Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2007
Commission File Number 000-50309
Clearant, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation)
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91-2190195
(I.R.S. Employer Identification Number) |
11111 Santa Monica Boulevard, Suite 650, Los Angeles, California 90025
(Address of principal executive offices, including zip code)
(310) 479-4570
(Registrants telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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. Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of June 18, 2007, there were 134,642,196 shares of registrants common stock, $0.0001 par value,
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes o No þ
PART I FINANCIAL INFORMATION |
Item 1. Financial Statements (Unaudited) |
CLEARANT, INC.
BALANCE SHEET
(in thousands, except par value)
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March 31, |
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2007 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
251 |
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Accounts receivable, net of allowance of $20 |
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372 |
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Inventory and inventory related prepayments, net of reserve of $799 |
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464 |
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Prepaids and other assets |
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270 |
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Total current assets |
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1,357 |
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Property and equipment, net of $279 of accumulated depreciation |
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172 |
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Identifiable intangibles, net of $1,043 of accumulated amortization |
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1,129 |
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Deposits and other assets |
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63 |
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Total assets |
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$ |
2,721 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Accounts payable |
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$ |
1,814 |
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Accrued liabilities |
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739 |
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Deferred revenue |
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4 |
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Bridge loans, net |
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306 |
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Total current liabilities |
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2,863 |
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Deferred revenue noncurrent |
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4 |
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Total liabilities |
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2,867 |
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Stockholders deficit: |
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Common stock ($0.0001 par value; 200,000 shares authorized; 40,922
issued and outstanding at March 31, 2007) |
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4 |
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Additional paid-in capital |
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83,186 |
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Accumulated deficit |
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(83,336 |
) |
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Total stockholders deficit |
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(146 |
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Total liabilities and stockholders deficit |
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$ |
2,721 |
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See accompanying notes to financial statements.
F-3
CLEARANT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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Revenues: |
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Licensing |
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$ |
40 |
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$ |
79 |
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Direct distribution |
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179 |
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Fee for service |
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50 |
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30 |
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Contract research and milestones |
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166 |
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61 |
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Grants |
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20 |
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Total revenues |
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435 |
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190 |
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Cost of sales |
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148 |
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54 |
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Gross Profit |
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287 |
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136 |
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Operating expenses: |
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Sales, general and administrative |
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1,134 |
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2,475 |
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Research and development |
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40 |
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327 |
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Total operating expenses |
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1,174 |
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2,802 |
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Loss from operations |
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(887 |
) |
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(2,666 |
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Other income (expense): |
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Interest income, net |
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5 |
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71 |
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Gain on extinguishment of debt |
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117 |
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Other loss |
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(35 |
) |
Loss on disposal of fixed assets |
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(85 |
) |
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Loss before provision (benefit) for income taxes |
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(967 |
) |
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(2,513 |
) |
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Provision (benefit) for income taxes |
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Net loss attributable to common stockholders |
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$ |
(967 |
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$ |
(2,513 |
) |
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Net loss per share: |
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Basic and diluted |
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$ |
(0.02 |
) |
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$ |
(0.06 |
) |
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Weighted average shares used in per share calculation: |
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Basic and diluted |
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40,758 |
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39,764 |
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See accompanying notes to financial statements.
F-4
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Operating activities |
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Net loss |
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$ |
(967 |
) |
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$ |
(2,513 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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189 |
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190 |
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Stock-based compensation |
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67 |
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208 |
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Issuance of common stock to consultants for services rendered |
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93 |
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51 |
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Loss on sale of fixed assets |
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85 |
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Gain on extinguishment of debt and other |
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(82 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(98 |
) |
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26 |
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Inventory |
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(186 |
) |
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(21 |
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Inventory related prepayments |
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107 |
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Prepaids |
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34 |
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(176 |
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Accounts payable |
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270 |
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(35 |
) |
Accrued liabilities |
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132 |
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(760 |
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Deferred revenue |
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(63 |
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(21 |
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Other assets and liabilities |
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(170 |
) |
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(10 |
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Net cash used in operating activities |
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(507 |
) |
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(3,143 |
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Investing activities |
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Cost of identified intangibles |
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(21 |
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(68 |
) |
Capital expenditures |
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(53 |
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Net proceeds from sale of fixed assets |
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16 |
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Net cash used in investing activities |
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(5 |
) |
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(121 |
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Financing activities |
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Issuance of bridge loan |
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200 |
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Principal payments on capital lease obligations |
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2 |
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Net cash provided by financing activities |
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200 |
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2 |
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Change in cash and cash equivalents |
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(312 |
) |
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(3,262 |
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Cash and cash equivalents, beginning of period |
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563 |
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10,141 |
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Cash and cash equivalents, end of period |
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$ |
251 |
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$ |
6,879 |
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Supplemental Disclosure of Non-cash Financing Activities: |
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During the three months ended March 31, 2007 and 2006, the Company paid
accounts payable of $109 and $38 with 435,280 and 10,259 shares of common
stock, respectively |
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$ |
109 |
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$ |
38 |
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See accompanying notes to financial statements.
F-5
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim financial statements for Clearant, Inc. (the Company or
Clearant) have been prepared in accordance with accounting principles generally accepted in the
United States of America and reflect all adjustments, consisting solely of normal recurring
adjustments, needed to fairly present the financial results for these interim periods. These
financial statements include amounts that are based on managements best estimates and judgments.
These estimates may be adjusted as more information becomes available, and any adjustment could be
significant. The impact of any change in estimates is included in the determination of earnings in
the period in which the change in estimate is identified. The results of operations for the three
months ended March 31, 2007 are not necessarily indicative of the results that may be expected for
the entire 2007 fiscal year.
