e10vq
United States SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2006
Commission File Number 000-50309
Clearant, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of incorporation)
|
|
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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,
or a non-accelerated file. See definition of accelerated file and large accelerated file in Rule
12b-2 of the Exchange Act (Check one):
Large accelerated filer
o Accelerated
filer
o
Non-accelerated filer þ
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 November 6, 2006, there were 39,990,784 shares of registrants common stock, $0.0001 par
value, outstanding.
CLEARANT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,004 |
|
|
$ |
10,141 |
|
Accounts receivable, net |
|
|
281 |
|
|
|
208 |
|
Inventory |
|
|
250 |
|
|
|
|
|
Inventory related prepayments |
|
|
761 |
|
|
|
|
|
Prepaids and other assets |
|
|
417 |
|
|
|
381 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,713 |
|
|
|
10,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of $1,047 and
$1,148 of accumulated depreciation at
September 30, 2006 and December 31, 2005,
respectively |
|
|
277 |
|
|
|
415 |
|
Identifiable intangibles, net of $794 and
$545 of accumulated amortization at
September 30, 2006 and December 31, 2005,
respectively |
|
|
1,332 |
|
|
|
1,403 |
|
Deposits and other assets |
|
|
93 |
|
|
|
244 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,415 |
|
|
$ |
12,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,315 |
|
|
$ |
1,292 |
|
Accrued liabilities |
|
|
1,017 |
|
|
|
1,664 |
|
Deferred revenue |
|
|
26 |
|
|
|
48 |
|
Bridge loans, net |
|
|
106 |
|
|
|
106 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,464 |
|
|
|
3,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
60 |
|
|
|
60 |
|
Other liabilities |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,524 |
|
|
|
3,180 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock ($0.0001 par value;
200,000 shares authorized; 39,913 and
39,759 issued and outstanding at
September 30, 2006 and December 31,
2005, respectively) |
|
|
4 |
|
|
|
4 |
|
Additional paid-in capital |
|
|
82,929 |
|
|
|
82,179 |
|
Accumulated deficit |
|
|
(80,042 |
) |
|
|
(72,571 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,891 |
|
|
|
9,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,415 |
|
|
$ |
12,792 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
F-3
CLEARANT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
82 |
|
|
$ |
62 |
|
|
$ |
250 |
|
|
$ |
154 |
|
Direct distribution |
|
|
76 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
Fee for service |
|
|
31 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Contract research and milestones |
|
|
2 |
|
|
|
72 |
|
|
|
65 |
|
|
|
223 |
|
Grants |
|
|
|
|
|
|
20 |
|
|
|
27 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
191 |
|
|
|
154 |
|
|
|
488 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
113 |
|
|
|
4 |
|
|
|
226 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
78 |
|
|
|
150 |
|
|
|
262 |
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
2,464 |
|
|
|
2,345 |
|
|
|
7,254 |
|
|
|
6,342 |
|
Research and development |
|
|
269 |
|
|
|
465 |
|
|
|
737 |
|
|
|
1,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,733 |
|
|
|
2,810 |
|
|
|
7,991 |
|
|
|
8,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,655 |
) |
|
|
(2,660 |
) |
|
|
(7,729 |
) |
|
|
(7,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
41 |
|
|
|
|
|
|
|
176 |
|
|
|
(1,786 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
1,329 |
|
Other loss |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes |
|
|
(2,614 |
) |
|
|
(2,660 |
) |
|
|
(7,471 |
) |
|
|
(8,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(2,614 |
) |
|
|
(2,660 |
) |
|
|
(7,471 |
) |
|
|
(8,087 |
) |
Add: Preferred stock dividend and financing
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,614 |
) |
|
$ |
(2,660 |
) |
|
$ |
(7,471 |
) |
|
$ |
(10,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
39,912 |
|
|
|
35,923 |
|
|
|
39,842 |
|
|
|
26,599 |
|
See accompanying notes to condensed financial statements.
F-4
CLEARANT, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value |
|
|
Additional Paid-in |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
Balance, December 31, 2005 |
|
|
39,759 |
|
|
$ |
4 |
|
|
$ |
82,179 |
|
|
$ |
(72,571 |
) |
|
$ |
9,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
44 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Issuance of common stock to
consultants for services |
|
|
110 |
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
168 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
556 |
|
|
|
|
|
|
|
556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,471 |
) |
|
|
(7,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
39,913 |
|
|
$ |
4 |
|
|
$ |
82,929 |
|
|
$ |
(80,042 |
) |
|
$ |
2,891 |
|
See accompanying notes to condensed financial statements.
