e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended September 30, 2005
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 an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No 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 9, 2005, there were 39,743,550 shares of registrants common stock, $0.0001 par
value, outstanding.
CLEARANT, INC.
CONDENSED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,083 |
|
|
$ |
177 |
|
Accounts receivable |
|
|
235 |
|
|
|
127 |
|
Prepaids and other assets |
|
|
386 |
|
|
|
502 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,704 |
|
|
|
806 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
427 |
|
|
|
595 |
|
Identifiable intangibles, net |
|
|
1,427 |
|
|
|
1,453 |
|
Restricted cash noncurrent |
|
|
189 |
|
|
|
161 |
|
Other assets |
|
|
48 |
|
|
|
63 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,795 |
|
|
$ |
3,078 |
|
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock
and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,543 |
|
|
$ |
1,847 |
|
Accrued liabilities |
|
|
1,109 |
|
|
|
3,061 |
|
Deferred revenue |
|
|
60 |
|
|
|
178 |
|
Bridge loans, net |
|
|
97 |
|
|
|
4,997 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,809 |
|
|
|
10,083 |
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
75 |
|
|
|
91 |
|
Other liabilities |
|
|
26 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,910 |
|
|
|
10,244 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Redeemable Preferred stock: |
|
|
|
|
|
|
|
|
Series A redeemable convertible
preferred stock (50,000 shares
authorized; -0- and 6,454 shares
issued and outstanding at
September 30, 2005 and December
31, 2004, respectively) |
|
|
|
|
|
|
17,829 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Series B preferred stock (-0-
shares authorized; -0- and 6,630
shares issued and outstanding at
September 30, 2005 and December
31, 2004, respectively) |
|
|
|
|
|
|
16,386 |
|
Series C junior preferred stock
(-0- shares authorized; -0- and
37 shares issued and outstanding
at September 30, 2005 and
December 31, 2004, respectively) |
|
|
|
|
|
|
86 |
|
Common stock ($0.0001 par value;
200,000 shares authorized;
35,936 and 7,365 issued and
outstanding at September 30,
2005 and December 31, 2004,
respectively) |
|
|
4 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
71,008 |
|
|
|
17,398 |
|
Accumulated deficit |
|
|
(69,068 |
) |
|
|
(58,820 |
) |
Other comprehensive loss |
|
|
(59 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
1,885 |
|
|
|
(24,995 |
) |
|
|
|
|
|
|
|
Total liabilities, redeemable
preferred stock and stockholders
equity (deficit) |
|
$ |
4,795 |
|
|
$ |
3,078 |
|
|
|
|
|
|
|
|
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, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
62 |
|
|
$ |
27 |
|
|
$ |
154 |
|
|
$ |
75 |
|
Contract research and milestones |
|
|
72 |
|
|
|
178 |
|
|
|
223 |
|
|
|
428 |
|
Grants |
|
|
20 |
|
|
|
64 |
|
|
|
75 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
154 |
|
|
|
269 |
|
|
|
452 |
|
|
|
689 |
|
Cost of sales |
|
|
4 |
|
|
|
9 |
|
|
|
13 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
150 |
|
|
|
260 |
|
|
|
439 |
|
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
968 |
|
|
|
911 |
|
|
|
2,276 |
|
|
|
3,163 |
|
Research and development |
|
|
465 |
|
|
|
1,282 |
|
|
|
1,727 |
|
|
|
3,996 |
|
General and administrative |
|
|
1,326 |
|
|
|
1,393 |
|
|
|
3,563 |
|
|
|
3,536 |
|
Stock-based compensation |
|
|
51 |
|
|
|
13 |
|
|
|
503 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,810 |
|
|
|
3,599 |
|
|
|
8,069 |
|
|
|
10,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,660 |
) |
|
|
(3,339 |
) |
|
|
(7,630 |
) |
|
|
(10,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
(98 |
) |
|
|
(1,786 |
) |
|
|
(174 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
1,290 |
|
|
|
|
|
Gain on settlement of debt for stock |
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,660 |
) |
|
|
(3,437 |
) |
|
|
(8,087 |
) |
|
|
(10,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Preferred stock dividend and financing
costs |
|
|
|
|
|
|
(413 |
) |
|
|
(2,161 |
) |
|
|
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,660 |
) |
|
$ |
(3,850 |
) |
|
$ |
(10,248 |
) |
|
$ |
(11,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.39 |
) |
|
$ |
(1.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
35,923 |
|
|
|
7,367 |
|
|
|
26,599 |
|
|
|
7,366 |
|
See accompanying notes to condensed financial statements.
