10QSB 1 fm10qsb-093004.txt FORM 10-QSB (9-30-04) ================================================================================ 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 September 30, 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 [ ] State the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Outstanding at November 12, 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 SEPTEMBER 30, DECEMBER 31, 2004 2003 (Unaudited) *** -------- -------- (in thousands except share data) ASSETS Current assets Cash and cash equivalents ..................... $ 3,132 $ 948 Accounts receivable ........................... -- 7 Prepaid expenses .............................. 31 19 Other current assets .......................... -- 35 -------- -------- Total current assets ............................... 3,163 1,009 Restricted cash .................................... -- 138 Furniture and fixtures, net of depreciation ........ -- 60 Patents net of amortization ........................ -- 283 -------- -------- TOTAL ASSETS ....................................... $ 3,163 $ 1,490 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ........................... $ 21 $ 163 Notes payable short term ................... 14 14 Accrued payroll and payroll taxes .......... 133 82 Other accrued liabilities .................. 43 194 -------- -------- Total current liabilities .......................... 211 453 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 ................................ (16,659) (18,574) -------- -------- Total stockholders' equity ......................... 2,952 1,037 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 3,163 $ 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 NINE MONTHS ENDING SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 -------- -------- -------- -------- (in thousands except per share data) SALES ...................................... $ -- $ 361 $ 102 $ 988 Cost of sales .............................. -- 278 79 792 -------- -------- -------- -------- GROSS PROFIT ............................... -- 83 23 196 Operating expenses: Selling, general, administrative ...... 236 435 1,328 1,897 Research and development .............. -- 40 98 212 -------- -------- -------- -------- Total operating expense .................... 236 475 1,426 2,110 Gain (loss) on sale of intellectual property (7) -- 3,310 -- Other income, net .......................... 4 2 8 47 -------- -------- -------- -------- NET INCOME (LOSS) .......................... $ (239) $ (390) $ 1,915 $ (1,867) ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic ................................. 16,533 16,533 16,533 16,533 Effect of dilutive shares ............. -- -- -- -- -------- -------- -------- -------- Diluted ............................... 16,533 16,533 16,533 16,533 ======== ======== ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Net income (loss) - Continuing operations ..................... $ (0.01) $ (0.02) $ 0.12 $ (0.11)
See accompanying notes to condensed financial statements. 3 XTRANA, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDING SEPTEMBER 30, 2004 2003 -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES ....................... $(1,453) $(1,942) INVESTING ACTIVITIES: Sale of intellectual property ......... 3,658 -- Other ................................. (21) 2,582 ------- ------- TOTAL INVESTING ACTIVITIES ................. 3,637 2,582 FINANCING .................................. -- (18) ------- ------- NET INCREASE IN CASH ....................... 2,184 622 CASH, BEGINNING OF PERIOD .................. 948 568 ------- ------- CASH, END OF PERIOD ........................ $ 3,132 $ 1,190 ======= ======= See accompanying notes to condensed financial statements. 4 XTRANA, INC. SEPTEMBER 30, 2004 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of Xtrana, Inc. (the "Company") 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 nine-month period ended September 30, 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. Nine Months Ended September 30, 2004 2003 --------- --------- Net income (loss) - as reported .................. $ 1,915 $ (1,867) Effect of stock-based compensation included in reported net income (loss) ........ -- -- Effect of stock-based compensation per SFAS 123 .................................. (49) (132) --------- --------- Net income (loss) applicable to common stock - pro forma ............................. $ 1,866 $ (1,999) ========= ========= Basic and diluted: Income (loss) per share - as reported .......... $ 0.12 $ (0.11) Effect of stock-based compensation included in reported net income (loss) ..... -- -- Effect of stock-based compensation per SFAS 123 ............................... (0.00) (0.01) --------- --------- Net loss applicable to common stock - pro forma .................................. $ 0.12 $ (0.12) ========= ========= 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 September 30, 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 nine months of 2004 and for fiscal year 2003 was as follows: WEIGHTED AVERAGE SHARES EXERCISE OUTSTANDING PRICE RANGE PRICE ----------- ----------- ----- Balance at January 1, 2003 1,890,179 0.2300 - 2.5000 0.83 Granted -- -- -- Exercised -- -- -- Cancelled (125,255) 0.2900 - 1.2720 1.00 ----------- Balance at September 30, 2003 1,764,924 0.2300 - 2.5000 0.82 Granted -- -- -- Exercised -- -- -- Cancelled (75,877) 0.2900 - 1.3750 0.80 ----------- Balance at December 31, 2003 1,689,047 0.2300 - 2.5000 0.82 Granted -- -- -- Exercised -- -- -- Cancelled (595,815) 0.2600 - 1.5000 1.10 ----------- Balance at September 30, 2004 1,093,232 0.2300 - 2.5000 0.67 6 The following information summarizes stock options outstanding at September 30, 2004: OUTSTANDING EXERCISABLE ------------------------------------ ----------------------- WEIGHTED AVERAGE ---------------------- Remaining Weighted Contractual Average Number Life in Exercise Number Exercise Exercise Price Outstanding Months Price Exercisable Price -------------------------------------------------------------------------------- $ 0.00 - $ 0.31 110,000 95 $ 0.230 110,000 $ 0.230 $ 0.31 - $ 0.62 495,000 91 $ 0.370 451,457 $ 0.370 $ 0.62 - $ 0.93 128,000 58 $ 0.764 123,249 $ 0.763 $ 0.93 - $ 1.25 298,232 54 $ 0.996 298,232 $ 0.995 $ 1.25 - $ 1.56 8,250 17 $ 1.437 8,250 $ 1.437 $ 1.56 - $ 1.87 12,500 35 $ 1.687 12,500 $ 1.687 $ 2.18 - $ 2.50 41,250 30 $ 2.395 41,250 $ 2.395 ----------- ----------- 1,093,232 73 $ 0.672 1,044,938 $ 0.684 At September 30, 2004, 2,853,402 shares were available for future grants under the 2000 Stock Incentive Plan. 