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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
COMMISSION FILE NUMBER 001-14257
XTRANA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-1729436
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
590 BURBANK STREET, SUITE 205, BROOMFIELD, COLORADO 80020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number (including area code) (303) 466-4424
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, par value $.01 per share
Common Stock Purchase Rights
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $1,191,000.
The aggregate market value of Xtrana, Inc. Common Stock, $.01 par value, held by
non affiliates, computed by reference to the average of the closing bid and
asked prices as reported by OTCBB on December 31, 2003, was $1,938,992.
Number of shares of Common Stock of Xtrana, Inc., $.01 par value, issued and
outstanding as of February 8, 2004: 16,533,269.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2004 Annual
Meeting are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]
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INDEX TO ANNUAL REPORT
ON FORM 10-KSB
PART I PAGE
Item 1. Business.........................................................3
Item 2. Properties.......................................................9
Item 3. Legal Proceedings...............................................10
Item 4. Submission of Matters to a Vote of Security-Holders.............10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................................10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11
Item 7. Financial Statements and Supplementary Data.....................23
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure...........................23
Item 8A. Controls and Procedures.........................................23
PART III
Item 9. Directors and Executive Officers................................24
Item 10. Executive Compensation..........................................24
Item 11. Security Ownership of Certain Beneficial Owners
and Management................................................24
Item 12. Certain Relationships and Related Transactions..................24
Item 13. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................24
Item 14. Principal Accountant and Fees...................................25
SIGNATURES....................................................................26
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This 2003 Annual Report on Form 10-KSB contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding the
intent, belief or current expectations of the Company and its management.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among other
things, whether the closing of the proposed sale of our intellectual property to
Applera will occur in a timely manner, if at all; our ability to settle our
remaining obligations following the sale of our intellectual property; our
ability to find a merger partner; our ability to continue as a going concern;
and other risks and uncertainties that may be detailed herein. See "Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors."
PART I
ITEM 1. BUSINESS
OVERVIEW
Xtrana, Inc. ("we," "us," "Xtrana" or the "Company") develops and
commercializes technologies to simplify the analysis of DNA and RNA, so that
nucleic acid-based detection systems can be utilized in point-of-care,
point-of-service applications. The proprietary assays developed by Xtrana are
designed to be easy to use outside of a traditional molecular biology laboratory
at a cost per test that is competitive with existing rapid test technologies.
These diagnostic tests are intended for use in drug discovery, detection of
environmental and food contaminants, forensics and identity testing, human and
animal diseases, genetic predisposition to disease, and other applications.
However, subsequent to year end, we entered into an agreement to sell our
intellectual property (see below).
We were initially incorporated in Delaware in 1987. The name of the
Company was changed from Biopool International, Inc., to Xtrana, Inc., in June
of 2001. Our corporate headquarters is located in Broomfield, Colorado, where we
conduct manufacturing operations as well as research and development activities.
On August 10, 2000, we completed a merger with the former Xtrana, Inc.,
a company based in Denver, Colorado, and primarily engaged in the development of
new proprietary nucleic acid (DNA/RNA) testing technology.
On December 21, 2001, we completed our strategy of divesting ourselves
of our Hemostasis business segment by selling substantially all of the assets of
that business to Trinity Biotech plc, an Irish corporation, for total
consideration of US$6,250,000 plus the assumption of certain of our liabilities
associated with that business. The assets sold included the operations of Xtrana
located in Ventura, California, and a wholly owned Swedish subsidiary, Biopool
AB. The total consideration of US$6,250,000 consisted of cash and notes as
follows: (a) US$3,658,500 in cash which was paid on December 21, 2001; (b) a
note in the amount of US$855,200 due on December 21, 2002, which was paid
subsequent to December 31, 2002; (c) a note in the amount of US$1,166,200 due on
December 21, 2003; and (d) a note in the amount of US$570,100 due December 21,
2004. The notes carry interest at a rate of 5% per annum, and are secured by a
second position on substantially all of the assets of Trinity Biotech plc that
are located in the United States. As a result of a settlement agreement in 2003
all notes were paid, net of a $225,000 discount.
RECENT DEVELOPMENTS
On January 26, 2004, we entered into an Assignment Agreement with
Applera Corporation through its Applied Biosystems Group. Pursuant to the
Assignment Agreement, we agreed to sell substantially all of our intellectual
property, including all patents and know-how, but excluding our trademarks and
trade names, to Applera for total consideration of US$4,000,000. In exchange for
our intellectual property, Applera agreed to
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pay and deliver to us total cash consideration of $4,000,000 in the following
manner: $3,600,000 in cash at closing ($100,000 of which has already been
received in the form of a non-refundable deposit); and $400,000 in cash ninety
(90) days after closing subject to our providing certain consulting services as
provided in the Assignment Agreement. Completion of the transaction is subject
to a number of closing conditions, including approval of our stockholders. We
have scheduled a special meeting of our stockholders for March 24, 2004, at
which the stockholders will be asked to vote on the sale of our intellectual
property to Applera.
The sale of our intellectual property pursuant to the Assignment
Agreement will result in the receipt of net proceeds of approximately
$3,600,000, after payment of all expenses associated with the transaction. We
could distribute that cash as a dividend to our stockholders as part of
liquidation, after satisfaction of all of our liabilities and payment of all
costs associated with the liquidation. If we were to make a distribution to
stockholders before the expiration of certain representations and warranties we
made under the Assignment Agreement (18 months from the date of closing), we
would be required to reserve and hold back $1,000,000 for possible settlement of
potential claims by Applera against us for our breaches of those representations
and warranties.
Alternatively, the Board of Directors believes that we could attract
interest from other businesses that might benefit from access to those funds, as
well as our status as a public company with a clean reporting history. Such
interest could result in us merging or otherwise joining together with an
existing business that could create much greater long-term stockholder value
than simply liquidating the Company. After closing the contemplated Sale of
Assets and complying with the requirements of the Assignment Agreement to
provide consulting services, we anticipate that we would terminate all of our
remaining employees and terminate our existing lease pursuant to an early
termination agreement (see Item 2 - Properties). Consequently, following the
transaction, after payment of employee severance and lease terminations costs,
we would have limited overhead costs of operation, but would remain a reporting
company under the rules and regulations of the Securities and Exchange
Commission. It is the intention of the Board of Directors to spend a reasonable
period of time exploring opportunities to find a merger candidate and, if it is
unable to conclude a transaction that it believes would provide long-term
stockholder value, to propose that the stockholders approve a liquidation. In
either event, the Board of Directors does not anticipate taking any action
without further stockholder approval.
NUCLEIC ACID (DNA/RNA) TESTING INDUSTRY
The growing understanding of genetics and the genetic basis of
biological activity is driving renewed growth in the research and commercial
testing markets. Genomic research is being applied to identify specific genes
and to use the identity of the gene to identify its source, as in forensics,
paternity and pathogen testing, or to reveal possible linkages between the gene
and biologic activity and disease, as in diagnostic testing. Highly specific
detection tests and, where applicable, precisely targeted therapeutic approaches
are being designed to address not only human disorders but also veterinary,
environmental, food safety, forensics, and other applications. These new tests
and approaches require specialized research reagents, supplies, tools, and
instruments. Currently, demand for these reagents, supplies, tools, and
instruments arise from both academic and industrial researchers and from
commercial testing applications, such as forensics, paternity, and diagnostic
testing.
In order to capitalize on increasing demand generated by both the
research and commercial markets, the Company, along with other industry
participants, are developing a wide range of products and services, including
genomic information, diagnostic tests and assays, testing services, drugs and
gene therapies, and environmental services. We are already participating in both
the commercial and research segments of the genetics market. Further, one
segment of the commercial market--human diagnostic testing--offers particular
opportunities due to the size of the market and the limited development of
nucleic acid-based testing products to date.
Historically, the analysis of nucleic acid has been a very expensive
and time-consuming process, requiring extensive and well-equipped microbiology
laboratories and highly trained personnel. The process can be segmented into
three independent steps. First, the DNA or RNA must be extracted from the
sample, which could be blood, tissue, urine, food products, or other organic
materials, and isolated from contaminants. This process is also referred to as
sample preparation. Second, the specific gene sequence related to the
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target to be analyzed is amplified, making thousands of copies of the sequence
if it is present in the sample. Lastly, the gene sequence must be detected and
analyzed. We have developed proprietary technologies in sample preparation and
detection, and are pursuing the license of an amplification technology. Each of
the technologies, once commercialized, could be marketed as standalone products.
When combined, the technologies could permit the development of rapid,
easy-to-use, and cost-effective nucleic acid testing devices that can be
employed either in a laboratory setting or at the point of sample collection in
place of the current complex and time-consuming laboratory-based procedures.
STRATEGY
Since the acquisition of the nucleic acid technologies in August of
2000, we have worked to continue the development of these technologies with the
ultimate goal of moving them into commercial products.
The first of these products were the Xtra Amp(TM) nucleic acid
extraction kits. These reagent kits were marketed primarily to the research
laboratory marketplace through a distributor network. The market for nucleic
acid extraction kits is a fairly mature market, and is dominated by a few large
firms. The majority of the customers in this market operate under tightly
regulated quality systems, which require them to go through a rigorous
validation of all new products. This validation process can be quite time
consuming and costly. Even though customers who evaluated the Xtra Amp(TM)
product liked its ease of use, it was not enough to convince them to make the
investment in the validation process and change over to Xtra Amp(TM) from the
products they were currently using. As a result, our sales of these products did
not meet expectations.
The primary product that we were focused on developing was our SCIP
diagnostic platform. This device would reduce DNA testing to a simple-to-use,
sample-in, result-out device that could be used outside of a traditional
laboratory. Although our SCIP product and our technologies had been funded
primarily through government research grants, we needed additional funding to
complete development and move into the commercial market. As our cash flow
received from the Xtra Amp(TM) products was much lower than anticipated, the
Board of Directors made the decision to seek outside capital to fund continued
operations and development of our SCIP technology. Our cash flow problems were
exacerbated when we were sued by Trinity Biotech, plc. In December 2002, Trinity
filed suit against us alleging breach of contract, breach of the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation,
unjust enrichment, and violation of the Delaware Consumer Fraud Act in
conjunction with the sale of our Hemostasis business to Trinity. The suit
alleged that we misrepresented the status of a single product that was the
subject of the Instrumentation Laboratory patent infringement suit settled by us
in January 2002, and Trinity sought $1.2 million in damages and $3 million in
punitive damages. We filed a counter suit against Trinity in response to
Trinity's suit seeking $27 million in actual damages and $30 million in punitive
damages for tortious interference with prospective economic advantage, breach of
contract, and breach of the covenant of good faith and fair dealing. We also
sought a declaratory judgment that Trinity's suit was an improper attempt to
avoid its contractual obligations to us because Trinity merely instituted
litigation to force us to renegotiate the terms of the sale of our Hemostasis
business. We settled this litigation in June 2003, but the cost of defending the
litigation forced us to radically reduce the investment in our product
development.
Based on these factors, and advice from our financial advisor, the
Board of Directors determined that the best way to maximize stockholder value
was to examine other alternatives, including the sale of the Company or our
assets. Working with our financial advisor, we conducted an extensive
solicitation process to obtain proposals for transactions ranging from a
financing to the sale of our Company or our assets. This process resulted in us
entering into the Assignment Agreement with Applera, as previously discussed.
TECHNOLOGIES
Xtra Bind(TM) is a family of nucleic acid extraction matrices that we
have developed, representing the foundation technologies for our current and
potential commercial products. These matrices capture and stabilize DNA and RNA
and allow for enzymatic manipulation of the nucleic acid, resulting in an
extremely rapid and efficient extraction protocol.
