Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2008.
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o |
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Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
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) |
1801 Avenue of the Stars, Suite 435
Los Angeles, California 90067
(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 large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
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o Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer
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þ Smaller reporting company |
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 August 12, 2008, there were 48,957,445 shares of registrants common stock, $0.0001 par
value, outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CLEARANT, INC.
BALANCE SHEETS
(in thousands, except par value)
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June 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
362 |
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$ |
1,062 |
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Accounts receivable, net of
allowances of $75 and $26 at
June 30, 2008 and December
31, 2007, respectively |
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323 |
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341 |
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Inventory and inventory
related prepayments, net of
reserve of $1,320 and $1,255
at June 30, 2008 and December
31, 2007, respectively |
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16 |
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Prepaids and other |
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123 |
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68 |
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Total current assets |
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824 |
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1,471 |
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Property and equipment, net of $129 and
$83 of accumulated depreciation at June
30, 2008 and December 31, 2007,
respectively |
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56 |
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87 |
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Identifiable intangibles, net of $1,260
and $1,217 of accumulated amortization at
June 30, 2008 and December 31, 2007,
respectively |
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972 |
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991 |
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Deposits and other assets |
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59 |
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60 |
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Total assets |
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$ |
1,911 |
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$ |
2,609 |
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Liabilities and Stockholders Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
1,170 |
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$ |
1,210 |
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Accrued liabilities |
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832 |
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733 |
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Deferred revenue |
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9 |
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7 |
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Bridge loans, net |
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106 |
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106 |
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Total current liabilities |
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2,117 |
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2,056 |
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Deferred revenue noncurrent |
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4 |
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Total liabilities |
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2,117 |
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2,060 |
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Stockholders equity (deficit): |
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Preferred
stock ($0.0001 par value; 50,000 shares authorized; 0 issued and
outstanding at June 30, 2008 and December 31, 2007;
respectively) |
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Common stock ($0.0001 par value;
200,000 shares authorized; 48,957
issued and outstanding at June 30,
2008 and December 31, 2007,
respectively) |
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5 |
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5 |
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Additional paid-in capital |
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86,633 |
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86,360 |
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Accumulated deficit |
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(86,844 |
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(85,816 |
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Total stockholders equity (deficit) |
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(206 |
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549 |
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Total liabilities and stockholders equity |
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$ |
1,911 |
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$ |
2,609 |
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See accompanying notes to financial statements.
F-1
CLEARANT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Licensing |
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$ |
14 |
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$ |
21 |
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$ |
71 |
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$ |
61 |
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Direct distribution |
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455 |
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125 |
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762 |
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304 |
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Fee for service |
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27 |
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19 |
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36 |
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69 |
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Contract research and milestones |
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8 |
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3 |
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100 |
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169 |
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Total revenues |
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504 |
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168 |
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969 |
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603 |
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Cost of revenues |
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289 |
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92 |
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502 |
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240 |
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Gross profit |
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215 |
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76 |
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467 |
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363 |
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Operating expenses: |
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Sales, general and administrative |
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690 |
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901 |
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1,502 |
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2,035 |
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Research and development |
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2 |
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19 |
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5 |
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59 |
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Total operating expenses |
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692 |
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920 |
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1,507 |
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2,094 |
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Loss from operations |
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(477 |
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(844 |
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(1,040 |
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(1,731 |
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Other income (expense): |
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Interest income (expense) |
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3 |
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(6 |
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12 |
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(1 |
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Gain on extinguishment of debt |
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3 |
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3 |
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Loss on disposal of fixed assets |
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(1 |
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(86 |
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Loss before provision (benefit) for
income taxes |
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(474 |
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(848 |
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(1,028 |
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(1,814 |
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Provision (benefit) for income taxes |
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Net loss |
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$ |
(474 |
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$ |
(848 |
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$ |
(1,028 |
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$ |
(1,814 |
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Net loss per share: |
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Basic and diluted |
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$ |
(0.01 |
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$ |
(0.11 |
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$ |
(0.02 |
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$ |
(0.34 |
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Number of weighted average shares
used in per share calculation: |
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Basic and diluted |
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48,957 |
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7,778 |
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48,957 |
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5,358 |
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See accompanying notes to financial statements.