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, the Company entered into an Assignment Agreement with Applera Corporation through its Applied Biosystems Group. Pursuant to the terms of the Assignment Agreement, Applied Biosystems purchased all intellectual property of the Company, other than the Company's trademarks and trade names. The assets purchased by Applied Biosystems included all the Company's U.S. and foreign patents, inventions, trade secrets and know-how, and constituted substantially all of the Company's assets. The total consideration of $4,000,000 consisted of: (a) a $100,000 cash deposit, which was previously paid to the Company, (b) $3,500,000 in cash paid to the Company at closing; and (c) $400,000 in cash paid 90 days after closing, upon performance by the Company of certain consulting services as required by the Assignment Agreement. The total purchase price paid by Applied Biosystems was determined in arms-length negotiations between the parties. On March 31, 2004, Applied Biosystems delivered the $3,500,000 closing cash payment, and the Company delivered its intellectual property rights, into an escrow account pending the final closing of the transaction. Such final closing took place on May 14, 2004, after Applied Biosystems' receipt of certain certifications from the Company required as part of the due diligence efforts under the Assignment Agreement. On August 15, 2004, Applied Biosystems delivered the $400,000 in cash due to the completion of the consulting services required by the Assignment Agreement. The sale of the Company's intellectual property to Applied Biosystems resulted in the receipt of net proceeds of approximately $3,357,000 by the Company, after payment of all expenses associated with the transaction. After complying with the requirements of the Assignment Agreement with Applera to provide consulting services, the Company terminated all of its remaining employees. As of May 3, 2004, the Company terminated the lease for its prior executive offices pursuant to an early termination agreement. The Company could distribute the remaining cash proceeds as a dividend to the Company's stockholders as part of liquidation, after satisfaction of all of the Company's liabilities and payment of all costs associated with the liquidation. If the Company were to make a distribution of the remaining cash proceeds to its stockholders 7 before the expiration of certain representations and warranties the Company made under the Assignment Agreement (18 months from the date of closing), the Company would be required to reserve and hold back $1,000,000 for possible settlement of potential claims by Applied Biosystems against the Company for the Company's breaches of those representations and warranties. 5. EXECUTIVE EMPLOYMENT AGREEMENT In August 2001, the Company entered into an executive employment agreement with Timothy J. Dahltorp. Pursuant to this agreement, Mr. Dahltorp agreed to serve as Chief Executive Officer and Chief Financial Officer for a period of 3 years. The agreement provided 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 provided for severance of up to one year's base salary if the agreement was terminated by the Company without cause or by Mr. Dahltorp upon a change in control. Pursuant to the employment agreement, the Company's entering into the Assignment Agreement with Applied Biosystems constituted a "change of control" and, in accordance with the terms of the Agreement, Mr. Dahltorp notified the Company that he would terminate the employment agreement effective as of March 19, 2004. As a result, the Company 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 September 30, 2004. 6. TERMINATION OF LETTER OF INTENT FOR MERGER In June 2004, the Company entered into a non-binding letter of intent with Aduromed Corporation, pursuant to which the Company would acquire Aduromed in a reverse merger transaction. The proposed acquisition was subject to certain conditions, including satisfactory completion of due diligence by both parties, execution of a definitive agreement, approval by the Company's stockholders, and obtaining required third party approvals, among others. In September 2004, the Company's Board of Directors determined to terminate its negotiations with Aduromed and the letter of intent as a result of the Company's due diligence investigation of Aduromed and its business. The Board of Directors continues to believe that the Company can attract interest from other businesses that might benefit from access to the Company's funds, as well as its status as a public company with a clean reporting history. The Board of Directors is currently in discussions with other potential merger candidates and plans to continue to spend a limited period of time exploring opportunities to find a merger candidate. If the Company is unable to conclude a transaction that it believes would provide long term stockholder value, the Board of Directors plans to propose that the stockholders approve a liquidation of the company. 