F-5
CLEARANT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,614 |
) |
|
$ |
(2,660 |
) |
|
$ |
(7,471 |
) |
|
$ |
(8,087 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
64 |
|
|
|
133 |
|
|
|
412 |
|
|
|
380 |
|
Non-cash stock-based compensation |
|
|
151 |
|
|
|
|
|
|
|
556 |
|
|
|
|
|
Issuance of common stock to consultants for services rendered |
|
|
32 |
|
|
|
51 |
|
|
|
121 |
|
|
|
503 |
|
Non-cash interest expense associated with convertible debt
financings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,786 |
|
Gain on extinguishment of debt and other, net |
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
(1,329 |
) |
Warrant exchange for common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(82 |
) |
|
|
(107 |
) |
|
|
(73 |
) |
|
|
(108 |
) |
Inventory |
|
|
(194 |
) |
|
|
|
|
|
|
(250 |
) |
|
|
|
|
Inventory related prepayments |
|
|
(67 |
) |
|
|
|
|
|
|
(761 |
) |
|
|
|
|
Prepaids |
|
|
(2 |
) |
|
|
154 |
|
|
|
(65 |
) |
|
|
176 |
|
Accounts payable |
|
|
147 |
|
|
|
30 |
|
|
|
188 |
|
|
|
(304 |
) |
Accrued liabilities |
|
|
11 |
|
|
|
(539 |
) |
|
|
(628 |
) |
|
|
(1,923 |
) |
Deferred revenue |
|
|
7 |
|
|
|
(30 |
) |
|
|
(22 |
) |
|
|
(134 |
) |
Other assets and liabilities |
|
|
5 |
|
|
|
91 |
|
|
|
179 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,542 |
) |
|
|
(2,877 |
) |
|
|
(7,896 |
) |
|
|
(8,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(38 |
) |
|
|
(29 |
) |
|
|
(178 |
) |
|
|
(130 |
) |
Capital expenditures |
|
|
(7 |
) |
|
|
(16 |
) |
|
|
(79 |
) |
|
|
(51 |
) |
Cash received in 2005 merger activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(45 |
) |
|
|
(45 |
) |
|
|
(257 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,455 |
|
Issuance of convertible notes payable, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,811 |
|
Exercise of common stock options |
|
|
|
|
|
|
13 |
|
|
|
26 |
|
|
|
32 |
|
Principal payments on bridge loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366 |
) |
Principal payments on capital lease obligations |
|
|
(4 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(4 |
) |
|
|
13 |
|
|
|
16 |
|
|
|
10,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustments on cash and cash equivalents |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(2,591 |
) |
|
|
(2,916 |
) |
|
|
(8,137 |
) |
|
|
1,906 |
|
Cash and cash equivalents, beginning of period |
|
|
4,595 |
|
|
|
4,999 |
|
|
|
10,141 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,004 |
|
|
$ |
2,083 |
|
|
$ |
2,004 |
|
|
$ |
2,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-cash Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2006, the Company
paid accounts payable of $38 with 10,259 shares of common stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
See accompanying notes to condensed financial statements.
F-6
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States 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 some 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 nine months ended September 30, 2006 are
not necessarily indicative of the results that may be expected for the entire 2006 fiscal year.
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 September 30, 2006, these
conditions raised substantial doubt as to the Companys ability to continue as a going concern. The
Companys ability to continue as a going concern is dependent upon its ability to raise additional
capital by the end of the fourth quarter in 2006, and generate sufficient cash flows to meet its
obligations as they become due. There can be no assurance that the Company will be successful in
its efforts to generate sufficient revenue or raise additional capital on terms acceptable to the
Company. 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.
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, 2005 and 2004 and notes thereto in
the Companys Form 10-K dated December 31, 2005, filed with the Securities and Exchange Commission
on March 16, 2006. The December 31, 2004 consolidated balance sheet has been derived from the
audited financial statements on Form 8-K/A filed with the Securities and Exchange Commission on May
16, 2005. All share data has been restated to reflect any reverse stock splits that took place
following the periods presented. Certain reclassifications, where needed, were made in prior
periods to be consistent with current period presentation. These unaudited condensed financial
statements should be read together with the financial statements for the year ended December 31,
2005, and footnotes thereto.
NOTE 2 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.
F-7
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
The Company evaluates the collectability of accounts receivables and provides a reserve for credit
losses, as appropriate.
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 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. Prior to 2006,
cost of revenues consists of minimum royalties paid on certain contracting activities and are
recognized when the related revenue is recognized.
Extinguishment of Debt
Extinguishment of debt consists of a gain recognized for the settlement of outstanding payables for
the nine months ended September 30, 2006, which, while unusual in nature, is not an infrequent
transaction for the Company. For the nine months ended September 30, 2005, a gain was recognized
for the exchange of warrants for outstanding debt in conjunction with the merger transaction.
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 and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Inventories and Inventory related Prepayments
Inventories are primarily comprised of implantable donor tissue treated with the Clearant Process®
and are valued at the lower of cost or market with cost determined using the first-in, first-out
method. Inventories are located at contracted tissue banks and on consignment in hospitals.
In accordance with the terms of the Companys spinal Supply and Distribution Agreement (See Note
7), 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.
F-8
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
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.
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.
The significant components of the provision for income taxes for the nine months ended September
30, 2006 and 2005 were $1 and $1, respectively, for the current state provision. There was no
state deferred and federal tax provision.
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.
Stock-Based Compensation
On January 1, 2006, the Company 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). The Company has applied the provisions
of SAB 107 in its adoption of SFAS 123(R).
The Company 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 the
Companys fiscal year 2006. The financial statements as of and for the three and nine months ended
September 30, 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). There was no stock-based compensation expense
related to employees or directors stock options recognized during the three and nine months ended
September 30, 2005. Stock-based compensation expense recognized under SFAS 123(R) for employees
and directors for the three and nine months ended September 30, 2006 was $151 and $556,
respectively. Basic and diluted loss per share for the three and nine months ended September 30,
2006 would have been $0.06 and $0.17 respectively, if the Company had not adopted SFAS 123(R),
compared to reported basic and diluted loss per share of $0.07 and $0.19 respectively.