The Xtra Bind(TM) matrices are unique in that they not only serve to
selectively bind DNA and RNA, but also interface with multiple amplification
technologies and downstream applications. For example, DNA can
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be amplified by Polymerase chain reaction (PCR), and RNA can be copied and
amplified by a similar process known as RT-PCR, directly off of the solid phase
bound nucleic acid without elution. This permits the use of our Xtra Bind(TM)
material to create an extremely rapid extraction protocol and eliminates the
need for the vacuum filtration, centrifugation, or hazardous chemicals commonly
associated with other extraction methods. The protocol merely requires pipetting
or liquid handling steps for the addition of the sample, lysis buffer, and a
wash buffer - thus making it ideally suited for automated platforms and high
throughput screening or sample processing. Nucleic acid is highly stable when
bound to the Xtra Bind(TM) matrix and can be stored at room temperature for
extended periods rather than using valuable freezer space.
Additionally, Xtra Bind(TM) provides both multiplex and
re-amplification capabilities. The multiplex protocol requires no primer
optimization and can be used to amplify up to 25 targets in a single reaction.
The Xtra Bind(TM) material also acts as an archival platform, allowing the user
to re-amplify either the same target or different targets from the original Xtra
Amp(TM) tube. This ability to re-amplify when combined with Xtra Amp(TM)'s
multiplex capability provides researchers with a powerful and efficient tool.
The Xtra Bind(TM) matrix can be coated on many different surfaces. This
capability, combined with the simple and efficient extraction protocol, makes
this material ideal for incorporating sample preparation onto diagnostic
platforms.
We also have several detection technologies that we have developed. Our
primary detection methodology is a lateral flow strip for nucleic acid
detection. This patented method is similar in function to the detection strip
utilized in home pregnancy tests. The sample is added to the lateral flow strip
post-amplification and, in less than one minute, a blue line will appear on the
strip if the sample is present. This qualitative detection method is much more
rapid than traditional agarose gel methods and, when used with Xtra Bind(TM)
extraction, can provide higher levels of sensitivity.
SCIP(TM) (Self-Contained Integrated Particle) is a strategy that we
have developed to combine all three aspects of nucleic acid analysis,
extraction, amplification, and detection, into a self-contained, point-of-care
device. We have several device patents surrounding the SCIP(TM) concept, and it
is envisioned that SCIP(TM) will be a family of diagnostic platforms, each
specific to the requirements of various applications. We have numerous other
technologies in various areas of nucleic acid analysis.
PRODUCTS
Our initial commercial product, the Xtra Amp(TM) Extraction System,
utilizes our proprietary Xtra Bind(TM) material, and provides the user with a
rapid and easy-to-use extraction kit. The Xtra Amp(TM) System is sold for use
with amplification and detection products and processes currently available in
the marketplace. This system enables the extraction of nucleic acid with only
three minutes of hands-on time and the elimination of centrifugation, vacuum
filtration, product transfer, or elution steps, all of which are currently
necessary with competing technologies. This saves valuable laboratory time and
minimizes the risks of cross-contamination, as the entire extraction and
amplification process takes place in the same tube. Additionally, the Xtra
Amp(TM) kits provide for long-term dry storage of the nucleic acid sample that
can be used later for tracking or follow-up testing.
Xtra Amp(TM) Extraction Kits are sold in 8x12 PCR tubes, 96-well plate
and 384-well plate formats. The kits come in three series for various
applications:
o SERIES I - For the extraction and isolation of DNA from whole
blood, buccal swab, buffy coat fraction, and E. coli cells.
o SERIES II - For the extraction and isolation of RNA from
tissue culture cells.
o SERIES III - For the extraction and isolation of DNA from
whole tissues, tissue culture cells, rodent tails, yeast,
blood stains and plant.
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CUSTOMERS
Because of the limited nature of our sales of nucleic acid-based
products to date, none of our current customers account for more than 10% of our
revenue.
RESEARCH AND DEVELOPMENT
All of our research and development activities are focused on the
development of technologies that can be brought to market in the form of
commercialized products. These research and development activities have been
funded by internal capital as well as by various government grants. The major
projects under development in 2003 were:
o Additional Xtra Amp(TM) applications, including DNA and RNA
from viruses, thus continuing to broaden the product line.
o SCIP(TM)for infectious disease - Intended to be a point of
care diagnostic device for the doctor's office. Provides a
highly simple device: sample in, result out. The test is
processed during the patient visit, thus allowing for more
effective treatment. Device design is a base unit with
disposable cartridges. The first cartridge under development
is a test for chlamydia/gonorrhea. Additionally, work has
begun on the development of assay chemistries for the
detection of respiratory viruses, which will also run on the
platform. During the first quarter of 2003, we completed work
on a functional SCIP prototype. This prototype automates the
extraction, amplification and detection of chlamydia and
gonorrhea from clinical urine samples. This prototype has
demonstrated the ability to detect targets down to a single
copy (single cell) of the target organism.
On November 8, 2000, we were issued U.S. patent 6,153,425, entitled
"Self-Contained Device Integrating Nucleic Acid Extraction, Amplification, and
Detection." This patent is a continuation, in part, of an earlier patent,
expanding upon our development strategy for a self-contained nucleic acid
detection system to include a modular design that will interface with multiple
amplification technologies.
On September 18, 2001, we were issued U.S. patent 6,291,166 entitled
"Nucleic Acid Archiving." This patent covers the Xtra Bind(TM) family of nucleic
acid extraction matrices representing the foundation technologies for the
Company's current and future commercial products. These matrices capture and
stabilize DNA and RNA and allow for enzymatic manipulation of the nucleic acid,
resulting in an extremely rapid and efficient extraction protocol.
On August 12, 2003, we were issued U.S. Patent 6,605,451, entitled
"Methods and Devices for Multiplexing Amplification Reactions." This patent
covers our Xtra Plex(TM) method, which is a multiplex protocol requiring no
primer optimization that can be used to amplify up to 25 targets in a single
reaction.
On November 18, 2003, we were issued U.S. patent 6,649,378, entitled
"Self-Contained Device Integrating Nucleic Acid Extraction, Amplification, and
Detection." This patent is a continuation, in part, of an earlier patent,
expanding upon our development strategy for a self-contained nucleic acid
detection system to include the method for solid phase capture, isothermal
amplification and lateral flow detection in an integrated device.
In 2002, we spent $1,794,000 on research and development. In 2003,
research and development expenses decreased approximately $535,000, or 30% from
2002 levels, to $1,259,000. Due to the proposed sale of our intellectual
property to Applera, all research and development spending will be eliminated
after closing.
In nucleic acid detection, we utilize the expertise of advisors. Two of
these are Michael P. Doyle, Ph.D., and James Mahony, Ph.D. Dr. Doyle is well
known in the food microbiology industry and provides consultation regarding our
food pathogen detection assays, including E. COLI 0157:H7, LISTERIA
MONOCYTOGENES, SALMONELLA, Coliforms, and Campylobacter. He received his B.S.
degree in Bacteriology in 1973, an M.S. in Food Microbiology in 1975, and a
Ph.D. in Food Microbiology in 1977, all from the University of
Wisconsin-Madison. After working for the Ralston Purina Co. from 1977-80, he
accepted an Assistant Professor position at the Food Research Institute at the
University of Wisconsin-
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Madison in 1980. He remained there, advancing to full Professor in the
Department of Food Science, until 1991. In 1991, Dr. Doyle moved to Griffin,
Georgia, where he remains as Professor and Director of the Center for Food
Safety and Quality Enhancement, and Head, Department of Food Science and
Technology, University of Georgia. Dr. Mahony is well known in clinical virology
and chlamydiology. He is consulting and collaborating on the development of a
SCIP(TM)-based assay for urine detection of chlamydia and gonorrhea. He is
Professor and Director at McMaster University Virology and Chlamydiology
Laboratory, Hamilton, Ontario, Canada. Dr. Mahony has authored 104 publications,
most of which deal with either chlamydia or gonorrhea. He has also published 25
articles in books, all discussing STD's and chlamydia. His lab frequently
conducts and publishes validation studies of new methods for detection of
sexually transmitted disease infectious agents. In August 2002, Dr. Mahony
became a Director of the Company.
MANUFACTURING AND QUALITY CONTROL
During 2002, we completed the transfer of Xtra Amp(TM) product
manufacturing to our Broomfield, Colorado facility.
All of our products are manufactured in accordance with Good
Manufacturing Practices for Medical Devices as promulgated by the FDA.
SALES AND MARKETING
During 2003 the sales of our nucleic acid-based products were
worldwide. The U.S. typically accounts for approximately 35% of the total
worldwide diagnostics market, Europe approximately 35%, Japan approximately10%,
and approximately 20% for the rest of the world.
As a result of the proposed sale of the Company's intellectual property
to Applera, the Company is no longer actively marketing its commercial products.
COMPETITION
We compete on a worldwide basis against a number of companies, some of
which are subsidiaries of large pharmaceutical, chemical, and biotechnology
firms whose financial resources and research and development facilities are
substantially greater than ours. Specifically, in the area of nucleic acid
extraction, we compete with, among others, Applied Biosystems, Qiagen, Promega,
and Aclara Biosciences.
Competition is based upon a number of factors, including product
quality, customer service, price, continuous availability of product, breadth of
product range, and the strength and effectiveness of the sales and marketing
organization. We believe our test kits and reagents compete on the basis of
relative ease of use, quality, accuracy, and precision.
SUPPLIERS
We obtain raw materials from numerous outside vendors. Key raw
materials include PCR tubes, microtiter plates, and enzymes. We generally have
more than one source for our key raw materials. We continually evaluate
additional suppliers and are not dependent on any single vendor.
PATENTS, TRADEMARKS, AND PROPRIETARY INFORMATION
We consider the protection of discoveries in connection with our
research and development on test kits important to our business. We seek patent
protection for technology when deemed appropriate and, to date, have been issued
six patents in the United States and foreign jurisdictions specific to nucleic
acid diagnostics. We also have five patents pending for additional nucleic
acid-related technologies.
We are also reliant on trade secrets, unpatented proprietary know-how,
and continuing technological innovation to develop our competitive position. We
require that all of our employees and consultants enter into
8
confidentiality agreements and agree to assign to us any inventions relating to
our business made by them while in our employ, or in the course of services
performed on our behalf. We perform an ongoing assessment of the value of our
intangible assets.
We have established rights in the trademarks "XTRANA," "Xtra Amp,"
"Xtra Bind," and "SCIP."
GOVERNMENT REGULATIONS
The manufacture and sale of diagnostic products are subject to
regulation by the FDA in the United States and by comparable regulatory agencies
in certain foreign countries in which our diagnostic products are sold. The FDA
has established guidelines and safety standards that are applicable to the
pre-clinical evaluation and clinical investigation of diagnostic products and
regulations that govern the manufacture and sale of such products. The FDA and
similar agencies in foreign countries have substantial regulations that apply to
the testing, marketing (including export), and manufacturing of products to be
used for the diagnosis of disease. In the United States, many diagnostic
products may be accepted by the FDA pursuant to a 510(k) notification, which
must contain information that establishes that the product in question is
"substantially equivalent" to similar diagnostic products already in general
use.
Our manufacturing facility, as well as any additional manufacturing
operations that may be established within or outside the United States, are
subject to compliance with the FDA's Good Manufacturing Practices regulations.
We are registered as a medical device manufacturer with the FDA and as a
manufacturer with the U.S. Drug Enforcement Administration. We may also be
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substance Control Act, Export Control
Act, and other present and future laws of general application.
We believe that the manufacture and use of our products have no
material adverse environmental impact.
Except as we indicated above, we are not subject to direct governmental
regulation other than the laws and regulations generally applicable to
businesses in the jurisdictions in which we operate, including those governing
the handling and disposal of hazardous wastes and other environmental matters.