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, OUR ABILITY TO SETTLE OUR REMAINING OBLIGATIONS FOLLOWING THE SALE OF OUR INTELLECTUAL PROPERTY AND 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. SALE OF OUR INTELLECTUAL PROPERTY On January 26, 2004, we entered into an Assignment Agreement with Applera Corporation through its Applied Biosystems Group. Pursuant to the terms of the Assignment Agreement, Applied Biosystems purchased all of our intellectual property, other than our trademarks and trade names. The assets purchased by Applied Biosystems included all our U.S. and foreign patents, inventions, trade secrets and know-how, and constituted substantially all of our assets. The total consideration of $4,000,000 consists of: (a) a $100,000 cash deposit, which was previously paid to us, (b) $3,500,000 in cash paid to us at closing; and (c) $400,000 in cash to be paid 90 days after closing, subject to our providing certain consulting services as required by the Assignment Agreement. 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 final closing took place on May 14, 2004, after Applied Biosystems' receipt of certain certifications from us required as part of the due diligence efforts under the Assignment Agreement. In August 2004, Applied Biosystems delivered the $400,000 in cash due to our completion of consulting services required by the Assignment Agreement. The sale of our intellectual property to Applied Biosystems resulted in our receipt of net proceeds of approximately $3,357,000, after payment of all expenses associated with the transaction. After complying with the requirements of the Assignment Agreement with Applied Biosystems to provide consulting services, we terminated 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. We could distribute the remaining 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 Applied Biosystems against us for our breaches of those representations and warranties. MERGER DISCUSSIONS The Board of Directors believes that we can attract interest from other businesses that might benefit from access to our 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 9 greater long-term stockholder value than simply liquidating the company. Since completion of the sale of our intellectual property, after payment of employee severance and lease terminations costs, we have limited overhead costs of operation, but remain a reporting company under the rules and regulations of the Securities and Exchange Commission. In June 2004, the Company entered into a non-binding letter of intent with Aduromed Corporation, pursuant to which we would acquire Aduromed in a reverse merger transaction. The proposed acquisition was subject to certain conditions, including satisfactory completion of due diligence by both parties, execution of a definitive agreement, approval by our stockholders, and obtaining required third party approvals, among others. In September 2004, our Board of Directors determined to terminate its negotiations with Aduromed and the letter of intent based on the results of our due diligence investigation of Aduromed and its business. We are currently pursuing discussions with another potential merger partner, although no written agreement has been reached and there can be no assurance that a definitive agreement will reached. The Board of Directors intends to spend a reasonable period of time continuing to explore merger candidates and, if it is unable to conclude a transaction that it believes would provide long-term stockholder value, to propose that the stockholders approve liquidation. In either event, the Board of Directors does not anticipate taking any action without further stockholder approval. When appropriate, we intend to make announcements of developments with respect to any potential business transaction by issuing a press release and/or filing of a Current Report on Form 8-K with the SEC. RESULTS OF OPERATIONS Sales were $0.10 million for the nine-month period ended September 30, 2004, compared with $1.0 million for the corresponding period of 2003, a decrease of 90%. We had no sales in the three-month period ended September 30, 2004, compared to sales of $0.4 million for the corresponding period of 2003. This decrease in revenue in 2004 is the result of the decision to sell our intellectual property to Applied Biosystems. We are in the process of liquidating our remaining assets and closing our operations in Broomfield, Colorado. The revenue generated in the first quarter of 2004 is the result of the winding down of our grants. As of September 30, 2004, we have abandoned the remaining grants. Cost of goods sold was $0.08 million for the nine months ended September 30, 2004, compared with $0.8 million for the corresponding period in 2003, a decrease of 90%. While we had no sales in the three-month period ended September 30, 2004, the cost of goods sold for the three-month period ended September 30, 2003 was $0.3 million. Management does not believe that comparison is particularly meaningful at this stage of the company because of the termination of our operations. Operating expenses decreased $0.7 million, or 33%, to $1.4 million for the nine months ended September 30, 2004, as compared with $2.1 million for the same period in 2003. Other income is primarily interest income. Gain on the sale of the intellectual property net of expenses was $3.3 million. Included in operating expenses for the nine months ended September 30, 2004 is $0.3 million related to the employee severance expense and our former CEO's executive employment agreement and $0.2 million in lease termination fees. Operating expenses decreased $0.3 million, or 60%, to $0.2 million for the three months ended September 30, 2004, as compared to $0.5 for the same period in 2003. Included in operating expenses for the three-months ended September 30, 2004 is $50,000 of employee severance expense related to our former CEO's executive employment agreement. Other income is primarily interest income. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, we had cash and cash equivalents of $3.1 million. The sale of our intellectual property to Applied Biosystems resulted in the receipt of net proceeds of approximately $3.357 million, after payment of all expenses associated with the transaction. After complying with the requirements of the Assignment Agreement to provide consulting services, we terminated all of our remaining employees. As of May 3, 2004 we terminated the lease for our former executive offices in Broomfield, Colorado at a cost of $0.2 million pursuant to an early termination agreement. Consequently, 10 following the completion of the transaction, and after payment of employee severance and lease terminations costs, we will have limited overhead costs of operation. We could distribute our remaining 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 Applied Biosystems against us for our breaches of those representations and warranties. Alternatively, the Board of Directors believes that we can 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. It is the intention of the Board of Directors to spend a reasonable period of time exploring potential merger candidates and, if it is unable to conclude a transaction that it believes would provide long-term stockholder value, to propose that the stockholders approve 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 provided 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 provided 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 Applied Biosystems constituted a "change of control" and, in accordance with the terms of the Agreement, Mr. Dahltorp notified us that he was terminating the employment agreement effective as of March 19, 2004. As a result, we are 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 September 30, 2004. On November 11, 2003, we entered into an early termination option agreement with the landlord from which we leased our executive offices in Broomfield, Colorado. This agreement provided 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 provided that we would 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 was expensed in the quarter ended June 30, 2004. OFF-BALANCE SHEET ARRANGEMENTS At September 30, 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 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. 11 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 we will be successful in raising additional funds or entering into business alliances. WE ARE NO LONGER GENERATING ANY REVENUE. We had nominal revenue for the nine months ended September 30, 2004 as the result of the decision to sell our intellectual property and the closing of our operations. Because of our limited revenues, we are dependent upon our current capital resources to fund our overhead and remaining 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 entered into any binding arrangements, we have identified and are in discussions with one or more potential opportunities for a business combination. Management will seek to determine whether any potential acquisition or merger transactions are 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 us and our 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. 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. 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 precise 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 our Company and management of the opportunity, and the relative negotiating strength of the parties involved. 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 our company. The owners of the business opportunity will likely acquire control of our company following such transaction. ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS. Although we have ceased substantially all of our operations, portions of our prior operations required the controlled use of hazardous and radioactive materials. Although we believe our safety procedures complied 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 12 could be liable for any damages that result, which could seriously damage our business and results of operations. 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 October 31, 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. Because we may not pay dividends, your return on this investment likely depends on your selling our stock at a profit. 13 ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF CONTROLS AND PROCEDURES We maintain disclosure controls and procedures, which we have designed to ensure that material information related to Xtrana, Inc., is disclosed in our public filings on a regular basis. In response to recent legislation and proposed regulations, we reviewed our internal control structure and our disclosure controls and procedures. We believe that our pre-existing disclosure controls and procedures are adequate to enable us to comply with our disclosure obligations. As of September 30, 2004, members of our management, including James Chamberlain, our acting Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, Mr. Chamberlain concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by our management on a timely basis and to ensure that the quality and timeliness of our public disclosures complies with our SEC disclosure obligations. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes in our internal controls or in other factors that could significantly affect these internal controls after the date of our most recent evaluation. PART II. OTHER INFORMATION ITEM 6. 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). 14 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: November 12, 2004 XTRANA, INC. /S/ JAMES CHAMBERLAIN ---------------------------------- James Chamberlain Acting Chief Executive Officer and Chief Financial Officer 15