F-2
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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Operating activities |
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Net loss |
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$ |
(1,028 |
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$ |
(1,814 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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89 |
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277 |
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Loss on disposal of fixed assets |
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86 |
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Stock-based compensation |
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273 |
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160 |
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Issuance of common stock to consultants for services
rendered |
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93 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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18 |
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(269 |
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Inventory and inventory related prepayments |
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(16 |
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(70 |
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Prepaids |
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(56 |
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175 |
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Accounts payable |
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(40 |
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204 |
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Accrued liabilities |
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99 |
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296 |
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Deferred revenue |
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(1 |
) |
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(66 |
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Other assets and liabilities |
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1 |
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(178 |
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Net cash used in operating activities |
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(661 |
) |
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(1,106 |
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Investing activities |
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Cost of identified intangibles |
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(24 |
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(30 |
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Capital expenditures |
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(15 |
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Net proceeds from sale of fixed assets |
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22 |
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Net cash used in investing activities |
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(39 |
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(8 |
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Financing activities |
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Issuance of common stock, net of costs of $316 |
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2,026 |
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Proceeds from issuance of bridge loan |
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200 |
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Net cash provided by financing activities |
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2,226 |
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Change in cash and cash equivalents |
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(700 |
) |
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1,112 |
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Cash and cash equivalents, beginning of period |
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1,062 |
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563 |
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Cash and cash equivalents, end of period |
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$ |
362 |
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$ |
1,675 |
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Supplemental Disclosure of Non-cash Financing Activities: |
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Issuance of common stock for accounts payable |
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$ |
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$ |
109 |
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Issuance of common stock to consultants for services |
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$ |
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$ |
103 |
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See accompanying notes to financial statements.
F-3
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
Our accompanying unaudited interim financial statements have been prepared in accordance with U.S.
generally accepted accounting principles 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 and six months ended June 30, 2008 are not necessarily indicative of
the results that may be expected for the entire 2008 fiscal year.
We have omitted footnote disclosures that would substantially duplicate the disclosures contained
in our audited financial statements and should be read in conjunction with the financial statements
for the fiscal years ended December 31, 2007 and 2006 and notes thereto in our Form 10-KSB dated
December 31, 2007, filed with the Securities and Exchange Commission on April 1, 2008.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared on the basis that we will continue as a
going concern. We have incurred significant operating losses and negative cash flows from operating
activities since our inception. As of June 30, 2008, these conditions raised substantial doubt as
to our ability to continue as a going concern. In July 2008, we raised additional capital to
supplement our operations. The $2,000 convertible loan is to be funded, net of fees of
approximately $250, in tranches of: $400 which was funded immediately; $400 on August 22, 2008;
$600 on October 6, 2008; and $600 on February 16, 2009.There can be no assurance that we will be
successful in our efforts to generate, increase, or maintain revenue or raise additional capital on
terms acceptable to us or that we 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
We recognize revenue in accordance with the provisions of Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. 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. 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 revenues. We evaluate
the collectability of accounts receivables and provide a reserve for credit losses, as appropriate.
As of June 30, 2008 and December 31, 2007, we reserved for credit losses of $75 and $26,
respectively.
F-4
Cost of revenues
Cost of revenues consists of costs associated with direct distribution of Clearant Process® sterile
implants to a customer and with providing sterilization services to customers.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles 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
We consider all highly liquid investments with an original maturity of three months or less to be
cash equivalents. Financial instruments that potentially subject us to a concentration of credit
risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash is
deposited with what we believe are highly credited, quality financial institutions. The deposited
cash may exceed FDIC insured limits. For the quarter ended June 30, 2008, three customers accounted
for approximately 26% of revenues and three customers accounted for approximately 24% 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. As of June 30, 2008 and
December 31, 2007, we had an inventory and inventory related prepayment reserve of $1,320 and
$1,255, respectively.
In accordance with the terms of the Osprey Agreement (see Note 9 in the accompanying footnotes to
the financial statements), we are 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 three and six months ended June 30, 2008, we sold no
property or equipment.
Long-Lived Assets
We review and evaluate our long-lived assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An impairment loss is measured
as the amount by which the asset carrying value exceeds its fair value. Fair value is generally
determined using valuation techniques such as estimated future cash flows. An impairment is
considered to exist if total estimated future cash flows on an undiscounted basis are less than the
carrying amount of the asset. An impairment loss is measured and recorded based on discounted
estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks
and uncertainties. No impairment losses were recorded during the six months ended June 30, 2008.
