------- -------- OTHER INCOME, NET ...................................... 51 165 -------- -------- LOSS FROM CONTINUING OPERATIONS ........................ (2,812) (11,200) DISCONTINUED OPERATIONS: Income (loss) from discontinued operations - net of income tax effect ............................. -- (50) Gain on disposal - net of income tax .............. -- -- -------- -------- NET LOSS ............................................... $ (2,812) $(11,250) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic ............................................. 16,533 17,322 Effect of dilutive shares ......................... -- -- -------- -------- Diluted ........................................... 16,533 17,322 ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Continuing operations ............................. $ (0.17) $ (0.65) Discontinued operations ........................... 0.00 0.00 -------- -------- Net loss .......................................... $ (0.17) $ (0.65) ======== ======== See accompanying notes to financial statements. 31 XTRANA, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share data)
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- ------ ---------- ----------- ------- BALANCE AT JANUARY 1, 2002 ..... 17,323,498 $ 173 $ 19,407 $ (4,512) $15,068 Net loss ................... -- -- -- (11,250) (11,250) Options issued to non- employees ............... -- -- 23 -- 23 Shares issued for exercise of warrants .... 146,717 1 (1) -- -- Shares canceled related to acquisition .......... (936,946) (9) 9 -- -- ---------- ----- ---------- --------- ------- BALANCE AT DECEMBER 31, 2002 ... 16,533,269 $ 165 $ 19,438 $ (15,762) $ 3,841 Net loss ................... -- -- -- (2,812) (2,812) Options issued to non- employees ............... -- -- 8 -- 8 ---------- ------ ---------- --------- ------- BALANCE AT DECEMBER 31, 2003 ... 16,533,269 $ 165 $ 19,446 $(18,574) $ 1,037 ========== ===== ========== ======== =======
See accompanying notes to financial statements. 32 XTRANA, INC. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2003 2002 - -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES Loss from continuing operations ..................... $ (2,812) $(11,200) Adjustments to reconcile loss from continuing operations to net cash used in by continuing operating activities: Options issued to non-employees .................. 8 23 Depreciation and Amortization .................... 245 236 Fixed Asset impairment charge .................... 493 Goodwill impairment charge ....................... -- 8,516 Inventory valuation allowance .................... 35 -- Changes in operating assets and liabilities: Notes receivable - discount ...................... (225) -- Accounts and grants receivable ................... 65 (25) Inventories ...................................... -- 31 Prepaid expenses and other current assets ........ 46 (77) Accounts payable and accrued expenses ............ (217) (176) -------- -------- Net cash used in continuing operating activities .... (2,362) (2,672) Net cash used in discontinued operating activities .. -- (50) -------- -------- NET CASH USED IN OPERATING ACTIVITIES .................. (2,362) (2,722) INVESTING ACTIVITIES Additions to property and equipment ................. -- (241) Receipts on note receivable ......................... 2,848 -- Additions to deferred patent cost ................... (78) (85) -------- -------- NET CASH PROVIDED IN CONTINUING INVESTING ACTIVITIES ... 2,770 (326) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... 408 (3,048) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........... 678 3,726 -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR ................. $ 1,086 $ 678 ======== ======== See accompanying notes to financial statements. 33 XTRANA, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Xtrana, Inc. ("Xtrana" or the "Company"), formerly known as Biopool International, Inc., was incorporated in 1987 in the state of Delaware. The Company develops and markets nucleic acid-based tests for use in drug discovery, detection of environmental and food contaminants, forensics and identity testing, human and animal diseases, genetic predisposition to disease, and other applications. BASIS OF PRESENTATION Our financial statements have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2003, we incurred a loss from continuing operations of approximately $2.8 million and sustained negative cash flows from operations of approximately $2.4 million. This is the result of continuing our development of our nucleic acid testing business. As described more fully in Notes 2 and 3 to the financial statements, during the latter part of 2001 and in 2002, the Company transitioned its core line of business from Hemostasis to nucleic acid testing. In connection with this transition, revenues from our continuing operations have been substantially reduced. 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 litigation with Trinity Biotech plc, combined with the slower than anticipated growth in Xtra Amp(TM) sales, the Company may not have the ability to sustain its operations through the next 12 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. The Company currently has a letter of intent for the sale of certain assets (see Note 11). There can be no guarantee that these activities will be successful. DISCONTINUED OPERATIONS The financial information presented in the notes to the financial statements excludes discontinued operations, except where noted. REVENUES 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. 34 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at 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 and the change could be material to the financial statements. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent highly liquid investments, which mature within three months of date of purchase. Restricted cash consists of cash identified for specific use. At December 31, 2003, restricted cash is comprised of $138,000 that is restricted to cover our letter of credit issued to our building lessor. STOCK-BASED COMPENSATION As permitted under the Statements of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the Company accounts for its stock-based compensation for options issued to employees in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). As such, for options granted to employees and directors, compensation expense is recorded on a straight-line basis over the shorter of the period that the services are provided or the vesting period, only if the current market price of the underlying stock exceeds the exercise price. Certain pro forma net income and earnings per share disclosures for employee stock option grants are also included below as if the fair value method as defined in SFAS 123 had been applied. Transactions in equity instruments with non-employees for goods or services are accounted for by the fair value method. Had compensation cost for the Plan been determined based upon the fair value at the grant date for options granted, consistent with the provisions of SFAS 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below: 2003 2002 --------- --------- Net loss - as reported .................... $ (2,812) $ (11,200) Effect of stock-based compensation included in reported net loss .......... -- -- Effect of stock-based compensation per SFAS 123 ........................... (148) (242) --------- --------- Net loss applicable to common stock - pro forma .............................. $ (2,960) $ (11,442) ========= ========= Basic and diluted: Loss per share - as reported ........... $ (0.17) $ (0.65) Effect of stock-based compensation included in reported net loss ....... -- -- Effect of stock-based compensation per SFAS 123 ........................ (0.01) (0.01) --------- --------- Net loss applicable to common stock - pro forma ........................... $ (0.18) $ (0.66) ========= ========= 35 The fair value of each option grant under the Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2003 2002 ---- ---- Risk-free interest ..................... 4.0% 4.0% Expected life .......................... 6.9 years 6.9 years Expected volatility .................... 167.0% 167.0% Expected dividend ...................... -- -- The expected life was determined based on the Plan's vesting period and exercise behavior of the employees. INVENTORIES We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. Additionally, material write-downs in our inventory can occur if competitive conditions or new product introductions by our customers or us vary from our current expectations. Inventories were valued at $35,000 at September 2003. During the fourth quarter of 2003, inventory values were reduced by approximately $35,000 due to the proposed sale of our intellectual property to Applera (Note 11) whereby the inventory on hand at December 31, 2003 was deemed impaired and, therefore, devalued to $0.00. PROPERTY AND EQUIPMENT AND LONG LIVED ASSETS Property and equipment are stated at cost. Depreciation is generally calculated on a straight-line basis over their estimated useful lives, which range from 3 to 10 years. Leasehold improvements are generally depreciated over their estimated useful lives or over the period of the lease, whichever is shorter. Long-lived assets, including intangibles, are accounted for at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined by a non-discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's long-lived assets would be reduced to its estimated fair value based on discounted cash flows. Long-lived assets consist primarily of leasehold improvements, computer equipment, office furniture, and equipment. As part of its review of its third quarter financial results and entering into an agreement to sell all its intellectual property, the Company performed an impairment assessment of fixed assets. The impairment assessment was performed to determine whether any impairment existed. The impairment indicators included, but were not limited to, the decline in the Company's stock price, the net book value of the assets, and the overall decline in forecasted growth rates which have negatively impacted the Company's revenues and forecasted revenue growth rates, and the impact of the sale of the intellectual property. As a result, the Company recorded a $493,000 impairment charge to reduce fixed assets to reflect their current estimated fair market value in forth quarter. Fair market value was determined based on the estimated fair value of the equipment. The estimates and assumptions used under our assessment may change in the short term resulting in the need to further write-down other long-lived assets. GOODWILL Beginning January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," and, as a result, ceased amortizing goodwill. The Company tests goodwill for impairment annually or on an interim basis if an event or circumstance occurs between the annual tests that may indicate impairment of goodwill. As a result of the Company's impairment test in the fourth quarter of fiscal 2002, the Company wrote off its remaining goodwill of approximately $8.5 million. 36 DEFERRED PATENT COSTS The Company capitalizes legal costs directly incurred in pursuing patent applications as deferred patent costs. When such applications result in an issued patent, the related costs are amortized over the remaining legal life of the patents, generally 15 years, using the straight-line method. The Company reviews its issued patents and pending patent applications, and if it determines to abandon a patent application or that an issued patent no longer has economic value, the unamortized balance in deferred patent costs relating to that patent is immediately expensed. It is possible the above estimates of future economic life of the Company's commercialization revenues, the amount of anticipated future commercialization revenues, or both, will be reduced significantly in the near term due to alternative technologies developed by other biotechnology or pharmaceutical companies. As a result, the carrying amount of deferred patent costs may be reduced in the future. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed when incurred and include both internal research and development costs and payments to third parties. INCOME TAXES The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized. The tax provision shown on the accompanying statement of operations is zero since the deferred tax asset generated from the net operating loss is offset in its entirety by a valuation allowance. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade receivables. At December 31, 2003, substantially all cash and cash equivalents were on deposit with one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the majority of the outstanding accounts receivable being from Government institutions. Generally, the Company does not require collateral or other security to support customer receivables. 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 common shares are outstanding options under the Company's stock option plans and outstanding warrants, which are included under the treasury stock method. Options and warrants to purchase 2,373,802 and 1,941,757 shares with exercise prices greater than the average market prices of common stock were outstanding during the years ended December 31, 2003 and 2002, respectively. These options and warrants were, therefore, excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, receivables, payables and accrued expenses approximate fair value due to the short maturity of these instruments. 37 SEGMENT INFORMATION Statement of Financial Accounting Standards No. 131, Disclosure About Segment of an Enterprise and Related Information, establishes standards for the reporting of information about operating segments. The Company's continuing operations constitute a single operating segment. RECENT ACCOUNTING PRONOUNCEMENTS RECENT PRONOUNCEMENTS - SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, was issued in May 2003 and requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Management believes the adoption of SFAS No. 150 will have no immediate impact on its financial position or results of operations. The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, in November 2002 and FIN No. 46, Consolidation of Variable Interest Entries, in January 2003. FIN No. 45 is applicable on a prospective basis for initial recognition and measurement provisions to guarantees issued after December 2002; however, disclosure requirements are effective immediately. FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee and expands the required disclosures to be made by the guarantor about its obligation under certain guarantees that it has issued. The adoption of FIN No. 45 did not have a material impact on the Companies financial position or results of operations. FIN No. 46 requires that a company that controls another entity through interest other than voting interest should consolidate such controlled entity in all cases for interim periods beginning after June 15, 2003. Management does not believe the adoption of FIN No. 46 will have a material impact on its financial position or results of operations. 2. GOING CONCERN The accompanying financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements reflect a loss of $2,812,000 and $11,250,000 for the years ended December 31, 2003 and 2002, respectively. Working capital and stockholders' equity is $557,000 and $1,037,000, respectively, as of December 31, 2003. The Company is currently consuming cash to fund its operations and the research and development of its nucleic acid diagnostic technologies. The proposed sale of the Company's intellectual property to Applera (see Note 11), if successful, will result in the receipt of net proceeds of approximately $3,600,000, after payment of all expenses associated with the transaction. After closing the contemplated sale of our intellectual property and complying with the requirements of the Assignment Agreement with Applera to provide consulting services, the Company anticipates that it would terminate all of its remaining employees and terminate its existing lease pursuant to an early termination agreement. Consequently, following the transaction, after payment of employee severance and lease terminations costs, the Company would have limited overhead costs of operation. Completion of the transaction is subject to a number of closing conditions, including stockholder approval. There can be no assurance that these conditions will be met. If the Company is not successful in closing the Applera transaction, the Company may be required to further curtail operations or liquidate assets. 3. DISCONTINUED OPERATIONS On December 20, 2001, the Company's stockholders 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 38 liabilities. The assets sold included the operations located in Ventura, California, and the Company's wholly owned Swedish subsidiary, Biopool AB. The total consideration paid to the Company of US$6,250,000 consisted of cash and notes as follows: (a) US$3,658,500 in cash at closing; (b) a note in the amount of US$855,200 due one year from the closing date, however, the note was paid subsequent to December 31, 2002; (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 note carried interest at a rate of 5% per annum and was collateralized by a second position on substantially all of the U.S. assets of Trinity Biotech plc. As a result of a settlement between the Company and Trinity Biotech plc during 2003, the Company received the remaining balance of the notes, net of a discount of $225,000. 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 4. INVENTORIES We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. Additionally, material write-downs in our inventory can occur if competitive conditions or new product introductions by our customers or us vary from our current expectations. Inventories were valued at $35,000 at September 2003. During the fourth quarter of 2003, inventory values were reduced by approximately $35,000 due to the proposed sale of our intellectual property to Applera whereby the inventory on hand at December 31, 2003 was deemed impaired and, therefore, devalued to $0.00. 5. REVOLVING LINE OF CREDIT As of December 31, 2003, the Company had a $138,000 standby letter of credit issued as a security deposit in conjunction with the lease of the Broomfield, Colorado, facility. This letter of credit is collateralized by restricted cash balances equal to the amount outstanding under the letter of credit. 6. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain equipment and facilities under non-cancelable operating leases. Continuing operations lease expense for 2003 and 2002 was approximately $300,000 and $288,000, respectively. At December 31, 2003, approximate future minimum annual lease commitments are $290,000 in 2004, $263,000 in 2005, and $63,000 in 2006. On November 11, 2003, the Company entered into an early termination agreement with the landlord. The agreement provides for rent abatement and an early termination option. The gross rent is reduced by $5,000 per month for the period of December 2003 through May 2004. The abated gross rent carries an accrued interest charge at 6% per annum. The early termination agreement stipulates that the Company will pay 50% of the remaining base rent plus the abetted gross rent plus any unpaid interest. 7. STOCKHOLDERS' EQUITY 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 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, with an additional 540,000 shares to be issued in connection with the exercise of certain warrants, for a total of 9,369,461 shares. During 2001, 270,000 of the 540,000 warrants were exercised using the cashless exercise feature for a total of 163,851 shares issued. Of the total shares issued, 936,946 shares were held in escrow 39 for purposes of satisfying Xtrana's indemnification obligations. These shares, less 3,365 shares that were canceled pursuant to the merger agreement relating to excess warrants issued to certain financial advisors, were released to the former Xtrana stockholders on November 6, 2001. In addition, 936,946 shares were held in escrow and were contingently cancelable if certain sales objectives for the Xtrana business were not met. Also, an additional 1,030,641 shares were issuable to the former Xtrana stockholders if certain sales objectives were exceeded. The sales objectives were not achieved; therefore, the 936,946 shares in escrow were canceled, and the additional 1,030,641 shares were not issued. The 936,946 contingent shares were reflected as outstanding common stock until canceled in the fourth quarter of 2002 as the holders of these shares had full right to vote the shares while in escrow. 8. STOCK OPTION PLANS AND WARRANTS The Company has two stock option plans (the "Plans") for the benefit of employees, officers, directors, and consultants of the Company. As of December 31, 2003, a total of 3,946,634 shares of the Company's common stock were reserved for issuance under the Plans. 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 2003 and 2002 was as follows: WEIGHTED AVERAGE SHARES EXERCISE OUTSTANDING PRICE RANGE PRICE - -------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2002 .... 1,941,757 $0.4800 - $2.6800 $ 1.13 Granted ....................... 667,750 $0.2300 - $0.7800 $ 0.35 Exercised ..................... -- -- -- Cancelled ..................... (719,328) $0.3200 - $2.6800 $ 1.19 --------- BALANCE AT DECEMBER 31, 2002 .. 1,890,179 $0.2300 - $2.5000 $ 0.83 Granted ....................... -- -- -- Exercised ..................... -- -- -- Cancelled ..................... (201,132) $0.2900 - $1.3750 $ 0.92 --------- BALANCE AT DECEMBER 31, 2003 .. 1,689,047 $0.2300 - $2.5000 $ 0.82 The following information summarizes stock options outstanding at December 31, 2003: OUTSTANDING EXERCISABLE ------------------------------------ ----------------------- WEIGHTED AVERAGE ----------------------- REMAINING WEIGHTED CONTRACTUAL AVERAGE NUMBER LIFE IN EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING MONTHS PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------- $ 0.01 - $ 0.31 110,250 103 $ 0.230 110,054 $ 0.230 $ 0.32 - $ 0.62 542,414 98 $ 0.384 454,246 $ 0.377 $ 0.63 - $ 0.93 347,749 77 $ 0.713 235,870 $ 0.725 $ 0.94 - $ 1.25 326,634 68 $ 0.998 307,463 $ 0.996 $ 1.26 - $ 1.56 308,250 79 $ 1.498 251,997 $ 1.498 $ 1.57 - $ 1.87 12,500 44 $ 1.687 12,500 $ 1.687 $ 2.19 - $ 2.25 41,250 38 $ 2.395 41,250 $ 2.395 -------------------------------------------------------------- 1,689,047 83 $ 0.822 1,413,380 $ 0.829 At December 31, 2003, 2,257,587 shares were available for future grants under the Plans. 40 The weighted average remaining contractual life of outstanding options at December 31, 2003, was 6.9 years. At December 31, 2003, there were 1,413,380 options exercisable with weighted average exercise prices of $0.83. During 2002 the options were granted at the market price of the stock and had a weighted average fair value of $0.36 per option. As of December 31, 2003, the Company had 684,755 warrants to purchase common stock outstanding and exercisable for prices ranging from $0.01 to $1.875 with a weighted average exercise price of $0.9105 per share. The weighted average remaining contractual life of these warrants at December 31, 2003, was 3.9 years. These warrants have expiration dates ranging from 2004 to 2011. 