10QSB 1 fm10qsb-033105.txt FORM 10-QSB (3-31-05) ================================================================================ 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, 2005 |_| 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. As of May 13, 2005, there were 16,533,269 shares of the issuer's Common Stock, $.01 par value per share, outstanding. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XTRANA, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEET (in thousands except share data) (continued) MARCH 31, DECEMBER 31, 2005 2004 (Unaudited) *** -------- -------- (in thousands except share data) ASSETS CURRENT ASSETS Cash and cash equivalents .................... $ 2,270 $ 2,397 Notes Receivable $500 (net of reserve of $500) -- -- Prepaid expenses and other current assets .... 55 13 -------- -------- TOTAL CURRENT ASSETS .............................. 2,325 2,410 TOTAL ASSETS ...................................... $ 2,325 $ 2,410 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable .......................... $ 16 $ 59 Accrued liabilities ....................... 100 56 -------- -------- TOTAL CURRENT LIABILITIES ......................... 116 115 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 16,533,269 shares issued and outstanding in 2005 and 2004 ...... 165 165 Other stockholders' equity ........................ 19,446 19,446 Accumulated deficit ............................... (18,574) (18,574) Retained earnings during development stage ........ 1,172 1,258 -------- -------- TOTAL STOCKHOLDERS' EQUITY ........................ 2,209 2,295 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 2,325 $ 2,410 ======== ======== *** Amounts derived from the audited financial statements for the year ended December 31. 2004. See accompanying notes to condensed financial statements. 2 XTRANA, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDING MARCH 31, 2005 2004 -------------------------------------------------------------------------------- (in thousands except per share data) SALES ........................................ $ -- $ 102 COST OF SALES ................................ -- 79 -------- -------- GROSS PROFIT ................................. -- 23 Operating expenses: Selling, general and administrative ..... 95 577 Research and development ................ -- 98 -------- -------- Total operating expenses ..................... 95 675 Other income, net ............................ 9 1 -------- -------- NET LOSS ..................................... $ (86) $ (651) ======== ======== 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 loss ................................ $ (0.01) $ (0.04) See accompanying notes to condensed financial statements. 3 XTRANA, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (Unaudited) THREE MONTHS ENDING MARCH 31, 2005 2004 -------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES ....................... $ (127) $ (450) INVESTING ACTIVITIES ....................... -- (21) NET INCREASE (DECREASE) IN CASH ............ (127) (471) CASH, BEGINNING OF PERIOD .................. 2,397 948 ------- ------- CASH, END OF PERIOD ........................ $ 2,270 $ 477 ======= ======= 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 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 three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. 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, 2004. The balance sheet at December 31, 2004, 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: Three Months Ended March 31, --------------------- 2005 2004 ------- ------- Net loss - as reported ................. $ (86) $ (651) Effect of stock-based compensation included in reported net loss ....... -- -- Effect of stock-based compensation per SFAS 123 ........................ -- (18) ------- ------- Net loss applicable to common stock - pro forma ........................... $ (86) $ (669) ======= ======= Basic and diluted: Loss per share - as reported ........ $ (0.01) $ (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 ........................ $ (0.01) $ (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: Three Months Ended March 31, 2005 2004 --------- --------- 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. NOTE RECEIVABLE Pursuant to the definitive merger agreement see (note 2), we loaned Alpha Innotech Corporation $500,000. The note matures and becomes due 6 months following the date of termination and automatically terminates as closing as defined in the merger agreement. The note carries interest at a rate of 8% annually payable at maturity. Concentration of credit risk with respect to the note receivable is collateralized by the assets of Alpha Innotech Corporation. The note receivable is subordinated to BFI Business Finance under a loan and security agreement dated March 9, 2004. The Company has reserved the entire amount of the note due to the questionable collectability of the note should the merger not be consummated. 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, 2005, 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 2005 and 2004 was as follows:
SHARES WEIGHTED AVERAGE OUTSTANDING PRICE RANGE EXERCISE PRICE ----------- ----------- -------------- BALANCE AT JANUARY 1, 2004 1,689,047 $0.2300 - $2.5000 $0.82 Granted -- -- -- Exercised -- -- -- Cancelled (163,622) $0.2600 - $1.5000 $0.87 ---------- BALANCE AT MARCH 31, 2004 1,525,425 $0.2300 - $2.5000 $0.82 Granted -- -- -- Exercised -- -- -- Cancelled (453,791) $0.2600 - $1.5000 $1.18 ---------- BALANCE AT DECEMBER 31, 2004 1,071,634 $0.2300 - $2.5000 $0.67 Granted -- -- -- Exercised -- -- -- Cancelled -- -- -- ----------- BALANCE AT MARCH 31, 2005 1,071,634 $0.2300 - $2.5000 $0.67
6 The following information summarizes stock options outstanding at March 31, 2005: 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 89 $ 0.230 110,000 $ 0.230 $ 0.31 - $ 0.63 495,000 85 $ 0.370 465,207 $ 0.370 $ 0.63 - $ 0.94 128,000 52 $ 0.765 124,749 $ 0.764 $ 0.94 - $ 1.25 276,634 52 $ 0.993 276,634 $ 0.993 $ 1.25 - $ 1.56 8,250 11 $ 1.438 8,250 $ 1.438 $ 1.56 - $ 1.88 12,500 29 $ 1.687 12,500 $ 1.687 $ 2.19 - $ 2.50 41,250 24 $ 2.396 41,250 $ 2.396 ------------------------------------------------------------- 1,071,634 67 $ 0.665 1,038,590 $ 0.673 At March 31, 2005, 2,985,000 shares were available for future grants under the 2000 Stock Incentive Plan. No further grants may be made under the 1993 Stock Incentive Plan. The weighted average remaining contractual life of outstanding options at March 31, 2005, was 5.8 years. At March 31, 2005 and 2004, respectively, there were 1,038,590 and 1,430,665 options exercisable with weighted average exercise prices of $0.67 and $0.84. As of March 31, 2005, the Company had 674,755 warrants to purchase common stock outstanding and exercisable for prices ranging from $0.01 to $1.875 with a weighted average exercise price of $0.9047 per share. The weighted average remaining contractual life of these warrants at March 31, 2005, was 2.7 years. These warrants have expiration dates ranging from 2005 to 2010. 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 terms of the Assignment Agreement, Applied Biosystems purchased all of our intellectual property, other than 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 consisted of: (a) a $100,000 cash deposit, which was paid to us prior to closing, (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. The transaction was completed on May 14, 2004. On August 15, 2004, Applied Biosystems delivered the final $400,000 in cash due to the completion of our consulting services as 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 Applera 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. As a result, we no longer have any continuing operations or significant assets other than cash. 7 If we were to 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, and such distribution occurred 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. 5. MERGER AGREEMENT WITH ALPHA INNOTECH CORPORATION In December 2004, we entered into a definitive Agreement and Plan of Merger with Alpha Innotech Corporation pursuant to which Alpha Innotech would merge with our wholly-owned subsidiary in a reverse merger transaction. The parties entered into an amendment to the Agreement and Plan of Merger in April 2005. Security holders of Alpha Innotech would receive shares of our common stock, and all outstanding Alpha Innotech stock options and warrants would be converted into options and warrants to purchase our common stock. Immediately following the consummation of the transaction, our stockholders would own approximately 17%, and the shareholders of Alpha Innotech would own approximately 83%, of the outstanding shares of common stock of the combined company (excluding options and warrants). Pursuant to the definitive agreement, we also loaned Alpha Innotech Corporation $500,000 pursuant to a Secured Promissory Note. Upon completion of the transaction, we are expected to change our corporate name to Alpha Innotech Corp. Alpha Innotech Corporation, a privately held company founded in 1992, is a supplier of innovative solutions for life science and drug discovery with core expertise in quantitative imaging, informatics, and molecular biology. Alpha Innotech maintains its corporate offices in San Leandro, California and it has distributors located in over 35 countries around the world. Following the merger, the board of directors will be comprised of two of our current board members and four current Alpha Innotech board members. The Boards of Directors of both companies have unanimously approved the merger agreement and each is expected to submit it to their respective stockholders for approval. Completion of the transaction is subject to a number of conditions, including approval of both the Xtrana and Alpha Innotech stockholders, obtaining certain regulatory and third party approvals, and other customary conditions. We expect to submit the merger for approval at a meeting of our stockholders within the next few months. NOTE RECEIVABLE Pursuant to the definitive merger agreement, we loaned Alpha Innotech Corporation $500,000. The note matures and becomes due 6 months following the date of termination and automatically terminates as closing as defined in the merger agreement. The note carries interest at a rate of 8% annually payable at maturity. Concentration of credit risk with respect to the note receivable is collateralized by the assets of Alpha Innotech Corporation. The note receivable is subordinated to BFI Business Finance under a loan and security agreement dated March 9, 2004. The Company has reserved the entire amount of the note due to the questionable collectability of the note should the merger not be consummated. 