Clearant, Inc.
As filed with the Securities and Exchange Commission on September 27, 2007
Registration No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CLEARANT, INC.
(Name of small business issuer in its charter)
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Delaware
(State of incorporation)
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2836
(Primary Standard Industrial
Classification Code Number)
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91-2190195
(I.R.S. Employer Identification No.) |
1801 Avenue of the Stars, Suite 435
Los Angeles, California 90067
(310) 479-4570
(Address and telephone number of principal executive offices and principal place of business)
Jon M. Garfield
Chief Executive Officer and Chief Financial Officer
Clearant, Inc.
1801 Avenue of the Stars, Suite 435
Los Angeles, California 90067
(310) 479-4570
(Name, address and telephone number of agent for service)
With copies to:
Edward T. Schultz, Esq.
Dreier Stein & Kahan, LLP
The Water Garden
1620 26th Street, Sixth Floor, North Tower
Santa Monica, California 90404
(424) 202-6050
Approximate date of proposed sale to the public: As soon as practicable after the effective date
of this registration statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the Securities Act)
check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of |
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Proposed Maximum |
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Amount of |
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Securities to be Registered(1) |
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Amount to be Registered(1) |
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Aggregate Offering Price(2) |
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Registration Fee |
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Common stock, $0.0001 par value per share |
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46,034,338 |
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$0.635 |
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$898.00 |
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(1) |
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This registration statement relates to the resale by the selling stockholders named
herein of shares of common stock. Pursuant to Rule 416 under the Securities Act, this registration
statement also covers such additional number of shares of common stock as may be issuable upon a
stock split, stock dividend or similar transaction. |
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Estimated solely for the purpose of computing the amount of the registration fee
pursuant to Rule 457(c) of the Securities Act, based on the average of the high price, $0.75, and
low price, $0.52, reported in the consolidated reporting system as of the close of business on
September 26, 2007. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act, or until this registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
The information in this prospectus is not complete and may be changed. These securities may not be
sold until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated September 27, 2007.
PROSPECTUS
CLEARANT, INC.
1801 Avenue of the Stars, Suite 435
Los Angeles, California 90067
(310) 479-4570
46,034,338 Shares of Common Stock
This prospectus is part of a registration statement that we have filed with the Securities and
Exchange Commission (the SEC). Clearant, Inc., a Delaware corporation (the Company) is
registering 46,034,338 shares of common stock (the Shares). This prospectus relates to the offer
for resale, from time to time, by the selling stockholders named in this prospectus (the
Investors) of up to an aggregate of 46,034,338 shares of our common stock, par value $0.0001 per
share. Shares of our common stock are currently quoted on the over-the-counter bulletin board
market (the OTCBB).
The Shares were originally issued and sold to the Investors at a price of $0.025 per share in
private placement transactions on April 3, 2007 and August 3, 2007. The stock purchase agreements
between the Company and the Investors provided the Investors with full ratchet antidilution
protection for subsequent sales of common stock at a price lower than that paid by the Investors.
The antidilution provision was triggered by a subsequent sale of common stock on August 3, 2007 at
a price of $0.005. As a result, the Investors investments were re-valued and each Investor was
issued that number of additional Shares, which when added to the originally purchased Shares
reflect a purchase price of $0.005 per share. The Investors were also granted customary demand
registration rights, obligating us to use our best efforts to file this registration statement in
respect of the Shares. At anytime after the effectiveness of this registration statement, the
Investors may sell the Shares on the OTCBB or on any other market or stock exchange on which our
common stock may be traded or listed at the time of sale. They may also sell Shares in block
transactions or private transactions or otherwise, through brokers or dealers. These sales will be
made either at market prices prevailing at the time of sale or at negotiated prices. Brokers or
dealers may act as agents for the selling stockholders or may purchase any of the Shares as
principals. If brokers or dealers purchase Shares as principals, they may sell such Shares at
market prices prevailing at the time of sale or at negotiated prices. The Company will not receive
any of the proceeds from the sale of the Shares.
Our common
stock is currently listed on the OTCBB under the symbol
CLRA. The bid and ask
price for Shares of our common stock on September 26, 2007 were
$0.75 and $0.55 per share,
respectively, based upon bids that represent prices quoted by broker-dealers on the OTCBB. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not represent actual transactions.