9. INCOME TAXES The reconciliation of income tax attributable to continuing operations computed at the U.S. Federal Statutory rates to the income tax provision is as follows: YEARS ENDED DECEMBER 31, 2003 2002 ----- ----- Tax at U.S. statutory rate (34%) ..................... -34% -34% Permanent differences ................................ 1% 26% Effect of gain on sale ............................... -- -- State income tax expense net of federal benefit ...... 2% 2% Valuation allowance .................................. 31% 6% ----- ----- Net expense (benefit) ........................... 0.00% 0.00% ===== ===== The components of the Company's deferred tax assets and liabilities at December 31, 2003 are as follows: (in thousands) CURRENT LONG TERM ------- ------- Deferred tax assets: Net operating loss carryforwards ........ $ 0 $ 3,139 Other ................................... 12 0 Accumulated depreciation amortization ... 0 255 R & D credit ............................ 0 45 Foreign tax credit ...................... 0 564 Valuation reserve ....................... (12) (4,003) ------- ------- Subtotal ................................... -- -- Net deferred tax (liability) asset ........... $ -- $ -- ======= ======= At December 31, 2003, the Company had available net operating loss carryforwards of approximately $8,460,000 in the United States. The United States carryforwards expire in varying amounts through 2023. 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. 10. RETIREMENT PLAN The Company has a defined contribution plan for its domestic operations under which employees who have satisfied minimum age and service requirements may defer compensation pursuant to Section 401(k) of the Internal Revenue Code. Participants in the plan may contribute between 1% and 20% of their pay, subject to the limitations placed by the IRS. The Company, at its discretion, may match a portion of the amount contributed by the employee. The Company contributions are offset by forfeitures of unvested balances for 41 terminated employees. The net Company contributions were $0.00 and $29,000 in 2003 and 2002, respectively. 11. SUBSEQUENT EVENT On January 26, 2004, the Company entered into an Assignment Agreement with Applera Corporation through its Applied Biosystems Group. Pursuant to the Assignment Agreement, the Company agreed to sell substantially all of its intellectual property, including all patents and know-how, but excluding its trademarks and trade names, to Applera for total consideration of US$4,000,000. Applera agreed to pay and deliver to the Company total cash consideration of $4,000,000 in the following manner: $3,600,000 in cash at closing ($100,000 of which has already been received in the form of a non-refundable deposit); and $400,000 in cash ninety (90) days after closing, subject to the Company providing certain consulting services as provided in the Assignment Agreement. Completion of the transaction is subject to a number of closing conditions, including approval of the Company's stockholders. 42 EX-2 3 ex2-1.txt EX-2.1 ASSIGNMENT AGREEMENT EXHIBIT 2.1 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT (this "Agreement") is entered into as of January 26, 2004 (the "Effective Date") by and between Applera Corporation through its Applied Biosystems Group with offices at 850 Lincoln Centre Drive, Foster City, CA 94404 (collectively, "AB") and Xtrana, Inc., with offices at 590 Burbank Street, Suite 205, Broomfield CO 80020 ("Xtrana") (each of AB and Xtrana a "Party" and, collectively, "Parties"). WHEREAS, AB desires to purchase and subject to the conditions of this Agreement, Xtrana is willing to assign to AB on the Closing Date upon the terms set forth in this Agreement, all of Xtrana's right, title and interest in and to the Intellectual Property (defined below); and WHEREAS, pursuant to this Agreement AB is not acquiring all or any portion of Xtrana's business or business operations (such as its facilities, personnel, inventory or other tangible assets, or financial assets such as cash, securities, or accounts receivable), and AB does not intend in any respect to be a successor to Xtrana's business or operations, and is therefore not expressly or impliedly assuming any of Xtrana's Liabilities (as defined herein); and WHEREAS, as part of such transaction Xtrana will also use its commercially reasonable efforts to render certain consulting services to AB. NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows. 1. CERTAIN DEFINITIONS. Terms, when used herein with initial capital letters shall have the meanings set forth below or as otherwise defined in this Agreement. "Effective Date" shall have the meaning set forth in the preamble hereto. "knowledge" "best knowledge," or "to the knowledge of" shall mean with respect to Xtrana, information which any director of Xtrana or which any of Timothy J. Dahltorp, Xtrana's Chief Executive Officer, John Gerdes, Xtrana's Chief Scientific Officer or Dennis Lineberry, Xtrana's Corporate Controller (i) has any actual knowledge of or (ii) should have knowledge of after a reasonable inquiry (and if there was no such inquiry, then knowledge as if due inquiry were made). "Closing Date" and "Closing" shall have the meaning set forth in Section 2(d) below. 1 "Consulting Agreement" and "Consulting Services" shall have the meanings set forth in Section 2(c) below. "Fundamental Representations" shall mean the representations, warranties and covenants set forth in Section 7 and Section 8(f); except that part (iii) of Section 8(f) as it relates to claims arising after the Closing that AB's use of the Intellectual Property infringes any third party's intellectual property rights shall not be deemed Fundamental Representation. "Intellectual Property" shall mean all (U.S. and foreign) Xtrana patents, patent applications and all divisions, continuations, continuations-in-part, reissues, reexaminations, and extensions and all foreign equivalents of any of the foregoing, inventions, trade secrets, know-how, manufacturing processes and procedures, design history, quality assurance methods and manual, software (including, without limitation, source code and object code), data and databases and other intellectual property, all as it exists on the Effective Date and the Closing Date, relating to methods or devices for nucleic acid capture, binding, hybridization, amplification, extraction, detection or gene expression. Without limiting the foregoing, "Intellectual Property" shall include the following: (a) U.S. patent Nos. 6,291,166; 5,955,351; 6,153,425; 5,989,813; 6,605,451; 6,063,568, 6,258,543, 6,649,378; and foreign equivalents thereof; and (b) pending or allowed patent applications relating to or claiming priority from the foregoing (the foregoing patents and patent applications set forth in parts (a) and (b), collectively referred to as the "Patents"). The term "Intellectual Property" shall exclude Xtrana's trademarks, tradenames and logos and all goodwill associated therewith. "Legal Requirement" shall mean any (i) federal, state, local, municipal, foreign, international, multinational or other constitution, law, ordinance, principle of common law, code, regulation, statute or treaty, and (ii) the terms and conditions of any permit or other authorization of any governmental or similar authority under which a party operates or to which a party is subject. "Liability" shall mean any liability or obligation of any kind, character, or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise, and whether or not the same is required to be accrued on the financial statements of any person or entity. "material" or "material adverse effect" shall mean any information, condition or effect that (i) impairs the value or use of the Intellectual Property, or (ii) has or could reasonably be expected to have an adverse impact with a dollar value or cost of fifty thousand dollars ($50,000) or more. 2 "Order" shall mean any order, injunction, judgment, decree, ruling, assessment or arbitration award of any governmental or quasi-governmental agency or authority of any nature (federal, state, local, or foreign). "Patent Assignment" shall have the meaning set forth in Section 2(e) below. "Proceeding" shall mean any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any governmental or quasi-governmental agency or authority of any nature (federal, state, local, or foreign) or arbitrator. "Proxy Statement" shall have the meaning set forth in Section 13(c) below. "Retained Liabilities" shall have the meaning set forth in Section 2(g) below. "Stockholder Approval" shall have the meaning set forth in Section 7(a) below. "Tax" shall mean any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any governmental or quasi-governmental agency or authority of any nature (federal, state, local, or foreign) or payable under any tax-sharing agreement or any other contract or agreement. Transaction Documents shall have the meaning set forth in Section 7(a). 2. ASSIGNMENT OF RIGHTS; CLOSING (a) ASSIGNMENT OF RIGHTS TO AB. Effective upon the Closing, Xtrana hereby assigns all of right, title and interest in and to the Intellectual Property to AB, together with all accrued causes of action for infringement thereof and the right to sue and recover for past and future infringement of the Intellectual Property. For the avoidance of doubt, following such assignment, Xtrana shall retain no rights under any of the Intellectual Property. (b) TRANSFER OF KNOW-HOW; PROSECUTION FILES. Within ten (10) business days of the Closing, Xtrana shall transfer to AB all of Xtrana's trade secrets and know-how, manufacturing processes and procedures, design history, 3 quality assurance methods and manuals, and any other Intellectual Property of Xtrana that is a Patent or other registered item of Intellectual Property to the extent that the foregoing exist in a tangible form. Together with the foregoing, Xtrana shall also transfer to AB all files relating to the prosecution of Intellectual Property (including, without limitation, all patent applications and office actions), all invention disclosure statements and all laboratory notebooks of Xtrana's current and former employees relating to such Intellectual Property. Xtrana shall accompany the foregoing items with a written statement of its chief executive officer certifying that Xtrana has delivered all of the Intellectual Property existing in a tangible form, and all prosecution files relating thereto as required pursuant to this Section 2(b). (c) CONSULTING SERVICES. Without limiting Xtrana's transfer of all Intellectual Property upon the Closing Date, Xtrana shall execute the Consulting Agreement referred to below pursuant to which Xtrana shall render, from and after the Closing Date, up to one hundred (100) hours (in the aggregate) of consulting and transition services relating to the Intellectual Property (collectively, "Consulting Services"). The standard of performance for Xtrana with respect to the rendering of such Consulting Services shall be one of reasonable efforts. Prior to rendering such Consulting Services, the scientists assigned by Xtrana to render such Consulting Services shall execute AB's form of consulting agreement, attached hereto as Exhibit II (the "Consulting Agreement"). Such Consulting Services shall be rendered as may be requested by AB from the Closing Date until ninety (90) days thereafter. The payment provided under Section 2(e) includes