The Company has omitted footnote disclosures that would substantially duplicate the disclosures
contained in the audited financial statements of the Company and should be read in conjunction with
the financial statements for the fiscal years ended December 31, 2006 and 2005 and notes thereto in
the Companys Form 10-KSB dated December 31, 2006, filed with the Securities and Exchange
Commission on May 17, 2007.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred significant operating losses and negative
cash flows from operating activities since its inception. As of March 31, 2007, these conditions
raised substantial doubt as to the Companys ability to continue as a going concern. In April
2007, the Company raised additional capital (See Note 10) to supplement its operations. There can
be no assurance that the Company will be successful in its efforts to generate, increase, or
maintain revenue or raise additional capital on terms acceptable to the Company or that the Company
will be able to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability of the carrying amount of the recorded assets or the
amount of liabilities that might result from the outcome of this uncertainty.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin
No. 104, Revenue Recognition (SAB 104). The Companys revenue sources are direct distribution of
Clearant Process® sterile implants, and licensing fees and sterilization services to customers who
incorporate the Clearant Process® technology into their product and manufacturing processes, which
may include performance milestones and contract research activities. In addition, the Company
recognizes revenues from government grants. The Company recognizes direct distribution revenue
upon the sourcing of tissue by a customer. Licensing revenue is recognized when a customer
distributes products incorporating the Clearant Process® and revenue related to the sterilization
service is recognized when the service is substantially complete. Revenue related to a performance
milestone is recognized upon customer acceptance of the achievement of that milestone, as defined
in the respective agreements. Revenue related to contract research activities is recognized on a
percentage-of-completion basis. In the event cash is received in advance of service performed, the
Company will defer the related revenue recognition until the underlying performance milestone is
achieved and or the contract research activities commence. In the event advance cash payments are
not attributable to any performance milestone and or contract research activity, the Company will
recognize the underlying amounts into revenue on a straight-line basis over the term of the
underlying agreement. The Company includes shipping charges in the gross invoice price to
customers and classifies the total amount as revenue in accordance with Emerging Issues Task Force
Issue (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping costs are
recorded as cost of sales. The Company evaluates the collectability of accounts receivables and
provides a reserve for credit losses, as appropriate. As of March 31, 2007 the Company reserved
for credit losses of $20.
F-6
Grants
The Company receives certain grants that support a portion of the Companys research efforts
in defined research projects, usually specific product applications of the Clearant
Process®. These grants generally provide for reimbursement of approved costs
incurred as defined in the various grants. Revenue associated with these grants is generally
recognized ratably over each grant period and as costs under each grant are incurred.
Cost of Sales
Cost of sales consists of costs associated with direct distribution of Clearant Process®
sterile implants to a customer and with providing sterilization services to customers.
Extinguishment of Debt
Extinguishment of debt consists of a gain recognized for the settlement of outstanding
payables for the quarter ended March 31, 2006, which, while unusual in nature, is not an infrequent
transaction for the Company.
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 of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents. Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term investments, and
accounts receivable. Cash is deposited with what the Company believes are highly credited, quality
financial institutions. The deposited cash may exceed FDIC insured limits. For the quarter ended
March 31, 2007, three customers accounted for approximately 57% of revenues and three customers
accounted for approximately 42% of accounts receivable.
Inventory and Inventory Related Prepayments
Inventory is primarily comprised of implantable donor tissue treated with the Clearant
Process® and is valued at the lower of cost or market with cost determined using the first-in,
first-out method. Inventory is located at contracted tissue banks and on consignment in hospitals.
Inventory may be written down from time to time based on market conditions or other factors. For
the quarter ended March 31, 2007 the Company has an inventory and inventory related prepayment
reserve of $799.
In accordance with the terms of the Companys spinal Supply and Distribution Agreement (See
Note 9), the Company is required to make prepayments. Upon receipt of the inventory the
prepayments will be reclassified as inventory until distributed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line
method based upon estimated useful lives of the assets, which are generally three to seven years.
Leasehold improvements are amortized over the estimated useful lives of the assets or related lease
terms, whichever is shorter. Repair and maintenance expenditures are charged to appropriate
expense accounts in the period incurred. During the quarter ended March 31, 2007, Clearant sold
property and equipment with net book value of $101.
F-7
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized
as incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. The Company evaluates the recoverability of its patent costs and
trademarks quarterly based on estimated undiscounted future cash flows. In accordance with
Statement of Financial Accounting Standards (FAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets the carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. As of March 31, 2007, no impairment existed.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes (SFAS 109), using the liability method. Under SFAS 109, deferred
tax assets and liabilities are determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Due to its current net loss position, the Company has provided a valuation allowance in full
on its net deferred tax assets in accordance with SFAS 109 and in light of the uncertainty
regarding ultimate realization of the net deferred tax assets.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires a new evaluation
process for all tax positions taken. If the probability for sustaining said tax position is greater
than 50%, then the tax position is warranted and recognition should be at the highest amount which
would be expected to be realized upon ultimate settlement. FIN 48 requires expanded disclosure at
each annual reporting period unless a significant change occurs in an interim period. For interim
periods in the year of initial adoption, all disclosures required by FIN 48 will be presented.
Differences between the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment
to the beginning balance of retained earnings. FIN 48 will be adopted by the Company on January 1,
2007. The Company does not anticipate that the adoption of FIN 48 will have a material affect on
its results of operations or financial position, although the Company is continuing to evaluate the
full impact of the adoption of FIN 48.
Stock-Based Compensation
Stock-based compensation expense recognized under SFAS 123(R) for employees and directors for
the quarters ended March 31, 2007 and 2006 was $67 and $208, respectively.
There were no options granted to employees and directors during the quarter ended March 31,
2007. The estimated fair value of options granted to employees and directors during the quarter
ended March 31, 2006 was $207. Assumptions used to value the options granted were as follows:
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Expected volatility |
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79.6 |
% |
Risk-free interest rate |
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4.46 |
% |
Expected life in years |
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|
6.25 |
|
Expected dividend yield |
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|
0 |
% |
As stock-based compensation expense recognized in the Statements of Operations for the
quarters ended March 31, 2007 and 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures which the Company estimates to be approximately 11% and 2%,
respectively. The forfeiture rate takes into consideration the significant downsizing of the business in the first quarter of 2007.
As of March 31, 2007, stock-based compensation expense has been reduced by estimated forfeitures
not yet incurred of approximately $26.
F-8
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. Bridge loans are estimated to
approximate fair value based upon current market borrowing rates for loans with similar terms and
maturities.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is required to adopt the
provision of SFAS 157, as applicable, beginning in fiscal year 2008. Management does not believe
the adoption of SFAS 157 will have a material impact on the Companys financial position or results
of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. The Company has not decided if it will early adopt SFAS 159 or if it will choose to
measure any eligible financial assets and liabilities at fair value.