THE SHARES DESCRIBED HEREIN INVOLVE A HIGH DEGREE OF RISK. FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS ASSOCIATED WITH THE PURCHASE OF THE SHARES OFFERED HEREBY, SEE RISK FACTORS
BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
These securities have not been approved or disapproved by the SEC or any state securities
commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is September ___, 2007.
TABLE OF CONTENTS
YOU MAY ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR THAT WE HAVE REFERRED YOU TO.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY COMMON STOCK IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE IN CONNECTION
WITH THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED BY
REFERENCE TO THIS PROSPECTUS IS CORRECT AS OF ANY TIME AFTER ITS DATE.
PROSPECTUS SUMMARY
CLEARANT, INC.
1801 Avenue of the Stars, Suite 435
Los Angeles, California 90067
(310) 479-4570
This Prospectus Summary Is Qualified In Its Entirety By The More Detailed Information Appearing
Elsewhere In This Prospectus. It does not contain all of the information that you should consider
when investing in our common stock. You should read this entire prospectus carefully, especially
Risk Factors and our financial statements and related notes. You should rely only on the
information contained or incorporated by reference in this prospectus. We have not authorized
anyone to provide you with different information. As used in this prospectus, the terms Clearant,
Company, we, our and like references mean Clearant, Inc., a Delaware corporation.
SUMMARY INFORMATION
Our Company
We acquire and develop our pathogen inactivation technology, the Clearant Process®, and market it
to producers of biological products, most notably devitalized musculoskeletal tissue allograft
implants (tissue).
We develop and market a proprietary pathogen inactivation technology that reduces the risk of
contamination to biological products by inactivating a broad range of pathogens. The Clearant
Process® is based on exposing a biological product to gamma-irradiation under specialized,
proprietary or patented conditions that deliver a predetermined amount of radiation to inactivate a
desired level of pathogens, thereby reducing the risk of contamination, while preserving the
functionality and integrity of the treated product. The Clearant Process® is designed to:
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Inactivate a broad range of known pathogens irrespective of size, origin or structure; |
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Achieve sterility, in some cases with margins of safety greater than that of a medical
device; |
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Be used in either intermediate or final stages of production; |
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Protect the mechanical and biological properties of the biological product being
treated; and |
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Be applied to a product after it has been sealed into its final package. |
To date, we have entered into a total of ten agreements with customers to utilize the Clearant
Process® with their products. Of these agreements, six are licensing agreements with tissue banks
and one is an agreement with a manufacturer of recombinant protein products, in return for
milestone payments and royalties on end-product sales. Through June 2007, four of these licensees
have launched tissue products that were treated using the Clearant Process®, but are not treating
all of their tissue with the Clearant Process®. Additionally, in September 2005, we launched a new
sterilization service (the Clearant Sterilization Service or Sterilization Service) which
allows customers to send ready for sterilization tissue to our facility near Chicago, Illinois to
be irradiated under Clearant Process® conditions by us. Through 2007, we have signed four such
Sterilization Service agreements with tissue banks. Many of the companies have not yet implemented
the Clearant Process®, and we cannot estimate when or if they will do so.
Based on these license and Sterilization Service results we implemented a plan, which we believe
will 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.
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Our principal executive offices are located at 1801 Avenue of the Stars, Suite 435, Los Angeles,
California 90067, telephone (310) 479-4570. We maintain a Web site at www.clearant.com. The content
of this site does not constitute a part of this prospectus.
Recent Developments
On August 3, 2007, after recommendation by Clearants board of directors, the holders of a majority
of Clearants common stock approved an amendment to the Companys Certificate of Incorporation to
permit Clearant to effect a reverse stock split of its common stock. On August 22, 2007, the
Company filed an Amended and Restated Certificate of Incorporation in connection with the 1-for-14
reverse stock split. Under the Amended and Restated Certificate of Incorporation, each outstanding
fourteen shares of the Companys common stock was combined and converted into one share of common
stock, effective at the close of business on August 23, 2007. The Amended and Restated Certificate
of Incorporation was attached to our Current Report on Form 8-K filed with the SEC on August 24,
2007.