F-4
CLEARANT, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred |
|
|
Series C Preferred |
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
$0.0001 par value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Totals |
|
Balance, December 31, 2004 |
|
|
6,630 |
|
|
$ |
16,386 |
|
|
|
37 |
|
|
$ |
86 |
|
|
|
7,372 |
|
|
$ |
1 |
|
|
$ |
17,398 |
|
|
$ |
(58,820 |
) |
|
$ |
(46 |
) |
|
$ |
(24,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants to
January 2005 Bridge
Holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
93 |
|
Settlement of debt for
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
64 |
|
Exchange of warrants for
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
158 |
|
Beneficial return to
preferred shareholders
from allocation of
shares from common to
preferred stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
2,100 |
|
Conversion of preferred
stock into common stock |
|
|
(6,630 |
) |
|
|
(16,386 |
) |
|
|
(37 |
) |
|
|
(86 |
) |
|
|
11,542 |
|
|
|
1 |
|
|
|
30,566 |
|
|
|
|
|
|
|
|
|
|
|
14,095 |
|
Exchange of bridge loan
warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,349 |
) |
|
|
|
|
|
|
|
|
|
|
(1,349 |
) |
Conversion of Series A
Preferred dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,141 |
|
|
|
|
|
|
|
3,794 |
|
|
|
|
|
|
|
|
|
|
|
3,794 |
|
Conversion of Series C
Preferred dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Conversion of 2004 bridge
loans into common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,834 |
|
|
|
1 |
|
|
|
6,724 |
|
|
|
|
|
|
|
|
|
|
|
6,725 |
|
Bliss Essential, Corp.
shares issued in
connection with the
merger transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,136 |
|
|
|
1 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Issuance of common stock
in conjunction with
Private Placement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,910 |
|
|
|
|
|
|
|
8,413 |
|
|
|
|
|
|
|
|
|
|
|
8,413 |
|
Conversion of Publico
Bridge Loans into common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
783 |
|
|
|
|
|
|
|
2,373 |
|
|
|
|
|
|
|
|
|
|
|
2,373 |
|
Exercise of common stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Issuance of common stock
to consultants for
services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
235 |
|
Compensation expenses
incurred in connection
with issuance of options
and warrants to
non-employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,087 |
) |
|
|
|
|
|
|
(8,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,087 |
) |
|
|
(13 |
) |
|
|
(8,100 |
) |
Preferred stock dividend
and financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2005 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,936 |
|
|
$ |
4 |
|
|
$ |
71,008 |
|
|
$ |
(69,068 |
) |
|
$ |
(59 |
) |
|
$ |
1,885 |
|
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, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,660 |
) |
|
$ |
(3,437 |
) |
|
$ |
(8,087 |
) |
|
$ |
(10,284 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
133 |
|
|
|
98 |
|
|
|
380 |
|
|
|
295 |
|
Stock-based compensation |
|
|
51 |
|
|
|
13 |
|
|
|
503 |
|
|
|
79 |
|
Non-cash interest expense associated with
convertible debt financings (Note 6) |
|
|
|
|
|
|
98 |
|
|
|
1,786 |
|
|
|
180 |
|
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(1,290 |
) |
|
|
|
|
Gain on settlement of debt for stock |
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
Warrant exchange for common stock |
|
|
|
|
|
|
|
|
|
|
158 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables and prepaids |
|
|
47 |
|
|
|
159 |
|
|
|
68 |
|
|
|
177 |
|
Accounts payable |
|
|
30 |
|
|
|
919 |
|
|
|
(304 |
) |
|
|
1,798 |
|
Accrued liabilities |
|
|
(539 |
) |
|
|
220 |
|
|
|
(1,923 |
) |
|
|
45 |
|
Deferred revenue |
|
|
(30 |
) |
|
|
14 |
|
|
|
(134 |
) |
|
|
137 |
|
Other assets and liabilities |
|
|
91 |
|
|
|
9 |
|
|
|
34 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,877 |
) |
|
|
(1,907 |
) |
|
|
(8,848 |
) |
|
|
(7,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(29 |
) |
|
|
(135 |
) |
|
|
(130 |
) |
|
|
(463 |
) |
Capital expenditures |
|
|
(16 |
) |
|
|
2 |
|
|
|
(51 |
) |
|
|
(53 |
) |
Cash received in 2005 merger activities |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Proceeds from disposals of marketable securities |
|
|
|
|
|
|
412 |
|
|
|
|
|
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(45 |
) |
|
|
279 |
|
|
|
(164 |
) |
|
|
2,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs |
|
|
|
|
|
|
|
|
|
|
8,455 |
|
|
|
|
|
Issuance of Series C preferred stock, net of costs |
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
85 |
|
Issuance of convertible notes payable, net of costs |
|
|
|
|
|
|
3,345 |
|
|
|
2,811 |
|
|
|
5,925 |
|
Exercise of common stock options |
|
|
13 |
|
|
|
1 |
|
|
|
32 |
|
|
|
1 |
|
Principal payments on bridge loans |
|
|
|
|
|
|
|
|
|
|
(366 |
) |
|
|
|
|
Principal payments on capital lease obligations |
|
|
|
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
13 |
|
|
|
3,426 |
|
|
|
10,931 |
|
|
|
5,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustments on cash and cash
equivalents |
|
|
(7 |
) |
|
|
(19 |
) |
|
|
(13 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(2,916 |
) |
|
|
1,779 |
|
|
|
1,906 |
|
|
|
1,404 |
|
Cash and cash equivalents, beginning of period |
|
|
4,999 |
|
|
|
799 |
|
|
|
177 |
|
|
|
1,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,083 |
|
|
$ |
2,578 |
|
|
$ |
2,083 |
|
|
$ |
2,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005 are
not necessarily indicative of the results that may be expected for the entire 2005 fiscal year.