In May 2007, the FASB issued FSP No. FIN 48-1 Definition of Settlement in FASB Interpretation
No. 48, (FSP FIN 48-1). FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should
determine whether a tax provision is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The term effectively settled replaces the term ultimately settled
when used to describe recognition, and the terms settlement or settled replace the terms
ultimate settlement or ultimately settled when used to describe measurement of a tax position
under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax
positions considered effectively settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to be sustained based solely on the
basis of its technical merits and the statute of limitations remains open. The Company do not
anticipate that the adoption of FSP FIN 48-1 will have a material effect on its results of
operations or financial position, although the Company is continuing to evaluate the full impact of
the adoption of FSP FIN 48-1.
NOTE 4 NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share
(SFAS 128). Under the provisions of SFAS 128, basic loss per share is computed by dividing net
loss by the weighted average number of common stock shares outstanding during the periods
presented. Diluted earnings would customarily include, if dilutive, potential common stock shares
issuable upon the exercise of stock options and warrants. The dilutive effect of outstanding stock
options and warrants is reflected in earnings per share in accordance with SFAS 128 by application
of the treasury stock method. For the periods presented, the computation of diluted loss per share
equaled basic loss per share as the inclusion of any dilutive instruments would have had an
antidilutive effect on the earnings per share calculation in the periods presented.
The following potential common shares have been excluded from the computation of diluted net
loss per share since their effect would have been antidilutive:
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For the Three Months Ended March 31, |
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2007 |
|
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2006 |
|
Stock Options |
|
|
2,358,000 |
|
|
|
4,997,000 |
|
Warrants |
|
|
2,195,000 |
|
|
|
3,317,000 |
|
F-9
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(967 |
) |
|
$ |
(2,513 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding |
|
|
40,758 |
|
|
|
39,764 |
|
Net loss per share, basic and diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
NOTE 5 INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Due to the fact that the Company has substantial net operating loss carryforwards, adoption of FIN
48 had no impact on the Companys beginning retained earnings, balance sheets, or statements of
operations.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for years before 2001.
The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax
expense. The Company did not have any unrecognized tax benefits as of March 31, 2007 and 2006. As
a result, the Company did not recognize interest expense, and additionally, did not record any
penalties during the three months ended March 31, 2007 and 2006. The Company does not expect that
the amounts of unrecognized tax benefits will change significantly within the next 12 months.
NOTE 6 DEBT
In February, 2007, the Company entered into a non-binding term sheet with a bridge lender for $700.
Under the terms of the non-binding term sheet, the bridge lender was required to lend the Company
$200 upon the signing of the non-binding term sheet and $500 upon signing of the definitive
agreement. In addition to requiring funding of $700, the non-binding term sheet provided that the
lender would receive 2,500,000 shares of the Companys common stock, a first lien on all of the
assets of the Company including its IP, repayment of the $700 by May 1, 2007, and interest of 10%
per annum. On February 20, 2007, the Company received $200. The $500 was never funded and neither
party entered into a definitive agreement. On March 27, 2007, the Company received notice of a
claim by the bridge lender to preserve his right as outlined in a non-binding term sheet to fund
the $700 bridge credit facility. The bridge lender provided $200 under the non-binding term sheet
and is seeking return of those funds. The Company is currently in discussion with the bridge
lender as it relates the non-funding of the remaining $500.
NOTE 7 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
During the three months ended March 31, 2007, the Company paid accounts payable of $109 with
435,280 shares of common stock.
During the three months ended March 31, 2007, the Company paid consultants $60 with 308,529 shares
of common stock.
F-10
During the three months ended March 31, 2006, the Company issued two-year warrants to such holders
to purchase an aggregate 332,220 shares of its common stock at an exercise price of $4.96 per share
with a fair value of $98,922 as of March 31, 2006.
During 2006, the Company issued 100,000 shares of common stock with a fair value of $130 to
consultants for services rendered to the Company over a twelve month contract. Accordingly, $33 and
$0 are reflected in sales, general and administrative expenses for the three months ended March 31,
2007 and 2006, respectively.
NOTE 8 STOCK-BASED AWARDS
Stock Options
A summary of activity under the Companys 2000 Stock Option Plan (the 2000 Plan) and 2005 Stock
Option Plan (the 2005 Plan) as of December 31, 2006, and for the three months ended March 31, 2007
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
December 31, 2006 |
|
|
3,405,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
595,000 |
|
|
$ |
0.35-$7.22 |
|
|
|
4,000,000 |
|
|
$ |
0.35-$7.94 |
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Change in Status |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Canceled |
|
|
(1,642,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
|
|
|
$ |
|
|
|
|
(1,642,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2007 |
|
|
1,763,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
595,000 |
|
|
$ |
0.35-$7.22 |
|
|
|
2,358,000 |
|
|
$ |
0.35-$7.94 |
|
The weighted average exercise prices for options granted and exercisable and the weighted average
remaining contractual life for options outstanding as of December 31, 2006 and March 31, 2007 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
Of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,405,000 |
|
|
$ |
1.89 |
|
|
|
8.01 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
2,126,000 |
|
|
$ |
2.00 |
|
|
|
7.47 |
|
|
$ |
|
|
Employees Exercisable |
|
|
1,449,000 |
|
|
$ |
2.40 |
|
|
|
6.45 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Outstanding |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Exercisable |
|
|
570,000 |
|
|
$ |
2.27 |
|
|
|
4.28 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
1,763,000 |
|
|
$ |
2.03 |
|
|
|
7.32 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
1,682,000 |
|
|
$ |
2.02 |
|
|
|
7.31 |
|
|
$ |
|
|
Employees Exercisable |
|
|
956,000 |
|
|
$ |
2.30 |
|
|
|
6.01 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Options Outstanding |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.25 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.25 |
|
|
$ |
|
|
Non-Employees Options Exercisable |
|
|
570,000 |
|
|
$ |
2.27 |
|
|
|
4.03 |
|
|
$ |
|
|
Cash received from stock options exercised during the three months ended March 31, 2007 and 2006
were $0, and $2, respectively. The total intrinsic value of options exercised during the three
months ended March 31, 2007 and 2006 were $0 and $3, respectively.