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 our patent costs and trademarks
quarterly based on estimated undiscounted future cash flows. In accordance with
Statement of Financial Accounting Standards (SFAS) 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 June 30, 2008 and December 31, 2007, no impairment existed.
F-5
Research and Development Costs
Research and development costs are expensed as incurred.
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.
The significant components of the provision for income taxes for the periods ending June 30, 2008
and December, 31, 2007 were $0 and $0, respectively, for the current state provision. There was no
state deferred or federal tax provision.
Due to our current net loss position, we have provided a valuation allowance in full on our net
deferred tax assets in accordance with SFAS 109 and in light of the uncertainty regarding ultimate
realization of the net deferred tax assets.
Stock-Based Compensation
Stock-based compensation expense is recognized under SFAS No. 123(R), Share Based Payment (SFAS
123R), which requires the measurement and recognition of compensation expense for all share-based
payment awards to employees and directors based on estimated fair value. Stock-based compensation
expense for employees and directors for the six months ended June 30, 2008 and 2007 was $273 and
$160, respectively, which were recorded as part of operating expenses.
There were 0 and 1,805,500 options granted to employees and directors during the six months ended
June 30, 2008 and 2007.
As stock-based compensation expense recognized for the six months ended June 30, 2008 and 2007 is
based on awards ultimately expected to vest, it has been reduced for estimated forfeitures, which
we estimate to be approximately 9% and 11%, respectively. For the six months ended June 30, 2008
and 2007, stock-based compensation expense has been reduced by estimated forfeitures not yet
incurred of approximately $20 and $35, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets 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 December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No.
141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for calendar year companies on January 1, 2009. We
do not anticipate that the adoption of SFAS 141(R) will have a material affect on the Company, but
the effect is dependent upon acquisitions at that time.
F-6
In December 2007, the SEC issued SAB 110. SAB 110 expresses the views of the staff regarding the
use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of
expected term of plain vanilla share options in accordance with SFAS No. 123 (revised 2004). We
do not believe that the adoption of SAB 110 will have a material impact on our financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities, and amendment of SFAS No. 133 (SFAS No.
161). This statement will require additional disclosures about how and why we use derivative
financial instruments, how derivative instruments and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted (SFAS No. 133), and how derivative instruments and related hedged items affect our
financial position, results of operations, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008; however
early adoption is encouraged, as are comparative disclosures for earlier periods. We do not
believe that the adoption of SFAS No. 161 will have a material impact on our financial statements.
NOTE 4 NET LOSS PER SHARE
We compute 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:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Stock Options |
|
|
3,358,212 |
|
|
|
3,976,000 |
|
Warrants |
|
|
133,052 |
|
|
|
2,195,000 |
|
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(474 |
) |
|
$ |
(848 |
) |
|
$ |
(1,028 |
) |
|
$ |
(1,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares
outstanding |
|
|
48,957 |
|
|
|
7,778 |
|
|
|
48,957 |
|
|
|
5,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 INCOME TAXES
We 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 we have substantial net operating loss carryforwards, adoption of
FIN 48 had no impact on our beginning retained earnings, balance sheets, or statements of
operations.
F-7
We file income tax returns in the U.S. federal jurisdiction, and various states and foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local
income tax examinations by tax authorities for years before 2001.
We recognize accrued interest and penalties on unrecognized tax benefits in income tax expense. We
did not have any unrecognized tax benefits as of June 30, 2008 and 2007. As a result, we did not
recognize interest expense, and additionally, did not record any penalties during the six months
ended June 30, 2008 and 2007. We do not expect that the amounts of unrecognized tax benefits will
change significantly within the next 12 months.
NOTE 6 DEBT
In February, 2007, we 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 us $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 our common stock, a first lien on all of our assets including our
intellectual property, repayment of the $700 by May 1, 2007 and interest of 10% per annum. On
February 20, 2007, we received $200. The $500 was never funded and neither party entered into a
definitive agreement. On March 27, 2007, we received notice of a claim by the bridge lender to
preserve his right as outlined in the non-binding term sheet to fund the $700 bridge credit
facility. On July 16, 2007, as disclosed on our Current Report on Form 8-K/A filed with the SEC on
August 9, 2007, we entered into a settlement and conversion agreement with the bridge lender
whereby we issued 2,857,143 shares for the $200 loan payable at $0.005 per share. The costs
associated with the transaction are $16. The settlement and conversion agreement would release us
from all outstanding claims from the bridge lender including the claim on our intellectual property
by the bridge lender. The shares were issued on August 23, 2007.