In June 2005, the registrant, Clearant, Inc., formerly known as Bliss Essentials Corp., (the
Company) changed its state of incorporation from Nevada to Delaware. In conjunction with the
reincorporation, Clearant now has authorized common stock consisting of 200 million shares, $0.0001
par value, of which 35,936,085 shares are issued and outstanding, and 50 million shares of
preferred stock, $0.0001 par value, none of which are issued and outstanding. Additional
information pertaining to the Companys reincorporation in Delaware can be found on Form 14A filed
with the Securities and Exchange Commission on June 16, 2005. The carrying value of the 2004
common stock has been historically revalued in accordance with the reincorporation.
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, 2004 and 2003 and notes thereto in
the Companys amended Current Report on Form 8K/A dated March 31, 2005, filed with the Securities
and Exchange Commission filed as of May 16, 2005. The December 31, 2004 consolidated balance sheet
has been derived from the audited financial statements on Form 8-K/A. 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. During the quarter, the Company increased its contingent liabilities by $137
as it relates to ongoing legal matters. These unaudited condensed financial statements should be read together with
the financial statements for the year ended December 31, 2004, and footnotes thereto.
In March 2005 and as described more fully in Note 5, the Company acquired all of the outstanding
common stock of Clearant, Inc., a Delaware corporation, formerly a California corporation
(Clearant), through a reverse triangular merger. For accounting purposes, the merger is treated as
a recapitalization of Clearant with Clearant deemed the acquirer (i.e., a reverse acquisition).
The historical financial statements prior to March 31, 2005 are those of Clearant.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123R). The statement requires
all entities to recognize compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The statement eliminates the alternative method of accounting for
employee share-based payments previously available under Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25) and SFAS 123. In April 2005,
the Securities and Exchange Commission amended the compliance dates to allow companies to implement
SFAS 123(R) at the beginning of fiscal 2006. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 123(R), but believes the impact upon
adoption will be an increase to compensation expense.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets (SFAS 153) an
amendment to APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29). SFAS 153
eliminates certain differences in the guidance in APB 29 as compared to the guidance contained
in standards issued by the International Accounting Standards Board. The amendment to APB 29
eliminates the fair value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier
application is permitted for
F-7
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS (Continued)
nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management
does not expect adoption of SFAS 153 to have a material impact on the Companys financial
statements or results of operations.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47), which clarifies the meaning of the term conditional asset
retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations (SFAS 143)
and clarifies when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. This interpretation is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies).
Retrospective application of interim financial information is permitted but is not required.
Management does not expect adoption of FIN 47 to have a material impact on the Companys financial
statements.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections (SFAS 154) an
amendment to APB Opinion No. 20, Accounting Changes (APB 20), and SFAS 3, Reporting Accounting
Changes in Interim Financial Statements (SFAS 3) though SFAS 154 carries forward the guidance in
APB 20 and SFAS 3 with respect to accounting for changes in estimates, changes in reporting entity,
and the correction of errors. SFAS 154 establishes new standards on accounting for changes in
accounting principles, whereby all such changes must be accounted for by retrospective application
to the financial statements of prior periods unless it is impracticable to do so. SFAS 154 is
effective for accounting changes and error corrections made in fiscal years beginning after
December 15, 2005, with early adoption permitted for changes and corrections made in years
beginning after May 2005.