On September 6, 2007, NASDAQ approved the Companys 1-for-14 reverse stock split, effectively
changing the Companys trading symbol from CLRI to CLRA. Clearants common stock will continue to
trade on the OTCBB on a split-adjusted basis, under this new stock symbol.
On September 13, 2007, Maurice J. DeWald was appointed to our board of directors and was issued
400,000 stock options in connection with his appointment. Maurice J. DeWald is Chairman and Chief
Executive Officer of Verity Financial Group, Inc., a private financial advisory firm that he
founded in 1992. From 1962-1991, Mr. DeWald was employed by KPMG LLC, a Big Four accounting and tax
consulting firm, where he served at various times as director, and as the Managing Partner of the
Orange County, Chicago and Los Angeles offices. Mr. DeWald is a director of Integrated Healthcare
Holdings, Inc., Advanced Materials Group, Inc., NNN Healthcare/Office REIT, Inc. and fileSCAN, Inc.
He also sits on the Advisory Council of the University of Notre Dame Mendoza School of Business.
Mr. DeWald is a past Chairman and director of United Way of Greater Los Angeles. Mr. DeWald
received a B.B.A. degree from the University of Notre Dame. He is also a Certified Public
Accountant.
Summary Terms of the Offering
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Securities Offered by
Selling Stockholders:
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46,034,338 shares of Clearant common stock, par value $0.0001. |
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The selling stockholders may sell any or all of the Shares
subject to this prospectus from time to time and may also
decide not to sell any or all of the Shares they are allowed
to sell under this prospectus. The selling stockholders will
act independently in making decisions with respect to the
timing, manner and size of each sale. Furthermore, the
selling stockholders may enter into hedging transactions with
broker-dealers in connection with distributions of Shares or
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Common Stock
Issued and
Outstanding:
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As of September 26, 2007, 48,957,445 shares of our common
stock are issued and outstanding. |
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Use of Proceeds:
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We will not receive any proceeds from the sale of the Shares
covered by this prospectus. |
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OTC Bulletin Board
Symbol:
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CLRA |
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RISK FACTORS
RISKS AND UNCERTAINTIES IN ADDITION TO THOSE WE DESCRIBE BELOW, THAT MAY NOT BE PRESENTLY KNOWN TO
US, OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL, MAY ALSO HARM OUR BUSINESS AND OPERATIONS. IF ANY
OF THESE RISKS OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED,
THE PRICE OF OUR COMMON STOCK COULD DECLINE, AND FUTURE EVENTS AND CIRCUMSTANCES COULD DIFFER
SIGNIFICANTLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS
PROSPECTUS.
Risks Related to Our Business
Our limited operating history may make it difficult to evaluate and forecast our business to date,
revenue potential, and project our future viability.
Clearant, Inc. was incorporated in April 1999 in order to acquire certain assets of PureSource,
Inc. and Sterways Pioneer, Inc., including patents that comprise a portion of the Clearant
Process®. Prior to the second quarter of 2004, Clearant was strictly a research and development
company. We are now in the early stage of operations and development, and have only a limited
operating history on which to base an evaluation and forecast of our business, revenue potential,
and prospects. In addition, our operations and developments are subject to all of the risks
inherent in the growth of an early stage company. We may not succeed given the technological,
marketing, strategic and competitive challenges we will face. The likelihood of our success must be
considered in light of the expenses, ability to increase revenues, maintain existing revenues,
difficulties, complications, problems and delays frequently encountered in connection with the
growth of a new business, the continuing development of new technology, and the competitive and
regulatory environment in which we operate or may choose to operate in the future. We have
generated limited revenues to date, and there can be no assurance that we will continue to achieve
the historical revenue levels, grow revenues or be able to successfully develop our products and
penetrate our target markets. In addition, as we attempt to grow revenue, it is likely that the
Company will experience monthly and quarterly revenue fluctuations. Further, it is likely that
significant losses will be incurred through at least the end of the year and probably beyond, as we
incur significant expenses associated with the further development, marketing and commercialization
of the Clearant Process®. Our current cash burn rate is approximately $0.2-$0.4 million per month.
If we do not raise any additional funds, our revenues do not increase and we do not reduce our
expenses, our cash reserves will be exhausted at approximately the end of 2007 or before if the
Company isnt able to successfully negotiate with vendors.