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, 2004 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 MERGER TRANSACTION WITH ALPHA INNOTECH CORPORATION IN A TIMELY MANNER, AS WELL AS OTHER FACTORS DISCUSSED IN THE COMPANY'S LAST REPORT ON FORM 10-KSB. OVERVIEW We previously 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. In May 2004, we completed the sale of substantially all our assets to the Applied Biosystems Group of Applera Corporation. The sale of assets to Applied BIosystems resulted in net proceeds to us of approximately $3.4 million after payment of all expenses associated with the transaction. After complying with the requirements of our agreement with Applied Biosystems to provide consulting services, we terminated all of our remaining employees. In May 2004, we terminated the lease for our prior executive offices pursuant to an early termination agreement. As a result, we no longer have any continuing operations or significant assets other than cash. Our Board of Directors believed that we could 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. As a result of the Board's review of potential enterprises for a business combination, we entered into a definitive agreement to merge with Alpha Innotech Corporation. MERGER AGREEMENT WITH ALPHA INNOTECH CORPORATION In December 2004, we entered into a definitive Agreement and Plan of Merger with Alpha Innotech Corporation pursuant to which Alpha Innotech would merge with our wholly-owned subsidiary in a reverse merger transaction. In April 2005, the parties entered into an amendment to the Agreement and Plan of Merger. Pursuant to the Agreement and Plan of Merger, as amended, security holders of Alpha Innotech would receive shares of our common stock, and all outstanding Alpha Innotech stock options and warrants would be converted into options and warrants to purchase our common stock. Immediately following the consummation of the transaction, our stockholders would own approximately 17%, and the shareholders of Alpha Innotech would own approximately 83%, of the outstanding shares of common stock of the combined company (excluding options and warrants). Pursuant to the definitive agreement, we also loaned Alpha Innotech Corporation $500,000. Upon completion of the transaction, we are expected to change our corporate name to Alpha Innotech Corp. Alpha Innotech Corporation, a privately held company founded in 1992, is a supplier of innovative solutions for life science and drug discovery with core expertise in quantitative imaging, informatics, and molecular biology. Alpha Innotech maintains its corporate offices in San Leandro, California and it has distributors located in over 35 countries around the world. Following the merger, the board of directors will be comprised of two of our current board members and four current Alpha Innotech board members. The Boards of Directors of both companies have unanimously approved the merger agreement and each is expected to submit it to their respective stockholders for approval. Completion of the transaction is subject to a number of conditions, including approval of both the Xtrana and Alpha Innotech stockholders, 9 obtaining certain regulatory and third party approvals, and other customary conditions. We expect to submit the merger for approval at a meeting of our stockholders within the next few months. If the merger transaction with Alpha Innotech is not approved by our stockholders, or not completed for any other reason, 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. 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. INCOME TAXES Deferred income taxes are recognized for the expected tax consequences in the future years for the differences between the tax bases of assets and liabilities and their financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Our significant deferred tax asset is related primarily to our net operating loss carryforwards and foreign tax credits. We have had net income in fiscal 2004 and a net loss 2003 and received a going concern explanatory paragraph in the Independent Auditors Report of our financial statements for the year ended December 31, 2004. We have concluded that it is more likely than not that our deferred tax assets will not be realized. As a result, we have provided a valuation allowance for the total of our net deferred tax asset at December 31, 2004. The estimates for deferred tax asset and the corresponding valuation allowance require complex judgments. We periodically review those estimates for reasonableness. However, because the recoverability of the deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially form our estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our financial statements. REVENUE RECOGNITION Product revenues are recorded on the day products are shipped from our facilities. The products are warranted; however, to date, no significant returns have occurred. Grant revenues are recorded when earned, pursuant to the respective grant agreements. Shipping costs are included in the cost of sales. Grant revenues and profit on long-term contracts are recorded as the contract progresses using the percentage of completion method of accounting, which relies on estimates of total expected contract revenues and costs. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. Accordingly, favorable changes in estimates result in additional profit recognition, and unfavorable changes in estimates result in the reversal of previously recognized revenue and profits. When estimates indicate a loss under a contract, cost of revenue is charged with a provision for such loss. As work progresses under a loss contract, revenue continues to be recognized, and a portion of the contract costs incurred in each period is charged to the contract loss reserve. We historically have been able to estimate its percentage of completion on contracts reliably. The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, 10 "Revenue Recognition," ("SAB 101") provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is consistent with this guidance and in accordance with generally accepted accounting principles. We do not anticipate any changes to our revenue recognition and shipping policies in the future. LONG-LIVED ASSETS In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The standard is effective for fiscal years beginning after December 15, 2001. It is our policy, and consistent with SFAS No. 144, to account for long-lived assets, including intangibles, at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined by a non-discounted cash flow analysis over the remaining amortization period, the carrying value of the Company's long-lived assets would be reduced to its estimated fair value based on discounted cash flows. Long-lived assets consist primarily of leasehold improvements, computer equipment, office furniture, and equipment. As part of its review of its first quarter financial results and executing an agreement to sell all its intellectual property, the Company performed an impairment assessment of fixed assets. The impairment assessment was performed to determine whether any impairment existed. The impairment indicators included, but were not limited to, the decline in the Company's stock price, the net book value of the assets, and the overall decline in forecasted growth rates which have negatively impacted the Company's revenues and forecasted revenue growth rates, and the impact of the sale of the intellectual property. RESULTS OF OPERATIONS REVENUE Revenue from continuing operations was $0.0 million for the three months ended March 31, 2005, compared with $0.1 million for the same period of 2004. This represents a decrease in revenue equal to $0.1 million, or 100%. The decrease was the result of the sale of our intellectual property to Applied Biosystems and discontinuance of our operations. COSTS AND EXPENSES Cost of sales, from continuing operations, decreased to $0.0 million for the three months ended March 31, 2005, as a result of the sale of the intellectual property to Applied Biosystems and discontinuance our operations. Selling, general and administrative expenses of operations decreased by $0.6 million, or 90%, to $0.1 million for the three months ended March 31, 2005 as compared to the same period of the prior year. The decline of $0.6 million was due to a reduction in expenses resulting from the termination of all employees and the termination and closing of our manufacturing facility in Broomfield, Colorado following the sale of substantially all our assets to Applied Biosystems in 2004. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2005, we had cash and cash equivalents of $2.2 million. As of March 31, 2005, our working capital position was $2.2 million, with a current ratio of 20.0 to 1.0. We used cash of $0.1 million in operating activities during the three months ended March 31, 2005 compared to $0.4 million used in same period of 2004. 11 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 our intellectual property other than our trademarks and trade names, for a total purchase price of $4 million. 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 transaction was completed in May 2004. The sale of our intellectual property to Applied Biosystems resulted in our receipt of net proceeds of approximately $3.4 million, 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. In May 2004, we terminated the lease for our prior executive offices pursuant to an early termination agreement. Pursuant to the Agreement and Plan of Merger with Alpha Innotech Corporation, in December 2004 we advanced Alpha Innotech $500,000 pursuant to a secured promissory note. The obligations under the note are secured by the assets of Alpha Innotech Corporation. The note bears interest at the rate of 8% per annum, is subordinated to Alpha Innotech's senior lender and will become due and payable if the Agreement and Plan of Merger is terminated for any reason six months following the termination date. The Company has never paid dividends on common stock and has no plans to do so in fiscal 2005. Our earnings if any will be retained for reinvestment in the business. Due to