F-11
Included in the table above, at March 31, 2007 and 2006, were options outstanding for 595,000 and
380,000 shares, respectively, granted to consultants. These options generally vest over zero to
four years and are expensed when the services are performed and benefit is received as provided by
the Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18).
As of March 31, 2007 and 2006, there were $724 and $1,398, respectively of total unrecognized
compensation costs related to non-vested share-based compensation arrangements granted under the
2005 Plan. That cost is expected to be recognized over the weighted-average period of 2.6 and 3.35
years, respectively.
When options are exercised, the Companys policy is to issue previously unissued shares of common
stock to satisfy share option exercises. As of March 31, 2007, the Company had 3,085,093 shares of
unissued shares reserved for issuance under the 2005 Plan.
NOTE 9 COMMITMENTS AND CONTINGENCIES
In September 2006, the Company entered into a renewable two-year spinal supply and
distribution agreement which supersedes its prior supply agreement, pursuant to which the Company
has the exclusive rights to place current and future spinal bone implants treated with the Clearant
Process® in a number of geographic territories and an option for additional geographic territories,
which in aggregate represent approximately 60% or more of the United States market. In exchange
for these exclusive rights, the Company agreed to pay $1,150 as a prepayment on October 31, 2006,
for ordered spinal bone implants to be delivered in 2007. In addition, the Company will be
required to make prepayments to be applied towards future spinal bone implants ordered in the
amounts of $3,800 and $4,550 for 2007 and 2008, respectively.
Pursuant to the Companys spinal supply and distribution agreement (Agreement), dated
September 27, 2006, in consideration for the exclusive distribution and/or representation in
various United States markets, the Company was required to remit a prepayment in the amount of
$1,150 on October 31, 2006. As of March 31, 2007, all tissue orders have not been delivered by the
supplier and this payment has not been made by the Company. In February 2007, the Company received
notification of termination of the Agreement. The Company is in ongoing discussions with the
supplier to resolve the issues, which could include but is not limited to, reduction in exclusive
territories or termination. The termination of the Agreement may result in the discontinuation or
disruption of the spinal bone implant supply, which would have a material adverse impact to the
Companys ability to distribute spinal bone implants treated with the Clearant Process®.
NOTE 10 SUBSEQUENT EVENTS
On April 3, 2007, the Company agreed to issue approximately 93,720,000 shares of its common
stock at a price of $0.025 per share in private placements to approximately twenty accredited and
institutional investors for gross proceeds of approximately $2,300 subject to adjustment for over
allotted orders. Purchasers included the Companys Chief Executive Officer. The private placements
were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
as transactions not involving a public offering. However, pursuant to the registration rights
agreements with the investors the Company is using its best efforts to register the stock.
Concurrent with the private placement, the directors at the time, John Wehrle, Nolan Sigal, and
Herve de Kergrohan as well as the CEO of the Company were granted stock options to purchase 400,000
shares of the Companys common stock at a price of $0.025 per share which vested immediately upon
grant. On April 26, 2007 all three board members resigned.
F-12
On April 25, 2007, the Company received notice of a claim on behalf of most of the investors
to whom it sold approximately $2.3 million in common stock on April 3, 2007, including shares
beneficially owned by two of the Companys directors, alleging that the financials projections
provided to them prior to investing were inaccurate, and seeking rescission of the stock purchase
agreements and return of the funds. If such a claim were pursued successfully, the Company would no
longer continue to operate as a going concern. As disclosed on the Form 8-K filed with the
Securities and Exchange Commission (SEC) on June 1, 2007, the Companys board of directors
approved an Amendment to the Stock Purchase Agreements entered into in connection with the April 3,
2007 private placement. The Stock Purchase Agreements were filed with the SEC as Exhibit 10.1 to a
Form 8-K on April 4, 2007. The Amendment releases the Company from liability to the investors for
its failure to timely file periodic reports or a registration statement, and from any alleged
misrepresentations in connection with the private placement. It also provides the investors with
full ratchet antidilution protection for subsequent sales of common stock at a price lower than
that paid by the investors. The form of the Amendment was filed as Exhibit 10.1 to the Form 8-K
filed on June 1, 2007.
F-13
ITEM 2. Managements Discussion and Analysis
The following discussion of our financial condition and results of operations should be read in
conjunction with our financial statements and the related notes, and the other financial
information included in this report. As used in this report, the terms Clearant, Company, we,
our, and like references mean Clearant, Inc., a Delaware corporation.
Forward-Looking Statements
The forward-looking comments contained in this report involve risks and uncertainties. Our actual
results may differ materially from those discussed here due to factors such as, among others,
limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, results of additional clinical studies, acceptance and success of our direct
distribution of allografts, intense competition and substantial regulation in the healthcare
industry. Additional factors that could cause or contribute to such differences can be found in the
following discussion and in the Risks Factors set forth in Item 1 of our Form 10-KSB for the year
ended December 31, 2006, filed with the SEC on May 17, 2007 (the Form 10-KSB).
Overview
We acquire and develop our pathogen inactivation technology, the Clearant Process®,
and market it to producers of biological products, most notably devitalized
musculoskeletal tissue allograft implants (tissue).
We develop and market a proprietary pathogen inactivation technology that reduces the risk of
contamination to biological products by inactivating a broad range of pathogens. The Clearant
Process® is based on exposing a biological product to gamma-irradiation
under specialized, proprietary or patented conditions that deliver a predetermined amount of
radiation to inactivate a desired level of pathogens, thereby reducing the risk of contamination,
while preserving the functionality and integrity of the treated product. The Clearant
Process® is designed to:
|
|
|
Inactivate a broad range of known pathogens irrespective of size, origin or structure; |
|
|
|
|
Achieve sterility, in some cases with margins of safety greater than that of a medical device; |
|
|
|
|
Be used in either intermediate or final stages of production; |
|
|
|
|
Protect the mechanical and biological properties of the biological product being treated; and |
|
|
|
|
Be applied to a product after it has been sealed into its final package. |
To date, we have entered into a total of ten agreements with customers to utilize the Clearant
Process® with their products. Through March 2007, we have entered into six licensing agreements
with tissue banks, and one with a manufacturer of recombinant protein products, in return for
milestone payments and royalties on end-product sales. Through March 2007, four licensees have
launched tissue products that were treated using the Clearant Process®. Additionally, in September
2005, we launched a new sterilization service (the Clearant Sterilization Service or
Sterilization Service) which allows customers to send ready for sterilization tissue to our
facility near Chicago, Illinois to be irradiated under Clearant Process® conditions by us. Through
2006, we have signed four such Sterilization Service agreements with tissue banks. Many of the
companies have not implemented the Clearant Process®, and we cannot estimate when or if they will
do so.
