10QSB 1 fm10qsb-033104.txt FORM 10-QSB (3-31-04) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-14257 XTRANA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 58-1729436 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. BOX 668, SEDALIA, COLORADO 80135 (303) 466-4424 (Address of Principal Executive Offices) (Registrant's Telephone Number Including Area Code) 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Outstanding at May 13, 2004, Common Stock, $.01 par value per share, 16,533,269 shares. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XTRANA, INC. CONDENSED BALANCE SHEETS MARCH 31, DECEMBER 2004 31, 2003 (Unaudited) *** -------- -------- (in thousands except share data) ASSETS CURRENT ASSETS Cash and cash equivalents ....................... $ 477 $ 948 Accounts receivable ............................. 22 7 Prepaid expenses ................................ 60 19 Other current assets ............................ 35 35 -------- -------- TOTAL CURRENT ASSETS ................................. 594 1,009 Restricted Cash ...................................... 138 138 FURNITURE AND FIXTURES, NET OF $58 OF DEPRECIATION ... 33 60 PATENTS NET OF AMORTIZATION OF $32 ................... 301 283 -------- -------- TOTAL ASSETS ......................................... $ 1,066 $ 1,490 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable ............................. $ 144 $ 163 Notes Payable Short Term ..................... 14 14 Accrued Payroll and payroll taxes ............ 339 82 Other accrued liabilities .................... 184 194 -------- -------- Total Current Liabilities ............................ 681 453 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 16,533,269 shares issued and outstanding in 2004 and 2003 ......... 165 165 Other stockholders' equity ........................... 19,446 19,446 Accumulated deficit .................................. (19,226) (18,574) -------- -------- TOTAL STOCKHOLDERS' EQUITY ........................... 385 1,037 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 1,066 $ 1,490 ======== ======== *** Amounts derived from the audited financial statements for the year ended December 31, 2003. See accompanying notes to condensed financial statements. 2 XTRANA, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDING MARCH 31, 2004 2003 -------------------------------------------------------------------------------- (in thousands except per share data) SALES .............................................. $ 102 $ 262 COST OF SALES ...................................... 79 213 -------- -------- GROSS PROFIT ....................................... 23 49 Operating expenses: Selling, general and administrative ........... 577 720 Research and development ...................... 98 94 -------- -------- Total Operating Expenses ........................... 675 814 Other income, net .................................. 1 26 -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ....... (651) (739) INCOME TAX EXPENSE ................................. -- -- -------- -------- LOSS FROM CONTINUING OPERATIONS .................... (651) (739) -------- -------- NET INCOME (LOSS) .................................. $ (651) $ (739) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic ......................................... 16,533 16,533 Effect of dilutive shares ..................... -- -- -------- -------- Diluted ....................................... 16,533 16,533 ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Net Income (loss) ............................. $ (0.04) $ (0.04) See accompanying notes to condensed financial statements. 3 XTRANA, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) THREE MONTHS ENDING MARCH 31, 2004 2003 -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES ............................. $(450) $ 354 INVESTING ACTIVITIES ............................. (21) (5) NET INCREASE (DECREASE) IN CASH .................. (471) 349 CASH, BEGINNING OF PERIOD ........................ 948 568 ----- ----- CASH, END OF PERIOD .............................. $ 477 $ 917 ===== ===== See accompanying notes to condensed financial statements. 4 XTRANA, INC. MARCH 31, 2004 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2003. The balance sheet at December 31, 2003, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 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: 2004 2003 ------- ------- Net loss - as reported ........................... $ (651) $ (739) Effect of stock-based compensation included in reported net loss ................. -- -- Effect of stock-based compensation per SFAS 123 .................................. (18) (63) ------- ------- Net loss applicable to common stock - pro forma ..................................... $ (669) $ (802) ======= ======= Basic and diluted: Loss per share - as reported .................. $ (0.04) $ (0.04) Effect of stock-based compensation included in reported net loss .............. -- -- Effect of stock-based compensation per SFAS 123 ............................... (0.00) (0.00) ------- ------- Net loss applicable to common stock - pro forma .................................. $ (0.04) $ (0.04) ======= ======= 5 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: 2004 2003 ---- ---- 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. 