consideration for such Consulting Services and no further payment shall be due. (d) CLOSING. Subject to the satisfaction of the terms and conditions herein set forth, and in reliance upon the respective representations and warranties of the parties set forth herein and in any document delivered pursuant hereto, the closing of the assignment of the Intellectual Property by Xtrana to AB pursuant to Section 2(a) (the "Closing") will be held at the offices of AB at 850 Lincoln Centre Drive, Foster City, California at such time, date and place as may be agreed to by AB and Xtrana, but with such Closing to occur no later than two business days following approval of such transfer by the stockholders of Xtrana (the date on which the Closing occurs being referred to as the "Closing Date"). (e) CLOSING DELIVERIES AND PAYMENTS. On the Closing Date, Xtrana will execute and deliver to AB the Patent assignments in the form of Exhibit III hereto (the "Patent Assignment"). (f) PAYMENTS. AB will make an aggregate payment in the amount of four million dollars ($4,000,000) as follows: (i) one payment of three million 4 five hundred thousand dollars ($3,500,000) will be due at Closing (reflecting the application of the deposit of $100,000 previously paid by AB); and (ii) a second payment of four hundred thousand dollars ($400,000) will be due three (3) months thereafter, contingent upon Xtrana's providing the consulting services as described in Section 2(c) above. For the avoidance of doubt, such payment shall be in consideration of Xtrana's assignment to AB of all right, title and interest in and to the Intellectual Property and the performance of the Consulting Services and any other Xtrana obligations hereunder. (g) RETENTION OF LIABILITIES. Notwithstanding anything contained herein to the contrary, AB is not assuming and shall not have any responsibility for any Liabilities of or relating to Xtrana, its predecessors or its or their subsidiaries or affiliates or the Intellectual Property or any claim against any of the foregoing of any kind, whether known or unknown, contingent absolute or otherwise (collectively, the "Retained Liabilities"). The Retained Liabilities shall remain the sole responsibility of and shall be retained, paid, performed, and discharged solely by Xtrana or its relevant affiliate. The Retained Liabilities include, without limitation: (i) any Liability arising out of or relating to products or services of Xtrana, its predecessors or affiliates to the extent manufactured or sold prior to the Closing, including, without limitation, any Liability resulting from claims that such products or services infringe or misappropriate any third party's intellectual property rights; (ii) any Liability arising out of or relating to Liability resulting from claims that Xtrana, its predecessors or affiliates have misappropriated (or by their conduct prior to the Closing infringed) any third party's intellectual property rights; (iii) any Liability for Taxes, including (A) any Taxes arising as a result of Xtrana's operation of its business or ownership and license of the Intellectual Property prior to the Closing, (B) any Taxes that will arise as a result of the transfer of the Intellectual Property pursuant to this Agreement (other than Taxes on the net income of AB), and (C) any deferred Taxes (by Xtrana) of any nature; (iv) any Liability under any contract, license or other agreement entered into by Xtrana, its predecessors or affiliates including, without limitation, any Liability arising out of or relating to Xtrana's credit facilities or any security interest related thereto; (v) any environmental, health and/or safety Liabilities arising out of or relating to the operation of Xtrana's (or its predecessors' or 5 affiliates') business or leasing, ownership or operation of real property; (vi) any Liability under any Xtrana (or its predecessors, subsidiaries or affiliates') employee benefit plans or relating to Xtrana's (or its predecessors', subsidiaries' or affiliates') payroll, vacation, sick leave, workers' compensation, unemployment benefits, pension benefits, employee stock option or profit-sharing plans, health care plans or benefits or any other employee plans or benefits of any kind for Xtrana's (or its predecessors' or affiliates') employees or former employees or both; (vii) any Liability under any employment, severance, retention or termination agreement between Xtrana and any employee of Xtrana or any of its predecessors or affiliates; (viii) any Liability arising out of or relating to any employee grievance against Xtrana whether or not the affected employees are hired by AB; (ix) any Liability of Xtrana to any of its shareholders or affiliates of Xtrana; (x) any Liability to indemnify, reimburse or advance amounts to any officer, director, employee or agent of Xtrana; (xi) any Liability to distribute to any of Xtrana's shareholders or otherwise apply all or any part of the consideration received hereunder; (xii) any Liability arising out of any Proceeding pending against Xtrana as of the Closing; (xiii) any Liability arising out of any Proceeding commenced after the Closing and arising out of or relating to any occurrence or event happening prior to the Closing; (xiv) any Liability arising out of or resulting from Xtrana's compliance or noncompliance with any Legal Requirement or Order; and (xv) any Liability of Xtrana based upon Xtrana's acts or omissions occurring after the Closing. For the avoidance of doubt any claims arising after Closing that AB's use of the Intellectual Property infringes any third party's intellectual property rights shall not be deemed a Retained Liability under Section 2(g)(xiii) and Section 2(g)(xiv) 6 to the extent such claim does not arise or result from (a) a Retained Liability set forth in Section 2(g)(i) or Section 2(g)(ii); or (b) Xtrana's breach of a Fundamental Representation. 3. EXISTING LICENSES. Prior to the Closing Date Xtrana shall, at its cost, exercise its contractual rights to terminate, or (if AB so elects by providing written notice to Xtrana) assign to AB, the existing licenses granted to third parties under the Intellectual Property. Such existing licenses are: (1) the Purchase and License Agreement between Xtrana's predecessor Biopool International, Inc. and Lifecodes, Inc., as amended March 2001; and (2) the Co-Development and License Agreement entered into December 10, 2001 between Xtrana and CUNO Inc. Notwithstanding the foregoing, it is understood that the foregoing CUNO-Xtrana Co-Development and License Agreement has no provision for termination upon the payment of a fixed dollar amount. As such, if Xtrana is unable to obtain such termination without expending money or an undue amount of effort, and provided AB does not waive this condition, AB shall not be obligated to consummate the transactions contemplated hereby. If requested by AB, Xtrana shall, without further payment, provide reasonable assistance (including obtaining all necessary third party consents) in assigning to AB any agreements with third parties pursuant to which Xtrana has obtained a license under such third parties' intellectual property rights. 4. PROSECUTION. AB shall have the sole right and obligation (which obligation it may exercise in its sole discretion), at its sole cost and expense, for obtaining, prosecuting, and maintaining, throughout the world, patents (or registrations for any other Intellectual Property) claiming the Intellectual Property. 5. ENFORCEMENT OF PATENTS OR OTHER REGISTERED INTELLECTUAL PROPERTY. AB shall have the sole right and discretion, at its own expense, to institute, control and prosecute suits, or other appropriate actions, for infringement or misappropriation of the Intellectual Property. All recovery or proceeds of litigation, enforcement or settlement of such infringement or misappropriation of AB's rights under the Intellectual Property shall belong to AB. 6. FURTHER ASSURANCES. Xtrana will, and to the extent that it can reasonably do so, Xtrana shall cause its current officers, directors, employees and representatives to, provide all reasonable assistance (at no additional cost) in transferring the Intellectual Property (including, without limitation, any trade secrets, know-how or invention disclosures) to AB. Without limiting the foregoing Xtrana will disclose to AB all material facts known by its current officers, directors and employees regarding the Intellectual Property and any and all material encumbrances, liens or disputes (including, without limitation, any infringement or misappropriation claims) regarding the Intellectual Property. Xtrana will and to the extent that it can reasonably do so, Xtrana shall cause its current officers, directors, employees and representatives to testify in all proceedings, sign all instruments (including, without limitation, assignment instruments and powers of 7 attorney) and other documents and provide such reasonable assistance as is reasonably necessary to secure, maintain and enforce AB's rights with respect to the Intellectual Property. 7. MUTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTIES. Each Party hereby represents, warrants, and covenants to the other Party as of the Effective Date and as of the Closing as follows. (a) Each Party (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to conduct its business as it is now being conducted, to own and use the properties and assets that it purports to use and own, and to enter into this Agreement and to perform its obligations hereunder, and (ii) has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the other agreements and instruments contemplated hereby to be executed by such Party (as relevant to each Party, the "Transaction Documents") and the performance of its obligations hereunder and thereunder, except that in the case of Xtrana, Xtrana's performance under this Agreement and the other Transaction Documents (including without limitation the assignment of the Intellectual Property) is subject to approval of this Agreement by the vote of holders of a majority of its issued and outstanding common stock (the "Stockholder Approval"). (b) The Agreement has been, and as of the Closing the other Transaction Documents will have been, duly executed and delivered on behalf of each Party and, in the case of Xtrana only subject to the Shareholder Approval, constitutes (or in the case of the other Transaction Documents, upon execution and delivery will constitute) a legal, valid, binding obligation of such Party and is (or in the case of the other Transaction Documents, upon execution and delivery will be) enforceable against it in accordance with its terms subject to the effects of bankruptcy, insolvency, or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered a proceeding at law or equity. (c) The execution and delivery of this Agreement and the other Transaction Documents by each Party and the performance of each Party's obligations hereunder and thereunder, do not and will not: (i) conflict with or violate, or require any consent or approval under, any Legal Requirement or Order or governmental authorization or permit applicable to such Party (but specifically excluding any conflict, violation or failure to obtain consent or approval under any Legal Requirement or Order or governmental authorization or permit that relates to products of AB manufactured or sold after the Closing), (ii) do not conflict with or violate any provision of 8 articles of incorporation, bylaws or limited partnership agreement or other organizational documents or corporate resolutions of such Party, as applicable, (ii) conflict with, violate, or breach or constitute a default under (with or without the passage of time or delivery of notice), or require (whether or not express) any consent or approval under, or give any party the right to accelerate any right or remedy under, any license or other contract or agreement to which such Party is a party or by which such Party or its assets (and in the case of Xtrana, including, without limitation, the Intellectual Property) is bound, (iii) result in the creation of any lien or encumbrance on the Intellectual Property. 