the sale of our intellectual property to Applied Biosystems, we no longer have any continuing operations and are no longer generating any revenues. We are currently consuming cash to fund our limited operations. However, since the completion of sale our intellectual property, we have terminated our remaining employees and liquidated substantially all of our assets. Our remaining expenses consist primarily of legal and accounting expenses, compensation for our management team and director fees. If the merger transaction with Alpha Innotech Corporation fails to close for any reason, we could continue to explore other potential business opportunities that would provide long-term value to stockholders or we could distribute our cash as a dividend to our stockholders as part of liquidation and 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. There can be no guarantee that any of these activities will be successful. OFF-BALANCE SHEET ARRANGEMENTS At March 31, 2005, 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. RELATED PARTY TRANSACTIONS We have a consulting agreement in place with Mr. James Chamberlain, a member of the Board of Directors, pursuant to which we have engaged Mr. Chamberlain as our Chief Executive Officer and Chief Financial Officer. The agreement stipulates payments of $5,000 per month until a merger transaction is complete. 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. 12 WE ARE NO LONGER GENERATING REVENUES FROM OPERATIONS. Our revenues for the year ended December 31, 2004 resulted primarily from the sale of our intellectual property. Since the completion of that transaction, we have closed our operations and are no longer generating any revenues. We are dependent upon our cash reserves to fund our remaining overhead and administrative operations. WE MAY NOT BE ABLE TO COMPLETE THE MERGER TRANSACTION WITH ALPHA INNOTECH IN A TIMELY MANNER, WHICH MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS. While we have entered into a definitive Agreement and Plan of Merger with Alpha Innotech Corporation, the closing of the transaction is subject to a number of conditions to closing. These conditions include approval of both the Xtrana and Alpha Innotech stockholders, obtaining certain regulatory and third party approvals, and other customary conditions. We expect to submit the merger for approval at a meeting of our stockholders within the next few months. However, there can be no assurance that the transaction will be completed in a timely manner, if at all. If the transaction is not completed, we could either pursue other potential business combinations or propose a liquidation of the Company. Because we are no longer generating revenues, delays in completion of any transaction will result in further depletion of our cash reserves. In addition, 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, including Alpha Innotech Corporation, for acquisition may involve new and untested products, processes or market strategies that may not ultimately prove successful. OUR STOCKHOLDERS WILL LIKELY EXPERIENCE SUBSTANTIAL DILUTION IN A POTENTIAL ACQUISITION, MERGER OR REORGANIZATION. 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. Most likely, the owners of the business opportunity will acquire control of our Company following such transaction. Our merger agreement with Alpha Innotech Corporation provides that immediately following the consummation of the transaction, our stockholders would own approximately 17%, and the shareholders of Alpha Innotech would own approximately 83%, of the outstanding shares of common stock of the combined company (excluding options and warrants). If we do not complete the Alpha Innotech transaction and pursue other opportunities, 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. ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU. Some investors favor companies that pay dividends, particularly in general downturns in the stock market. We have not declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth, and we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, your return on this investment likely depends on your selling our stock at a profit. ITEM 3. CONTROLS AND PROCEDURES As of March 31, 2005, the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer believe that, as of the date of the evaluation, our disclosure controls and procedures are effective. There were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these internal controls over financial reporting during the first quarter of 2005. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS EXHIBIT NO. DESCRIPTION ------- ----------- 2.2.1 Amendment No. 1 to Agreement and Plan of Merger by and among Xtrana, Inc., AIC Merger Corp. and Alpha Innotech Corporation (incorporated by reference to the Company's Current Report on Form 8-K filed on April 12, 2005). 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 5, 2005, reporting Items 3.03 and 9.01. 2. Current Report on Form 8-K filed April 12, 2005, reporting Items 1.01 and 9.01. 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: May 13, 2005 XTRANA, INC. /S/ JAMES CHAMBERLAIN ------------------------------------ James Chamberlain Chief Executive Officer and Chief Financial Officer 15