NOTE 7 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
In August, 2007, we entered into stock purchase agreements and registration rights agreements with
approximately 11 accredited and institutional investors for the sale of 7,511,875 shares of our
common stock (shares) at $0.005 per share, in a private offering, in exchange for gross proceeds
of approximately $525. This private placement was made in connection with the private placement we
previously entered into on April 3, 2007 (the April private placement), pursuant to which
approximately 20 accredited and institutional investors purchased 6,694,299 shares at $0.025 in
exchange for gross proceeds of approximately $2,300. The costs associated with the transaction are
$344. On August 23, 2007, pursuant to the antidilution provisions in the stock purchase agreements,
7,511,875 shares were issued to the new investors and 26,777,141 additional shares were issued to
the April private placement investors to adjust their selling price to $0.005 per share. These
shares have been recorded as an adjustment between additional paid in capital and par value as it
represents an adjustment to the original sale price of common stock.
In August, 2007, we entered into a settlement and conversion agreement with a bridge lender
pursuant to which the bridge lender would be issued 2,857,143 shares for the $200 loan payable at
$0.005 per share. As part of the settlement and conversion agreement, the lender purchased an
additional 2,142,859 shares at a price of $0.005 per share in exchange for aggregate proceeds of
$142 and interest accrued on the bridge loan of $8. The bridge lender was also issued 51,021 shares
as part of the original non-binding term sheet entered into by us in February 2007. The settlement
and conversion agreement directly caused the antidilution provision of the April private placement
investors. The shares were issued on August 23, 2007.
On August 8, 2007, we announced a 1-for-14 reverse stock split which was previously authorized at
our annual meeting of stockholders held on August 3, 2007. The record date for the reverse split
was August 23, 2007 and we began trading on the NASD Electronic Bulletin Board (OTCBB) on a split
adjusted basis on September 6, 2007 under the new symbol CLRA.OB.
During the six months ended June 30, 2008 and 2007, we paid accounts payable of $0 and $109 with 0
and 31,092 shares of common stock, respectively.
During the six months ended June 30, 2008 and 2007, we paid consultants $0 and $60 with 0 and
22,038 shares of common stock, respectively.
F-8
NOTE 8 STOCK-BASED AWARDS
Stock Options
A summary of activity under our 2000 Stock Option Plan (the 2000 Plan) and 2005 Stock Option Plan
(the 2005 Plan) as of December 31, 2007, and for the six months ended June 30, 2008 is presented
below:
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|
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|
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|
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|
|
|
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|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
December 31, 2007 |
|
|
3,244,000 |
|
|
$ |
0.35-$63.14 |
|
|
|
173,000 |
|
|
$ |
4.90-$57.68 |
|
|
|
3,417,000 |
|
|
$ |
0.35-$63.14 |
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Change in Status |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Canceled |
|
|
59,000 |
|
|
$ |
0.35-$57.68 |
|
|
|
|
|
|
$ |
|
|
|
|
59,000 |
|
|
$ |
0.35-$57.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2008 |
|
|
3,185,000 |
|
|
$ |
0.35-$63.14 |
|
|
|
173,000 |
|
|
$ |
4.90-$57.68 |
|
|
|
3,358,000 |
|
|
$ |
0.35-$63.14 |
|
Of the 3,358,000 shares outstanding for the six-months ended June 30, 2008 and for the year ended
December 31, 2007, 1,299,000 were issued to directors.
As of June 30, 2008 and December 31, 2007, there were $1,400 and $1,724, respectively of total
unrecognized compensation costs related to non-vested share-based compensation arrangements granted
under the 2005 Plan. These costs are expected to be recognized over the weighted-average period of
2.8 and 3.2 years, respectively.
When options are exercised, our policy is to issue previously unissued shares of common stock to
satisfy share option exercises. As of June 30, 2008 and December 31, 2007, we had 7,073,366 and
7,018,306 shares of unissued shares reserved for issuance under the 2005 Plan.