2. STOCK OPTION PLANS The Company has two stock option plans (the "Plans") for the benefit of employees, officers, directors, and consultants of the Company. As of March 31, 2004, 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 the first three months of 2004 and for fiscal year 2003 was as follows: SHARES WEIGHTED AVERAGE OUTSTANDING PRICE RANGE EXERCISE PRICE ----------- ----------- -------------- BALANCE AT JANUARY 1, 2003 1,890,179 $0.2300 - $2.5000 $0.83 Granted -- -- -- Exercised -- -- -- Cancelled (58,330) $1.0300 - $1.0300 $1.03 ----------- BALANCE AT MARCH 31, 2003 1,831,849 $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 Granted -- -- -- Exercised -- -- -- Cancelled (155,503) $0.4800 - $1.5000 $0.87 ----------- BALANCE AT MARCH 31, 2004 1,533,544 $0.2300 - $2.5000 $0.82 The following information summarizes stock options outstanding at March 31, 2004: 6 OUTSTANDING EXERCISABLE ----------------------------------- ---------------------- Weighted Average -------------------- Remaining Weighted Contractual Average Number Life in Exercise Number Exercise Exercise Price Outstanding Months Price Exercisable Price -------------------------------------------------------------------------------- $ 0.01 - $ 0.31 110,250 101 $ 0.230 110,066 $ 0.230 $ 0.32 - $ 0.62 535,000 96 $ 0.383 455,706 $ 0.377 $ 0.63 - $ 0.93 237,163 36 $ 0.729 229,495 $ 0.728 $ 0.94 - $ 1.25 326,634 66 $ 0.999 310,901 $ 0.997 $ 1.26 - $ 1.56 270,747 4 $ 1.498 270,747 $ 1.498 $ 1.57 - $ 1.87 12,500 41 $ 1.687 12,500 $ 1.687 $ 2.19 - $ 2.50 41,250 36 $ 2.396 41,250 $ 2.396 ------------------------------------------------------------ 1,533,544 62 $ 0.818 1,430,665 $ 0.838 At March 31, 2004, 2,998,720 shares were available for future grants under the Plans. 3. EARNINGS PER SHARE Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based upon the weighted average number of common shares and dilutive potential common shares outstanding. Potential dilutive shares are outstanding options under the Company's stock option plans and outstanding warrants, which are included under the treasury stock method. 4. SALE OF INTELLECTUAL PROPERTY 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. 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. On March 24, 2004, our stockholders approved the sale of our intellectual property to Applera at a special stockholders meeting. On March 31, 2004, Applied Biosystems delivered the $3,500,000 closing cash payment, and we delivered our intellectual property rights, into an escrow account pending the final closing of the transaction. Such closing will take place after Applera's receipt of certain certifications from Xtrana required as part of Applera's due diligence efforts under the assignment agreement. We expect the final closing of the transaction to occur on or about May 14, 2004, but there can be no assurance that the closing will occur in a timely manner. The Company expects to record a gain of approximately $3,384,000 in the quarter ended June 30, 2004 as a result of this transaction. The proposed sale of our intellectual property to Applera, 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, we anticipate that we would terminate all of our remaining employees. As of May 3, 2004, we terminated the lease for our prior executive offices 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. Following completion of the sale of our intellectual property pursuant to the Assignment Agreement, 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. 7 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. 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. 5. EXECUTIVE EMPLOYMENT AGREEMENT 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 which has been accrued and expensed as severance as of March 31,2004. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The information contained in this Form 10-QSB is intended to update the information contained in our Annual Report on Form 10-KSB for the year ended December 31, 2003 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-KSB. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-QSB. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED BY THE WORDS "ESTIMATE," "ANTICIPATE," "EXPECT," "BELIEVE," AND SIMILAR EXPRESSIONS), WHICH ARE BASED UPON MANAGEMENT'S CURRENT EXPECTATIONS AND SPEAK ONLY AS OF THE DATE MADE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AND INCLUDE, BUT ARE NOT LIMITED TO, THE ABILITY TO CLOSE THE APPLIED BIOSYSTEMS TRANSACTION IN A TIMELY MANNER, GOVERNMENT REGULATIONS AND RIGHTS WITH RESPECT TO THE INTELLECTUAL PROPERTY SOLD TO APPLIED BIOSYSTEMS, OUR ABILITY TO SETTLE OUR REMAINING OBLIGATIONS FOLLOWING THE SALE OF OUR INTELLECTUAL PROPERTY, OUR ABILITY TO FIND A MERGER PARTNER, AS WELL AS OTHER FACTORS DISCUSSED IN THE COMPANY'S LAST REPORT ON FORM 10-KSB. OVERVIEW Until recently, we developed and marketed 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 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. 