Based on these license and sterilization service results we implemented a plan to better market and
promote adoption of the Clearant Process®, which is to directly distribute
Clearant Process® sterile implants of our customers in order to facilitate
market penetration. We intend to continue to pursue the license and sterilization agreements,
although the direct distribution revenue model may have an adverse impact on the pursuit of such
agreements.
14
Results of Operations
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
Revenues
Our total revenue increased by $245,000 or 129%, to $435,000 for the quarter ended March 31, 2007,
from $190,000 for the quarter ended March 31, 2006.
Revenues from direct distribution of Clearant Process® sterile implants were
$179,000 and $0 during the quarters ended March 31, 2007 and 2006, respectively. This is a 22%
increase over the fourth quarter 2006 direct distribution revenue of $147,000. Due to cash
constraints the Company experienced in the first quarter 2007, the Company was not able to hire
independent distributors, direct sales employees, or otherwise aggressively grow the direct
distribution operations. In addition, growth in this business line is dependant on adequate
supply, which will cause the Company to balance the increase in sales force with the supply. As a
result of not hiring sales people in the first quarter of 2007, not securing tissue supply, and
inadequate cash to fulfill vendor obligations, the Company is likely to experience a second quarter
2007 decline in revenue, but believes this will be a temporary fluctuation and will more
aggressively pursue additional sales and supply efforts. Direct distribution continues to be the
primary strategy of the Companys growth plan.
Revenues from licensing activities decreased 49% to $40,000 in the quarter ended March 31, 2007,
from $79,000 in the quarter ended March 31, 2006. The decrease primarily related to the loss of
one licensing customer in the first quarter of 2007. Revenues from fee for service activities
increased 67% to $50,000 for the quarter ended March 31, 2007 from $30,000 in the quarter ended
March 31, 2006. This increase was a result of greater implementation of the Clearant
Process® into our customers manufacturing processes and greater market
acceptance of human tissue treated with the Clearant Process®. We are
continuing to market the license and sterilization service to gain further adoption in addition to
the direct distribution revenue model.
Revenues from contract research, milestones and grants increased to $166,000 in the quarter ended
March 31, 2007, from $61,000 in the same quarter last year. The increase is primarily related to a
one-time non-recurring license agreement termination fee in that quarter. The reason for the
termination was due to the customers discontinuation of orthopedic activities in January 2007.
During 2007 and 2006 we changed our emphasis away from one-time, generally non-recurring research
and grant revenue to direct distribution of Clearant Process® sterile
implants and obtaining license and sterilization service customers. We expect to continue this
strategy and expect contract research and grant revenue to decrease. We expect these direct
distribution, license and sterilization revenue to be more characteristic of recurring revenue. In
addition, we expect that the costs associated with the direct distribution and sterilization
services to increase in conjunction with the revenue increase.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased by $1,341,000 or 54%, to $1,134,000 for the
quarter ended March 31, 2007, from $2,475,000 for the quarter ended March 31, 2006. The $1,341,000
decrease in sales, general and administrative expenses for the quarter ended March 31, 2007, from
the quarter ended March 31, 2006, was principally due to the downsizing of personnel in the first
quarter of 2007, as well as the reduction in overall expenses. Future sales and marketing expense
increases or decreases will be affected by the revenue, effort and timing required to provide
Clearant Process® sterile implants to the marketplace.
We incurred $67,000 in non-cash stock-based compensation for the quarter ended March 31, 2007 from
$259,000 for the quarter ended March 31, 2006. The reduction primarily relates to the downsizing
of personnel in the first quarter of 2007. We issued common stock and stock options to outside
consultants for services rendered during the quarter ended March 31, 2007 and 2006, resulting in
non-cash expense of $48,000 and $51,000, respectively. From time to time, we may issue common stock
to consultants for services rendered.
15
Research and Development Expenses
Research and development expenses decreased 88% to $40,000 for the quarter ended March 31, 2007,
from $327,000 for the quarter ended March 31, 2006. This decrease was largely a result of reduced
research and development costs associated with the reduction of our Research and Development
personnel and related expenses. This was accomplished due to our shift in focus from research and
development to the commercialization of the Clearant Process®. Further
reductions in research and development costs may be achieved.
In addition to the elimination of certain costs and the completion of certain projects, we have
complemented in-house research and development with universities and third party research and
development consulting firms, which we believe provides a broader expertise in research and
development and allows us to maintain a low research and development headcount.
Other Income/Expense
For the quarter ended March 31, 2007, we recognized $5,000 in net interest income compared to
$71,000 for the same quarter last year. We had $251,000 cash on hand as of March 31, 2007, which we
invested in short-term conservative money market funds.
Preferred Stock Dividend and Financing Costs
As of March 31, 2007 and 2006, there were no shares of preferred stock outstanding and therefore no
dividends.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred significant operating losses and negative
cash flows from operating activities since its inception. As of March 31, 2007, these conditions
raised substantial doubt as to the Companys ability to continue as a going concern. In April 2007,
the Company raised additional capital to supplement its operations. There can be no assurance that
the Company will be successful in its efforts to generate, increase, or maintain revenue or raise
additional capital on terms acceptable to the Company or that the Company will be able to continue
as a going concern. The financial statements do not include any adjustments relating to the
recoverability of the carrying amount of the recorded assets or the amount of liabilities that
might result from the outcome of this uncertainty.
We expect to incur operating losses and negative cash flows for the foreseeable future. Our ability
to execute on our current business plan is dependent upon our ability to develop and market our
products, and, ultimately, to generate revenue.