NOTE 9 COMMITMENTS AND CONTINGENCIES
On September 27, 2006, we entered into a renewable two-year supply and distribution agreement (the
Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement, Osprey
granted us exclusive rights to place current and future Osprey cervical and lumbar allografts
treated with the Clearant Process® in certain geographic territories with an option for additional
geographic territories. In exchange for the exclusive rights under the Osprey Agreement, we were
obligated to pay Osprey $500 as a prepayment for certain ordered products to be delivered after
October 1, 2006. This prepayment was due upon the earlier of the following: (i) within three
business days after we receive debt or equity financing of at least $1 million, or (ii) October 31,
2006. In addition, we were required to make the following quarterly payments to be applied to
payments for ordered products: $650 by October 31, 2006; $750 by January 1, 2007; $850 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 June 30, 2008, all tissue orders had not been delivered by Osprey and we have not made the
prepayments. In February 2007, we received notice from Osprey of its termination of the Osprey
Agreement, effective within thirty days from receipt of the notification if we did not timely cure
certain alleged payment defaults. We are 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 has resulted in the
discontinuation or disruption of the spinal bone implant supply, which has had a material adverse
impact on our
ability to distribute spinal bone implants treated with the Clearant Process®. In addition, the
lack of supply of the ordered products has had a material impact on our revenues and cash flows.
F-9
NOTE 10 SUBSEQUENT EVENTS
On July 9, 2008, we entered into an Agreement dated as of July 8, 2008 with CPI Investments, Inc.
(CPI) whereby CPI agreed to loan us the aggregate amount of $2,000 (the Agreement).
The loan is payable, net of fees of approximately $250, in tranches of: $400 which was funded
immediately; $400 on August 22, 2008; $600 on October 6, 2008; and $600 on February 16, 2009. The
principal amounts loaned will bear interest at 12% per year payable monthly with no prepayment
option. The loan is convertible into 18,181,818 shares of our restricted common stock.
Pursuant to the Agreement, we granted CPI 2-year warrants to purchase (a) 4,500,000 shares of
common stock at a $0.30 exercise price, and (b) 200,000 shares of common stock at $0.15 exercise
price, both vesting pro-rata upon funding of each tranche.
In addition, we also granted CPI one share of our Series A Preferred Stock, which votes together
with our common stock and has votes equal to 45,454,545 shares of common stock. Those votes will be
reduced by 2.5 votes for every 1 share of common stock into which the loan is converted. Provided
that CPI meets its funding obligations under the Agreement, CPI will maintain its voting rights
throughout the term of the loan.
Under the terms of the Agreement, CPI appointed a board member to our board of directors and has
the right to appoint two additional board members.
F-10
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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 dated
December 31, 2007, filed with the Securities and Exchange Commission on April 1, 2008 (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. Of these agreements, six are licensing agreements with tissue banks
and one is an agreement with a manufacturer of recombinant protein products, in return for
milestone payments and royalties on end-product sales. As of June 30, 2008, four of these licensees
have launched tissue products that were treated using the Clearant Process®, but are not treating
all of their tissue with 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. As of June 30, 2008, we have signed four
such Sterilization Service agreements with tissue banks. Many of the companies have not yet
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 to our customers in order to facilitate market penetration. We do not intend to
actively pursue or promote any of the new or existing license or sterilization agreements. The
direct distribution revenue model may have an adverse impact on any current or future license and
sterizilation agreements.
11
Results of Operations
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues
Our total revenue increased by $336,000 or 200%, to $504,000 for the three months ended June 30,
2008, from $168,000 for the three months ended June 30, 2007.
Revenues from direct distribution of both Clearant Process® sterile implants and non-Clearant
Process® implants were $455,000 and $125,000 during the three months ended June 30, 2008 and 2007,
respectively. This is a 264% increase over the quarter ending June 30, 2007. Direct distribution
continues to be our primary strategy of our growth plan.
Revenues from licensing activities decreased 33% to $14,000 for the three months ended June 30,
2008, from $21,000 for the three months ended June 30, 2007. Additionally revenues from fee for
service activities were $27,000 and $19,000 for the three months ended June 30, 2008 and 2007,
respectively, as we continued to offer customers the opportunity to use our Sterilization Service.
These figures are consistent with our strategy of moving away from a royalty model and aggressively
targeting a direct distribution strategy. While we are continuing to service the existing license
and fee for service agreements, we are not actively pursuing new license or fee for service
agreements, and it is unlikely that there will be a near-term material growth in licensing or fee
for service revenue.