8. ADDITIONAL XTRANA REPRESENTATIONS, WARRANTIES AND COVENANTS. Xtrana represents and warrants as of the Effective Date and as of the Closing, and covenants, that: (a) COMPLIANCE WITH LAWS AND CONTRACTS; LEGAL PROCEEDINGS. Xtrana has not taken any action in violation of any provision of its certificate of incorporation or bylaws or other applicable charter documents. Xtrana is not, and has not received notice from any person or entity alleging that it is, in material violation or breach of, or in material default under any provision of, any Legal Requirement or Order, and Xtrana has not received notice that it is under investigation by any governmental or other authority with respect to any alleged violation or breach of any Legal Requirement or Order. Xtrana is not subject to any Order that directly or indirectly relates to the Intellectual Property. Xtrana is not in breach or default under (including any circumstances that would result in a breach or default with notice or lapse of time or both) of any contract or agreement to which it is a party or by which it or its assets are bound, and Xtrana has not received any notice alleging any such breach or default. There is no Proceeding pending against or relating to Xtrana or its assets (including without limitation the Intellectual Property) and to the knowledge of Xtrana no such Proceeding is threatened and no facts or circumstances exist or have occurred that are reasonably likely to give rise to or serve as a basis for the commencement of any Proceeding (other that litigation arising in the ordinary course of Xtrana's business that does not directly or indirectly relate to the Intellectual Property and which in any case does not involve claims in excess of fifty thousand dollars ($50,000)). Xtrana has not violated the Worker Adjustment and Retraining Notification Act or any similar state or local Legal Requirement, and Xtrana does not intend to, and shall not, take any action or omit to take any action in connection with this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby that would cause it to be subject to such Act or such other Legal Requirements. (b) NO UNDISCLOSED LIABILITIES. Xtrana has no Liabilities except for Liabilities reflected or reserved against in the balance sheet contained in the financial statements included in [identify most recent periodic SEC filing] and 9 current liabilities incurred in the ordinary course of business of Xtrana since the date of such balance sheet. (c) TAXES. Xtrana has filed or caused to be filed on a timely basis all tax returns, reports, statements, and the like with respect to Taxes that are or were required to be filed pursuant to applicable Legal Requirements. All such returns and other documents filed by Xtrana were and are true, correct and complete in all material respects. Xtrana has paid, or made provision for the payment of, all Taxes that have or may have become due for all periods covered by such returns and other documents or otherwise, or pursuant to any assessment received by Xtrana. No claim has ever been made or is expected to be made by any governmental authority in a jurisdiction where Xtrana does not file tax returns that it is or may be subject to taxation by that jurisdiction. There are no liens or encumbrances on any of Xtrana's assets that arose in connection with any failure (or alleged failure) to pay any Tax, and Xtrana has no knowledge of any basis for assertion of any claims attributable to Taxes which, if adversely determined, would result in any such lien or encumbrance. Xtrana is not currently under audit with respect to any Tax returns, statements, or other documents filed by it and has not been advised that any of such documents will be audited, and Xtrana has not been advised of any deficiency in assessment or proposed judgment to its Taxes. Xtrana has no knowledge of any Liability of any Tax to be imposed upon its properties or assets. All Taxes that Xtrana is or was required by Legal Requirements to withhold, deduct or collect have been duly withheld, deducted and collected and, to the extent required, have been paid to the proper governmental authority or other entity. Xtrana is not a party to any tax sharing agreement, tax allocation agreement, tax indemnity obligation or similar written or unwritten agreement, arrangement, understanding or practice with respect to Taxes that will require any payment by Xtrana. (d) EMPLOYEES AND EMPLOYMENT BENEFITS. Xtrana does not have a duty to bargain with any labor organization with respect to any employees and there is not pending any demand for recognition or any other request or demand from a labor organization for representative status with respect to any employee of Xtrana. Xtrana is in compliance with all employment, employee benefit, compensation, change in control, and similar plans, agreements, policies, practices, commitments, contracts, and understandings (whether qualified or non-qualified, currently effective or terminated, written or unwritten), any trust, escrow, or other agreement related thereto, and all Legal Requirements applicable thereto, and has not been notified of any allegation to the contrary. Neither the Xtrana nor any "ERISA affiliate" (as defined below) of Xtrana maintains, contributes to or has any liability (contingent or otherwise) with respect to a plan (including a "multiemployer plan", as defined below) subject to Title IV of ERISA or Section 412 of the Code (as defined below). All employee 10 benefit plans and arrangements (regardless of whether such plans or arrangements are covered by ERISA) maintained by or contributed to by Xtrana or any ERISA Affiliate of Xtrana are in material compliance with all Legal Requirements, including any reporting requirements. The Company does not have any liability (contingent or otherwise) with respect to retirees, including retiree death benefits. Neither Xtrana nor any other person or entity, including any fiduciary, has engaged in any transaction prohibited by Section 4975 of the Code or Section 406 of ERISA which would subject Xtrana, or any entity that Xtrana has an obligation to indemnify, to any tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. The transaction contemplated by this Agreement and the other Transaction Documents will not involve any transactions prohibited by Section 406 of ERISA or Section 4975 of the Code. For purposes of this provision, (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time; (ii) "ERISA affiliate" means any entity required to be aggregated with Xtrana under Sections 414(b), (c), (m) or (o) of the Code; and (iii) "multiemployer plan" means a plan which is a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA (e) ENVIRONMENTAL MATTERS. Xtrana (i) has never violated, and is presently in compliance with, all Legal Requirements relating to environmental and health and safety matters applicable to its business and properties, (ii) has not generated, manufactured, refined, transported, treated, stored, handled, disposed of, transferred, produced or processed any pollutant, toxic substance, hazardous waste, hazardous substance, hazardous material, oil or petroleum product or other material regulated under any of such Legal Requirements (referred to in this provision as "hazardous materials") or any solid waste, and has no knowledge of the release or threat of release of any hazardous materials from its products, properties or facilities, (iii) has not (A) entered into or been subject to any Order with respect to any environmental or health and safety matter relating to its business or any of its properties or facilities, (B) received notice under the citizen suit provision of any of such Legal Requirements in connection with its business or any of its properties or facilities, (C) received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim with respect to any environmental or health and safety matter relating to its business or any of its properties or facilities or (D) been subject to or to its knowledge threatened with any governmental or citizen enforcement action with respect to any environmental or health and safety matter relating to its business or any of its properties or facilities. To the knowledge of the Xtrana, no lien or encumbrance has been imposed on any of the properties or facilities of Xtrana by any governmental authority in connection with the presence of any hazardous materials. 11 (f) INTELLECTUAL PROPERTY. (i) Xtrana has obtained a full assignment of all right, title and interest in and to (and is the owner of) the Intellectual Property (including, without limitation, the Patents) to be assigned pursuant to this Agreement to AB; (ii) the Intellectual Property (or Xtrana's use of the same) is not the subject of and has not been the subject of any litigation or dispute with any third party with respect to infringement, misappropriation or validity, inventorship or priority of invention; (iii) to the best of its knowledge, the Intellectual Property (and Xtrana's use or acquisition of the same) does not infringe or misappropriate any third party rights and all Intellectual Property claimed by any of the Patents is valid and enforceable; (iv) it has received no notice of such litigation, disputes or any cease and desist letter or offers to license the intellectual property rights of any third party which such rights are allegedly necessary to practice the Intellectual Property; (v) except as set forth in Section 3, it has not granted any license under the Intellectual Property to any third party; and (vi) there are no liens, encumberances or security interests on the Intellectual Property. (g) USE OF PROCEEDS. Xtrana is not entering into this Agreement or the other Transaction Documents as part of a scheme or plan to avoid payment of any Liabilities, and acknowledges that AB is relying on this representation by Xtrana and Xtrana's covenant in Section 13(g) below in entering into this Agreement and the other Transaction Documents and agreeing to consummate the transactions contemplated hereby and thereby. (h) NO BROKERS. Other than Westridge Associates, LLC, whose fees in the amount of [$250,000] shall be entirely borne by Xtrana and paid by Xtrana immediately upon the Closing, no broker, finder, or similar agent, if any, employed by or on behalf of Xtrana in connection with this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby will be entitled to the payment of any brokerage commission, finder's fee, or expenses or any similar compensation or payment in connection with this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby. (i) VOTING AGREEMENT. The parties executing the Voting Agreement with AB concurrently with the execution and delivery of this Agreement hold shares of capital stock of Xtrana representing, in the aggregate, 15.1% of the issued and outstanding voting capital stock and voting power of Xtrana on the date hereof. 