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,
after deducting dividend requirements from the Series A Preferred Stock, 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, warrants and convertible preferred stock and accrued preferred stock dividends. 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. All convertible preferred
stock and accrued dividends would be reflected on an as-if-converted basis. 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 for the nine months ended September 30, 2005 and 2004, since their effect would have been
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Convertible preferred stock (and related accrued
dividends)
and convertible bridge loans |
|
|
|
|
|
|
18,210,000 |
|
Stock Options |
|
|
2,686,000 |
|
|
|
4,999,000 |
|
Warrants |
|
|
3,417,000 |
|
|
|
4,119,000 |
|
F-8
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 3 NET LOSS PER SHARE (Continued)
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,660 |
) |
|
$ |
(3,850 |
) |
|
$ |
(10,248 |
) |
|
$ |
(11,499 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares
outstanding (in thousands) |
|
|
35,923 |
|
|
|
7,367 |
|
|
|
26,599 |
|
|
|
7,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.39 |
) |
|
$ |
(1.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 STOCK OPTIONS AND STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements in accordance with APB 25, and
complies with the disclosure provisions of SFAS 123 and SFAS 148. Under APB 25, compensation
expense is recognized over the vesting period based on the difference, if any, on the date of grant
between the deemed fair value for accounting purposes of the Companys stock and the exercise price
on the date of grant.
Effective March 31, 2005 and in conjunction with the merger (Note 5), the Company cancelled all
stock options previously issued to employees and non-employees with exercise prices greater than
$3.50 per share (the 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 million shares (the Existing Options), which are grandfathered under the
Companys 2000 Stock Option Plan, as amended (the 2000 Plan). As of September 30, 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 (the 2005
Plan). There are 5,081,412 shares of common stock authorized for issuance under the Plan. In
addition, the Company assumed options to purchase 1,918,588 shares of common stock in connection
with the reverse merger consummated on March 31, 2005. Accordingly, an aggregate of 7,000,000
shares of common stock are reserved for issuance upon exercise of options. The terms of the Plan
provide for grants of stock options, 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 plan. However, incentive stock options may only be granted to
employees.
SFAS 123 requires disclosure of pro forma net loss based upon the fair value of the options issued
to employees and consultants, had the Company elected to account for such options under the
provisions of SFAS 123.
The Company calculates the fair value of each option granted on the date of the grant using the
Black-Scholes option pricing model for employees as prescribed by SFAS 123 and the following
assumptions:
|
|
|
|
|
Risk-free interest rate |
|
|
3.0%5.5 |
% |
Expected life in years |
|
|
5 |
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
70%75 |
% |
F-9
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 4 STOCK OPTIONS AND STOCK-BASED COMPENSATION (Continued)
Had the Company determined compensation expense for its stock options based on the fair value at
the grant date under SFAS 123, the Companys pro forma net loss for the three and nine months ended
September 30, 2005 and September 30, 2004 would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss attributable to common stock, as reported |
|
$ |
(2,660 |
) |
|
$ |
(3,850 |
) |
|
$ |
(10,248 |
) |
|
$ |
(11,499 |
) |
Add: stock-based compensation expense included in
reported net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: stock-based compensation expense
determined under the fair value method for all
awards |
|
|
(868 |
) |
|
|
(395 |
) |
|
|
(1,034 |
) |
|
|
(1,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock pro forma |
|
$ |
(3,528 |
) |
|
$ |
(4,245 |
) |
|
$ |
(11,282 |
) |
|
$ |
(13,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported, basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.39 |
) |
|
$ |
(1.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, basic and diluted |
|
$ |
(0.10 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.42 |
) |
|
$ |
(1.77 |
) |
|
|
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|
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|
Because the Companys stock options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
On July 1, 2005, the Board of Directors approved awarding stock options for 1,011,665 shares to
employees & directors. All awards were at $4.12, the fair market value at the date of grant based
on the closing price of the Companys common stock on July 1, 2005. The Company valued the shares
using the Black-Scholes option-pricing model and the following assumptions: risk-free interest
rate 3.84%, expected life 5 years, dividend yield 0% and volatility 72%.
On July 29, 2005, the Company granted 42,500 stock options to employees under the 2005 Stock Option
Plan. All awards were at $4.51, the fair market value at the date of grant based on the closing
price of the Companys common stock on July 29, 2005. The Company valued the options using the
Black-Scholes option pricing model and the following assumptions: risk-free interest rate 4.12%,
expected life 5 years, dividend yield 0% and volatility 72%.
On August 30, 2005, the Company granted 200,000 stock options to an Officer of the Company under
the 2005 Stock Option Plan. The award was at $3.86, the fair market value at the date of grant
based on the closing price of the Companys common stock on August 30, 2005. The Company valued
the options using the Black-Scholes option pricing model and the following assumptions: risk-free
interest rate 4.03%, expected life 5 years, dividend yield 0% and volatility 72%.
NOTE 5 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.
F-10
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 5 REVERSE MERGER TRANSACTION (Continued)
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 March 31, 2005 Form
10-Q filed with the Securities and Exchange Commission on May 16, 2005.