Revenues from contract research, milestones and grants increased to $8,000 in the three months
ended June 30, 2008, from $3,000 for the three months ended June 30, 2007. The increase is
primarily related to the addition of a new annual support customer in 2008.
Since 2006, we have 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 $211,000 or 23%, to $690,000 for the three
months ended June 30, 2008, from $901,000 for the three months ended June 30, 2007.
The $211,000 decrease in sales, general and administrative expenses for the three months ended June
30, 2008, from the three months ended June 30, 2007, was principally due to the reduction in
overall expenses including legal fees, accounting fees, board fees, and investor relations. 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 $136,000 in non-cash stock-based compensation expense for the three months ended June
30, 2008 compared to $93,000 for the three months ended June 30, 2007. The increase primarily
relates to the issuance of shares to board members in the third quarter of 2007.
Research and Development Expenses
Research and development expenses decreased 90% to $2,000 for the three months ended June 30, 2008,
from $19,000 for the three months ended June 30, 2007. 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 by our shift in focus from
research and development to the commercialization of the
Clearant Process®. We expect to maintain minimal research and development costs in 2008, however we
cannot make any assurances that we will stay ahead of competition at these low levels of
expenditures. From time-to-time we may complement our 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.
12
Other Income/Expense
For the three months ended June 30, 2008, we recognized $3,000 in net interest income compared to
$6,000 in net interest expense for the same three months last year. We had $362,000 cash on hand as
of June 30, 2008, of which $267,000 was invested in short-term conservative money market funds.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues
Our total revenue increased by $366,000 or 61%, to $969,000 for the six months ended June 30, 2008,
from $603,000 for the six months ended June 30, 2007.
Revenues from direct distribution of both Clearant Process® sterile implants and non-Clearant
Process® implants were $762,000 and $304,000 during the six months ended June 30, 2008 and 2007,
respectively. This is a 151% increase over the quarter ending June 30, 2007. Direct distribution
continues to be our primary strategy of our growth plan.
Revenues from licensing activities increased 16% to $71,000 for the six months ended June 30, 2008,
from $61,000 for the six months ended June 30, 2007. The increase is primarily related to the
addition of a new licensing customer in the first quarter of 2008. Additionally revenues from fee
for service activities were $36,000 and $69,000 for the six months ended June 30, 2008 and 2007,
respectively, as we continued to offer customers the opportunity to use our Sterilization Service.
These figures are consistent with our strategy of moving away from a royalty model and aggressively
targeting a direct distribution strategy. While we are continuing to service the existing license
and fee for service agreements, we are not actively pursuing new license or fee for service
agreements, and it is unlikely that there will be a near-term material growth in licensing or fee
for service revenue.
Revenues from contract research, milestones and grants decreased to $100,000 in the six months
ended June 30, 2008, from $169,000 for the six months ended June 30, 2007. The decrease is
primarily related to a one-time termination fee from one of our licensing customers in the first
quarter 2007.
Since 2006, we have 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 $533,000 or 26%, to $1,502,000 for the six
months ended June 30, 2008, from $2,035,000 for the six months ended June 30, 2007.
The $533,000 decrease in sales, general and administrative expenses for the six months ended June
30, 2008, from the six months ended June 30, 2007, was principally due to the reduction in overall
expenses including legal fees, accounting fees, board fees, and investor relations. 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.
13
We incurred $273,000 in non-cash stock-based compensation expense for the six months ended June 30,
2008 compared to $160,000 for the six months ended June 30, 2007. The increase primarily relates to
the issuance of shares to board members in the third quarter of 2007. We issued common stock and
stock options to outside consultants for services rendered during the six months ended June 30,
2008 and 2007, in the amount of $0 and $48,000, respectively. From time to time, we may issue
common stock to consultants for services rendered.
Research and Development Expenses
Research and development expenses decreased 92% to $5,000 for the six months ended June 30, 2008,
from $59,000 for the six months ended June 30, 2007. 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 by our shift in focus from research and
development to the commercialization of the Clearant Process®. We expect to maintain minimal
research and development costs in 2008, however we cannot make any assurances that we will stay
ahead of competition at these low levels of expenditures. From time-to-time we may complement our
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 six months ended June 30, 2008, we recognized $12,000 in net interest income compared to
$1,000 in net interest expense for the same six months last year. In addition, we incurred $0 and
$86,000 loss on disposal of fixed assets during the six months ended June 30, 2008 and June 30,
2007, respectively. We had $362,000 cash on hand as of June 30, 2008, of which $267,000 was
invested in short-term conservative money market funds.