The estimated fair value of options granted to employees and directors during the three and nine
months ended September 30, 2006, was $2 and $1,256, respectively. Assumptions used to value the
options granted were as follows:
|
|
|
|
|
Expected volatility |
|
|
79.6%-93.0 |
% |
Risk-free interest rate |
|
|
4.46%-5.18 |
% |
Expected life in years |
|
|
5.17-6.25 |
|
Expected dividend yield |
|
|
0 |
% |
F-9
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
The following table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123(R) to stock-based awards granted under
the Companys stock option plans for the three and nine months ended September 30, 2005. For
purposes of this pro-forma disclosure, the fair value of the options is estimated using the
Black-Scholes-Merton option-pricing formula (Black-Scholes model) and amortized to expense over the
options contractual term.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net loss as reported |
|
$ |
(2,660 |
) |
|
$ |
(10,248 |
) |
Less: Stock-based expense
determined under fair value
based method |
|
|
(868 |
) |
|
|
(1,034 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,528 |
) |
|
$ |
(11,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share |
|
|
|
|
|
|
|
|
As reported basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.39 |
) |
Pro forma basic and diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.42 |
) |
On June 30, 2005, the Company granted options to non-employees to purchase 120,000 shares of common
stock. The options were fully vested and exercisable upon grant. The Company valued the options
using the Black-Scholes option-pricing model and the following assumptions: risk-free interest rate
3.94%, expected life 10 years, dividend yield 0% and volatility 71%. The full value of the
options, $386, were charged to stock-based compensation expense for the nine months ended September
30, 2005, as all services related to the options had been completed.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards to
employees and directors on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Statements of Operations. Prior to the adoption of SFAS 123(R),
the Company accounted for stock-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had
been recognized in the Statements of Operations for awards to employees and directors because the
exercise price of our stock options equaled the fair market value of the underlying stock at the
date of grant.
Stock-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Stock-based
compensation expense recognized in the Statements of Operations for the three and nine months ended
September 30, 2006 included compensation expense for share-based payment awards granted prior to,
but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance
with the pro-forma provisions of SFAS 123 and compensation expense for the share-based payment
awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). For stock-based awards issued to employees and
directors, stock-based compensation is attributed to expense using the straight-line single option
method, which is consistent with how the prior-period pro formas were provided. As stock-based
compensation expense recognized in the Statements of Operations for the first three and nine months
ended September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures which the Company estimates to be approximately 8%, the same as of June 30,
2006. To date, stock-based compensation expense has been reduced by forfeitures of approximately
$49. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. In our
pro-forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred.
The Company determines the fair value of share-based payment awards to employees and directors on
the date of grant using the Black-Scholes model, which is affected by the Companys stock price as
well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to the Companys
F-10
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
expected stock price volatility over the term of the awards. Prior to 2006, when valuing awards
the Company used the awards contractual terms as a proxy for its expected terms. For new grants
after December 31, 2005, the Company estimates expected term using the safe harbor provisions
provided in SAB 107. The Company uses historical data to estimate forfeitures.
The Company has elected to adopt the detailed method provided in SFAS 123(R) for calculating the
beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact on the APIC pool and
Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123(R).
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, cash equivalents, marketable
securities, 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.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43 (SFAS 151). SFAS 151 requires idle facility expenses, freight, handling
costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed
when incurred. It also requires that allocation of fixed overheads to the costs of conversion be
based on the normal capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
151 in the 2006 did not have a material impact on our financial reporting and disclosures.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 156). The provisions of SFAS 156 are effective for
fiscal years beginning after September 15, 2006. This statement was issued to simplify the
accounting for servicing rights and to reduce the volatility that results from using different
measurement attributes. Management does not believe the adoption of SFAS 156 will have a material
impact on the Companys financial position or results of operations.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company is currently in the
process of evaluating the expected effect of FIN 48 on its results of operations and financial
position.
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.
NOTE 3 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
F-11
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
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 for the nine months ended September 30, 2006 and 2005, since their effect would have been
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2006 |
|
2005 |
Stock Options |
|
|
4,144,000 |
|
|
|
2,686,000 |
|
Warrants |
|
|
5,512,000 |
|
|
|
3,317,000 |
|
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to
common stock |
|
$ |
(2,614 |
) |
|
$ |
(2,660 |
) |
|
$ |
(7,471 |
) |
|
$ |
(10,248 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock
shares outstanding |
|
|
39,912 |
|
|
|
35,923 |
|
|
|
39,842 |
|
|
|
26,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
During the nine months ended September 30, 2006, the Company issued 100,000 shares of common stock
with a fair value of $130 to consultants for services to be rendered to the Company over a twelve
month contract. Accordingly, $54 is reflected in sales, general and administrative expenses for
the nine months ended September 30, 2006.
During the nine months ended September 30, 2006, the Company paid accounts payable of $38 with
10,259 shares of common stock.
During the nine months ended September 30, 2006, the Company issued two-year warrants to such
holders to purchase an aggregate 332,220 shares of our common stock at an exercise price of $4.96
per share with a fair value of $98,922 as of March 31, 2006, in connection with a settlement of
disputed claims, at the discretion of the Company.
During 2005, the Company issued 57,979 shares of common stock with a fair value of $235 to
consultants for services rendered to the Company. A portion of the fair value, $203, is for
services to be rendered over a twelve month contract. Accordingly, $67 and $117 is reflected in
sales, general and administrative expenses for the nine months ended September 30, 2006 and 2005,
respectively.
Lock-up Period
For a period beginning on March 25, 2005 and ending on March 25, 2006, the existing holders of
Clearants common stock immediately prior to the 2005 merger cannot (i) sell, offer to sell,
contract or agree to sell, hypothecate, pledge, grant any
option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of or
agree to dispose of, directly or indirectly, any common stock of the Corporation or (ii) enter into
any swap or other arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of any of the common stock in cash or otherwise, whether
F-12
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
or not for
consideration, and in each of the four consecutive three-month periods beginning on March 25, 2006
will not transfer, on a non-cumulative basis, more than 25% of the common stock held by any such
person as of March 25, 2005. As of March 25, 2007, there shall be no further transfer restrictions
except as provided by law.