We have a history of and expect to continue to generate substantial losses, may not become
profitable and will need to expand our licensing of the Clearant Process® and sterilization
services to generate significant revenues.
To date, we have generated only limited revenues, and have had limited marketing activities. We
expect that we will have significant operating losses and accumulated losses and will record
significant net operating cash outflows at least through the end of 2007 and possibly beyond.
Our ability to achieve meaningful near-term revenues is heavily dependent on our current effort to
prove the efficacy of the Clearant Process® in the tissue market and the successful
commercialization of such technology. No assurances can be made that we will be successful in doing
this. In addition, if the Company begins to be a processor representative for certain tissue of its
customers, our ability to assist in the distribution of such tissues and recover the purchasing and
operating costs will be meaningful in our ability to achieve revenues and control expenses. Our
longer term financial performance, on the other hand, is heavily dependent on timely and cost
effectively proving the efficacy of the Clearant Process® in other markets. We may not successfully
prove the efficacy of our pathogen inactivation processes for specific products according to our
current development schedule, if at all.
Even if we successfully prove the efficacy of the Clearant Process® for specific products, there
can be no assurance that we will be able to successfully market that process to third party
manufacturers or that our marketing efforts will result in significant revenues. Various other
factors could have material, negative impacts on our results of operations, including difficulties
encountered by third parties in obtaining governmental approvals for products which are treated
with our pathogen inactivation processes; adverse changes in government regulations; the timing of
the introduction of new processes; competitive forces within the current and anticipated future
markets served by us; and general economic conditions. Fluctuations in results may also occur
depending on differences in the timing of, and the time period between, our expenditures on the
development and marketing of our processes and the receipt of revenues.
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The Clearant Process® is at an early stage of commercial development and, if we are not able to
clinically validate claims of our effectiveness in our target markets and obtain widespread
commercial acceptance of the Clearant Process® in our target markets, we may not be able to grow or
attain profitability.
Our growth and profitability will depend in large part on our unproven ability to:
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Continue to successfully demonstrate the efficacy of the Clearant Process® in
tissue; |
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Successfully demonstrate the efficacy of the Clearant Process® in sterilizing
other biological products, including plasma protein, recombinant proteins and
medical devices; |
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Successfully market and commercialize the Clearant Process®. |
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Enter into additional license, sterilization service and processor
representative agreements with manufacturers and providers of biological products; |
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Develop and protect our intellectual property rights; |
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Complete product-specific development of the Clearant Process® for our target
markets; and |
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Obtain (or have the users of the Clearant Process® obtain) required product
regulatory approvals. |
Research and development and commercialization efforts may not be successful or, if they are, the
Clearant Process® may not obtain market acceptance among major manufacturers and providers of
tissues and other biological products. The Company is currently conducting a multi-center clinical
study at eight separate facilities across the U.S. The clinical study tracts the post-operative
results of patients who received tissue that had been treated with the Clearant Process®. Study
evaluations include failure rate, range of motions, and joint effusion (swelling) among other
metrics which had been previously established by the clinical study committee prior to the start of
the study. The twelve-month outcome results of this study are favorable. The occurrence of
complications, stability and strength in the anterior cruciate ligament reconstructions using
tissue treated with the Clearant Process® are comparable to the patients non-operated
contralateral knee. Notwithstanding such current clinical results, the Company has received an
indication from a single site, both participating in such multi-center study and with prior
clinical data, that the clinical outcomes are significantly more adverse than the current data
collected from the other multi-center sites. The Company is currently collecting, assessing and
investigating such adverse data to understand this discrepancy. If the data and results from the
multi-center are negative, it would materially impact the adoption of the Clearant Process® and our
revenues.
The Company is experiencing material cash flow constraints.
The Company is past due on many of its accounts with vendors, suppliers, distributors, sales
representatives, and other service providers. The Company is in discussions with many of these
accounts and is actively trying to resolve these past due amounts. No assurances can be made that the
Company will be successful in reaching a settlement. Furthermore, many of these outstanding
balances are with critical vendors and no assurances can be made that these accounts will continue
to conduct business with the Company on similar terms or at all. If this happens, it could
materially impact operations and revenue.
The Company utilizes Independent Sales Representatives and Distributors.