NOTE 6 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
During the nine months ended September 30, 2005, the Company settled certain debts of approximately
$103 in exchange for 31,000 shares of common stock at a price per share of $2.25 (the Settlement
Price). In connection with the debt settlement, the Company recorded a one-time gain of $39, which
represented the difference between the deemed fair value of the Companys common stock and the
Settlement Price at the settlement date.
During the nine months ended September 30, 2005 and prior to the March 31, 2005 reverse merger,
Clearant exchanged certain warrants for 77,000 shares of the Companys common stock. The exchange
resulted in a one-time expense of $157, which is included in general and administrative costs in
the Companys Condensed Statements of Operations for the nine months ended September 30, 2005.
During the nine months ended September 30, 2005 and immediately prior to the March 31, 2005 reverse
merger, Clearants common stockholders exchanged 1.5 million shares (pre share split) of common
stock to the then-holders of Series A, B and C preferred stock in order to consummate the
transaction. The 1.5 million shares were allocated pro-rata amongst the then-preferred holders and
valued at $2,100. The share exchange was treated as a beneficial impact of the transaction to
preferred shareholders and included in net loss attributable to common stock in the Companys
Condensed Statements of Operations for the nine months ended September 30, 2005.
During the nine months ended September 30, 2005, the Company issued 57,979 shares of common stock
with a fair value of $235 as compensation 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, $117
is reflected in stock-based compensation in the nine months ended September 30, 2005.
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 merger (Note 5) 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 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 7 SUBSEQUENT EVENTS
Pursuant to the License Agreement (Agreement) with Tristar Bioventures International (Tristar),
dated April 1, 2005, in consideration for the access to and use of the Clearant
Process ® the Company was due a one-time, non-recoupable, non-refundable
payment in the amount of $500 on October 31, 2005. As of the filing date of this document, payment
has not
been received by the Company. Pursuant to the Agreement, Tristar shall be deemed to be in material
breach in the event that payment is not cured within sixty days from notice of such breach and the
Agreement will be terminated. On November 1, 2005, the Company sent a notice of default to
Tristar. To date in 2005, the Company has not recognized any revenue from Tristar, therefore no
bad debt expense will be incurred related to this default.
F-11
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 7 SUBSEQUENT EVENTS (Continued)
On November 9, 2005 the Company closed a private placement of 3,774,465 shares of its common stock
and warrants to purchase 1,698,509 additional shares of common stock for an aggregate purchase
price of approximately $12,000, or a unit price of $3.18. Each warrant is exercisable for one
share of common stock at an exercise price of $4.96 per share. To date we have received
approximately $11,709, which is net of legal costs of $294. In addition, the Company granted a warrant to purchase 164,189 shares of
common stock at an exercise price of $4.96 per share to the placement agent.
F-12
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, 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 5 of our Quarterly Report for the quarter ended June
30, 2005.
Overview
We acquire, develop and market our pathogen inactivation technology, the Clearant
Process ® , to producers of biological products such as:
|
|
|
Tissue allograft implants |
|
|
|
|
Recombinant products |
|
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|
|
Plasma therapeutics |
|
|
|
|
Blood and blood-related products |
The Merger
We were incorporated in the state of Nevada on March 31, 2003. On March 31, 2005, we sold
substantially all of our operating assets and liabilities to three majority stockholders, and
changed our name from Bliss Essentials Corp. to Clearant, Inc. We entered into a reverse triangular
merger with Clearant, Inc., which was incorporated in the state of California on April 30, 1999,
and reincorporated in Delaware on March 31, 2005, and is now Clearant Licensing, Inc., our
wholly-owned subsidiary through whom we conduct our business operations. Because Clearant was the
sole operating company at the time of the merger, the transaction was accounted for as a reverse
acquisition, with Clearant deemed the acquirer for accounting purposes. On June 30, 2005, we
reincorporated from Nevada to Delaware.
Our Business
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 four to thirteen
logs of pathogen reduction; |
|
|
|
|
Be used in both intermediate and final stages of production; |
|
|
|
|
Protect the mechanical and biological properties of the tissue being treated; and |
|
|
|
|
Be applied to a product after it has been sealed into its final package. |
The Clearant Process ® is designed to be effective against a wider
spectrum of pathogens than many competing sterilization technologies, including the inactivation of
bacteria, fungi, spores and lipid-enveloped and non-enveloped viruses. We believe the Clearant
Process ® will enable our customers, who offer a wide variety of biological
products, to meet the medical need for safer biological products and to satisfy current and future
product safety guidelines. We
1
believe the Clearant Process ® is a
cost-effective technology applicable across multiple market segments, with minimal capital
requirements to implement.