9. CONFIDENTIALITY. Except as shall be set forth in the Proxy Statement or as provided below in this Section, from the Effective Date Xtrana shall not disclose to any third party (and shall contractually obligate its officers, directors, employees and representatives in the same manner) (i) any of the Intellectual Property that is not 12 fully disclosed in any of the Patents, or otherwise in the public domain; (ii) AB's interest in (and the subject matter of the negotiations between the Parties with respect to) the Intellectual Property, or (iii) the existence of, or the terms and conditions of, this Agreement or the other Transaction Documents, or the status of the transactions contemplated hereby and thereby. The foregoing nondisclosure obligation (A) shall not apply to any disclosures required pursuant to a court order or other applicable law; provided that Xtrana shall provide AB with prompt written notice any such requirement and a reasonable opportunity to seek a protective order or other injunctive relief to limit the extent of such disclosure and (B) shall not prohibit Xtrana from making disclosures of the terms and conditions of this Agreement as are necessary to comply with regulatory requirements of the United States Securities and Exchange Commission, provided that it gives AB advance notice of, and consults with AB regarding, any disclosures pursuant to this sentence to the extent practicable under the circumstances. 10. INDEMNIFICATION. (a) OF AB BY XTRANA. From and after the Closing, Xtrana shall indemnify, defend and hold harmless AB and its affiliates, subsidiaries and permitted assigns, and successors-in-interest, and their respective officers, directors, employees, agents, and representatives (as applicable) (the "AB Indemnitees") from and against (A) any and all liabilities, losses, costs, damages or expenses (including court costs and reasonable attorneys' fees) whatsoever ("Losses") incurred by the AB Indemnitees to the extent arising from or relating to Xtrana's breach of its covenants, representations, warranties, or other obligations hereunder or any third party claims that any of the Patents infringe an issued United States patent, or any of the Intellectual Property, solely in the form assigned to AB, otherwise infringes or misappropriates any intellectual property rights of a third party, and (B) any and all Retained Liabilities and any and all Losses incurred by AB arising therefrom or relating thereto. Notwithstanding the foregoing, in satisfaction of its indemnification obligation hereunder for infringement or misappropriation claims relates to the Intellectual Property assigned to AB, Xtrana, at its sole option, may obtain for AB licenses (at Xtrana's expense) reasonably satisfactory to AB from such third parties as necessary to enable AB to enjoy full use and enjoyment of any such Intellectual Property that is the subject of such infringement or misappropriation claim. (b) OF XTRANA BY AB. From and after the Closing Date, AB shall indemnify, defend and hold harmless Xtrana and its affiliates, subsidiaries and permitted assigns, successors-in-interest and their respective officers, directors and employees (as applicable) (the "Xtrana Indemnitees") from and against any and all Losses incurred by the Xtrana Indemnitees to the extent arising from AB's breach of its covenants, representations, warranties, or other obligations herein or 13 any claim that intellectual property of AB, other than the Intellectual Property assigned to AB, infringes or misappropriates any intellectual property rights of a third party. (c) NOTICE; LIMITATIONS. In order for an AB Indemnitee or Xtrana Indemnitee, as applicable, to be entitled to any indemnification provided for under this Agreement, such AB Indemnitee or Xtrana Indemnitee, as applicable, must notify the indemnifying Party in writing, and in reasonable detail, of the claim as promptly as reasonably possible after receipt by such AB Indemnitee or Xtrana Indemnitee, as applicable, of notice of such claim; provided, however, that failure to give such notification on a timely basis shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been actually materially prejudiced as a result of such failure. Thereafter, the AB Indemnitee or Xtrana Indemnitee, as applicable, shall, promptly after the indemnified party's receipt thereof, deliver to the indemnifying party copies of all notices and documents (including court papers) received by the AB Indemnitee or Xtrana Indemnitee, as applicable, relating to the claim. No party shall be entitled to bring any claim for indemnity hereunder until, and only to the extent that its aggregate Losses exceed $50,000. Except with respect to Retained Liabilities or Fundamental Representations, no Party shall be entitled to bring a claim for indemnity hereunder unless notice of such claim has been given under this Section 10 within the date that is eighteen (18) months from the Closing Date. Neither party shall be liable for Losses incurred by the other party under this Agreement, whether claimed by way of indemnification under Section 10 or otherwise, for any amount in excess of $1,000,000 (the "Liability Cap"), provided that the Liability Cap shall not apply to any claims by AB in respect of Retained Liabilities or Fundamental Representations and any payments to AB in respect of such claims by AB shall not be considered in determining whether the Liability Cap has been met. For the avoidance of doubt, Xtrana's indemnification obligations pursuant to Section 10 of this Agreement with respect to the Retained Liabilities and the Fundamental Representations shall survive Closing and shall not terminate or expire. (d) DEFENSE OF CLAIM. If one or more AB Indemnitees or Xtrana Indemnitees, as applicable, makes a claim for indemnification pursuant to Section 10 (a) or (b) above in respect of any Proceeding initiated against an indemnified party by a third party (a "Third Party Claim"), the indemnifying party shall be entitled to assume the defense thereof and, if it so chooses and acknowledges in writing its obligation to indemnify the AB Indemnitees or Xtrana Indemnitees, as applicable, therefor, to assume the defense thereof with counsel selected by the indemnifying party and reasonably satisfactory to the AB Indemnitees or Xtrana Indemnitees, as applicable, and to settle such suit, action, claim or proceeding in its discretion with a full release of the AB Indemnitees or Xtrana Indemnitees, as applicable, 14 and no admission of liability; provided, that the written consent of the AB Indemnitees or Xtrana Indemnitee, as applicable (which shall not be unreasonably withheld) shall be required for any settlement if as a result thereof the rights of the AB Indemnitees or Xtrana Indemnitees, as applicable, may be adversely affected or the AB Indemnitees or Xtrana Indemnitees, as applicable, would become subject to injunctive or other equitable relief or any remedy other than the payment of money by the indemnifying Party . Should the indemnifying party so elect to assume the defense of a Third Party Claim, the indemnifying party shall not be liable to the AB Indemnitees or Xtrana Indemnitees, as applicable, for legal expenses subsequently incurred by the AB Indemnitees or Xtrana Indemnitees, as applicable, in connection with the defense thereof unless (i) the indemnifying party has failed to vigorously defend, contest or otherwise protest in a timely manner against Third Party Claims, or (ii) an actual or potential conflict of interest exists such that separate representation of the AB Indemnitees or Xtrana Indemnitees, as applicable, is appropriate or necessary. If the indemnifying party assumes such defense, the AB Indemnitees or Xtrana Indemnitees, as applicable, shall have the right to participate in the defense thereof and to employ counsel, at their own expense, separate from the counsel employed by the indemnifying party. The indemnifying party shall be liable for the reasonable fees and expenses of counsel employed by the AB Indemnitees or Xtrana Indemnitees, as applicable, for any period during which the indemnifying party has not assumed the defense thereof and for any period in which a conflict of interest exists such that separate representation of one or more of the Indemnitees is appropriate or necessary. If the indemnifying party chooses to defend any Third Party Claim, all the parties hereto shall cooperate in the defense or prosecution of such Third Party Claim at the expense of the indemnifying party. 11. CONDITIONS TO CLOSING APPLICABLE TO AB. The obligation of AB to conclude the transaction at the Closing is subject to the fulfillment to AB's reasonable satisfaction or waiver of each of the following conditions as of the date of such Closing: (a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties (including, without limitation the representations and warranties set forth in Sections 7 and 8 hereto) made by Xtrana herein shall be true and correct when made, and shall be true and correct as of the Closing as if made at the Closing; and AB shall have received a certificate signed on behalf of Xtrana by its Chief Executive Officer and its Chief Financial Officer, in form and substance reasonably acceptable to AB and its counsel, confirming the matters set forth in this paragraph; (b) Xtrana shall have performed all of the convenants (including, without limitation, the covenants set forth in Sections 8 and 13 hereto) required to 15 be performed and satisfied on or prior to Closing; and AB shall have received a certificate signed on behalf of Xtrana by its Chief Executive Officer and its Chief Financial Officer, in form and substance reasonably acceptable to AB and its counsel, confirming the matters set forth in this paragraph; (c) STOCKHOLDER APPROVAL. The Stockholder Approval shall have been validly obtained at a duly convened meeting of Xtrana's stockholders, and AB shall have received from Xtrana documentation reasonably requested by AB evidencing such approval; (d) SECRETARY'S CERTIFICATE. Xtrana shall have delivered to AB a certificate of the Secretary of Xtrana, in form and substance reasonably acceptable to AB and its counsel, certifying: (i) Xtrana's articles of incorporation and bylaws and good standing (including a good standing certificate certified by the relevant secretary of state within 5 days of Closing), (ii) board resolutions approving this Agreement, the other Transaction Documents, and the transactions contemplated hereby and thereby, (iii) the shareholder vote approving this Agreement, the other Transaction Documents, and the transactions contemplated hereby and thereby, along with the number of dissenting shares, if any, and (iv) the incumbency of the officers executing this Agreement and the other Transaction Documents and the certificates referenced in paragraphs (a) and (b) above. (e) GOVERNMENTAL APPROVAL. Any applicable United States government regulatory period shall have expired and Xtrana and AB shall have received all requisite regulatory approvals necessary for the transactions contemplated by this Agreement; (f) OTHER TRANSACTION DOCUMENTS. At the Closing, Xtrana shall have executed and delivered to AB the Patent Assignment and the Consulting Agreement; (g) EXISTING LICENSES. The agreements referred to in Section 3 above shall have been terminated as contemplated by such Section; (h) LITIGATION. There shall be no Proceedings pending or threatened (i) with respect to or in any way relating to the Intellectual Property; (ii) involving any challenge to, or seeking damages or other relief in connection with, this Agreement or the other Transaction Documents or the transfer of the Intellectual Property to AB contemplated hereby or the consummation of the other transactions contemplated hereby and thereby; or (iii) that would otherwise have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with any of the transactions contemplated by this Agreement and the other Transaction Documents. 