NOTE 5 STOCK-BASED AWARDS
Stock Options
Effective March 31, 2005 and in conjunction with its reverse merger consummated March 31, 2005, the
Company cancelled all stock options previously issued to employees and non-employees with exercise
prices greater than $3.50 per share (2005 Option Cancellations). As a result of the 2005 Options
Cancellations, the Company retained stock options to employees and non-employees at March 31, 2005
of approximately 1,918,588 shares (Existing Options), which are grandfathered under the Companys
2000 Stock Option Plan, as amended (2000 Plan). As of December 31, 2005, there are no future grants
available under the 2000 Plan.
On June 30, 2005, the stockholders approved the Clearant, Inc. 2005 Stock Award Plan (2005 Plan).
There are 5,081,412 shares of common stock authorized for issuance under the Plan. Accordingly, an
aggregate of 7,000,000 shares of common stock are reserved for issuance upon exercise of options
under the 2000 Plan and 2005 Plan. The terms of the 2005 Plan provide for grants of stock options
(NSO), stock appreciation rights, restricted stock, deferred stock, bonus stock, dividend
equivalents, other stock-related awards and performance awards that may be settled in cash, stock
or other property. Employees, officers, directors and consultants are eligible for awards under the
2005 Plan. However, incentive stock options (ISO) may only be granted to employees. An ISO will
have the terms stated in the option agreement, provided, however, that the term shall be no more
than ten years from the date of grant and the exercise price shall be no less than 100% of the
estimated fair market value per share on the date of grant. NSOs shall have a term of no more than
10 years from the date of grant and an exercise price of no less than 85% of the estimated fair
market value per share on the date of grant. Options granted to an individual who, at the time of
grant of such option, owns stock representing more than 10% of the voting power of all classes of
stock of the Company, shall have an exercise price equal to no less than 110% of fair market value
and a term of no more than five years from the date of grant. The vesting period for ISOs and NSOs
is generally four years from the date of grant.
A summary of activity under the 2000 and 2005 Plans as of December 31, 2005 and for the year then
ended, and as of September 30, 2006 and for the nine months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
December 31, 2004 |
|
|
5,253,000 |
|
|
$ |
0.60-$7.94 |
|
|
|
319,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
5,572,000 |
|
|
$ |
0.60-$7.94 |
|
Granted |
|
|
1,254,000 |
|
|
$ |
3.86-$4.51 |
|
|
|
120,000 |
|
|
$ |
4.12 |
|
|
|
1,374,000 |
|
|
$ |
3.86-$4.51 |
|
Exercised |
|
|
(86,000 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
$ |
|
|
|
|
(86,000 |
) |
|
$ |
0.60 |
|
Change in status |
|
|
(226,000 |
) |
|
$ |
0.60-$2.30 |
|
|
|
226,000 |
|
|
$ |
0.60-$2.30 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(3,799,000 |
) |
|
$ |
0.60-$7.94 |
|
|
|
(285,000 |
) |
|
$ |
0.60-$7.22 |
|
|
|
(4,084,000 |
) |
|
$ |
0.60-$7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2005 |
|
|
2,396,000 |
|
|
$ |
0.60-$7.94 |
|
|
|
380,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
2,776,000 |
|
|
$ |
0.60-$7.94 |
|
Granted |
|
|
1,671,000 |
|
|
$ |
0.44-$1.64 |
|
|
|
25,000 |
|
|
$ |
0.91 |
|
|
|
1,696,000 |
|
|
$ |
0.44-$1.64 |
|
Exercised |
|
|
(3,000 |
) |
|
$ |
0.60 |
|
|
|
(41,000 |
) |
|
$ |
0.60 |
|
|
|
(44,000 |
) |
|
$ |
0.60 |
|
Change in status |
|
|
(263,000 |
) |
|
$ |
0.60-$3.17 |
|
|
|
263,000 |
|
|
$ |
0.60-$3.17 |
|
|
|
|
|
|
$ |
0.60-$3.17 |
|
Canceled |
|
|
(242,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
(42,000 |
) |
|
$ |
2.30 |
|
|
|
(284,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2006 |
|
|
3,559,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
585,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
4,144,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
The weighted average exercise prices for options granted and exercisable and the weighted average
remaining contractual life for options outstanding as of December 31, 2005 and September 30, 2006
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
Number |
|
Average |
|
Remaining |
|
|
|
|
Of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
As of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
2,396,000 |
|
|
$ |
2.83 |
|
|
|
7.17 |
|
|
$ |
692,000 |
|
Employees Expected to Vest |
|
|
2,376,000 |
|
|
$ |
2.82 |
|
|
|
7.16 |
|
|
$ |
692,000 |
|
Employees Exercisable |
|
|
1,563,000 |
|
|
$ |
2.25 |
|
|
|
6.03 |
|
|
$ |
692,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Outstanding |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Expected to Vest |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Exercisable |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,559,000 |
|
|
$ |
1.93 |
|
|
|
7.94 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
3,381,000 |
|
|
$ |
1.94 |
|
|
|
7.87 |
|
|
$ |
|
|
Employees Exercisable |
|
|
1,516,000 |
|
|
$ |
2.42 |
|
|
|
5.99 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Options Outstanding |
|
|
585,000 |
|
|
$ |
2.29 |
|
|
|
5.04 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
585,000 |
|
|
$ |
2.29 |
|
|
|
5.04 |
|
|
$ |
|
|
Non-Employees Options Exercisable |
|
|
560,000 |
|
|
$ |
2.37 |
|
|
|
4.82 |
|
|
$ |
|
|
The total intrinsic value of options exercised for the year ended December 31, 2005 was $297.