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. On March 24, 2004, our stockholders approved the sale of our intellectual property to Applera at a special stockholders meeting. On March 31, 2004, Applied Biosystems delivered the $3,500,000 closing cash payment, and we delivered our intellectual property rights, into an escrow account pending the final closing of the transaction. Such closing will take place after Applera's receipt of certain certifications from Xtrana required as part of Applera's due diligence efforts under the assignment agreement. We expect the final closing of the transaction to occur on or about May 14, 2004, but there can be no assurance that the closing will occur in a timely manner. The Company expects to record a gain of approximately $3,384,000 in the quarter ended June 30, 2004 as a result of this transaction. The proposed sale of our intellectual property to Applera, 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, we anticipate that we would terminate all of our remaining employees. As of May 3, 2004, we terminated the lease for our prior executive offices 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. Following completion of the sale of our intellectual property pursuant to the Assignment Agreement, 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. 9 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. 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. 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 $22,000 in gross trade accounts on the balance sheet at March 31, 2004. Because of our limited sales, we do not believe that a change in the financial condition of any of our current customers could result in the need to create a significant allowance, nor could any such change have a material adverse effect on our financial results for 2004. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our financial statements. REVENUE RECOGNITION. Grant revenues are recorded when earned, pursuant to the respective grant agreements. Grant revenues and profit on long-term contracts are recorded as the contract progresses using the percentage of completion method of accounting, which relies on estimates of total expected contract revenues and costs. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. Accordingly, favorable changes in estimates result in additional profit recognition, and unfavorable changes in estimates result in the reversal of previously recognized revenue and profits. When estimates indicate a loss under a contract, cost of revenue is charged with a provision for such loss. As work progresses under a loss contract, revenue continues to be recognized, and a portion of the contract costs incurred in each period is charged to the contract loss reserve. The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition," ("SAB 101") provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is consistent with this guidance and in accordance with generally accepted accounting principles. We do not anticipate any changes to our revenue recognition and shipping policies in the future. RESULTS OF OPERATIONS Sales were $0.10 million for the three-month period ended March 31, 2004, compared with $0.26 million for the corresponding period of 2003. This decrease in revenue is the result of the decision to sell our intellectual property Applera. We are in the process of liquidating our remaining assets and closing our operations in Broomfield Colorado. The revenue generated in the first quarter is the result of the winding down of our grants. As of March 31, 2004, we have abandoned the remaining grants. 10 Cost of goods sold was $0.08 million for the three months ended March 31, 2004, compared with $0.21 million for the corresponding period in 2003. Management does not believe that comparison is particularly meaningful at this stage of the Company because of the termination of our operations. Operating expenses were $0.7 million for the three months ended March 31, 2004, compared with $0.8million for the same period in 2003. Other income is primarily interest income. Included in operating expenses for the three months ended March 31, 2004 is $0.3 million related to the employee severance expense and Mr. Dahltorp's executive employment agreement. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2004, we had cash and cash equivalents of $0.5 million. The sale of our intellectual property to Applera will result in the receipt of net proceeds of approximately $3.6 million, after payment of all expenses associated with the transaction. After closing the contemplated sale our intellection 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. As of May 3, 2004 we terminated the lease for our executive offices in Broomfield, Colorado at a cost of $0.2 million pursuant to an early termination agreement. Consequently, following the completion of the transaction, after payment of employee severance and lease terminations costs, we would have limited overhead costs of operation. 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. 