Preferred Stock Dividend and Financing Costs
As of June 30, 2008 and 2007, 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 we will continue as a
going concern. We have incurred significant operating losses and negative cash flows from operating
activities since our inception. As of June 30, 2008, these conditions raised substantial doubt as
to our ability to continue as a going concern. In July 2008, we raised additional capital to
supplement our operations. The $2.0 million convertible loan is to be funded, net of fees of
approximately $0.25 million, in tranches of: $0.4 million which was funded immediately; $0.4
million on August 22, 2008; $0.6 million on October 6, 2008; and $0.6 million on February 16, 2009.
There can be no assurance that we will be successful in our efforts to generate, increase, or
maintain revenue or raise additional capital on terms acceptable to us or that we 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 June 30, 2008, we had net cash on hand of approximately $362,000. Including the July 2008
funding, we anticipate that we will need to seek additional financing before the end of the second
quarter 2009. Any equity financing may result in substantial dilution of existing stockholders, and
financing may not be available on acceptable terms, or at all.
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 raises 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.
14
Options for raising capital include issuing common stock, preferred stock, convertible notes,
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.
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.
Tissue Agreement
On September 27, 2006, we entered into the Osprey Agreement described in Note 9 in the accompanying
footnotes to the financial statements. Under the Osprey Agreement, Osprey granted us exclusive
rights to place current and future Osprey cervical and lumbar allografts treated with the Clearant
Process® in certain geographic territories with an option for additional geographic territories. In
exchange for the exclusive rights under the Osprey Agreement, we were obligated to pay Osprey $500
as a prepayment for certain ordered products to be delivered after October 1, 2006. This prepayment
was due upon the earlier of the following: (i) within three business days after we receive debt or
equity financing of at least $1 million, or (ii) October 31, 2006. In addition, we were required to
make the following quarterly payments to be applied to payments for ordered products: $650 by
October 31, 2006; $750 by January 1, 2007; $850 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 June 30, 2008, all tissue orders had not been delivered by Osprey and we have not made the
prepayments. In February 2007, we received notice from Osprey of its termination of the Osprey
Agreement, effective within thirty days from receipt of the notification if we did not timely cure
certain alleged payment defaults. We are 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 has resulted in the
discontinuation or disruption of the spinal bone implant supply, which has had a material adverse
impact on our ability to distribute spinal bone implants treated with the Clearant Process®. In
addition, the lack of supply of the ordered products has had a material impact on our revenues and
cash flows.
Limited Cash Availability
Net cash used in operating activities was $661,000 for the six months ended June 30, 2008, compared
to $1,106,000 for the six months ended June 30, 2007. During the six months ended June 30, 2008,
cash used by operations resulted in a $56,000 increase in prepaids and $99,000 increase in accrued
liabilities due to the renewal of our insurance during the second quarter of 2008. Non-cash
adjustments to operating activities for the six months ended June 30, 2008, included depreciation
and amortization expense of $89,000 and a non-cash charge of $273,000 for stock-based compensation.
Our net cash used by investing activities was $39,000 for the six months ended June 30, 2008
compared to net cash used of $8,000 for the six months ended June 30, 2007. 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 $0 for the six months
ended June 30, 2008, compared to net cash provided by financing activities of $2,226,000 for the
six months ended June 30, 2007. Cash provided by
financing activities for the six months ended June 30, 2007 consisted of $2,026,000 from the
issuance of common stock and $200,000 from the issuance of a bridge loan.
15
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various expirations
through 2011. The future minimum lease payments under these leases and other contractual
obligations as of June 30, 2008 are as follows ($ in 000s):
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Payments Due By Period |
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More |
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Less than 1 |
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1 -3 |
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3 - 5 |
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than 5 |
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Contractual Obligations |
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Total |
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Year |
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Years |
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Years |
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Years |
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Operating Lease Obligations |
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$ |
83 |
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$ |
72 |
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$ |
11 |
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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 for the year ended December 31, 2007.
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of June 30, 2008, 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 U.S. generally accepted
accounting principles. 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.