The Clearant Process ® does not require the use of toxic chemicals. The
advantage of gamma irradiation over currently available pathogen reduction technologies is that it
is inherently reliable, predictable, non-toxic, penetrating, and scalable for a wide variety of
products. Traditional uses of gamma irradiation have been proven to be among the best methods for
inactivating pathogens that contaminate medical devices and instruments. However, prior to the
development of the Clearant Process ® , it was not possible to apply gamma
radiation on biological products because the necessary high levels of gamma irradiation also
damaged the active proteins present in the biological products, compromising its integrity and
functionality.
Our initial area of focus is the application of the Clearant Process ® on
devitalized human tissue implants used in surgical procedures. We are also focusing on the
application of the Clearant Process ® on in-process intermediates used in the
production of recombinant protein products (e.g., serum) and biotechnology recombinant protein
products (including biotherapeutics, diagnostics and vaccines). We believe that the devitalized
human tissue market represents a source of near-term product revenue, while the protein-based
pharmaceuticals markets present an intermediate to longer-term opportunity.
We have signed six licensing agreements with devitalized human tissue banks, and one with a
manufacturer of recombinant protein products, in return for milestone payments and royalties on
end-product sales. To date in 2005, four licensees have launched devitalized human tissue products
that were treated using the Clearant Process ® . Clearant
Process ® -treated allografts produced by our licensees have been implanted by
doctors in more than 4,000 patients since January 2004. Additionally, in September 2005, we
launched a new sterilization service which allows tissue banks to send pre-treated tissue to our
facility in Chicago to be irradiated under Clearant Process ® conditions by
us. To date in 2005, we have signed two such sterilization service agreements. Finally, we
continue to work with various other companies at different stages of development with the
anticipation that these companies incorporate the Clearant Process ® into
their manufacturing process.
Results of Operations
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
Revenues
Revenues from licensing activities increased 130% to $62,000 in the quarter ended September
30, 2005, from $27,000 in the quarter ended September 30, 2004, as a result of increased sales of
human tissue treated with the Clearant Process ® . We expect licensing revenue
to continue to increase as market acceptance of the Clearant Process ® becomes
greater. We also anticipate beginning to receive revenue from our sterilization service. Revenues
from contract research and grants decreased 62% to $92,000 in the quarter ended September 30, 2005,
from $242,000 in the same quarter last year. The decrease is primarily related to non-recurring
milestones reached during the three months ended September 30, 2004. We expect contract research
and grant revenue to continue to decrease as our customers move towards licensing activities and
sterilization services.
Sales, General and Administrative Expenses
Sales, general
and administrative expenses decreased to $2,294,000 for the quarter ended
September 30, 2005, from $2,304,000 for the quarter ended September 30, 2004. The decrease was
principally due to decreased expenses of approximately $19,000 associated with outside legal and
accounting expenses as compared to the same period last
year. We expect our sales, general and administrative expenses to increase gradually as we
increase our efforts in the commercialization of the Clearant Process ®
through an increase in the sales force and market coverage.
Research and Development Expenses
Research and development expenses decreased 64% to $465,000 for the quarter ended September
30, 2005, from $1,282,000 for the quarter ended September 30, 2004. This decrease was largely a
result of reduced research and development personnel-related costs during the quarter compared to
the same period in 2004. Throughout the latter part
2
of 2004 and during the first quarter of 2005,
we reduced our R&D personnel and related expenses as the principal research and development
required to support the Clearant Process ® in the tissue market was
substantially complete. We anticipate we will continue to incur research and development costs,
primarily for non-tissue products, but at a reduced rate, as a significant amount of R&D for tissue
has been completed.
Stock-based Compensation
We incurred $51,000 in stock-based compensation for the three months ended September 30, 2005,
related to common stock and options granted to non-employees compared to $13,000 for non-employee
stock options for the three months ended September 30, 2004. This increase was due to the issuance
of common stock and options to outside consultants for services rendered during the period. From
time to time, we may issue common stock to consultants for services rendered.
Net Interest Expense
Net interest expense decreased to $0 for the quarter ended September 30, 2005, compared to net
interest expense of $98,000 for the quarter ended September 30, 2004. This decrease was primarily
the result of the repayment or conversion of bridge loans to common stock in connection with the
March 31, 2005 merger.