As of March 31, 2007, we had net cash on hand of approximately $251,000. Excluding non-current
accounts payable, accrued liability payments, and inventory related
payments, we are currently expending cash at a rate of approximately $200,000 to $400,000 per month, and at
present rates, including the April 2007 funding, we anticipate that we will need to seek additional
financing prior to the end of 2007. The Company cannot make any assurances that operations can be
maintained at this reduced expense level and we may need to increase expenses or expand our staff
to properly continue normal operations. As of March 31, 2007 the Company has $2,553,000 of accounts
payable and accrued liabilities, most of which are non-current.
Research and Development
For the coming year we plan to focus on generating revenue through our direct distribution revenue
model and will expend cash to facilitate that process. In the long term, we plan to re-initiate our
research and development spending surrounding blood plasma derivatives and recombinant products.
16
Direct Distribution Strategy
On November 28, 2006, Clearant entered into a two-year supply agreement with a tissue bank for the
supply of Clearant Process® sports medicine implants. Clearant has agreed to pay a transfer fee
for the sports medicine implants. The Agreement shall automatically renew for successive one-year
terms unless either party terminates upon written notice to the other party.
On September 27, 2006, Clearant entered into a renewable two-year supply and distribution agreement
(the Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement,
Osprey granted Clearant exclusive rights to place current and future Osprey cervical and lumbar
allografts treated with the Clearant Process® in a number of geographic territories and an option
for additional geographic territories. In exchange for the exclusive rights under the Osprey
Agreement, Clearant is obligated to pay Osprey $500,000 as a prepayment for certain ordered
products to be delivered after October 1, 2007. This prepayment was due upon the earlier of the
following: (i) within three business days after Clearant receives debt or equity financing of at
least $1 million, or (ii) October 31, 2006. In addition, Clearant was required to make the
following quarterly payments to be applied to payments for ordered products: $650,000 by October
31, 2006; $750,000 by January 1, 2007; $850,000 by April 1, 2007; $1 million by July 1, 2007; $1.2
million by October 1, 2007; $1.3 million by January 1, 2008; $1.5 million by April 1, 2008; and
$1.75 million by July 1, 2008. As of the end of the first quarter 2007, all tissue orders had not
been delivered by Osprey and the prepayments had not been made by the Company. In February 2007,
Clearant received notice from Osprey of its termination of the Osprey Agreement, effective within
thirty (30) days from receipt of this notification if certain alleged payment defaults were not
timely cured by Clearant. Clearant is in ongoing discussions with Osprey to resolve these issues,
which could include but is not limited to, reduction in exclusive territories or termination of the
Osprey Agreement. The termination of the Osprey Agreement would result in the disruption of the
spinal bone implant supply from Osprey, which would have a material adverse impact on Clearants
ability to distribute spinal bone implants treated with the Clearant Process®.
Our operating plan, this acquisition of inventory, higher levels of historic accounts receivable
and the related sales and marketing costs associated with the direct distribution strategy have had
an impact on our cash requirements, and have created the need for additional financing.
Limited Cash Availability
Net cash used in operating activities was $507,000 for the three months ended March 31, 2007,
compared to $3,143,000 for the three months ended March 31, 2006. During the three months ended
March 31, 2007, cash used by operations resulted in a $186,000 increase in inventory of Clearant
Process® sterile implants, $270,000 increase in accounts payable due to the
slowing down of payments made by the Company, and $170,000 increase in other assets and liabilities
primarily due to cash received from the bridge financing and being held by an outside trust
account. Significant non-cash adjustments to operating activities for the three months ended March
31, 2007, included depreciation and amortization expense of $189,000, non-cash charges of $67,000
for stock-based compensation, $93,000 for common stock issued to consultants for services rendered,
and an $85,000 loss on sale of fixed assets.
Our net cash used by investing activities was $5,000 for the three months ended March 31, 2007
compared to net cash used of $121,000 for the three months ended March 31, 2006. Our investing
activities consist primarily of patent-related intellectual property expenses and capital
expenditures.
We have financed our operations since inception primarily through the sale of shares of our stock
and convertible notes. Our net cash provided by financing activities was $200,000 for the three
months ended March 31, 2007, compared to net cash provided by financing activities of $2,000 for
the three months ended March 31, 2006. Cash provided by financing activities for the three months
ended March 31, 2007 consisted of $200,000 from the issuance of a bridge loan.
Doubt About Our Ability To Continue As Going Concern
We have incurred significant operating losses and negative cash flows from operating activities,
and have limited available cash, which raise substantial doubt about our ability to continue as a
going concern. Our ability to continue
as a going concern is dependent upon our ability to obtain additional equity or debt financing,
reduce expenditures, attain further operating efficiencies, and, ultimately, to generate greater
revenue.
17
As of March 31, 2007, we had approximately $251,000 in cash and cash equivalents. Excluding
non-current accounts payable, accrued liability payments, and inventory related payments, we are
expending non-inventory related cash at a rate of approximately $200,000 to $400,000 per month, and
at present rates, including the proceeds from the April 2007 private placement we will need to seek
additional financing prior to the end of 2007. Any equity financing may result in substantial
dilution of existing stockholders, and financing may not be available on acceptable terms, or at
all.
Options for raising to raise capital include issuing common stock, preferred stock, convertible
stock, warrants, or a combination of these equity securities. Equity financing may be supplemented
with additional debt financing for inventory, accounts receivable and working capital.
We may not be successful in obtaining financing, and if funding is obtained it may be on terms
considered unfavorable to us or our existing shareholders. The inability or failure to raise
capital before our available cash is depleted will have a material adverse effect on our business
and may result in bankruptcy or discontinuation of operations.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various expirations
through 2011. The future minimum lease payments under these leases and other contractual
obligations as of March 31, 2007 are as follows ($ in 000s):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Obligations |
|
$ |
102 |
|
|
$ |
63 |
|
|
$ |
38 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge Loan |
|
$ |
306 |
|
|
$ |
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
408 |
|
|
$ |
369 |
|
|
$ |
38 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
(1) |
|
Excludes renewable two-year spinal supply and distribution agreement which was
terminated in February 2007. |
The forward-looking comments contained in the above discussion involve risks and uncertainties. Our
actual results may differ materially from those discussed here due to factors such as, among
others, limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, intense competition and substantial regulation in the healthcare industry. Additional
factors that could cause or contribute to such differences can be found under the Risk Factors
section in our Form 10-KSB.