Our research and development activities involve the controlled use of small
amounts of hazardous materials and chemical compounds. Although we believe that
our safety procedures for handling and disposing of such materials comply with
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, we could be held liable for resulting damages. This liability could
have a material adverse effect on us.
EMPLOYEES
As of December 31, 2003, we had 8 regular employees, of whom 7 were
full-time and 1 was part-time.
ITEM 2. PROPERTIES
The Company leases a 14,671 square-foot corporate office, research and
development, and manufacturing facility in Broomfield, Colorado. The lease
commenced in April 2001 and has a term of five years. Base rent for this
facility is $214,894 per year, increasing 3% per year. On November 11, 2003, the
Company entered into an early termination agreement with the landlord. The
agreement provides for rent abatement and an early termination option. The gross
rent is reduced by $5,000 per month for the period of December 2003 through May
2004. The abated gross rent carries an accrued interest charge at 6% per annum.
The early termination agreement stipulates that the Company will pay 50% of the
remaining base rent plus the abetted gross rent plus any unpaid interest. We
believe that our facilities are in good condition, are adequately covered by
insurance, and will be adequate for our occupancy needs for the foreseeable
future.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various routine legal proceedings
incidental to the conduct of our business. Management does not believe that any
of these legal proceedings will have a material adverse impact on our business,
financial condition or results of operations, either due to the nature of the
claims, or because management believes that such claims should not exceed the
limits of our insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this Report to a vote of stockholders, through the solicitation
of proxies, or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock currently trades on the OTC Bulletin Board(R) (OTCBB)
under the symbol XTRN. The following sets forth the high and low trade prices
for our common stock for the periods indicated as reported by the OTCBB. The
quotations provided by the OTCBB reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions. We
have not paid any dividends since our inception and do not contemplate payment
of dividends in the foreseeable future.
2003 2002
HIGH LOW HIGH LOW
---- --- ---- ---
First quarter $ 0.210 $ 0.100 $ 0.800 $ 0.400
Second quarter 0.300 0.090 0.610 0.270
Third quarter 0.220 0.100 0.450 0.170
Fourth quarter 0.180 0.090 0.360 0.140
(a) On March 16, 2004, the closing trade price of our common stock, as
reported by the OTCBB, was $0.12.
(b) As of March 16, 2004, we had 229 holders of record of our common stock.
A large number of shares are held in nominee name. Based upon
information provided by our transfer agent, American Stock Transfer and
Trust Company, we had approximately 2,056 beneficial stockholders on
the same date.
10
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003.
----------------------- ------------------------- ----------------------------
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER EQUITY
WARRANTS AND RIGHTS RIGHTS COMPENSATION PLANS
----------------------- ----------------------- ------------------------- ----------------------------
Equity compensation
plans approved by
security holders....... 1,689,047 $0.82 2,257,587
Equity compensation
plans not approved by
security holders....... 684,755 $0.91 --
Total.................. 2,373,802 $0.85 2,257,587
----------------------- ----------------------- ------------------------- ----------------------------
As of December 31, 2003, the Company had 684,755 warrants to purchase
common stock outstanding, which are shown in the table above as equity
compensation plans not approved by security holders. These warrants are
exercisable for prices ranging from $0.01 to $1.875 with a weighted average
exercise price of $0.9105 per share. The weighted average remaining contractual
life of these warrants at December 31, 2003, was 3.9 years. These warrants have
expiration dates ranging from 2004 to 2011.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We develop and market nucleic acid-based tests for use in drug
discovery, detection of environmental and food contaminants, forensics and
identity testing, human and animal diseases, genetic predisposition to disease,
and other applications.
On January 26, 2004, we entered into an Assignment Agreement with
Applera Corporation through its Applied Biosystems Group. Pursuant to the
Assignment Agreement, we will sell substantially all of our intellectual
property, including all patents and know-how, but excluding our trademarks and
trade names, to Applera for total consideration of US$4,000,000. Applera will
pay and deliver to us total cash consideration of $4,000,000 in the following
manner: $3,600,000 in cash at closing ($100,000 of which has already been
received in the form of a non-refundable deposit); and $400,000 in cash ninety
(90) days after closing subject to our providing certain consulting services as
provided in the Assignment Agreement. Completion of the transaction is subject
to a number of closing conditions, including approval by our stockholders.
Our financial statements have been prepared assuming the Company will
continue as a going concern. For the year ended December 31, 2003, we incurred a
loss from continuing operations of approximately $2.8 million, which included an
asset impairment charge of $0.5 million, expenses relating to the Trinity
litigation of approximately $0.6 million, and sustained negative cash flows from
operations of approximately $2.4 million. The negative cash flow from operations
is a result of continuing our development of our nucleic acid testing business.
The Company is currently consuming cash to fund its operations and the research
and development of its nucleic acid diagnostic technologies. The proposed sale
of our intellectual property to Applera will result in the receipt of net
proceeds of approximately $3,600,000, after payment of all expenses associated
with the transaction. After closing the contemplated Sale of Assets and
complying with the requirements of the Assignment Agreement to provide
consulting services, we anticipate that we would terminate all of our remaining
employees and terminate our existing lease pursuant to an early termination
agreement. Consequently, following the transaction, after payment of employee
severance and lease terminations costs, we would have limited overhead costs of
operation. Completion of the transaction is subject to a number of closing
conditions, including stockholder approval. There can be no assurance that these
conditions will be met. We have scheduled a special meeting of stockholders for
March 24, 2004, at which the stockholders will be asked to vote on the sale of
our intellectual property to Applera.
The following discussion should be read in conjunction with our
financial statements provided under Part II, Item 8, of this annual report on
Form 10-KSB. Certain statements contained herein may constitute
11
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties, and other factors that could cause actual results to differ
materially, as discussed more fully herein.
The forward-looking information set forth in this annual report on Form
10-KSB is as of March 19, 2004, and we undertake no duty to update this
information. Should events occur subsequent to March 19, 2004, that make it
necessary to update the forward-looking information contained in this Form
10-KSB, the updated forward-looking information will be filed with the
Securities and Exchange Commission in a quarterly report on Form 10-QSB or as an
earnings release included as an exhibit to a Form 8-K, each of which will be
available at the Securities and Exchange Commission's website at www.sec.gov.
More information about potential factors that could affect our business and
financial results is included in the section entitled "Risk Factors" beginning
on page 16 of this Form 10-KSB.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Specifically, management must make estimates in the following areas.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has $7,000 in gross grant accounts receivable on the
balance sheet at December 31, 2003. A review of our allowance for doubtful
accounts is done timely and consistently throughout the year. As of December 31,
2003, we believe our allowance for doubtful accounts is fairly stated. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
INVENTORY ADJUSTMENTS
We review the components of our inventory on a regular basis for
excess, obsolete and impaired inventory based on estimated future usage and
sales. Additionally, material write-downs in our inventory can occur if
competitive conditions or new product introductions by our customers or us vary
from our current expectations. Inventories were valued at $35,000 at September
2003. During the fourth quarter of 2003, inventory values were reduced by
approximately $35,000 due to the proposed sale of our intellectual property to
Applera whereby the inventory on hand at December 31, 2003, was deemed impaired
and, therefore, devalued to $0.00.
INCOME TAXES
Deferred income taxes are recognized for the expected tax consequences
in the future years for the differences between the tax bases of assets and
liabilities and their financial reporting amounts, based upon enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Our significant deferred tax asset is related
primarily to our net operating loss carryforwards and foreign tax credits. We
have had net losses in fiscal 2003 and 2002 and received a going concern
explanatory paragraph in the Independent Auditors Report of our financial
statements for the year ended December 31, 2003. We have concluded that it is
more likely than not that our deferred tax assets will not be realized. As a
result, we have provided a valuation allowance for the total of our net deferred
tax asset at December 31, 2003. The estimates for deferred tax asset and the
corresponding valuation allowance require complex judgments. We periodically
review those estimates for reasonableness. However, because
12
the recoverability of the deferred tax assets is directly dependent upon future
operating results, actual recoverability of deferred tax assets may differ
materially form our estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparation of our financial
statements.
REVENUE RECOGNITION
Product revenues are recorded on the day products are shipped from the
Company's facilities. The products are warranted; however, to date, no
significant returns have occurred. Grant revenues are recorded when earned,
pursuant to the respective grant agreements. Shipping costs are included in the
cost of sales. Grant revenues and profit on long-term contracts are recorded as
the contract progresses using the percentage of completion method of accounting,
which relies on estimates of total expected contract revenues and costs.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revision become known. Accordingly, favorable changes in
estimates result in additional profit recognition, and unfavorable changes in
estimates result in the reversal of previously recognized revenue and profits.
When estimates indicate a loss under a contract, cost of revenue is charged with
a provision for such loss. As work progresses under a loss contract, revenue
continues to be recognized, and a portion of the contract costs incurred in each
period is charged to the contract loss reserve. We historically have been able
to estimate its percentage of completion on contracts reliably. The Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition," ("SAB 101") provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. We
believe that our revenue recognition policy is consistent with this guidance and
in accordance with generally accepted accounting principles. We do not
anticipate any changes to our revenue recognition and shipping policies in the
future.
LONG-LIVED ASSETS
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement on Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that statement. The standard is effective for
fiscal years beginning after December 15, 2001. It is our policy, and consistent
with SFAS No. 144, to account for long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation and amortization
of long-lived assets, management assesses the carrying value of such assets if
facts and circumstances suggest that they may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined by a
non-discounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's long-lived assets would be reduced to its
estimated fair value based on discounted cash flows. Long-lived assets consist
primarily of leasehold improvements, computer equipment, office furniture, and
equipment. As part of its review of its third quarter financial results and
entering into an agreement to sell all its intellectual property, the Company
performed an impairment assessment of fixed assets. The impairment assessment
was performed to determine whether any impairment existed. The impairment
indicators included, but were not limited to, the decline in the Company's stock
price, the net book value of the assets, and the overall decline in forecasted
growth rates which have negatively impacted the Company's revenues and
forecasted revenue growth rates, and the impact of the sale of the intellectual
property. As a result, the Company recorded a $493,000 impairment charge to
reduce fixed assets to reflect their current estimated fair market value. Fair
market value was determined based on the estimated fair value of the equipment.
The estimates and assumptions used under our assessment may change in the short
term resulting in the need to further write-down other long-lived assets.
GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after
13
June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. SFAS No. 142 requires that these
assets be reviewed for impairment at least annually. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
These statements are required to be adopted by the Company on January 1, 2002,
and for any acquisitions entered into after July 1, 2001. The Company adopted
Statement 142 on January 1, 2002. The Company completed the transitional
goodwill impairment test utilizing the present value of future cash flows
approach at a 25% discount rate and concluded that no goodwill impairment
existed at January 1, 2002. Due to the liquidity issues currently facing us, the
methodology for the impairment test at December 31, 2002 was changed to a market
approach. Based on that analysis (Note 1), the Company wrote off the entire net
goodwill balance of $8.5 million.
RESULTS OF OPERATIONS
REVENUE
Revenue from continuing operations was $1.2 million for the year ended
December 31, 2003, compared with $1.4 million for the year ended 2002. This
represents a decrease in revenue equal to $0.2 million, or 14%. The decrease was
the result of a $0.1 million decrease in grant revenue and a $0.1 million
decrease in the sales of Xtra Amp(TM).
As a result of the proposed sale of our intellectual property to
Applera, we do not anticipate recognizing any material revenue over the next 12
months.
COSTS AND EXPENSES
Cost of sales, from continuing operations, decreased by $0.1 million,
or 10%, to $1.0 million in 2003, as a result of reduced revenue during the
period. As a percentage of sales, cost of goods sold from continuing operations
was 80% in 2003 compared with 74% in 2002. This increase in cost as a percentage
of sales was the result of research and development grants, a portion of which
was funded on a cost reimbursement basis by various government grants.