16
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 SAB No. 104, Revenue Recognition. 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. 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
EITF 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping costs are recorded as
cost of revenues. We evaluate the collectability of accounts receivables and provide a reserve for
credit losses, as appropriate. As of June 30, 2008 and December 31, 2007, we reserved for credit
losses of $75,000 and $26,000, respectively.
Cost of Revenues
Cost of revenues consists of costs associated with direct distribution of Clearant Process® sterile
implants to a customer and with providing Sterilization Services to customers.
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. As of June 30, 2008
and December 31, 2007, we had an inventory and inventory related prepayment reserve of $1,320,000
and $1,255,000, respectively.
In accordance with the terms of the Osprey Agreement (see Note 9 in the accompanying footnotes to
the financial statements), we are required to make prepayments. Upon receipt of the inventory, as
provided under the Osprey Agreement, 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.
Income Taxes
Income taxes are accounted for under SFAS 109, Accounting for Income Taxes, 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.
17
Stock-Based Compensation
Stock-based compensation expense is recognized under SFAS No. 123(R), Share Based Payment, which
requires the measurement and recognition of compensation expense for all share-based payment awards
to employees and directors based on estimated fair value. Stock-based compensation expense for
employees and directors for the six months ended June 30, 2008 and 2007 was $273,000 and $160,000,
respectively, which were recorded as part of operating expenses.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No.
141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for calendar year companies on January 1, 2009. We
do not anticipate that the adoption of SFAS 141(R) will have a material affect on the Company, but
the effect is dependent upon acquisitions at that time.
In December 2007, the SEC issued SAB 110. SAB 110 expresses the views of the staff regarding the
use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of
expected term of plain vanilla share options in accordance with SFAS No. 123 (revised 2004). We
do not believe that the adoption of SAB 110 will have a material impact on our financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities, and amendment of SFAS No. 133 (SFAS No.
161). This statement will require additional disclosures about how and why we use derivative
financial instruments, how derivative instruments and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted (SFAS No. 133), and how derivative instruments and related hedged items affect our
financial position, results of operations, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008; however
early adoption is encouraged, as are comparative disclosures for earlier periods. We do not
believe that the adoption of SFAS No. 161 will have a material impact on our financial statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Historically, we have invested our cash in short term commercial paper, certificates of deposit,
money market accounts and marketable securities. We consider any liquid investment with an original
maturity of three months or less when purchased to be cash equivalents. We classify investments
with maturity dates greater than three months when purchased as marketable securities, which have
readily determined fair values as available-for-sale securities. We adhere to an investment policy
which requires that all investments be investment grade quality and no more than ten percent of our
portfolio may be invested in any one security or with one institution.
At June 30, 2008, we had no investments that would create market risk. It is our intention to
invest in highly liquid, high grade commercial paper, variable rate securities and certificates of
deposit. Investments in both fixed rate and floating rate interest earning instruments carry a
degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating rate securities
with shorter maturities may produce less income if interest rates fall. The market risk associated
with our investments in debt securities is substantially mitigated by the frequent turnover of the
portfolio.
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ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer who is also our Chief
Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report (June 30, 2008), as is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Our disclosure
controls and procedures are intended to ensure that the information we are required to disclose in
the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and (ii) accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as the principal executive and financial
officer, to allow timely decisions regarding required disclosures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this report, our disclosure controls and procedures were
effective. Our management has concluded that the financial statements included in this report
present fairly, in all material respects our financial position, results of operations and cash
flows for the periods presented in conformity with generally accepted accounting principles.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system will be met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events.
Changes in Internal Control
There have been no changes in our internal controls over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 6. 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.
19
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, 2007, filed with the SEC on April 1, 2008 (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 for the year ended December 31, 2007, 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; |
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physician and patient acceptance of our products and services, including
newly introduced products; |
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anticipated trends and conditions in the industry in which we operate,
including regulatory changes; |
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our future capital needs and our ability to obtain financing; and |
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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 quarterly 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.
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: August 14, 2008
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CLEARANT, INC.
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By: |
/s/ Jon Garfield
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Jon Garfield, Chief Executive Officer and |
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Chief Financial Officer |
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21
EXHIBIT INDEX
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Exhibit No. |
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Description |
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Exhibit 31.1
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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Exhibit 32.1
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
22