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of March 31, 2007, we had no off-balance
sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. Generally accepted accounting principles require
management to make estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We
base our estimates on experience and on various other assumptions that we
believe 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 may not be readily apparent from
other sources. Our actual results may differ from those estimates.
18
We consider our critical accounting policies to be those that involve significant uncertainties,
require judgments or estimates that are more difficult for management to determine or that may
produce materially different results when using different assumptions. We consider the following
accounting policies to be critical:
Revenue Recognition and Deferred Revenue
We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104). Our revenue sources are direct distribution of Clearant Process®
sterile implants, and licensing fees and sterilization services to customers who incorporate the
Clearant Process® technology into their product and manufacturing processes, which may include
performance milestones and contract research activities. In addition, we recognize revenues from
government grants. We recognize direct distribution revenue upon the sourcing of tissue by a
customer. Licensing revenue is recognized when a customer distributes products incorporating the
Clearant Process® and revenue related to the sterilization service is recognized when the service
is substantially complete. Revenue related to a performance milestone is recognized upon customer
acceptance of the achievement of that milestone, as defined in the respective agreements. Revenue
related to contract research activities is recognized on a percentage-of-completion basis. In the
event cash is received in advance of service performed, we will defer the related revenue
recognition until the underlying performance milestone is achieved and or the contract research
activities commence. In the event advance cash payments are not attributable to any performance
milestone and or contract research activity, we will recognize the underlying amounts into revenue
on a straight-line basis over the term of the underlying agreement. We include shipping charges in
the gross invoice price to customers and classify the total amount as revenue in accordance with
Emerging Issues Task Force Issue (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
Shipping costs are recorded as cost of sales. We evaluate the collectability of accounts
receivables and provide a reserve for credit losses, as appropriate. As of March 31, 2007, we
reserved for credit losses of $20,000.
Cost of Sales
Cost of Sales consists of costs associated with direct distribution of Clearant Process® sterile
implants to a customer and with providing sterilization services to customers. For the quarters
ended March 31, 2007 and 2006, we had no inventory write-downs.
Inventory and Inventory Related Prepayments
Inventory is primarily comprised of implantable donor tissue treated with the Clearant Process® and
is valued at the lower of cost or market with cost determined using the first-in, first-out method.
Inventory is located at contracted tissue banks and on consignment in hospitals. Inventory may be
written down from time to time based on market conditions or other factors.
In accordance with the terms of the spinal supply and distribution agreement (See Note 9), we are
required to make prepayments. Upon receipt of the inventory the prepayments will be reclassified as
inventory until distributed.
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized as
incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. We evaluate the recoverability of its patent costs and trademarks
quarterly based on estimated undiscounted future cash flows.
Research and Development Costs
Research and development costs are expensed as incurred.
19
Income Taxes
Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes (SFAS 109), using
the liability method. Under SFAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that are expected to be in effect when the differences
reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Stock-Based Compensation
On January 1, 2006, we adopted Statements of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning
in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 107 (SAB 107) relating to SFAS 123(R). We have applied the provisions of SAB 107
in its adoption of SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective transition method, which requires the
application of the accounting standard as of January 1, 2006, the first day of our fiscal year
2006. The financial statements as of and for the year ended December 31, 2006 reflect the impact of
SFAS 123(R). In accordance with the modified prospective transition method, the financial
statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R).
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. Bridge loans are estimated to
approximate fair value based upon current market borrowing rates for loans with similar terms and
maturities.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. The following legal proceedings commenced, or material
developments concerning legal proceedings occurred, during this reporting period:
On March 27, 2007, we received notice of a claim by John McGinnis in order to preserve his right as
outlined in a non-binding term sheet to fund a $700,000 bridge credit facility. Mr. McGinnis
provided $200,000 under the non-binding term sheet and is seeking return of those funds.
On April 25, 2007, we received notice of a claim on behalf of most of the investors to whom we sold
approximately $2.3 million in common stock on April 3, 2007, including shares beneficially owned by
two of our directors, alleging that the financials projections provided to them prior to investing
were inaccurate, and seeking rescission of the stock purchase agreements and return of the funds.
If such a claim were pursued successfully, we would no longer continue to operate as a going
concern. As disclosed on the Form 8-K filed with the Securities and Exchange Commission (SEC) on
June 1, 2007, our board of directors approved an Amendment to the Stock Purchase Agreements entered
into in connection with the April 3, 2007 private placement. The Stock Purchase Agreements were
filed with the SEC as Exhibit 10.1 to a Form 8-K on April 4, 2007. The Amendment releases us from
liability to the investors for our failure to timely file periodic reports or a registration
statement, and from any alleged misrepresentations in connection with the private placement. It
also provides the investors with full ratchet antidilution protection for subsequent sales of
common stock at a price lower than that paid by the investors. The form of the Amendment was filed
as Exhibit 10.1 to the Form 8-K filed on June 1, 2007.
GE Commercial Finance filed a Verified Complaint for Monetary Damages against us on May 24, 2007 in
the Superior Court of the State of California. The complaint alleges breach of an equipment lease
and seeks damages in
the amount of $29,594.60 not including interest of 18% per annum from December 1, 2006. We have
not filed a formal response.
20
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. We are required to adopt the provision
of SFAS 157, as applicable, beginning in fiscal year 2008. We do not believe the adoption of SFAS
157 will have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We have not decided if we will early adopt SFAS 159 or if it will choose to measure any
eligible financial assets and liabilities at fair value.
In May 2007, the FASB issued FSP No. FIN 48-1 Definition of Settlement in FASB Interpretation No.
48, (FSP FIN 48-1). FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should
determine whether a tax provision is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The term effectively settled replaces the term ultimately settled
when used to describe recognition, and the terms settlement or settled replace the terms
ultimate settlement or ultimately settled when used to describe measurement of a tax position
under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax
positions considered effectively settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to be sustained based solely on the
basis of its technical merits and the statute of limitations remains open. We do not anticipate
that the adoption of FSP FIN 48-1 will have a material affect on its results of operations or
financial position, although we are continuing to evaluate the full impact of the adoption of FSP
FIN 48-1.