Selling, general and administrative expenses of continuing operations
decreased by $0.1 million, or 3%, to $2.3 million in 2003 as compared to the
prior year. The decline of $0.1 million was due to a reduction in expenses of
$0.7 million during the period resulting from the reduction in force implemented
on December 31, 2002, and other overhead reductions we implemented during the
period. This reduction was partially offset by $0.6 million in costs incurred
relating to the Trinity litigation.
Research and development expenses of continuing operations decreased
$0.5 million in fiscal 2003, or 64%, from 2002 levels. This decrease was due to
the decrease in grant revenues, combined with the reduction of internal funded
product development
INCOME TAXES
The difference between our effective tax rate for 2002 and the 34%
federal statutory tax rate was primarily due to the effects of state income
taxes, non-deductible goodwill amortization, and impairment, as well as the
provision for a full valuation allowance on all net deferred tax assets
available to us.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had cash and cash equivalents of $0.9
million. As of December 31, 2003, our working capital position was $0.6 million,
with a current ratio of 2.2 to 1.0.
The Company used cash of $0.5 million from continuing operations in
2003 compared to $2.7 million in 2002. Net cash used in operating activities is
primarily the result of loss form continuing operations, net of depreciation,
amortization and impairment charges.
In December 2002, Trinity Biotech plc filed suit against us alleging
breach of contract, breach of the implied covenant of good faith and fair
dealing, fraud, negligent misrepresentation, unjust enrichment, and
14
violation of the Delaware Consumer Fraud Act in conjunction with the sale of our
Hemostasis business to Trinity in December 2001. The suit alleged that we
misrepresented the status of a single product that was the subject of the
Instrumentation Laboratory patent infringement suit settled by us in January
2002, and Trinity sought $1.2 million in damages and $3 million in punitive
damages. We filed a counter suit against Trinity in response to Trinity's suit
seeking $27 million in actual damages and $30 million in punitive damages for
tortious interference with prospective economic advantage, breach of contract,
and breach of the covenant of good faith and fair dealing. We also sought a
declaratory judgment that Trinity's suit was an improper attempt to avoid its
contractual obligations to us because Trinity merely instituted litigation to
force us to renegotiate the terms of the sale of our Hemostasis business. We
settled this litigation in June 2003, but the cost of defending the litigation
forced us to radically reduce the investment in our product development.
The proposed sale of our intellectual property to Applera will result
in the receipt of net proceeds of approximately $3,600,000, after payment of all
expenses associated with the transaction. After closing the contemplated Sale of
Assets and complying with the requirements of the Assignment Agreement to
provide consulting services, we anticipate that we would terminate all of our
remaining employees and terminate our existing lease pursuant to an early
termination agreement. Consequently, following the transaction, after payment of
employee severance and lease terminations costs, we would have limited overhead
costs of operation. Completion of the transaction is subject to a number of
closing conditions, including shareholder approval. There can be no assurance
that these conditions will be met. We have scheduled a special meeting of
stockholders for March 24, 2004, at which the stockholders will be asked to vote
on the sale of our intellectual property to Applera.
Following closing of the sale our intellectual property to Applera, we
could distribute our net cash proceeds as a dividend to our stockholders as part
of liquidation, after satisfaction of all of our liabilities and payment of all
costs associated with the liquidation. If we were to make a distribution to
stockholders before the expiration of certain representations and warranties we
made under the Assignment Agreement (18 months from the date of closing), we
would be required to reserve and hold back $1,000,000 for possible settlement of
potential claims by Applera against us for our breaches of those representations
and warranties.
Alternatively, the Board of Directors believes that we could attract
interest from other businesses that might benefit from access to those funds, as
well as our status as a public company with a clean reporting history. Such
interest could result in us merging or otherwise joining together with an
existing business that could create much greater long-term stockholder value
than simply liquidating the Company. It is the intention of the Board of
Directors to spend a reasonable period of time exploring opportunities to find a
merger candidate and, if it is unable to conclude a transaction that it believes
would provide long-term stockholder value, to propose that the stockholders
approve a liquidation.
In August 2001, we entered into an executive employment agreement with
Timothy J. Dahltorp. Pursuant to this agreement, Mr. Dahltorp agreed to serve as
our Chief Executive Officer and Chief Financial Officer for a period of 3 years.
The agreement provides for a base salary of $200,000 per year, plus annual
incentive compensation as determined by the Compensation Committee of the Board
of Directors. The agreement also provides for severance of up to one year's base
salary if the agreement is terminated by us without cause or by Mr. Dahltorp
upon a change in control. Pursuant to the employment agreement, our entering
into the Assignment Agreement with Applera constituted a "change of control"
and, in accordance with the terms of the Agreement, Mr. Dahltorp has notified us
that he will terminate the employment agreement effective as of March 19, 2004.
As a result, we will be obligated to continue to pay Mr. Dahltorp his current
base salary of $200,000 for a period of 12 months following such termination.
The Company has never paid dividends on common stock and has no plans
to do so in fiscal 2004. Our earnings will be retained for reinvestment in the
business.
15
The following table summarizes our contractual obligations as of
December 31, 2003:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD (in thousands)
----------------------- -------------------------------------
2004 2005 2006
---- ---- ----
Operating Leases ..................... $235 $242 $61
Contractual Cash Obligations ......... $47 $14 --
On November 11, 2003, we entered into an early termination agreement
with the landlord from which we lease or executive offices in Broomfield,
Colorado. This agreement provides for rent abatement and grants us an early
termination option. The gross rent was reduced by $5,000 per month for the
period of December 2003 through May 2004. The abated gross rent carries an
accrued interest charge at 6% per annum. If we exercise the early termination
agreement, this agreement provides that we will pay 50% of the remaining base
rent plus the abated gross rent plus any unpaid interest.
We are currently consuming cash to fund our operations and the research
and development of our nucleic acid diagnostic technologies. Due to the cost of
defending the Trinity litigation and the slower than anticipated growth in Xtra
Amp(TM) sales, we may not have the ability to sustain our operations through the
next 12 months. To address these capital pressures, we have undertaken steps to
significantly reduce our operating costs and have entered into the Assignment
Agreement with Applera. If the sale of our assets to Applera is not approved by
our stockholders or fails to close for any other reason, we intend to pursue
alternatives, which could include a financing, a co-development arrangement, the
license of our technologies, or the sale of the Company or our assets. There can
be no guarantee that these activities will be successful.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENT PRONOUNCEMENTS - SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, was issued in
May 2003 and requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. Management
believes the adoption of SFAS No. 150 will have no immediate impact on its
financial position or results of operations.
The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others in November 2002 and FIN No. 46, Consolidation of
Variable Interest Entries, in January 2003. FIN No. 45 is applicable on a
prospective basis for initial recognition and measurement provisions to
guarantees issued after December 2002; however, disclosure requirements are
effective immediately. FIN No. 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations
undertaken in issuing the guarantee and expands the required disclosures to be
made by the guarantor about its obligation under certain guarantees that it has
issued. The adoption of FIN No. 45 did not have a material impact on the
Company's financial position or results of operations. FIN No. 46 requires that
a company that controls another entity through interest other than voting
interest should consolidate such controlled entity in all cases for interim
periods beginning after June 15, 2003. Management does not believe the adoption
of FIN No. 46 will have a material impact on its financial position or results
of operations.
16
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this report before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. If any of
the following events or outcomes actually occurs, our business, operating
results, and financial condition would likely suffer. As a result, the trading
price of our common stock could decline, and you may lose all or part of the
money you paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
GOING CONCERN AND LIQUIDITY PROBLEMS. Our auditors have included an
explanatory paragraph in their audit opinion with respect to our financial
statements as of December 31, 2003. The paragraph states that our recurring
losses from operations raise substantial doubts about our ability to continue as
a going concern. The proposed sale of our intellectual property to Applera will
result in the receipt of net proceeds of approximately $3,600,000, after payment
of all expenses associated with the transaction. After closing the contemplated
sale of our intellectual property and complying with the requirements of the
Assignment Agreement to provide consulting services, we anticipate that we would
terminate all of our remaining employees and terminate our existing lease
pursuant to an early termination agreement. Consequently, following the
transaction, after payment of employee severance and lease terminations costs,
we would have limited overhead costs of operation. Completion of the transaction
is subject to a number of closing conditions, including stockholder approval.
There can be no assurance that these conditions will be met.
We may not have sufficient working capital to sustain our operations.
We have been unable to generate sufficient revenues to sustain our operations.
We will have to obtain funds to meet our cash requirements through business
alliances, such as strategic or financial transactions with third parties,
increase our revenue and/or, the sale of securities or other financing
arrangements, or we may be required to curtail our operations or seek a merger
partner. Any of the foregoing may be on terms that are unfavorable to us or
disadvantageous to existing stockholders. In addition, no assurance may be given
that the Company will be successful in raising additional funds or entering into
business alliances.
FAILURE TO CONCLUDE THE PROPOSED SALE OF OUR ASSETS TO APPLERA MAY
ADVERSELY EFFECT ON OUR LIQUIDITY. The closing of the proposed sale of our
intellectual property to Applera is subject to a number of conditions, or waiver
of those conditions, including without limitation:
o approval by our stockholders at the special meeting of
stockholders currently scheduled for March 24, 2004;
o neither party shall be subject to any order, decree or
injunction of a court that would delay or prevent total
completion of the transaction;
o the truth of the representations and warranties of each party
contained in the Assignment Agreement;
o termination by us of certain license agreements relating to
our intellectual property; and
o no material adverse change in our intellectual property.
There can no assurance that these conditions will be satisfied. In
addition, the Assignment Agreement may be terminated, and the transaction
abandoned, at any time prior to the closing:
o by Applera if we should fail to satisfy certain closing
conditions, including obtaining stockholder approval and
terminating our license agreements related to the intellectual
property;
o by us if Applera should fail to satisfy certain closing
conditions or if we fail to obtain stockholder approval;
17
o by either us or Applera if the closing has not occurred on or
prior to April 13, 2004, and the party electing to terminate
the Assignment Agreement has not caused the closing to be
delayed due to breach of its obligations thereunder; or
o automatically if the transaction is not approved by our
stockholders at the special meeting.
There can be no guarantee that the sale of our intellectual property to
Applera will close. If the transaction with Applera does not close for any
reason and is abandoned, we would seek to identify another potential
transaction. There can be no assurance that we will be able to identify any
other buyer for the Company or its assets. If another potential buyer is
identified, there is no guarantee that the terms of such a transaction would be
as advantageous to the Company and our stockholders as the Applera transaction.
OUR ABILITY TO RAISE THE CAPITAL NECESSARY TO MAINTAIN OR EXPAND OUR
BUSINESS IS UNCERTAIN. In the future, in order to expand our business through
internal development or acquisitions, we may need to raise substantial
additional funds through equity or debt financings, research and development
financings, or collaborative relationships. However, this additional funding may
not be available or, if available, it may not be available on economically
reasonable terms. In addition, any additional funding may result in significant
dilution to existing stockholders. If adequate funds are not available, we may
be required to curtail our operations or obtain funds through collaborative
partners that may require us to release material rights to our products.
WE HAVE LIMITED REVENUE. We had revenues of $1.4 million and $1.2
million in fiscal 2002 and 2003, respectively. Because of our limited revenues,
we are dependent upon our current capital resources to fund our overhead and
operations. Should sales of our nucleic acid products and government research
grants not materialize, it may become necessary for us to raise additional
capital to fund its operations.
REDUCTION OR DELAYS IN RESEARCH AND DEVELOPMENT BUDGETS AND IN
GOVERNMENT FUNDING MAY NEGATIVELY IMPACT OUR SALES. Our customers include
researchers at pharmaceutical and biotechnology companies, academic
institutions, and government and private laboratories. Fluctuations in the
research and development budgets of these researchers and their organizations
could have a significant effect on the demand for our products. Research and
development budgets fluctuate due to numerous factors that are outside our
control and are difficult to predict, including changes in available resources,
spending priorities and institutional budgetary policies. Our business could be
seriously damaged by any significant decrease in life sciences research and
development expenditures by pharmaceutical and biotechnology companies, academic
institutions, or government and private laboratories.