Prior to 2005, options exercised were immaterial. Cash received from stock options exercised
during the year ended December 31, 2005 and the nine months ended September 30, 2006 and 2005 were
$50, $26, and $32, respectively. The total intrinsic value of options exercised during the three
and nine months ended September 30, 2006 was $0 and $18, respectively. The total fair value of
shares vested during the years ended December 31, 2005, 2004 and 2003, were approximately $1,480,
$3,270, and $2,680, respectively.
Included in the table above, at September 30, 2006 and 2005, were options outstanding for 585,000
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 September 30, 2006, there was $1,949 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 3.1 years.
When options are exercised, our policy is to issue previously unissued shares of common stock to
satisfy share option exercises. As of September 30, 2006 the Company had 2,537,880 shares of
unissued shares reserved for issuance under our 2005 Plan.
F-14
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 6 REVERSE MERGER TRANSACTION
In March 2005, a wholly-owned subsidiary of the Company merged with and into Clearant. The Company
had approximately $17 in cash and no operations as of the date of the merger. Concurrent with the
merger, the Company raised gross proceeds of approximately $11,080 through a private placement of
shares of its Common Stock at $3.00 per share, including the conversion of approximately $2,350 of
bridge loans in the form of promissory notes. The Company completed the merger and placement
effective March 31, 2005. Because the registrant had substantially no other operating assets or
liabilities and Clearant was the sole operating business as of the merger date, the merger was
accounted for as a reverse acquisition. Accordingly, Clearants financial statements now reflect
the Companys financial results and operations on a carry over basis.
Details and analysis of the capital transactions and adjustments recorded to the Companys balance
sheet in conjunction with the merger are more fully described in the Companys December 31, 2005
Form 10-K filed with the Securities and Exchange Commission on March 16, 2006.
NOTE 7 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. (See Note 8)
NOTE 8 SUBSEQUENT EVENTS
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 November 9, 2006, this payment has not been made by the Company. Failure to make
the required payment may result in the disruption of the spinal bone implant supply or termination
of the Agreement, which would have a material adverse impact to the Companys ability to distribute
spinal bone implants treated with the Clearant Process®.
F-15
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.
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 1A of our Form 10-K for the year
ended December 31, 2005.
Overview
We acquire, develop and market our pathogen inactivation technology, the Clearant
Process ® , to producers of biological products such as:
|
|
|
Devitalized musculoskeletal tissue allograft implants (tissue), |
|
|
|
|
Plasma protein therapeutics, |
|
|
|
|
Recombinant protein therapeutics, |
|
|
|
|
Medical devices, and |
|
|
|
|
Blood and blood-related products. |
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 both intermediate and 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 signed a total of 11 agreements with customers to utilize the Clearant
Process® with their products. Through September 2006, we have signed 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. Clearant
Process®-treated tissues produced by our licensees have been implanted by doctors in
more than 9,000 patients since January 2004. Additionally, in September 2005, we launched a new
sterilization service which allows tissue banks to send tissue that is ready for sterilization to
our facility in Chicago. This tissue will then be irradiated under Clearant Process®
conditions by us. To date in 2006, we have signed four such sterilization service agreements
with tissue banks and five customers have launched tissue products that were treated using the
Clearant Process®. Despite these agreements being signed the adoption from our
licenscees and sterilization service customers has been unpredictable and slower than desired.
Examples of this include one tissue bank that postponed the application of bone
16
implants, despite
indicating earlier that the Clearant Process ® would be applied to these
products in the 2nd quarter of 2006. Currently, the customer has indicated adoption in
the 4th quarter of 2006, but a final timetable is still being established. Another
example is a tissue bank that has not successfully scaled up its operations and is estimating that
this will delay their implementation of the Clearant Process ® by six months. A
third example is a tissue bank that has not established a timetable for adopting and marketing the
Clearant Process ® despite having signed an agreement. We plan to continue
pursuing adoption of those licensing and sterilization service contracts and pursue affiliated
contracts, in addition to the recent implementation of our direct distribution plan.
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. In February 2006, we
ordered approximately $240,000 of spinal bone implants that were treated with the Clearant
Process®. In April 2006, we entered into a spinal tissue supply and inventory agreement
whereby we have the exclusive rights to six territories. Under this agreement we paid $600,000
which can be applied to the future purchase of spinal bone implants treated with the Clearant
Process®. In accordance with the terms of the Supply and Distribution Agreement we are
required to make prepayments. Upon receipt of spinal tissue inventory the prepayments will be
reclassified as inventory until distributed. As of September 30, 2006, we had inventory related
prepayments of approximately $761,000 and inventory of approximately $250,000. We began hiring
salespeople in the second quarter 2006 and had 6 salespeople employed as of September 30, 2006. We
have hired an additional 4 sales people in the fourth quarter of 2006. In June
2006, our sales people began to directly distribute Clearant Process® sterile spinal bone implants.
In September 2006, we entered into a renewable two-year supply and representation agreement
which supersedes our prior supply agreement, pursuant to which we have 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, we agreed to make a $1,150,000 prepayment on October 31, 2006, for ordered spinal bone
implants to be delivered in 2007. In addition, we agreed to make prepayments to be
applied towards future spinal bone implants ordered in the amounts of $3,800,000 and $4,550,000 for
2007 and 2008, respectively. As of November 9, 2006, we have not
made the required payment.