ITEM 3. Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our system of disclosure controls and procedures as of the end of the
period covered by this report. Based on this evaluation our Chief Executive Officer and Chief
Financial Officer has determined that our disclosure controls and procedures are effective in
timely alerting him to material information required to be included in this report. There has been
no change in our internal control over financial reporting during our most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. The following legal proceedings commenced, or material
developments concerning legal proceedings occurred, during this reporting period:
On March 27, 2007, we received notice of a claim by John McGinnis in order to preserve his right as
outlined in a non-binding term sheet to fund a $700,000 bridge credit facility. Mr. McGinnis
provided $200,000 under the non-binding term sheet and is seeking return of those funds.
21
On April 25, 2007, we received notice of a claim on behalf of most of the investors to whom we sold
approximately $2.3 million in common stock on April 3, 2007, including shares beneficially owned by
two of our directors, alleging that the financials projections provided to them prior to investing
were inaccurate, and seeking rescission of the stock purchase agreements and return of the funds.
If such a claim were pursued successfully, we would no
longer continue to operate as a going concern. As disclosed on the Form 8-K filed with the
Securities and Exchange Commission (SEC) on June 1, 2007, our board of directors approved an
Amendment to the Stock Purchase Agreements entered into in connection with the April 3, 2007
private placement. The Stock Purchase Agreements were filed with the SEC as Exhibit 10.1 to a Form
8-K on April 4, 2007. The Amendment releases us from liability to the investors for our failure to
timely file periodic reports or a registration statement, and from any alleged misrepresentations
in connection with the private placement. It also provides the investors with full ratchet
antidilution protection for subsequent sales of common stock at a price lower than that paid by the
investors. The form of the Amendment was filed as Exhibit 10.1 to the Form 8-K filed on June 1,
2007.
GE Commercial Finance filed a Verified Complaint for Monetary Damages against us on May 24, 2007 in
the Superior Court of the State of California. The complaint alleges breach of an equipment lease
and seeks damages in the amount of $29,594.60 not including interest of 18% per annum from December
1, 2006. We have not filed a formal response.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 3, 2007, we entered into Stock Purchase Agreements and Registration Rights Agreements with
approximately twenty accredited and institutional investors for the sale of shares of our common
stock in exchange for gross proceeds of approximately $2.3 million. We agreed to issue
approximately 93,720,000 shares of our common stock at a price of $0.025 per share in the private
placements. Purchasers included our chief executive officer. The private placements were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions not involving a public offering.
Each of the purchasers represented their intention to acquire the securities for their own account
for investment purposes and not with a view to the distribution thereof other than in accordance
with applicable law. Appropriate legends were affixed to the stock certificates issued in the
transaction. All purchasers either received or had access to adequate information concerning the
investment. Purchasers were also granted customary demand registration rights, obligating us to use
our best efforts to file registration statements covering the purchased shares.
We reserve the right to accept oversubscriptions for additional amounts. Unless otherwise required
by law, we disclaim any obligation to release publicly any updates or changes in our expectations
or any change in events, conditions, or circumstances on which any forward-looking statements are
based.
As disclosed on the Form 8-K filed with the Securities and Exchange Commission (SEC) on June 1,
2007, our board of directors approved an Amendment to the Stock Purchase Agreements entered into in
connection with the April 3, 2007 private placement. The Stock Purchase Agreements were filed with
the SEC as Exhibit 10.1 to a Form 8-K on April 4, 2007. The Amendment releases us from liability
to the investors for our failure to timely file periodic reports or a registration statement, and
from any alleged misrepresentations in connection with the private placement. It also provides the
investors with full ratchet antidilution protection for subsequent sales of common stock at a price
lower than that paid by the investors. The form of the Amendment was filed as Exhibit 10.1 to the
Form 8-K filed on June 1, 2007.
ITEM 5. Other Information
On June 19, 2007, we agreed to pay legal fees of $60,000 to Rowland W. Day II, in his
capacity as corporate attorney for the lead investors in our April private
placement, payable $15,000 within ten days and $5,000 per month thereafter.
Mr. Day has not acted as counsel for, or provided legal services to, Clearant.
In addition, we agreed to compensation Mr. Day in the amount of $7,500 per month,
effective April 2007, for serving as chairman of our board of directors.
ITEM 6. Exhibits
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
22
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results of operations,
business strategies, operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, plans and objectives of management, markets for stock of
Clearant, Inc. and other matters. Statements in this report that are not historical facts are
forward-looking statements for the purpose of the safe harbor provided by Section 21E of the
Exchange Act and Section 27A of the Securities Act. Such forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues and income of
Clearant, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the
senior management of Clearant, Inc. on the date on which they were made, or if no date is stated,
as of the date of this report. These forward-looking statements are subject to risks, uncertainties
and assumptions, including those described in the Risk Factors in our Form 10-KSB for the fiscal
year ended December 31, 2006, filed with the SEC on May 17, 2007 (the Form 10-KSB), that may
affect the operations, performance, development and results of our business. Because the factors
discussed in our Form 10-KSB and this report could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us or on our behalf, you
should not place undue reliance on any such forward-looking statements. New factors emerge from
time to time, and it is not possible for us to predict which factors will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements.
You should understand that the following important factors, in addition to those discussed in the
Risk Factors section of our Form 10-KSB could affect our future results and could cause those
results to differ materially from those expressed in such forward-looking statements:
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general economic conditions; |
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|
|
|
the effectiveness of our planned advertising, marketing and promotional campaigns; |
|
|
|
|
physician and patient acceptance of our products and services, including newly
introduced products; |
|
|
|
|
anticipated trends and conditions in the industry in which we operate, including
regulatory changes; |
|
|
|
|
our future capital needs and our ability to obtain financing; and |
|
|
|
|
other risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the SEC. |
Although we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this annual report as anticipated, believed, estimated, expected
or intended.
Except to the extent required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or any other
reason. All subsequent forward-looking statements attributable to us or any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements contained or referred
to herein. In light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report may not occur.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CLEARANT, INC. |
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Date: June 20, 2007 |
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/s/ Jon Garfield |
|
|
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|
|
By:
|
|
Jon Garfield, Chief Executive Officer and
Chief Financial Officer |
24
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
25