A significant portion of our sales has been to researchers,
universities, government laboratories, and private foundations whose funding is
dependent upon grants from government agencies such as the U.S. Department of
Defense and similar domestic and international agencies. In addition, a
significant portion of our own revenue and our anticipated future revenue is
from such grants. Although the level of research funding has increased during
the past several years, we cannot assure you that this trend will continue.
Government funding of research and development is subject to the political
process, which is inherently fluid and unpredictable. Our revenues may be
adversely affected if we fail to receive a material portion of the grants for
which we have applied, or if our customers delay purchases as a result of
uncertainties surrounding the approval of government budget proposals. Also,
government proposals to reduce or eliminate budgetary deficits have sometimes
included reduced allocations to the Department of Defense and other government
agencies that fund research and development activities. A reduction in
government funding for the Department of Defense or other government research
agencies could seriously damage our business.
Many of our customers receive funds from approved grants at particular
times of the year, as determined by the federal government. Grants have, in the
past, been frozen for extended periods or have otherwise become unavailable to
various institutions without advance notice. The timing of the receipt of grant
funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our operating
results have fluctuated in the past and are likely to do so in the future. These
fluctuations could cause our stock price to decline. Some of the
18
factors that could cause our operating results to fluctuate include: (1)
expiration or termination of research contracts with collaborators or government
research grants, which may not be renewed or replaced; (2) the timing and
willingness of collaborators to commercialize our products; (3) the timing,
release, and competitiveness of our products; and (4) general and
industry-specific economic conditions, which may affect our customers' research
and development expenditures and use of our products. If revenue declines in a
quarter, whether due to a delay in recognizing expected revenue or otherwise,
our earnings will decline because many of our expenses are relatively fixed in
the short term. In particular, research and development and general and
administrative expenses are not affected directly by variations in revenue. Due
to fluctuations in our revenue and operating expenses, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our operating results will be below the expectations of securities
analysts or investors. In that case, our stock price could fluctuate
significantly or decline.
WE MAY NOT BE ABLE TO IDENTIFY AND EVALUATE A POTENTIAL MERGER OR
REORGANIZATION PARTNER IN A TIMELY MANNER, WHICH MAY HAVE AN ADVERSE EFFECT ON
OUR BUSINESS. While we have not identified any specific business opportunity,
once we do identify a particular entity as a potential acquisition target or
merger candidate, management will seek to determine whether the acquisition or
merger is warranted or whether further investigation is necessary. Such
determination will generally be based on management's knowledge and experience
or, with the assistance of outside advisors and consultants, evaluating the
preliminary information made available to them. Management may elect to engage
outside independent consultants to perform analyses of potential business
opportunities.
In evaluating such potential business opportunities, we will consider,
to the extent relevant to the specific opportunity, several factors including:
potential benefits to the Company and its stockholders; similarity of business,
such as a business also involved in biotechnology; working capital; financial
requirements and availability of additional financing; history of operation, if
any; nature of present and expected competition; quality and experience of
management; need for further research, development or exploration; potential for
growth and expansion; potential for profits; and other factors deemed relevant
to the specific opportunity being analyzed.
Because we have not located or identified any specific business
opportunity as of the date of this report, there are certain unidentified risks
that cannot be adequately appreciated or quantified prior to the identification
of a specific business opportunity. There can be no assurance following
consummation of any acquisition or merger that the business venture will develop
into a going concern or, if the business is already operating, that it will
continue to operate successfully. Many of the potential business opportunities
available for acquisition may involve new and untested products, processes or
market strategies that may not ultimately prove successful.
OUR STOCKHOLDER MAY EXPERIENCE SUBSTANTIAL DILUTION IN A POTENTIAL
ACQUISITION, MERGER OR REORGANIZATION. Presently, we cannot predict the manner
in which we might participate in a prospective new business opportunity. Each
separate potential opportunity will be reviewed and, upon the basis of that
review, a suitable legal structure or method of participation will be chosen.
The particular manner in which we participate in a specific business opportunity
will depend upon the nature of that opportunity, the respective needs and
desires of the Company and management of the opportunity, and the relative
negotiating strength of the parties involved. Actual participation in a business
venture may take the form of an asset purchase, lease, joint venture, license,
partnership, stock purchase, reorganization, merger or consolidation. We may act
directly or indirectly through an interest in a partnership, corporation,
limited liability company or other form of organization.
In the event we do successfully acquire or merge with an operating
business opportunity, it is likely that our present stockholders will experience
substantial dilution; and, in such event, there will be a probable change in
control of the Company. Most likely, the owners of the business opportunity will
acquire control of the Company following such transaction. Management has not
established any guidelines as to the amount of control it will offer to
prospective business opportunities, rather management will attempt to negotiate
the best possible agreement for the benefit of our stockholders.
19
FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.
Our sales and profitability will increase primarily through the acquisition or
internal development of new product lines, additional customers, and new
businesses. We expect that future acquisitions, if successfully consummated,
will create increased working capital requirements, which will likely precede by
several months any material contribution of an acquisition to our net income.
Our ability to achieve our expansion objectives and to manage our growth
effectively and profitably depends upon a variety of factors, including: (1) our
ability to internally develop new products; (2) our ability to make profitable
acquisitions; (3) integration of new facilities into existing operations; (4)
hiring, training, and retention of qualified personnel; (5) establishment of new
relationships or expansion of existing relationships with customers and
suppliers; and (6) availability of capital. In addition, the implementation of a
growth strategy could place significant strain on our administrative,
operational and financial resources and increased demands on our financial
systems and controls. Our ability to manage our growth successfully will require
us to continue to improve and expand these resources, systems and controls. If
our management is unable to manage growth effectively, our operating results
could be adversely affected. Moreover, there can be no assurance that we will
continue to successfully expand or that growth or expansion will result in
profitability.
FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL OR LOSS OF KEY
MANAGEMENT OR KEY PERSONNEL COULD HURT OUR BUSINESS. Our continued success
depends to a significant extent on the members of our management team. Because
the industry in which we compete is very competitive, we face significant
challenges attracting and retaining members of our management team and personnel
base. Although we believe we have been and will be able to attract and retain
these members of management and personnel, there can be no assurance that we
will be able to continue to successfully attract such qualified individuals. In
addition, we do not maintain insurance on the lives of anyone at the Company.
The loss of services of any key employee could have a material adverse effect
upon our business.
INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS.
Litigation regarding patents and other intellectual property rights is extensive
in the biotechnology industry. We are aware that patents have been applied for
and, in some cases, issued to others, claiming technologies that are closely
related to ours. In the event of an intellectual property dispute, we may be
forced to litigate. This litigation could involve proceedings declared by the
U.S. Patent and Trademark Office or the International Trade Commission, as well
as proceedings brought directly by affected third parties. Intellectual property
litigation can be extremely expensive, and these expenses, as well as the
consequences should we not prevail, could seriously harm our business.
If a third party claimed an intellectual property right to technology
we use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees, or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all.
In addition to intellectual property litigation, other substantial,
complex, or extended litigation could result in large expenditures by us and
distraction of our management. For example, lawsuits by employees, stockholders,
collaborators, or distributors could be very costly and substantially disrupt
our business. Disputes from time to time with companies or individuals are not
uncommon in our industry, and we cannot assure you that we will always be able
to resolve them out of court.
We regard our trademarks, trade secrets, and similar intellectual
property as important to our success. We rely on trademark law and trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners, and others to protect our proprietary rights. We have
pursued the registration of our trademarks in the U.S. and internationally.
Effective trademark and trade secret protection may not be available in every
country in which our products are available. We cannot be certain that we have
taken adequate steps to protect our proprietary rights, especially in countries
where the laws may not protect our rights as fully as in the United States. In
addition, third parties may infringe or misappropriate our proprietary rights,
and we could be required to incur significant expenses in preserving them.
Our success will depend in part on our ability to obtain and maintain
meaningful patent protection for our products, both in the United States and in
other countries. We rely on patents to protect some of our intellectual property
and our competitive position. We own issued patents and pending patent
applications,
20
including both domestic and foreign patents and patent applications. We cannot
assure you that any of the presently pending or future patent applications will
issue as patents, or that any patents issued to us will not be challenged,
invalidated, held unenforceable, or circumvented. Further, we cannot assure you
that claims in patents that have been issued, or that may be issued to us in the
future, will be sufficiently broad to prevent third parties from producing
competing products similar in design to our products. In addition, laws of
foreign countries may not protect our intellectual property to the same extent
as would laws in the United States. Failure to obtain adequate patent protection
for our proprietary technology could have a material adverse effect on our
business, operating results, financial condition, and future growth prospects.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND
FINANCIAL CONDITION. Despite product testing prior to sale, our products have
from time to time experienced performance problems discovered after we sold the
products. If a customer experiences performance problems, errors in shipment or
product defects, it could result in:
o injuries to persons;
o loss of sales;
o delays in or elimination of market acceptance;
o damage to our brand or reputation; and
o product returns.
Although our distributors and manufacturers have return policies, if we
accept a product returned by a customer, but it is not accepted for return by
the distributor, we will incur the cost. Because we depend on third parties for
certain of the components of our products, if those components are defective,
the performance of our products would be reduced or undermined. Any increase in
the rate of returns would affect our financial condition, operating results and
cash flows.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR
BUSINESS. Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state, local, and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of an accident, we could
be liable for any damages that result, which could seriously damage our business
and results of operations.
RISKS ASSOCIATED WITH OUR INDUSTRY
WE ARE ENGAGED IN A COMPETITIVE INDUSTRY, AND WE MAY BE UNABLE TO
CONTINUE TO COMPETE EFFECTIVELY IN THIS INDUSTRY IN THE FUTURE. We are engaged
in a segment of the human health care products industry that is highly
competitive. Many of our competitors, both in the United States and elsewhere,
are major pharmaceutical, chemical, and biotechnology companies, and many of
them have substantially greater capital resources, marketing experience,
research and development staffs, and facilities than we do. Any of these
companies could succeed in developing products that are more effective than the
products that we have or may develop and may also be more successful than us in
producing and marketing their products. Not only do we face intense competition
in the marketplace against our competitors, but we also must compete with these
same companies for the services of personnel. We expect this competition to
continue and intensify in the future.
Our industry has also seen substantial consolidation in recent years,
which has led to the creation of competitors with greater financial and
intellectual property resources than us. In addition, we believe that the
success that others have had in our industry will attract new competitors. Some
of our current and future competitors also may cooperate to better compete
against us. We may not be able to compete effectively against these current or
future competitors. Increased competition could result in price reductions for
our products, reduced margins, and loss of market share, any of which could
adversely impact our business, financial condition, and results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. We operate in a
highly regulated industry. Our business is currently subject to extensive
regulation, supervision, and licensing by federal, state, and local governmental
authorities. Also, from time to time we must expend resources to comply with
newly adopted
21
regulations, as well as changes in existing regulations. If we fail to comply
with these regulations, we could be subject to disciplinary actions or
administrative enforcement actions. These actions could result in penalties,
including fines.
RISKS ASSOCIATED WITH OUR COMMON STOCK
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE
OF OUR CAPITAL STOCK AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR
AFFAIRS. Our executive officers, directors, and principal stockholders will
continue to beneficially own 43% of our outstanding common stock, based upon the
beneficial ownership of our common stock as of March 1, 2004. In addition, these
same persons also hold options to acquire additional shares of our common stock,
which may increase their percentage ownership of the common stock further in the
future. Accordingly, these stockholders: (1) will be able to significantly
influence the composition of our board of directors; (2) will significantly
influence all matters requiring stockholder approval, including change of
control transactions; and (3) will continue to have significant influence over
our affairs. This concentration of ownership of our common stock could have the
effect of delaying or preventing a change of control of us or otherwise
discouraging a potential acquirer from attempting to obtain control of us. This,
in turn, could have a negative effect on the market price of our common stock.