Failure to make the required payment may result in the disruption of the spinal bone implant supply
or termination of the agreement, which would have a material adverse impact to our ability to
distribute spinal bone implants treated with the Clearant Process®.
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
Revenues
Our total revenue increased by $37,000 or 24%, to $191,000 for the quarter ended September 30,
2006, from $154,000 for the quarter ended September 30, 2005. Revenues from direct distribution of
Clearant Process® sterile implants were $76,000 during the quarter ended September 30, 2006, which
was the first full quarter of implementation. We expect revenue from direct distribution to
increase as our sales force becomes fully integrated into the marketplace.
Revenues from licensing activities increased 32% to $82,000 in the quarter ended September 30,
2006, from $62,000 in the quarter ended September 30, 2005. Additionally, revenues from fee for
service activities were $31,000 for the quarter ended September 30, 2006, as we introduced an
opportunity for potential customers to try the Clearant Process®. These increases were 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 decreased to $2,000 in the quarter
ended September 30, 2006, from $92,000 in the same quarter last year. The decrease is primarily
related to non-recurring milestones reached during the three months ended September 30, 2005 and
the end of the grant studies in early 2006.
17
During 2005 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 increased by $119,000 or 5%, to $2,464,000 for the
quarter ended September 30, 2006, from $2,345,000 for the quarter ended September 30, 2005.
Included in the $2,464,000 for the quarter ended September 30, 2006, are approximately
$151,000 of non-cash stock-based compensation and $32,000 of non-cash stock option grants to
consultants, $250,000 for a one-time consulting expense for services rendered in the quarter,
approximately $277,000 of legal costs associated with a civil action involving certain statements
regarding a competitors product claim which was settled during the quarter, regulatory matters and
due diligence efforts.
We incurred $151,000 in non-cash stock-based compensation for the quarter ended September 30,
2006, which is related to the implementation of SFAS 123(R) in 2006. We issued common stock and
stock options to outside consultants for services rendered during the quarter ended September 30,
2006 and 2005, resulting in non-cash expense of $32,000 and $51,000, respectively. From time to
time, we may issue common stock to consultants for services rendered.
The $119,000 increase for the quarter ended September 30, 2006, from the quarter ended
September 30, 2005, was principally due to increased legal fees related to a settled civil action
and a one-time consulting expense. 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.
Research and Development Expenses
Research and development expenses decreased 42% to $269,000 for the quarter ended September
30, 2006, from $465,000 for the quarter ended September 30, 2005. This decrease was largely a
result of reduced research and development costs associated with the reduction of our R&D 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 September 30, 2006, we recognized $41,000 in net interest income
compared to $0 for the same quarter last year. We have $2,004,000 cash on hand as of September 30,
2006, which we are currently investing in short-term conservative money market funds. We expect to
earn interest income in 2006, although this amount will decrease as the cash is depleted.
Preferred Stock Dividend and Financing Costs
As of September 30, 2006 and 2005, there were no shares of preferred stock outstanding and
therefore no dividends.
18
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Revenues
Our total revenue increased by $36,000 to $488,000 for the nine months ended September 30,
2006, from $452,000 for the nine months ended September 30, 2005. Revenues from direct distribution
of Clearant Process® sterile implants, which began in late June 2006, were $85,000 during the nine
months ended September 30, 2006. We expect revenue from direct distribution to increase as our
sales force becomes fully integrated into the marketplace.
Revenues from licensing activities increased 62% to $250,000 in the nine months ended
September 30, 2006, from $154,000 in the nine months ended September 30, 2005, as 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®. Additionally, revenues from fee for service activities were $61,000 for the nine months
ended September 30, 2006, as we introduced an opportunity for potential customers to try 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 decreased 69% to $92,000 in the nine
months ended September 30, 2006, from $298,000 in the same nine months last year. The decrease is
primarily related to a greater amount of non-recurring milestones reached during the nine months
ended September 30, 2005 and the end of the grant studies in early 2006.
During 2005 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 increased by $912,000 or 14%, to $7,254,000 for the
nine months ended September 30, 2006, from $6,342,000 for the nine months ended September 30, 2005.
Included in the $7,254,000 for the nine months ended September 30, 2006, are approximately
$556,000 of non-cash stock-based compensation and $121,000 of non-cash stock option grants to
consultants, $212,000 of non-cash patent-related write-offs in accordance with SFAS 144, $250,000
for a one-time consulting expense for services rendered in the third quarter, $118,000 of
sales-related expenses associated with the initial setup of the direct distribution sales force,
and approximately $500,000 of legal costs associated with a civil action involving certain
statements regarding a competitors product claim which was settled during the quarter, regulatory
matters and due diligence efforts.
We incurred $556,000 in non-cash stock-based compensation for the nine months ended September
30, 2006, which is related to the implementation of SFAS 123(R) in 2006. In addition, we issued
common stock and stock options to outside consultants for services rendered during the nine months
ended September 30, 2006 and 2005, resulting in non-cash expense of $121,000 and $503,000,
respectively. This decrease was due to a non-recurring grant of stock options to non-employees made
during the nine months ended September 30, 2005. In addition, there was an increase in non-cash
patent-related write-offs in accordance with SFAS 144 of $212,000 for the nine months ended
September 30, 2006, compared to $132,000 to the same nine months in 2005. From time to time, we may
issue common stock to consultants for services rendered and incur patent-related costs.