11 The following table summarizes our contractual obligations as of March 31, 2004: CONTRACTUAL OBLIGATIONS Payments Due by Period (in thousands) ---------------------------- ------------------------------------ 2004 2005 2006 ---- ---- ---- Operating Leases $235 $242 $61 Contractual Cash Obligations $208 $68 - On November 11, 2003, we entered into an early termination option 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. Upon our exercise of 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 exercised the early termination of this lease as of May 3, 2004 and as such, we were obligated to pay the landlord $0.2 million as an early termination fee, which will be expensed in the quarter ended June 30, 2004. OFF-BALANCE SHEET ARRANGEMENTS At March 31, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. CAUTIONARY STATEMENTS AND RISK FACTORS You should carefully consider the following risk factors and all other information contained in this report before purchasing shares of our common stock. Investing in our common stock involves a high degree of risk. If any of the following events or outcomes actually occur, our business, operating results, and financial condition would likely suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of the money you paid to purchase our common stock. RISKS RELATED TO OUR BUSINESS GOING CONCERN AND LIQUIDITY PROBLEMS. Our auditors have included an explanatory paragraph in their audit opinion with respect to our financial statements as December 31, 2003. The paragraph states that our recurring losses from operations raise substantial doubts about our ability to continue as a going concern. We may not have sufficient working capital to sustain our operations. We have been unable to generate sufficient revenues to sustain our operations. We will have to obtain funds to meet our cash requirements through business alliances, such as strategic or financial transactions with third parties, increase our revenue and/or, the sale of securities or other financing arrangements, or we may be required to curtail our operations or seek a merger partner. Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing stockholders. In addition, no assurance may be given that the Company will be successful in raising additional funds or entering into business alliances. OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO MAINTAIN OR EXPAND OUR BUSINESS IS UNCERTAIN. In the future, in order to expand our business through internal development or acquisitions, we may need to raise substantial additional funds through equity or debt financings, research and development financings, or collaborative relationships. However, this additional funding may not be available or, if available, it may not 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 12 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 nominal revenue for the three months ended March 31, 2004 as a the result of the decision to sell our intellectual property and closing our operations. Because of our limited revenues, we are dependent upon our current capital resources to fund our overhead and operations. 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. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include: (1) expiration or termination of research contracts with collaborators or government research grants, which may not be renewed or replaced; (2) the timing and willingness of collaborators to commercialize our products; (3) the timing, release, and competitiveness of our products; and (4) general and industry-specific economic conditions, which may affect our customers' research and development expenditures and use of our products. If revenue declines in a 13 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. 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 SCIENTIFIC OR PRODUCTION PERSONNEL OR LOSS OF KEY MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS. Our continued success depends to a significant extent on the members of our management team. Because of our lack of ongoing revenues, 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 14 rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, third parties may infringe or misappropriate our proprietary rights, and we could be required to incur significant expenses in preserving them. Our success will depend in part on our ability to obtain and maintain meaningful patent protection for our products, both in the United States and in other countries. We rely on patents to protect some of our intellectual property and our competitive position. We own issued patents and pending patent applications, including both domestic and foreign patents and patent applications. We cannot assure you that any of the presently pending or future patent applications will issue as patents, or that any patents issued to us will not be challenged, invalidated, held unenforceable, or circumvented. Further, we cannot assure you that claims in patents that have been issued, or that may be issued to us in the future, will be sufficiently broad to prevent third parties from producing competing products similar in design to our products. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws in the United States. Failure to obtain adequate patent protection for our proprietary technology could have a material adverse effect on our business, operating results, financial condition, and future growth prospects. POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL CONDITION. Despite product testing prior to sale, our products have from time to time experienced performance problems discovered after we sold the products. If a customer experiences performance problems, errors in shipment or product defects, it could result in: o injuries to persons; o loss of sales; o delays in or elimination of market acceptance; o damage to our brand or reputation; and o product returns. Although our distributors and manufacturers have return policies, if we accept a product returned by a customer, but it is not accepted for return by the distributor, we will incur the cost. Because we depend on third parties for certain of the components of our products, if those components are defective, the performance of our products would be reduced or undermined. Any increase in the rate of returns would affect our financial condition, operating results and cash flows. ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS. Portions of our operations require the controlled use of hazardous and radioactive materials. Although we believe our safety procedures comply with the standards prescribed by federal, state, local, and foreign regulations, the risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of an accident, we could be liable for any damages that result, which could seriously damage our business and results of operations. 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 15 against these current or future competitors. Increased competition could result in price reductions for our products, reduced margins, and loss of market share, any of which could adversely impact our business, financial condition, and results of operations. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. We operate in a highly regulated industry. Our business is currently subject to extensive regulation, supervision, and licensing by federal, state, and local governmental authorities. Also, from time to time we must expend resources to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these regulations, we could be subject to disciplinary actions or administrative enforcement actions. These actions could result in penalties, including fines. RISKS ASSOCIATED WITH OUR COMMON STOCK OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS. Our executive officers, directors, and principal stockholders will continue to beneficially own approximately 34% of our outstanding common stock, based upon the beneficial ownership of our common stock as of April 30, 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) announcement of potential strategic transactions; (5) legislative or regulatory changes; (6) recommendations by securities industry analysts; and (7) 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. 16 Because we may not pay dividends, your return on this investment likely depends on your selling our stock at a profit. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures, which it has designed to ensure that material information related to Xtrana, Inc., is disclosed in its public filings on a regular basis. In response to recent legislation and proposed regulations, the Company reviewed its internal control structure and its disclosure controls and procedures. The Company believes that its pre-existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations. As of March 31, 2004, members of the Company's management, including James Chamberlain, the Company's acting Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, Mr. Chamberlain concluded that the Company's disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by management of the Company on a timely basis and to ensure that the quality and timeliness of the Company's public disclosures complies with its SEC disclosure obligations. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls after the date of our most recent evaluation. 17 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERs On March 24, 2004, the Company held a Special Meeting of Stockholders (the "Special Meeting"). At the Special Meeting, there were 16,533,269 shares of common stock entitled to vote. Of the shares entitled to vote, 10,301,856 shares (62.3%) were represented at the meeting in person or by proxy. The following summarizes the voting results for the sole matter submitted to the Registrant's stockholders for action at the Special Meeting: 1. Proposal to approve the sale of the Company's intellectual property to the Applied Biosystems Group of Applera Corporation pursuant to the Assignment Agreement between Applera and the Company. FOR AGAINST ABSTAIN BROKER NON-VOTES 9,907,956 357,960 35,940 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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). (b) Reports on Form 8-K 1. Current Report on Form 8-K filed January 30, 2004, reporting Items 5 and 7. 2. Current Report on Form 8-K filed March 12, 2004, reporting Items 5 and 7. 18 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 14, 2004 XTRANA, INC. /S/ JAMES CHAMBERLAIN ------------------------------------ James Chamberlain Acting Chief Executive Officer and Chief Financial Officer 19