It could also prevent our stockholders from realizing a premium over the market
prices for their shares of common stock.
OUR STOCK PRICE HAS BEEN VOLATILE. Our common stock is quoted on the
OTC Bulletin Board(R), and there can be substantial volatility in the market
price of our common stock. The trading price of our common stock has been, and
is likely to continue to be, subject to significant fluctuations due to a
variety of factors, including: (1) variations in our quarterly operating
results; (2) the gain or loss of significant contracts; (3) changes in
management; (4) announcements of technological innovations or new products by us
or our competitors; (5) legislative or regulatory changes; (6) general trends in
the industry; (7) recommendations by securities industry analysts; (8)
biological or medical discoveries; (9) developments concerning intellectual
property, including patents and litigation matters; (10) public concern as to
the safety of new technologies; (11) developments in our relationships with
current or future customers and suppliers; and (12) general economic conditions,
both in the United States and abroad.
In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price of our common stock,
as well as the stock of many biotechnology companies. Often, price fluctuations
are unrelated to operating performance of the specific companies whose stock is
affected. In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has occurred against the
issuing company. If we were subject to this type of litigation in the future, we
could incur substantial costs and a diversion of our management's attention and
resources, each of which could have a material adverse effect on our revenue and
earnings. Any adverse determination in this type of litigation could also
subject us to significant liabilities.
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND UNDER
APPLICABLE LAW COULD IMPAIR THE ABILITY OF A THIRD PARTY TO TAKE OVER OUR
COMPANY. We are subject to various legal and contractual provisions that may
impede a change in our control, including our adoption of a stockholders' rights
plan, which could result in the significant dilution of the proportionate
ownership of any person that engages in an unsolicited attempt to take over our
Company. These provisions, as well as other provisions in our certificate of
incorporation and bylaws and under the Delaware General Corporations Law, may
make it more difficult for a third party to acquire our Company, even if the
acquisition attempt was at a premium over the market value of our common stock
at that time.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU. Some
investors favor companies that pay dividends, particularly in general downturns
in the stock market. We have not declared or paid any cash dividends on our
common stock. We currently intend to retain any future earnings for funding
growth, and we do not currently anticipate paying cash dividends on our common
stock in the foreseeable future. Because we may not pay dividends, your return
on this investment likely depends on your selling our stock at a profit.
22
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Xtrana, Inc. are included in the
report on the following pages:
PAGE NO.
Reports of independent auditors................................ 28
Balance sheet as of December 31, 2003.......................... 29
Statements of operations for the years ended
December 31, 2003 and 2002..................................... 31
Statements of stockholders' equity for the years
ended December 31, 2003 and 2002............................... 32
Statements of cash flows for the years ended
December 31, 2003 and 2002..................................... 33
Notes to financial statements.................................. 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 8, 2003, the Company dismissed Ernst & Young LLP as the
Company's principal accountant. The decision to change accountants was
recommended by the Audit Committee of the Board of Directors.
The report of Ernst & Young LLP on the financial statements of the
Company for the year ended December 31, 2001, did not contain an adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principals. The Company does not believe that there
were any disagreements with Ernst & Young LLP on any matter of accounting
principals or practices, financial statement disclosure, or auditing scope or
procedure during the year ended December 31, 2001 and during the subsequent
interim period through January 8, 2003, which, if not resolved to Ernst & Young
LLP's satisfaction, would have caused Ernst & Young LLP to make reference to the
subject matter of the disagreement(s) in connection with its reports.
The Company engaged Hein & Associates LLP as its new principal
independent accountant as of January 8, 2003.
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2003, the end of the period covered by this report,
our Chief Executive Officer and Chief Financial Officer, with the participation
of our management, carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer believes that, as of the date of the evaluation, our disclosure controls
and procedures are effective in making known to them material information
relating to us required to be included in this report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
23
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls, known to the Chief
Executive Officer and Chief Financial Officer, subsequent to the date of the
evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
Incorporated by reference to the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or before April 29,
2004.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or before April 29,
2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference to the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or before April 29,
2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or before April 29,
2004.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
EXHIBIT
NO.
-------
2.1 Assignment Agreement dated January 24, 2004 between
the Company and Applera Corporation, though its
Applied Biosystems Group
3.1 Certificate of Incorporation (1)
3.2 By Laws (1)
4.1 Shareholder Rights Plan (3)
10.1 Executive Employment Agreement of Michael D. Bick,
Ph.D. (4)
10.2 1993 Stock Incentive Plan (2)
10.3 2000 Stock Incentive Plan (5)
10.4 Lease Agreement - Broomfield, Colorado (6)
10.4.1 Lease Addendum Two for Modification of Rent and Early
Termination of Lease dated November 11, 2003 between
the Company and James M. Roswell d/b/a Burbank East
Business Park.
10.4.2 Lease Addendum Three for Modification of Rent and
Early Termination of Lease dated February 12, 2004
between the Company and James M. Roswell d/b/a
Burbank East Business Park.
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included on signature page)
31.1 Certificate of our Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(a).
32.1 Certificate of our Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b).
24
(1) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No.
33-20584).
(2) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994.
(3) Incorporated by reference to Registrant's Form 8-A
filed June 26, 1998.
(4) Incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1999.
(5) Incorporated by reference to Registrant's Definitive
Proxy Statement filed on June 23, 2000.
(6) Incorporated by reference to Registrant's Form 8-K
filed January 25, 2001.
(b) Reports on Form 8-K filed during the fourth quarter of 2003:
None
ITEM 14. PRINCIPAL ACCOUNTANT AND FEES
AUDIT FEES
The aggregate fees billed by Hein & Associates LLP for professional
services rendered for the audit of our annual financial statements and review of
financial statements included in our Form 10-QBS's or services that are normally
provided in connection with statutory and regulatory filings were $25,970 for
fiscal year 2002 and $25,562 for fiscal year 2003.
AUDIT-RELATED FEES
Hein & Associates LLP did not bill us for any for professional services
rendered for assurance and related services reasonably related to the
performance of the audit or review of our financial statements (other than those
reported above) for fiscal years 2002 and 2003.
TAX FEES
The aggregate fees billed by Hein & Associates LLP for professional
services rendered for tax compliance, tax advice and tax planning were $3,800
for fiscal year 2002 and $5,150 for fiscal year 2003.
ALL OTHER FEES
In fiscal years 2002 and 2003, Hein & Associates LLP did not bill us
for any other services performed for us during the periods.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Xtrana, Inc.
Date: March 19, 2004 BY: /S/ TIMOTHY J. DAHLTORP
-----------------------------------
Timothy J. Dahltorp
Chief Executive Officer &
Chief Financial Officer
Each person whose signature appears below constitutes and appoints
James H. Chamberlain and Michael Bick, Ph.D., and each of them, as his true and
lawful attorney-in-fact and agent with full power of substitution and
re-substitution, for him and his name, place and stead, in any and all
capacities to sign this Form 10-KSB and to file any amendments hereto under the
Securities and Exchange Act of 1934 and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or their substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ MICHAEL D. BICK Chairman of the Board March 19, 2004
--------------------------
Michael D. Bick, Ph.D.
/S/ TIMOTHY J. DAHLTORP Chief Executive Officer, March 19, 2004
-------------------------- Chief Financial
Timothy J. Dahltorp Officer and Director
/S/ DOUGLAS L. AYER Director March 19, 2004
--------------------------
Douglas L. Ayer
/S/ N. PRICE PASCHALL Director March 19, 2004
--------------------------
Price Paschall
/S/ JAMES H. CHAMBERLAIN Director March 19, 2004
--------------------------
James H. Chamberlain
/S/ JAMES MAHONY Director March 19, 2004
--------------------------
James Mahony, Ph.D.
26
ANNUAL REPORT ON FORM 10-KSB
ITEM 13(A)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
YEAR ENDED DECEMBER 31, 2003
XTRANA, INC.
BROOMFIELD, COLORADO
27
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Xtrana, Inc.
Broomfield, CO
We have audited the accompanying balance sheet of Xtrana, Inc. as of December
31, 2003, and the related statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Xtrana, Inc. as of December 31,
2003 and the results of its operations and its cash flows for the years ended
December 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered significant losses from operations for the
years ended December 31, 2003 and 2002. Management's plans to address these
matters are also included in Note 2 to the financial statements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
HEIN & ASSOCIATES LLP
Denver, Colorado
February 11, 2004
28
XTRANA, INC.
BALANCE SHEET
DECEMBER 31, 2003
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 948
Grant receivable ............................................ 7
Prepaid expenses ............................................ 19
OTHER CURRENT ASSETS ........................................ 35
TOTAL CURRENT ASSETS ............................................. 1,009
RESTRICTED CASH .................................................. 138
FURNITURE AND FIXTURES, NET OF $83 OF DEPRECIATION ............... 60
PATENTS, NET OF AMORTIZATION OF $29 .............................. 283
------
TOTAL ASSETS ..................................................... $1,490
======
See accompanying notes to financial statements.
29
XTRANA, INC.
BALANCE SHEET
DECEMBER 31, 2003
(in thousands except share data)
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................. $ 163
Notes payable Short Term ..................................... 14
Accrued payroll and payroll taxes ............................ 82
OTHER ACCRUED LIABILITIES .................................... 194
TOTAL CURRENT LIABILITIES ......................................... 453
COMMITMENTS AND CONTINGENCIES (see notes 2, 6 and 11)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized;
16,533,269 shares issued and outstanding .................. 165
Additional paid-in capital ................................... 19,446
ACCUMULATED DEFICIT .......................................... (18,574)
--------
TOTAL STOCKHOLDERS' EQUITY ........................................ 1,037
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 1,490
========
See accompanying notes to financial statements.
30
XTRANA, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2003 2002
--------------------------------------------------------------------------------
(in thousands except per share data)
REVENUE:
Grant revenue .......................................... $ 1,159 $ 1,268
Nucleic acid (DNA/RNA) testing kits .................... 32 141
-------- --------
Total revenue .......................................... 1,191 1,409
COST OF SALES:
Grant Cost of Sales .................................... 949 945
Nucleic acid (DNA/RNA) testing kits .................... 4 102
-------- --------
TOTAL COST OF SALES .................................... 953 1,047
-------- --------
GROSS PROFIT ........................................... 238 362
Operating expenses:
Selling, general and administrative ............... 2,300 2,361
Research and development .......................... 308 850
Goodwill and fixed asset impairment charges ....... 493 8,516
-------- --------
TOTAL OPERATING EXPENSES ............................... 3,101 11,727
-------- --------
OTHER INCOME, NET ...................................... 51 165
-------- --------
LOSS FROM CONTINUING OPERATIONS ........................ (2,812) (11,200)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations - net of
income tax effect ............................. -- (50)
Gain on disposal - net of income tax .............. -- --
-------- --------
NET LOSS ............................................... $ (2,812) $(11,250)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ............................................. 16,533 17,322
Effect of dilutive shares ......................... -- --
-------- --------
Diluted ........................................... 16,533 17,322
======== ========
BASIC AND DILUTED EARNINGS PER SHARE
Continuing operations ............................. $ (0.17) $ (0.65)
Discontinued operations ........................... 0.00 0.00
-------- --------
Net loss .......................................... $ (0.17) $ (0.65)
======== ========
See accompanying notes to financial statements.