The $912,000 increase for the nine months ended September 30, 2006, from the nine months ended
September 30, 2005 was principally due to increased sales and marketing expenses, recruiting fees,
legal fees related to a settled civil action and a one-time consulting expense. 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.
19
Research and Development Expenses
Research and development expenses decreased 57% to $737,000 for the nine months ended
September 30, 2006, from $1,727,000 for the nine months ended September 30, 2005. This decrease was
largely a result of reduced research and development costs associated with the closing of the
Maryland facility during the nine months ended September 30, 2006, compared to the same period in
2005. Throughout the latter part of 2005 and during the first quarter of 2006, we closed our
Maryland facility and reduced our R&D personnel and related expenses 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 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 nine months ended September 30, 2006, we recognized $176,000 in net interest income
compared to $1,786,000 in net interest expense for the same quarter last year. The expense was
primarily the result of the issuance of additional bridge loans in the beginning of 2005 and
subsequent payoff of all outstanding loan interest prior to the reverse merger transaction during
2005. In addition, we have $2,004,000 cash on hand as of September 30, 2006, which we are
currently investing in short-term conservative money market funds. We expect to earn interest
income in 2006, although this amount will decrease as the cash is depleted. Additionally there
was an $117,000 gain on extinguishment of debt and a $35,000 loss on disposal of fixed assets in
connection with the closing of the Maryland facility for the nine months ended September 30, 2006.
From time to time, we may participate in these infrequent events.
Preferred Stock Dividend and Financing Costs
Preferred stock dividend and financing costs decreased to $0 from $2,161,000 for the nine
months ended September 30, 2006 and 2005, respectively. The decrease was principally due to the
conversion of preferred stock in conjunction with the reverse merger transaction during 2005. As of
September 30, 2006 and 2005, there were no shares of preferred stock outstanding and therefore no
dividends.
Liquidity and Capital Resources
Development Stage
We have been unprofitable since our inception and we expect to incur additional operating
losses through at least the end of 2007, as we incur expenditures on sales and marketing,
commercial operations, and research and development. Our activities to date are not as broad in
depth or scope as the activities we may undertake in the future, and our historical operations and
financial information are not necessarily indicative of our future operating results, financial
condition or ability to operate profitably as a commercial enterprise.
Our future capital requirements will depend upon many factors, including
progress with marketing our technologies, the ramp-up of revenue from our existing and new
contracts, future decisions to purchase Clearant Process® sterile implants, costs required to
represent the tissue banks in the distribution of the tissue, the time and costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary
rights, the necessity of, and time and costs involved in obtaining, regulatory approvals, competing
technological and market developments, and our ability to establish collaborative arrangements,
effective commercialization, marketing activities and other arrangements.
20
Direct Distribution Strategy
In February 2006, we ordered approximately $240,000 of spinal bone implants that were treated
with the Clearant Process®. In April 2006, we entered into a tissue supply and inventory
agreement whereby we have the exclusive rights to six territories. Under this agreement we paid
$600,000 which was applied to the future purchase of spinal bone implants treated with the
Clearant Process®.
During the second quarter of 2006, we implemented a direct distribution strategy. As a part of
this strategy, we will continue to acquire inventory of Clearant Process® sterile implants and
generate higher levels of accounts receivable than historically incurred. We began hiring
salespeople in the second quarter 2006. These salespeople are paid a base salary and have the
ability to earn a significant portion of their compensation through
commissions. In late June 2006, our
sales people began to directly distribute Clearant Process® sterile implants. We have experienced
positive results from this direct distribution strategy.
In September 2006, we entered into a renewable two-year supply and representation agreement
which supersedes the prior supply agreement, whereby we have 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, we
agreed to make a $1,150,000 prepayment on October 31, 2006, for ordered spinal bone implants to be
delivered in 2007. In addition, we agreed to make prepayments to be applied towards future spinal
bone implants ordered in the amounts of $3,800,000 and $4,550,000 for 2007 and 2008, respectively.
We have not made the required payment. Failure to do so may result in the disruption of our spinal
bone implant supply or termination of the agreement, which would have a material adverse impact on
our ability to distribute spinal bone implants treated with the Clearant Process®. As of the nine
months ended September 30, 2006, we have made inventory-related payments of $1,031,000.
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 $7,896,000 for the nine months ended September 30,
2006, compared to $8,848,000 for the nine months ended September 30, 2005. During the nine months
ended September 30, 2006, cash used by operations resulted in a $761,000 increase in prepayments of
Clearant Process® sterile implants, and a $628,000 decrease in accrued liabilities primarily
related to Maryland facility closing expenses accrued for in 2005 and paid in 2006. Significant
non-cash adjustments to operating activities for the nine months ended September 30, 2006, included
depreciation and amortization expense of $412,000, non-cash charges of $556,000 for stock-based
compensation, $121,000 for common stock issued to consultants for services rendered, and a non-cash
gain on extinguishment of debt and other of $82,000.
Our net cash used in investing activities was $257,000 for the nine months ended September 30,
2006 compared to $164,000 for the nine months ended September 30, 2005. 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 $16,000 for the nine
months ended September 30, 2006, compared to net cash provided by financing activities of
$10,931,000 for the nine months ended September 30, 2005. Cash provided by financing activities for
the nine months ended September 30, 2006 consisted of $26,000 in the exercise of common stock
options partially offset by $10,000 in principal payments on capital lease obligations.
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.
As of September 30, 2006 we had approximately $2 million in cash and cash equivalents. As of
November 3, 2006 we had approximately $1,390,000 in cash and cash equivalents. Based on our
current plans and operations, we will need to raise capital by approximately January 2007, or
substantially curtail operations and significantly reduce our expenditures.