16 (i) NO MATERIAL ADVERSE CHANGE. There shall be no material adverse change in the Intellectual Property. (j) ADDITIONAL DOCUMENTATION. AB shall have received from Xtrana such additional documentation as AB may reasonably request evidencing all corporate and other proceedings to be taken by Xtrana in connection with this Agreement and the other Transaction Documents prior to Closing and evidencing the satisfactions of the other conditions specified in this Section 11, and such documentation shall be reasonably acceptable to AB and its counsel. 12. CONDITIONS TO CLOSING APPLICABLE TO XTRANA. The obligation of Xtrana to conclude the transaction at the Closing is subject to the fulfillment to Xtrana's reasonable satisfaction or waiver of each of the following conditions as of the date of such Closing: (a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by AB herein shall be true and correct in all material respects when made, and shall be true and correct in all material respects as of the Closing as if made at the Closing. (b) STOCKHOLDER APPROVAL. The assignment of the Intellectual Property by Xtrana to AB shall have been validly approved by the holders of a majority of the stock of Xtrana at a duly convened meeting of its stockholders. (c) LITIGATION. There shall be no litigation filed or threatened which would seek to challenge the transfer of the Intellectual Property to AB, or the validity or effect of this Agreement. 13. ADDITIONAL COVENANTS. Upon execution of this Agreement, and prior to (and to the extent intended below, including parts (h) and (i) and as specified in parts (b), also upon and following the Closing) the Closing, Xtrana covenants and agrees that: (a) Xtrana shall not (directly or indirectly through agents or representatives) accept, solicit or otherwise entertain offers from third parties or enter into negotiations of other discussions with such third parties directed at conveyance of any rights under the Intellectual Property and Xtrana shall not grant or attempt to grant to any third party any license, assignment or other right under the Intellectual Property. (b) Xtrana shall operate its business only in the ordinary course, and shall not take any action which might reasonably be expected to have a material adverse effect on the Intellectual Property, and without limitation of the 17 foregoing shall pay and perform (both prior to and after Closing) all of its debts, obligations, and other Liabilities as they become due and payable. (c) Xtrana shall use its best efforts to validly convene a meeting of its stockholders as promptly as practicable following the execution of this Agreement for the purpose of seeking the Stockholder Approval; and in connection therewith (i) Xtrana shall, through its Board of Directors, use its commercially reasonable efforts to obtain the Stockholder Approval and shall recommend such approval to its stockholders; and (ii) Xtrana provide AB promptly with all drafts of the proxy statement to be used in connection with such meeting (the "Proxy Statement") and Xtrana shall use commercially reasonable efforts to file the final draft of such Proxy Statement with the Securities and Exchange Commission no later than five (5) business days after the Effective Date; (d) Xtrana shall preserve the Intellectual Property, free of any security interests, liens or encumbrances and shall extinguish all outstanding security interests, liens or encumbrances with respect to the Intellectual Property and shall provide AB with documentations substantiating the same; (e) Xtrana shall give AB prompt written notice after gaining knowledge of the occurrence or failure to occur of any event or facts the occurrence (or failure to occur) of which (i) render any of Xtrana's representations and warranties made herein as of the Effective Date inaccurate when made, (ii) could reasonably be expected to cause any of Xtrana's representations or warranties herein to be untrue or inaccurate if made as of the Closing; (iii) could result in Xtrana's failure to comply with or satisfy the covenants made by it; or (iv) could reasonably be expected to materially adversely affect the Intellectual Property or AB's full use and enjoyment thereof after the Closing; (f) Xtrana shall use commercially reasonable efforts to take all such actions necessary or advisable to satisfy the conditions specified herein and consummate the transactions contemplated by this Agreement and the other Transaction Documents; and Xtrana shall not take any action or omit to take any action that would cause any of Xtrana's representations and warranties contained herein to be untrue as of the Closing. (g) The Parties agree to waive compliance with the provisions of any and all "bulk sales" and similar laws applicable to this Agreement, the other Transaction Documents, and the transactions contemplated hereby and thereby. 18 (h) Xtrana shall promptly pay and fully discharge any income, excise, employment, sales or use taxes of Xtrana arising as a result of the sale, transfer, conveyance or assignment of the Intellectual Property. (i) Xtrana shall continue to exist as a corporate entity in good standing for a period of at least eighteen months following the Closing. Xtrana agrees that the money paid to it pursuant to Section 2(f) shall not be distributed to its stockholders after Closing without (A) first satisfying or adequately providing for all of its outstanding Liabilities as determined by the board of directors of Xtrana in the exercise of its reasonable business judgment, which determination is evidenced in a formal resolution, and (B) retaining an adequate reserve for Xtrana's payment of its then-existing and reasonably anticipated Liabilities (and without limitation of the foregoing, such reserve will include a retention of no less than one million dollars ($1,000,000) specifically for the purpose of potential claims under Section 10 of this Agreement for no less than eighteen (18) months from the Closing Date), as determined by its board of directors in the exercise of its reasonable business judgment as evidenced by a formal resolution, it being the understanding of AB that Xtrana is not entering into this Agreement and the other Transaction Documents as part of a scheme or plan to avoid payment of any Liabilities. The foregoing requirement to maintain a reserve of no less than a one million dollars ($1,000,000) shall not prohibit Xtrana from distributing to its stockholders such reserve from the money paid to it pursuant to Section 2(f) after the date which is eighteen (18) months from the Closing Date if neither AB nor any other AB Indemnitee has any pending claim under Section 10 of this Assignment Agreement and the board of directors of Xtrana has determined in the exercise of its reasonable business judgment, which determination is evidenced in a formal resolution, that no other Liabilities exist under this Assignment Agreement. In the event that Xtrana intends to effect any distribution, then no less than thirty days prior to any such distribution Xtrana shall deliver to AB a certificate of its Secretary notifying AB of such distribution and certifying any of the aforementioned board resolutions that are required as a condition to such distribution. 14. TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) by AB, in a writing, should one or more of the conditions set forth in Section 11 (Conditions to Closing Applicable to AB) fail to be satisfied on or prior to the Closing within the time frame set forth in Section 14(c) below, provided that such failure to satisfying such conditions is not the result of a breach by AB of its obligations hereunder; or (b) by Xtrana, in a writing, should one or more of the conditions set forth in Section 12 (Conditions to Closing Applicable to Xtrana) fail to be satisfied on or prior to the Closing within the time frame set forth in Section 14(c) 19 below, provided that such failure to satisfy such conditions is not the result of a breach by Xtrana of its obligations hereunder; or (c) by AB or Xtrana, in a writing, if the Closing does not occur on or prior to (i) the date that is two (2) months after Xtrana files a definitive Proxy Statement with the Securities and Exchange Commission, if the Securities and Exchange Commission does not review Xtrana's Proxy Statement, and (ii) September 15, 2004 if the Securities and Exchange Commission does review Xtrana's Proxy Statement, but a Party may not seek termination under this Section 14(c) if the failure to consummate a Closing by the dates set forth in parts (i) and (ii) above is a result of a breach of a duty or obligation hereunder of the Party seeking such termination. (d) Automatically without further action on the part of either Party if Xtrana holds a meeting for purposes of obtaining the Stockholder Approval, and such Stockholder Approval is not obtained at that meeting. In the event of such termination, no party shall have any obligation or liability to any other in respect to this Agreement, except for any liabilities that may arise from the conduct of the parties prior to such termination, including without limitation any breach of contract or misrepresentation occurring prior to such termination. 15. EFFECTS OF CLOSING. Unless expressly provided herein to the contrary, all rights, obligations, representation and warranties of the Parties shall survive any investigation made by the Parties and shall survive Closing of this Agreement. 16. SEVERABILITY. If any provision hereof should be held invalid, illegal or unenforceable in any respect, then, to the fullest extent permitted by applicable law: (a) all other provisions hereof shall remain in full force and effect and shall be liberally construed in order to carry out the intent of the Parties as nearly as may be possible, and (b) the Parties agree to use their commercially reasonable efforts to negotiate a provision, in replacement of the provision held invalid, illegal or unenforceable, that is consistent with applicable law and accomplishes, as nearly as possible, the original intention of the Parties with respect thereto. To the fullest extent permitted by applicable law, each Party hereby waives any provision of law that would render any provision hereof prohibited or unenforceable in any respect. 17. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to rules of conflict of laws. The Parties hereby agree to designate San Francisco, California as the appropriate venue for any litigation relating to this Agreement. 20 18. NOTICES. All notices or other communications that are required or permitted hereunder shall be in writing and delivered personally, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier), sent by nationally-recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to AB: Applied Biosystems 850 Lincoln Centre Drive Foster City, CA 94404 Attention: Vice President, Intellectual Property, Legal Department Fax No. (650) 638-6677 If to Xtrana: Xtrana, Inc. 590 Burbank Street, Suite 205 Broomfield, Colorado 80020 Attention: J. Timothy Dahltorp, Chief Executive Officer Fax No. (303) 466-3323 With a copy to: Stubbs Alderton & Markiles, LLP 15821 Ventura Blvd., Suite 525 Encino, CA 91436 Attention: Scott Alderton Fax No. (818) 444-4520 or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such communication shall be deemed to have been given (i) when delivered, if personally delivered or sent by telecopier on a business day, (ii) on the business day after dispatch, if sent by nationally-recognized overnight courier, and (iii) on the third business day following the date of mailing, if sent by mail. It is understood and agreed that this Section is not intended to govern the day-to-day business communications necessary between the Parties in performing their duties, in due course, under the terms of this Agreement. 19. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement sets forth and constitutes the entire agreement and understanding between the Parties with respect to the subject matter hereof and all prior agreements, understanding, promises and representations, whether written or oral, with respect thereto are superseded hereby. Each Party confirms that it is not relying on any representations or warranties of the other Party except for the representations or warranties specifically set forth in this Agreement. No amendment, modification, release or discharge hereof shall be binding upon the Parties unless in writing and duly executed by authorized representatives of both Parties. 21 20. CONSTRUCTION. Except where the context otherwise requires, wherever used, the singular shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders and the word "or" is used in the inclusive sense. The captions and headings of this Agreement are for convenience of reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. Both Parties been represented by counsel and have participated equally in the formation of this Agreement; the language of this Agreement shall not be presumptively construed against either Party. 21. RELATIONSHIP OF THE PARTIES. It is expressly agreed that the Parties are independent contractors and that the relationship between the two Parties shall not constitute a partnership, joint venture or agency. 22. EQUITABLE RELIEF. Notwithstanding anything herein to the contrary, nothing in this Agreement shall preclude either Party from seeking interim or provisional relief, in the form of a temporary restraining order, preliminary injunction or other interim equitable relief as necessary to protect the interests of such Party. 23. WAIVER. The waiver by either Party hereto of any right hereunder or the failure to perform or a breach by the other Party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other Party whether of a similar nature or otherwise. 24. COUNTERPARTS. This Agreement may be executed (including via facsimile or other electronic means of transmitting signed copies) in mutliple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 25. NO BENEFIT TO THIRD PARTIES. Except for the rights in Section 10, which are for the express benefit of the indemnitees identified therein, the representations, warranties, covenants, rights and obligations set forth in this Agreement are for the sole benefit of the Parties and their successors and permitted assigns, and they shall not be construed as conferring any rights on any other third parties. 26. SUCCESSORS AND ASSIGNS. This Agreement and the other Transaction Documents will apply to, be binding in all respects upon, and inure to the benefit of the successors and assigns of the parties. 22 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. APPLERA CORPORATION, THROUGH ITS APPLIED BIOSYSTEMS GROUP XTRANA, INC. BY: /s/ MICHAEL W. HUNKAPILLER BY: /S/ TIMOTHY DAHLTORP -------------------------- --------------------------------- NAME: Michael W. Hunkapiller NAME: Timothy Dahltorp TITLE: Senior Vice President TITLE: Chief Executive Officer 23 EX-10 4 ex10-4_1.txt EX-10.4.1 LEASE ADDENDUM TWO EXHIBIT 10.4.1 LEASE ADDENDUM TWO FOR MODIFICATION OF RENT AND OPTION FOR EARLY TERMINATION OF LEASE THIS ADDENDUM DATED November 11, 2003 (for reference purposes only) shall be attached to and considered part of that certain Lease Agreement entered into by and between James M. Roswell d/b/a Burbank East Business Park, ("Landlord"), and Biopool International, Inc. d/b/a Xtrana, Inc., a Delaware Corporation (Tenant"), dated December 19, 2001, as modified by the Lease Addendum One for Increase In Space Dated December 21, 2001. For the promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows. The following provisions shall hereby modify the aforementioned Lease Agreement, as modified by the Lease Addendum One for Increase In Space Dated December 21, 2001. 1. GROSS RENT ABATEMENT. Landlord and Tenant agree to a 6 month partial abatement of the Gross Rent in the amount of $5,000 per month for a 6 month period commencing on December 1, 2003, and expiring on May 31, 2004. During this abatement time period, Tenant shall pay Landlord as Gross Rent the sum of FOURTEEN-THOUSAND EIGHT-HUNDRED THIRTY-NINE DOLLARS AND 75/100 ($14,839.75) on or before December 1, 2003, and a like sum on or before the first day of each and every successive calendar month thereafter and expiring March 31, 2004. Landlord and Tenant agree that commencing on April 1, 2004, and expiring on May 31, 2004, Tenant shall pay Landlord as Gross Rent the sum of FIFTEEN-THOUSAND THREE-HUNDRED THIRTY-FOUR DOLLARS AND 44/100 ($15,334.44). 2. ABATED RENT REPAYMENT. This abated Gross Rent shall accrue interest at the rate of 6% per annum and shall be paid in full, without deduction or offset in lawful money of the United States on or before June 1, 2004. Commencing on June 1, 2004 the Gross Rent shall continue at the unabated rate as set forth in the Lease Agreement and Lease Addendum One on a monthly basis, continuing until the expiration of the lease as set forth in the Lease agreement and Lease Addendum One. 3. AMENDMENT TO LETTER OF CREDIT. On or before December 1, 2003, Tenant shall provide landlord with a second amendment to the Irrevocable Standby Letter of Credit No. STR19435, dated April 9, 2002, as amended by the Amendment to Irrevocable Standby Letter of Credit No. STR19435 dated January 21, 2003, to increase the amount of the Irrevocable Standby Letter of Credit to the sum of $137,500, effective for the one year time period December 1, 2003 through December 1, 2004. On or after December 1, 2004, Tenant shall provide Landlord with a third amendment to the Irrevocable Standby Letter of Credit reducing the sum to $62,046, as per the original Lease. 4. OPTION FOR EARLY TERMINATION OF LEASE. After December 1, 2003, Tenant shall have the option to effect an early termination of the Lease Agreement, as amended, upon timely notice and payment of one half of the remaining Base Rent due under the lease agreement, plus payment of the abetted Gross Rent, plus accrued interest amount referenced in paragraph 1 and 2 of this Lease Addendum Two, less the amount of the security deposit in the sum of $31,022.40, plus any cost of repair or cleaning as provided in paragraph 6 of the Lease Agreement ("Termination Payment"). Tenant shall provide Landlord with written notice of its election to exercise its option for early termination sixty (60) days prior to termination. In the event Tenant exercises its option for early termination, and conditioned upon receipt of the Termination Payment as set forth in this paragraph, the Irrevocable Standby Letter of Credit No. STR19435 and Amendments thereto shall be null and void, and will be released by Landlord. Landlord agrees to release Tenant from all obligations under the Lease Agreement upon receipt of the Termination Payment. 5. MASTER LEASE. It is hereby agreed and understood between Landlord and Tenant that this Lease Addendum does not apply to any Sublease Agreement. 6. ALL OTHER TERMS AND CONDITIONS OF THE LEASE. It is hereby agreed and understood between Landlord and Tenant that all other terms and conditions of the Lease Agreement and attachments, addenda and exhibits thereto, including, without limitation, Lease Addendum One for Increase in Space, shall be unmodified and shall remain in full force and effect. LANDLORD: TENANT: James M. Roswell DBA Burbank East Business Park Biopool International, Inc. /s/ James M. Roswell By: /s/ James M. Roswell By: /s/ Timothy J. Dahltorp ---------------------------- ----------------------------- James M. Roswell Timothy J. Dahltorp Chief Financial Officer Date: November 11, 2003 Date: November 11, 2003 EX-10 5 ex10-4_2.txt EX-10.4.2 LEASE ADDENDUM THREE EXHIBIT 10.4.2 LEASE ADDENDUM THREE FOR MODIFICATION OF RENT THIS ADDENDUM DATED February 12, 2004 shall be attached and considered apart of that certain Lease Agreement entered into by and between James M. Roswell d/b/a Burbank East Business Park, ("Landlord"), and Biopool International, Inc. d/b/a Xtrana, Inc., a Delaware Corporation ("tenant"), dated December 19, 2000, as modified by the Lease Addendum One for Increase in Space dated December 21, 2001, and Lease Addendum Two for Modification of Rent and Option for Early Termination dated November 11, 2003. For the promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows. The following provisions shall hereby modify the aforementioned Lease Agreement as modified by Lease Addendum One for Increase in Space dated December 21, 2001, and Lease Addendum Two for Modification of Rent and Option for Early Termination dated November 11, 2003. The Section 1 of the Lease Addendum Two entitled Gross Rent Abatement, shall be replaced in its entirety with the following: 1. GROSS RENT ABATEMENT. Landlord and Tenant agree to a 6 month partial abatement of the Gross Rent in the amount of $5,000 per month for a 6 month period commencing on December 1, 2003, and expiring on May 31, 2004. During this abatement time period, Tenant shall pay Landlord as Gross Rent the sum of fourteen thousand, eight hundred, thirty nine dollars and 75/100 ($14,839.75) on or before December 1, 2003, and a like sum on or before the first day of each and every successive calendar month thereafter and expiring March 31, 2004. Landlord and Tenant agree that commencing on April 1, 2004, and expiring on May 31, 2004, Tenant shall pay Landlord Gross Rent the sum of twelve thousand, one hundred, one dollars and 22/100 ($12,101.22). It is hereby agreed and understood between Landlord and Tenant that all other terms and conditions of the Lease Agreement and attachments, addenda and exhibits thereto, shall be unmodified and shall remain in full force and effect. LANDLORD: TENANT: James M. Roswell d/b/a Biopool International, Inc. d/b/a Burbank East Business Park Xtrana, Inc. By: /s/ James M. Roswell By: /s/ Timothy J. Dahltorp ---------------------------- ------------------------------ James M. Roswell Timothy J. Dahltorp Chief Executive Officer Date: February 12, 2004 Date: February 12, 2004 EX-23 6 ex23-1a.txt EX-23.1 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-22819 and 333-58318) pertaining to the Biopool International, Inc. 1993 Stock Incentive Plan and the Biopool International, Inc. 2000 Stock Incentive Plan of our report dated March 5, 2003, with respect to the financial statements of Xtrana, Inc. included in the Annual Report (Form 10-KSB) for the year ended December 31, 2003. /S/ HEIN & ASSOCIATES LLP Hein & Associates Denver, Colorado February 11, 2004 EX-31 7 ex31-1a.txt EX-31.1 CEO/CFO CERTIFICATION (302) EXHIBIT 31.1 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 annual report on Form 10-KSB of Xtrana, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 19, 2004 /S/ TIMOTHY DAHLTORP ----------------------------------- Timothy Dahltorp Chief Executive Officer and Chief Financial Officer EX-32 8 ex32-1a.txt EX-32.1 CEO/CFO CERTIFICATION (906) EXHIBIT 32.1 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 Annual Report on Form 10-KSB for the Fiscal Year Ended December 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: March 19, 2004 /S/ TIMOTHY DAHLTORP -------------------------------------------- Timothy Dahltorp, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----