31
XTRANA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ----------- -------
BALANCE AT JANUARY 1, 2002 ..... 17,323,498 $ 173 $ 19,407 $ (4,512) $15,068
Net loss ................... -- -- -- (11,250) (11,250)
Options issued to non-
employees ............... -- -- 23 -- 23
Shares issued for
exercise of warrants .... 146,717 1 (1) -- --
Shares canceled related
to acquisition .......... (936,946) (9) 9 -- --
---------- ----- ---------- --------- -------
BALANCE AT DECEMBER 31, 2002 ... 16,533,269 $ 165 $ 19,438 $ (15,762) $ 3,841
Net loss ................... -- -- -- (2,812) (2,812)
Options issued to non-
employees ............... -- -- 8 -- 8
---------- ------ ---------- --------- -------
BALANCE AT DECEMBER 31, 2003 ... 16,533,269 $ 165 $ 19,446 $(18,574) $ 1,037
========== ===== ========== ======== =======
See accompanying notes to financial statements.
32
XTRANA, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2003 2002
--------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Loss from continuing operations ..................... $ (2,812) $(11,200)
Adjustments to reconcile loss from continuing
operations to net cash used in by continuing
operating activities:
Options issued to non-employees .................. 8 23
Depreciation and Amortization .................... 245 236
Fixed Asset impairment charge .................... 493
Goodwill impairment charge ....................... -- 8,516
Inventory valuation allowance .................... 35 --
Changes in operating assets and liabilities:
Notes receivable - discount ...................... (225) --
Accounts and grants receivable ................... 65 (25)
Inventories ...................................... -- 31
Prepaid expenses and other current assets ........ 46 (77)
Accounts payable and accrued expenses ............ (217) (176)
-------- --------
Net cash used in continuing operating activities .... (2,362) (2,672)
Net cash used in discontinued operating activities .. -- (50)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES .................. (2,362) (2,722)
INVESTING ACTIVITIES
Additions to property and equipment ................. -- (241)
Receipts on note receivable ......................... 2,848 --
Additions to deferred patent cost ................... (78) (85)
-------- --------
NET CASH PROVIDED IN CONTINUING INVESTING ACTIVITIES ... 2,770 (326)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... 408 (3,048)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........... 678 3,726
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ................. $ 1,086 $ 678
======== ========
See accompanying notes to financial statements.
33
XTRANA, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Xtrana, Inc. ("Xtrana" or the "Company"), formerly known as Biopool
International, Inc., was incorporated in 1987 in the state of Delaware. The
Company develops and markets nucleic acid-based tests for use in drug discovery,
detection of environmental and food contaminants, forensics and identity
testing, human and animal diseases, genetic predisposition to disease, and other
applications.
BASIS OF PRESENTATION
Our financial statements have been prepared assuming the Company will
continue as a going concern. For the year ended December 31, 2003, we incurred a
loss from continuing operations of approximately $2.8 million and sustained
negative cash flows from operations of approximately $2.4 million. This is the
result of continuing our development of our nucleic acid testing business. As
described more fully in Notes 2 and 3 to the financial statements, during the
latter part of 2001 and in 2002, the Company transitioned its core line of
business from Hemostasis to nucleic acid testing. In connection with this
transition, revenues from our continuing operations have been substantially
reduced. The Company is currently consuming cash to fund its operations and the
research and development of its nucleic acid diagnostic technologies. Due to the
cost of defending the litigation with Trinity Biotech plc, combined with the
slower than anticipated growth in Xtra Amp(TM) sales, the Company may not have
the ability to sustain its operations through the next 12 months. To address
these capital pressures, the Company has undertaken steps to significantly
reduce its operating costs and has retained an investment banker to pursue
strategic alternatives for the Company. These alternatives could include a
financing, a co-development arrangement, the license of the Company's
technologies, or the sale of the Company or its assets. The Company currently
has a letter of intent for the sale of certain assets (see Note 11). There can
be no guarantee that these activities will be successful.
DISCONTINUED OPERATIONS
The financial information presented in the notes to the financial
statements excludes discontinued operations, except where noted.
REVENUES
Product revenues are recorded on the day products are shipped from the
Company's facilities. Grant revenues are recorded when earned, pursuant to the
respective grant agreements. Shipping costs are included in the cost of sales.
Grant revenues and profit on long-term contracts are recorded as the
contract progresses using the percentage of completion method of accounting,
which relies on estimates of total expected contract revenues and costs.
Revisions in profit estimates are reflected in the period in which the facts
that give rise to the revision become known. Accordingly, favorable changes in
estimates result in additional profit recognition, and unfavorable changes in
estimates result in the reversal of previously recognized revenue and profits.
When estimates indicate a loss under a contract, cost of revenue is charged with
a provision for such loss.
As work progresses under a loss contract, revenue continues to be
recognized, and a portion of the contract costs incurred in each period is
charged to the contract loss reserve.
34
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and classifications
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and the change could be material to the financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent highly liquid investments, which
mature within three months of date of purchase.
Restricted cash consists of cash identified for specific use. At
December 31, 2003, restricted cash is comprised of $138,000 that is restricted
to cover our letter of credit issued to our building lessor.
STOCK-BASED COMPENSATION
As permitted under the Statements of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the Company
accounts for its stock-based compensation for options issued to employees in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). As such, for options
granted to employees and directors, compensation expense is recorded on a
straight-line basis over the shorter of the period that the services are
provided or the vesting period, only if the current market price of the
underlying stock exceeds the exercise price. Certain pro forma net income and
earnings per share disclosures for employee stock option grants are also
included below as if the fair value method as defined in SFAS 123 had been
applied. Transactions in equity instruments with non-employees for goods or
services are accounted for by the fair value method.
Had compensation cost for the Plan been determined based upon the fair
value at the grant date for options granted, consistent with the provisions of
SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
2003 2002
--------- ---------
Net loss - as reported .................... $ (2,812) $ (11,200)
Effect of stock-based compensation
included in reported net loss .......... -- --
Effect of stock-based compensation
per SFAS 123 ........................... (148) (242)
--------- ---------
Net loss applicable to common stock -
pro forma .............................. $ (2,960) $ (11,442)
========= =========
Basic and diluted:
Loss per share - as reported ........... $ (0.17) $ (0.65)
Effect of stock-based compensation
included in reported net loss ....... -- --
Effect of stock-based compensation
per SFAS 123 ........................ (0.01) (0.01)
--------- ---------
Net loss applicable to common stock -
pro forma ........................... $ (0.18) $ (0.66)
========= =========
35
The fair value of each option grant under the Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
2003 2002
---- ----
Risk-free interest ..................... 4.0% 4.0%
Expected life .......................... 6.9 years 6.9 years
Expected volatility .................... 167.0% 167.0%
Expected dividend ...................... -- --
The expected life was determined based on the Plan's vesting period and
exercise behavior of the employees.
INVENTORIES
We review the components of our inventory on a regular basis for
excess, obsolete and impaired inventory based on estimated future usage and
sales. Additionally, material write-downs in our inventory can occur if
competitive conditions or new product introductions by our customers or us vary
from our current expectations. Inventories were valued at $35,000 at September
2003. During the fourth quarter of 2003, inventory values were reduced by
approximately $35,000 due to the proposed sale of our intellectual property to
Applera (Note 11) whereby the inventory on hand at December 31, 2003 was deemed
impaired and, therefore, devalued to $0.00.
PROPERTY AND EQUIPMENT AND LONG LIVED ASSETS
Property and equipment are stated at cost. Depreciation is generally
calculated on a straight-line basis over their estimated useful lives, which
range from 3 to 10 years. Leasehold improvements are generally depreciated over
their estimated useful lives or over the period of the lease, whichever is
shorter. Long-lived assets, including intangibles, are accounted for at
amortized cost. As part of an ongoing review of the valuation and amortization
of long-lived assets, management assesses the carrying value of such assets if
facts and circumstances suggest that they may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined by a
non-discounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's long-lived assets would be reduced to its
estimated fair value based on discounted cash flows. Long-lived assets consist
primarily of leasehold improvements, computer equipment, office furniture, and
equipment. As part of its review of its third quarter financial results and
entering into an agreement to sell all its intellectual property, the Company
performed an impairment assessment of fixed assets. The impairment assessment
was performed to determine whether any impairment existed. The impairment
indicators included, but were not limited to, the decline in the Company's stock
price, the net book value of the assets, and the overall decline in forecasted
growth rates which have negatively impacted the Company's revenues and
forecasted revenue growth rates, and the impact of the sale of the intellectual
property. As a result, the Company recorded a $493,000 impairment charge to
reduce fixed assets to reflect their current estimated fair market value in
forth quarter. Fair market value was determined based on the estimated fair
value of the equipment. The estimates and assumptions used under our assessment
may change in the short term resulting in the need to further write-down other
long-lived assets.
GOODWILL
Beginning January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets,"
and, as a result, ceased amortizing goodwill. The Company tests goodwill for
impairment annually or on an interim basis if an event or circumstance occurs
between the annual tests that may indicate impairment of goodwill. As a result
of the Company's impairment test in the fourth quarter of fiscal 2002, the
Company wrote off its remaining goodwill of approximately $8.5 million.
36
DEFERRED PATENT COSTS
The Company capitalizes legal costs directly incurred in pursuing
patent applications as deferred patent costs. When such applications result in
an issued patent, the related costs are amortized over the remaining legal life
of the patents, generally 15 years, using the straight-line method. The Company
reviews its issued patents and pending patent applications, and if it determines
to abandon a patent application or that an issued patent no longer has economic
value, the unamortized balance in deferred patent costs relating to that patent
is immediately expensed.
It is possible the above estimates of future economic life of the
Company's commercialization revenues, the amount of anticipated future
commercialization revenues, or both, will be reduced significantly in the near
term due to alternative technologies developed by other biotechnology or
pharmaceutical companies. As a result, the carrying amount of deferred patent
costs may be reduced in the future.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and include
both internal research and development costs and payments to third parties.
INCOME TAXES
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax liabilities and assets at currently
enacted tax rates for the expected future tax consequences of events that have
been included in the financial statements or tax returns. A valuation allowance
is recognized to reduce the net deferred tax asset to an amount that is more
likely than not to be realized. The tax provision shown on the accompanying
statement of operations is zero since the deferred tax asset generated from the
net operating loss is offset in its entirety by a valuation allowance.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of temporary cash investments
and trade receivables. At December 31, 2003, substantially all cash and cash
equivalents were on deposit with one financial institution. Concentrations of
credit risk with respect to trade receivables are limited due to the majority of
the outstanding accounts receivable being from Government institutions.
Generally, the Company does not require collateral or other security to support
customer receivables.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted-average number of
common shares outstanding. Diluted earnings per share is based upon the
weighted-average number of common shares and dilutive potential common shares
outstanding. Potential common shares are outstanding options under the Company's
stock option plans and outstanding warrants, which are included under the
treasury stock method.
Options and warrants to purchase 2,373,802 and 1,941,757 shares with
exercise prices greater than the average market prices of common stock were
outstanding during the years ended December 31, 2003 and 2002, respectively.
These options and warrants were, therefore, excluded from the respective
computations of diluted earnings per share because their effect would be
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents,
receivables, payables and accrued expenses approximate fair value due to the
short maturity of these instruments.
37
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, Disclosure About
Segment of an Enterprise and Related Information, establishes standards for the
reporting of information about operating segments. The Company's continuing
operations constitute a single operating segment.
RECENT ACCOUNTING PRONOUNCEMENTS
RECENT PRONOUNCEMENTS - SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, was issued in
May 2003 and requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. Management
believes the adoption of SFAS No. 150 will have no immediate impact on its
financial position or results of operations.