Options being pursued to raise capital include issuing common stock, preferred stock,
convertible stock, warrants, or a combination of these equity securities. Equity financing may be
supplemented with additional debt financing for inventory, accounts receivable and working capital.
We have engaged an investment bank and are actively pursuing financing alternatives.
We may not be successful in obtaining financing, and if funding is obtained it may be on terms
considered unfavorable to us or our existing shareholders. The inability or failure to raise
capital before our available cash is depleted will have a material adverse effect on our business
and may result in bankruptcy or discontinuation of operations.
21
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various
expirations through 2011. The future minimum lease payments under these leases and other
contractual obligations as of September 30, 2006 are as follows ($ in 000s):
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Less than |
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More than |
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Contractual Obligations |
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Total |
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1 year |
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1 - 3 years |
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3 - 5 years |
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5 years |
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Lease obligations |
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$ |
116 |
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|
$ |
87 |
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|
$ |
28 |
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|
$ |
2 |
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|
$ |
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|
Bridge loans |
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|
106 |
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|
106 |
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Purchase obligations |
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|
9,500 |
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|
4,950 |
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4,550 |
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$ |
9,722 |
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$ |
5,143 |
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$ |
4,578 |
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$ |
2 |
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$ |
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Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of September 30, 2006, 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. 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.
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, licensing fees, sterilization services, performance milestones and contract
research activities, with additional revenues generated from government grants.
We directly distribute Clearant Process® sterile implants to third parties for allograft
implant usage. We also license the Clearant Process ® to third parties who
intend to incorporate our technology into their product and manufacturing processes. Customers may
require contract research or commercial scale-up activities to support and validate the commercial
applicability and eventual licensing of the Clearant Process ® . In addition,
we provide customers the option of using our sterilization services whereby we apply irradiation
and certain other proprietary steps of the Clearant Process® for our customers. We recognize
direct distribution revenue upon the customers sourcing of the Clearant Process® sterile implant.
We recognize licensing revenue when a customer distributes products incorporating the Clearant
Process ® . Revenue related to our 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 and ability to pay. Revenue related to contract research activities is recognized on a
percentage-of-completion basis, provided the customer has the ability to pay. In the event cash is
received in advance of services performed, we will defer the related revenue recognition until the
underlying performance milestone is achieved or the contract research activities commence. In the
event advance cash payments are not attributable to any performance milestone or contract research
activity, we will recognize the underlying amounts into revenue on a straight-line basis over the
term of the underlying agreement or up to a maximum of fifteen years. 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.
22
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.
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).
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43 (SFAS 151). SFAS 151 requires idle facility expenses, freight, handling
costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed
when incurred. It also requires that allocation of fixed overheads to the costs of conversion be
based on the normal capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
151 in the 2006 first quarter did not have a material impact on our financial reporting and
disclosures.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 156). The provisions of SFAS 156 are effective for
fiscal years beginning after September 15, 2006. This statement was issued to simplify the
accounting for servicing rights and to reduce the volatility that results from using different
measurement attributes. We do not believe the adoption of SFAS 156 will have a material impact on
our financial position or results of operations.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This
statement is effective for fiscal years beginning after December 15, 2006. We are currently in the
process of evaluating the expected effect of FIN 48 on its results of operations and financial
position.
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.
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 September 30, 2006, 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
23
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.
ITEM 4. Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and our 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
our Chief Financial Officer have determined that our disclosure controls and procedures are
effective in timely alerting them 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 reasonable 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. As of the date of this report, we are not currently
involved in any legal proceeding that we believe would have a material adverse effect on our
business, financial condition or operating results.
ITEM 1A. Risk Factors
Our results of operations and financial condition are subject to numerous risks and
uncertainties described in our Annual Report on Form 10-K for 2005, filed on March 16, 2006, and
incorporated herein by reference. You should carefully consider these risk factors in conjunction
with the other information contained in this report. Should any of these risks materialize, our
business, financial condition and future prospects could be negatively impacted. As of September
30, 2006, there have been no material changes to the disclosures made on the above-referenced Form
10-K.
The accompanying financial statements have been prepared on the basis that we will continue as
a going concern. This indicates that there is substantial doubt that we can continue as a going
concern in that we did not have sufficient cash and liquid assets at September 30, 2006, to cover
our operating capital requirements for the next twelve-month period and if sufficient cash cannot
be obtained we would have to substantially alter our operations, or we may be forced to discontinue
operations. This may limit our ability to access certain types of financing, or may prevent us
from obtaining financing on acceptable terms.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Securities Holders
None.
ITEM 5. Other Information
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,
24
markets for stock of Clearant 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, wherever they occur, are necessarily estimates reflecting the best judgment of the senior
management of Clearant 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 described below, that may affect the
operations, performance, development and results of our business. Because the factors discussed in
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.
25
You should understand that the following important factors, in addition to those discussed
above and in the Risk Factors 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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limited operating history, |
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difficulty in developing, exploiting and protecting proprietary technologies, |
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results of additional clinical studies, |
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acceptance and success of our direct distribution of allografts, |
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intense competition and substantial regulation in the healthcare industry, |
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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. |
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 the Company 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.
ITEM 6. Exhibits
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
26
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: November 9, 2006 |
By: |
/s/ ALAIN DELONGCHAMP
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Alain Delongchamp |
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Chief Executive Officer |
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Date: November 9, 2006 |
By: |
/s/ JON GARFIELD
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Jon Garfield |
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Chief Financial Officer |
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27