Preferred Stock Dividend and Financing Costs
Preferred stock dividend and financing costs decreased to $0 from $413,000 for the quarters
ended September 30, 2005 and 2004, respectively. The decrease was principally due to the exchange
of 1.5 million shares of common stock to preferred stockholders of Clearant in order to consummate
the March 31, 2005 merger. As of September 30, 2005, there was no outstanding preferred stock.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
Revenues
Revenues from licensing activities increased 105% to $154,000 in the nine months ended
September 30, 2005, from $75,000 in the nine months ended September 30, 2004, as a result of
increased sales of human tissue treated with the Clearant Process ® . We
expect licensing revenue to continue to increase as market acceptance of the Clearant
Process ® becomes greater. We also anticipate beginning to receive revenue
from our sterilization service. Revenues from contract research and grants declined 51% to
$298,000 in the nine months ended September 30, 2005, from $614,000 in the same nine months last
year. This decline largely resulted from a non-recurring $250,000 milestone payment from a single
customer in the nine months ended September 30, 2004. We expect contract research and grant
revenue to continue to decrease as our customers move towards licensing activities and
sterilization services.
Sales, General and Administrative Expenses
Sales, general
and administrative expenses decreased 13% to $5,839,000 for the nine months
ended September 30, 2005, from $6,699,000 for the nine months ended September 30, 2004. The
decrease was principally due to decreased expenses of approximately $794,000 associated with
outside legal and marketing expenses and $62,000 associated with salary related expenses as
compared to the same period last year. We expect our sales, general and administrative expenses to
increase gradually as we increase our efforts in the commercialization of the Clearant
Process ® through an increase in the sales force and market coverage.
Research and Development Expenses
Research and development expenses decreased 57% to $1,727,000 for the nine months ended
September 30, 2005, from $3,996,000 for the nine months ended September 30, 2004. This decrease was
largely a result of reduced research and development personnel-related costs during the nine months
compared to the same period in 2004. Throughout the latter part of 2004 and during the first
quarter of 2005, we reduced our R&D personnel and related expenses as the principal research and
development required to support the Clearant Process ® in the tissue market
was substantially
3
complete. We anticipate we will continue to incur research and development costs,
primarily for non-tissue products, but at a reduced rate, as a significant amount of R&D for tissue
has been completed.
Stock-based Compensation
We incurred $503,000 in stock-based compensation for the nine months ended September 30, 2005,
related to common stock and options granted to non-employees compared to $79,000 for non-employee
stock options for the nine months ended September 30, 2004. This increase was due to the issuance
of common stock and options to outside consultants for services rendered during the period. From
time to time, we may issue common stock to consultants for services rendered.
Net Interest Expense
Net interest expense increased to $1,786,000 for the nine months ended September 30, 2005,
compared to net interest expense of $174,000 for the nine months ended September 30, 2004. This
increase was primarily the result of increased interest expense associated with bridge loan
borrowing from April 2004 through March 31, 2005.
Preferred Stock Dividend and Financing Costs
Preferred stock dividend and financing costs increased to $2,161,000 for the nine months ended
September 30, 2005, compared to $1,215,000 for the nine months ended September 30, 2004,
respectively. The increase was principally due to a $2,100,000 deemed preferred dividend as a
result of our exchanging 1.5 million shares of common stock to preferred stockholders of Clearant
in order to consummate the March 31, 2005 merger, partially offset by 2004 preferred dividends in
the amount of $1,203,000. As of September 30, 2005, there was no outstanding preferred stock.
Liquidity and Capital Resources
Net cash used in operating activities was $8,848,000 for the nine months ended September 30,
2005, compared to $7,552,000 for the nine months ended September 30, 2004. During the nine months
ended September 30, 2005, cash used by operations resulted in a $7,950,000 net loss and a
$2,364,000 decrease in accounts payable and accrued liabilities, primarily employee related.
Significant non-cash adjustments to operating activities for the nine months ended September 30,
2005, included depreciation and amortization expense of $380,000, non-cash charges of $503,000 for
stock-based compensation, a non-cash gain on extinguishment of debt of $1,290,000, and non cash
interest expense of $1,786,000.
Our net cash used in investing activities was $164,000 for the nine months ended September 30,
2005 compared to net cash provided by investing activities of $2,984,000 for the nine months ended
September 30, 2004. Our investing activities consist primarily of intellectual property
expenditures and investment purchases and proceeds from marketable securities. Compared to the
first nine months of 2004, there were no marketable securities purchases or disposals during the
nine months ended September 30, 2005.
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 $10,931,000 for the
nine months ended September 30, 2005, compared to net cash provided by financing activities of
$5,993,000 for the nine months ended September 30, 2004. Cash provided by financing activities for
the nine months ended September 30, 2005 consisted of $11,266,000 in net proceeds from issuance
of convertible notes and sales of common stock, primarily in connection with the merger, leaving a
balance of approximately $2,083,000 in cash and cash equivalents at September 30, 2005.