The FASB issued Interpretation ("FIN") No.45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, in November 2002 and FIN No. 46, Consolidation of
Variable Interest Entries, in January 2003. FIN No. 45 is applicable on a
prospective basis for initial recognition and measurement provisions to
guarantees issued after December 2002; however, disclosure requirements are
effective immediately. FIN No. 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations
undertaken in issuing the guarantee and expands the required disclosures to be
made by the guarantor about its obligation under certain guarantees that it has
issued. The adoption of FIN No. 45 did not have a material impact on the
Companies financial position or results of operations. FIN No. 46 requires that
a company that controls another entity through interest other than voting
interest should consolidate such controlled entity in all cases for interim
periods beginning after June 15, 2003. Management does not believe the adoption
of FIN No. 46 will have a material impact on its financial position or results
of operations.
2. GOING CONCERN
The accompanying financial statements have been prepared on the basis
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
accompanying financial statements reflect a loss of $2,812,000 and $11,250,000
for the years ended December 31, 2003 and 2002, respectively. Working capital
and stockholders' equity is $557,000 and $1,037,000, respectively, as of
December 31, 2003.
The Company is currently consuming cash to fund its operations and the
research and development of its nucleic acid diagnostic technologies. The
proposed sale of the Company's intellectual property to Applera (see Note 11),
if successful, will result in the receipt of net proceeds of approximately
$3,600,000, after payment of all expenses associated with the transaction. After
closing the contemplated sale of our intellectual property and complying with
the requirements of the Assignment Agreement with Applera to provide consulting
services, the Company anticipates that it would terminate all of its remaining
employees and terminate its existing lease pursuant to an early termination
agreement. Consequently, following the transaction, after payment of employee
severance and lease terminations costs, the Company would have limited overhead
costs of operation. Completion of the transaction is subject to a number of
closing conditions, including stockholder approval. There can be no assurance
that these conditions will be met.
If the Company is not successful in closing the Applera transaction,
the Company may be required to further curtail operations or liquidate assets.
3. DISCONTINUED OPERATIONS
On December 20, 2001, the Company's stockholders approved the sale of
the Hemostasis business. On December 21, 2001, the Company closed the sale of
substantially all of the assets of its Hemostasis business to Trinity Biotech
plc for total consideration of US$6,250,000, plus the assumption of certain
38
liabilities. The assets sold included the operations located in Ventura,
California, and the Company's wholly owned Swedish subsidiary, Biopool AB. The
total consideration paid to the Company of US$6,250,000 consisted of cash and
notes as follows: (a) US$3,658,500 in cash at closing; (b) a note in the amount
of US$855,200 due one year from the closing date, however, the note was paid
subsequent to December 31, 2002; (c) a note in the amount of US$1,166,200 due
two years from the closing date; and (d) a note in the amount of US$570,100 due
three years from the closing date. The note carried interest at a rate of 5% per
annum and was collateralized by a second position on substantially all of the
U.S. assets of Trinity Biotech plc. As a result of a settlement between the
Company and Trinity Biotech plc during 2003, the Company received the remaining
balance of the notes, net of a discount of $225,000.
The Hemostasis business was a distinct operating segment, whose sale is
accounted for as discontinued operations in accordance with ACCOUNTING
PRINCIPLES BOARD OPINION 30 - REPORTING THE RESULTS OF OPERATIONS - REPORTING
THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS
4. INVENTORIES
We review the components of our inventory on a regular basis for
excess, obsolete and impaired inventory based on estimated future usage and
sales. Additionally, material write-downs in our inventory can occur if
competitive conditions or new product introductions by our customers or us vary
from our current expectations. Inventories were valued at $35,000 at September
2003. During the fourth quarter of 2003, inventory values were reduced by
approximately $35,000 due to the proposed sale of our intellectual property to
Applera whereby the inventory on hand at December 31, 2003 was deemed impaired
and, therefore, devalued to $0.00.
5. REVOLVING LINE OF CREDIT
As of December 31, 2003, the Company had a $138,000 standby letter of
credit issued as a security deposit in conjunction with the lease of the
Broomfield, Colorado, facility. This letter of credit is collateralized by
restricted cash balances equal to the amount outstanding under the letter of
credit.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and facilities under
non-cancelable operating leases. Continuing operations lease expense for 2003
and 2002 was approximately $300,000 and $288,000, respectively. At December 31,
2003, approximate future minimum annual lease commitments are $290,000 in 2004,
$263,000 in 2005, and $63,000 in 2006.
On November 11, 2003, the Company entered into an early termination
agreement with the landlord. The agreement provides for rent abatement and an
early termination option. The gross rent is reduced by $5,000 per month for the
period of December 2003 through May 2004. The abated gross rent carries an
accrued interest charge at 6% per annum. The early termination agreement
stipulates that the Company will pay 50% of the remaining base rent plus the
abetted gross rent plus any unpaid interest.
7. STOCKHOLDERS' EQUITY
Effective August 10, 2000, the former Xtrana, Inc. was merged with and
into the Company pursuant to an Agreement and Plan of Reorganization dated May
3, 2000, between the former Xtrana and the Company, as reported on the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
August 11, 2000, and amended October 24, 2000. The Company issued 8,829,461
shares of the Company's common stock in exchange for all the outstanding capital
stock of the former Xtrana, with an additional 540,000 shares to be issued in
connection with the exercise of certain warrants, for a total of 9,369,461
shares. During 2001, 270,000 of the 540,000 warrants were exercised using the
cashless exercise feature for a total of 163,851 shares issued. Of the total
shares issued, 936,946 shares were held in escrow
39
for purposes of satisfying Xtrana's indemnification obligations. These shares,
less 3,365 shares that were canceled pursuant to the merger agreement relating
to excess warrants issued to certain financial advisors, were released to the
former Xtrana stockholders on November 6, 2001. In addition, 936,946 shares were
held in escrow and were contingently cancelable if certain sales objectives for
the Xtrana business were not met. Also, an additional 1,030,641 shares were
issuable to the former Xtrana stockholders if certain sales objectives were
exceeded. The sales objectives were not achieved; therefore, the 936,946 shares
in escrow were canceled, and the additional 1,030,641 shares were not issued.
The 936,946 contingent shares were reflected as outstanding common stock until
canceled in the fourth quarter of 2002 as the holders of these shares had full
right to vote the shares while in escrow.
8. STOCK OPTION PLANS AND WARRANTS
The Company has two stock option plans (the "Plans") for the benefit of
employees, officers, directors, and consultants of the Company. As of December
31, 2003, a total of 3,946,634 shares of the Company's common stock were
reserved for issuance under the Plans. Options granted under the Plans are
generally exercisable for a period of ten years from the date of grant at an
exercise price that is not less than the closing price of the common stock on
the date of grant. Options granted under the Plans generally vest over a one- to
five-year period from the date of the grant.
Stock option activity for 2003 and 2002 was as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE
OUTSTANDING PRICE RANGE PRICE
--------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2002 .... 1,941,757 $0.4800 - $2.6800 $ 1.13
Granted ....................... 667,750 $0.2300 - $0.7800 $ 0.35
Exercised ..................... -- -- --
Cancelled ..................... (719,328) $0.3200 - $2.6800 $ 1.19
---------
BALANCE AT DECEMBER 31, 2002 .. 1,890,179 $0.2300 - $2.5000 $ 0.83
Granted ....................... -- -- --
Exercised ..................... -- -- --
Cancelled ..................... (201,132) $0.2900 - $1.3750 $ 0.92
---------
BALANCE AT DECEMBER 31, 2003 .. 1,689,047 $0.2300 - $2.5000 $ 0.82
The following information summarizes stock options outstanding at December 31,
2003:
OUTSTANDING EXERCISABLE
------------------------------------ -----------------------
WEIGHTED AVERAGE
-----------------------
REMAINING WEIGHTED
CONTRACTUAL AVERAGE
NUMBER LIFE IN EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING MONTHS PRICE EXERCISABLE PRICE
--------------------------------------------------------------------------------
$ 0.01 - $ 0.31 110,250 103 $ 0.230 110,054 $ 0.230
$ 0.32 - $ 0.62 542,414 98 $ 0.384 454,246 $ 0.377
$ 0.63 - $ 0.93 347,749 77 $ 0.713 235,870 $ 0.725
$ 0.94 - $ 1.25 326,634 68 $ 0.998 307,463 $ 0.996
$ 1.26 - $ 1.56 308,250 79 $ 1.498 251,997 $ 1.498
$ 1.57 - $ 1.87 12,500 44 $ 1.687 12,500 $ 1.687
$ 2.19 - $ 2.25 41,250 38 $ 2.395 41,250 $ 2.395
--------------------------------------------------------------
1,689,047 83 $ 0.822 1,413,380 $ 0.829
At December 31, 2003, 2,257,587 shares were available for future grants
under the Plans.
40
The weighted average remaining contractual life of outstanding options
at December 31, 2003, was 6.9 years. At December 31, 2003, there were 1,413,380
options exercisable with weighted average exercise prices of $0.83.
During 2002 the options were granted at the market price of the stock
and had a weighted average fair value of $0.36 per option.
As of December 31, 2003, the Company had 684,755 warrants to purchase
common stock outstanding and exercisable for prices ranging from $0.01 to $1.875
with a weighted average exercise price of $0.9105 per share. The weighted
average remaining contractual life of these warrants at December 31, 2003, was
3.9 years. These warrants have expiration dates ranging from 2004 to 2011.
9. INCOME TAXES
The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal Statutory rates to the income tax provision is as
follows:
YEARS ENDED DECEMBER 31,
2003 2002
----- -----
Tax at U.S. statutory rate (34%) ..................... -34% -34%
Permanent differences ................................ 1% 26%
Effect of gain on sale ............................... -- --
State income tax expense net of federal benefit ...... 2% 2%
Valuation allowance .................................. 31% 6%
----- -----
Net expense (benefit) ........................... 0.00% 0.00%
===== =====
The components of the Company's deferred tax assets and liabilities at
December 31, 2003 are as follows:
(in thousands)
CURRENT LONG TERM
------- -------
Deferred tax assets:
Net operating loss carryforwards ........ $ 0 $ 3,139
Other ................................... 12 0
Accumulated depreciation amortization ... 0 255
R & D credit ............................ 0 45
Foreign tax credit ...................... 0 564
Valuation reserve ....................... (12) (4,003)
------- -------
Subtotal ................................... -- --
Net deferred tax (liability) asset ........... $ -- $ --
======= =======
At December 31, 2003, the Company had available net operating loss
carryforwards of approximately $8,460,000 in the United States. The United
States carryforwards expire in varying amounts through 2023. Under section 382
of the Internal Revenue Code, the utilization of the federal net operating loss
carryforwards may be limited based on changes in the percentage of ownership in
the Company.
10. RETIREMENT PLAN
The Company has a defined contribution plan for its domestic operations
under which employees who have satisfied minimum age and service requirements
may defer compensation pursuant to Section 401(k) of the Internal Revenue Code.
Participants in the plan may contribute between 1% and 20% of their pay, subject
to the limitations placed by the IRS. The Company, at its discretion, may match
a portion of the amount contributed by the employee. The Company contributions
are offset by forfeitures of unvested balances for
41
terminated employees. The net Company contributions were $0.00 and $29,000 in
2003 and 2002, respectively.
11. SUBSEQUENT EVENT
On January 26, 2004, the Company entered into an Assignment Agreement
with Applera Corporation through its Applied Biosystems Group. Pursuant to the
Assignment Agreement, the Company agreed to sell substantially all of its
intellectual property, including all patents and know-how, but excluding its
trademarks and trade names, to Applera for total consideration of US$4,000,000.
Applera agreed to pay and deliver to the Company total cash consideration of
$4,000,000 in the following manner: $3,600,000 in cash at closing ($100,000 of
which has already been received in the form of a non-refundable deposit); and
$400,000 in cash ninety (90) days after closing, subject to the Company
providing certain consulting services as provided in the Assignment Agreement.
Completion of the transaction is subject to a number of closing conditions,
including approval of the Company's stockholders.
42