We have been unprofitable since our inception and we expect to incur additional operating
losses for at least the next twelve months as we incur expenditures on sale and marketing,
commercial operations, 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 or 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 time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other
4
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. We expect to continue to incur negative cash flows and
net losses for at least the next twelve months.
In November 2005, the Company closed a private placement of approximately $12 million in gross
proceeds through the sale of common stock and warrants to purchase shares of common stock. Based
upon our current plans, we believe that our existing capital resources will be sufficient to meet
our operating expenses and capital requirements for at least the next twelve months. However,
changes in our business strategy, technology development or marketing plans or other events
affecting our operating plans and expenses may result in the expenditure of existing cash before
that time. If this occurs, our ability to meet our cash obligations as they become due and payable
will depend on our ability to sell securities, borrow funds or some combination thereof. We may not
be successful in raising necessary funds on acceptable terms, or at all.
We may seek to raise additional funding through public or private financing or through
collaborative arrangements with strategic partners. We may also seek to raise additional capital
through public or private placement of shares of equity securities, in order to increase the amount
of our cash reserves on hand.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various
expirations through 2007. The future minimum lease payments under these leases and other
contractual obligations as of September 30, 2005 are as follows ($ in 000s):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
1 3 years |
|
|
3 5 years |
|
|
5 years |
|
Operating lease obligations |
|
$ |
655 |
|
|
$ |
560 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
655 |
|
|
$ |
560 |
|
|
$ |
95 |
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of September 30, 2005, 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 licensing fees, performance milestones
and contract research activities, with additional revenues generated from government grants.
We 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 ® . We recognize
licensing revenue
5
when a customer sells products incorporating the Clearant
Process ® . 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.
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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123R). The statement
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees. The statement eliminates the alternative method of
accounting for employee share-based payments previously available under Accounting Principles Board
(APB) Opinion No. 25 (APB 25) and SFAS 123R. The statement is effective for the Company beginning
in the quarter ended September 30, 2005. In April 2005, the Securities and Exchange Commission
amended the compliance dates to allow companies to implement SFAS 123R at the beginning of fiscal
2006. We are currently evaluating the provisions of SFAS 123R and its effect on our financial
statements. We expect the effect of adopting this statement will be to increase the amounts
reported as stock-based compensation expense in the future.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS 153),
an amendment to APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29). SFAS 153
eliminates certain differences in the guidance in APB 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The amendment to APB 29
eliminates the fair value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. We do not expect adoption of SFAS 153 to have a material impact on our financial statements.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47), which clarifies the meaning of the term conditional asset
retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations (SFAS 143)
and clarifies when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. This interpretation is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year
companies). Retrospective application of interim financial information is permitted but is not
required. We do not expect adoption of FIN 47 to have a material impact on our financial
statements.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections (SFAS 154)
an amendment to APB Opinion No. 20, Accounting Changes (APB 20), and SFAS 3, Reporting
Accounting Changes in Interim Financial Statements (SFAS 3) though SFAS 154 carries forward the
guidance in APB 20 and SFAS 3 with respect to accounting for changes in estimates, changes in
reporting entity, and the correction of errors. SFAS 154 establishes new standards on accounting
for changes in accounting principles, whereby all such changes must be accounted for by
retrospective application to the financial statements of prior periods unless it is impracticable
to do so. SFAS 154 is effective for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005, with early adoption permitted for changes and corrections made
in years beginning after May 2005. We do not currently anticipate making accounting changes other
than those mandated by the adoption of new accounting pronouncements.
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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, 2005, 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.
ITEM 4. Controls and Procedures
Evaluation of Disclosure 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.
Internal Control over Financial Reporting
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.
Since our public float at the end of our third quarter of fiscal year 2005 is greater than $75
million, we will be required to comply with section 404 of the Sarbanes-Oxley Act (section 404) by
the end of fiscal year 2005. In the second quarter of fiscal 2005, we began implementation of our
project to document and test our internal control procedures in order to satisfy the requirements
of section 404. We have engaged a third party consulting firm to assist us in this effort. We are
currently in the documentation phase of the project. We have not yet identified any deficiencies
in internal control that would constitute a material weakness and there have not yet been
significant changes in our internal control over financial reporting as a result of our
documentation efforts. However, as we complete the documentation and testing of internal controls
there may be changes to our internal control structure in order to comply with section 404.
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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 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, 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.
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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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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competition among addiction treatment centers, |
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anticipated trends and conditions in the industry in which we operate, including regulatory changes, |
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development of new treatment modalities, |
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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
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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 14, 2005 |
By: |
/s/ ALAIN DELONGCHAMP
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Alain Delongchamp |
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Chief Executive Officer |
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Date: November 14, 2005 |
By: |
/s/ JON GARFIELD
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Jon Garfield |
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Chief Financial Officer |
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