The Company utilizes a strategy to contract with independent distributors and sales
representatives. These sales teams are not Company employees and are independent contractors, and
in some cases sell many other product lines. The Company cannot give any assurances that these
sales teams will continue to market Clearant products or how much time and effort they will devote
to the Company versus other product lines. Further, the Company expects other products and
companies to compete for their attention and time. Changes in product offerings or focus by these
teams could lead to material fluctuations in revenue and unpredictability in revenue.
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Achieving market acceptance for the Clearant Process® will depend on our ability to demonstrate the
efficacy of the Clearant Process® in our target markets, as well as how the Food and Drug
Administration applies the Good Tissue Practice guidelines issued on November 18, 2004 which became
effective on May 25, 2005 and the Task Force on Human Tissue Safety created on August 30, 2006.
We currently have a limited sales force and may need to hire additional sales and business
development personnel. Our marketing success will depend, to a significant degree, on our unproven
ability to successfully demonstrate the efficacy of the Clearant Process® in our target markets, on
the willingness of potential users of the Clearant Process® to adopt the Clearant Process® and on
the markets willingness of doctors and patients to utilize Clearant Process®-treated products. We
may not be successful in our marketing endeavors or, if we are, we may not be able to adequately,
timely and profitably market our pathogen inactivation process.
In addition, adoption of the Clearant Process® by potential users may depend, in part, on how the
Good Tissue Practice or GTP regulations issued by the Food and Drug Administration or FDA on
November 18, 2004, effective on May 25, 2005, are applied to tissue processors utilizing the Task
Force created on August 30, 2006. The requirements may not provide sufficient incentive for tissue
processors to adopt technologies that can provide validation for sterility label claims, the
Clearant Process® may not prove compatible with the GTP regulations, or the FDA may, as a result of
normal inspections of tissue processors, require additional data to allow customers to claim
sterility. If the FDA requires additional data from our customers to support label claims of
sterility, they may not be able to develop it in a timely and cost-effective manner, or at all. The
inability of our customers to obtain or maintain validation of a sterility claim, or the failure to
develop additional data if it is required, could materially impact our business, financial
condition and results of operations.
Our success will depend on our ability to retain our managerial personnel and to attract additional
personnel.
Our success will depend largely on our ability to attract and retain managerial personnel.
Competition for desirable personnel is intense, and we cannot guarantee that we will be able to
attract and retain the necessary staff. Furthermore, we do not currently have employment contracts
with our key employees, except for an employment agreement with our Chief Executive Officer, Jon
Garfield.
The loss of members of managerial, sales or scientific staff could have a material adverse effect
on our future operations and on successful development of the Clearant Process® for our target
markets.
We also collaborate with scientists and physicians at academic and other institutions, but these
scientists and physicians may have other commitments or conflicts of interest that limit their
availability. The failure to maintain our management, sales and scientific staff and to attract
additional key personnel could materially adversely affect our business, financial condition and
results of operations. Although we intend to provide incentive compensation to attract and retain our key personnel, we cannot guarantee that
these efforts will be successful. We do not carry key man life insurance for any of our
personnel.
We may need to expand our finance, administrative, scientific, sales and marketing, and operations
staff, and it is currently anticipated that we will need to hire an employee for the product
development of tissues, other than musculoskeletal. There are no assurances that we will be able to
make such hires. In addition, we may be required to enter into relationships with various strategic
partners and other third parties necessary to our business. Planned personnel may not be adequate
to support our future operations, management may not be able to hire, train, retain, motivate and
manage required personnel or management may not be able to identify, manage and exploit existing
and potential strategic relationships and market opportunities. If we fail to manage our growth
effectively, it could have a material adverse effect on our business, results of operations and
financial condition.
We need to develop our financial and reporting processes, procedures and controls to support our
anticipated growth.
We currently have only a limited number of financial operations personnel and have not historically
invested significantly in our financial and reporting systems. To comply with our public reporting
requirements, and manage the anticipated growth of our operations and personnel, we will be
required to improve existing, or implement new, operational and financial systems,
processes and procedures, and to expand, train
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and manage our employee base. Our current and planned systems,
procedures and controls may not be adequate to support our future operations.
The laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley
Act of 2002 and rules adopted or proposed by the Securities and Exchange Commission (the SEC) and
the NASD will result in increased costs to us as we evaluate the implications of any new rules and
respond to their requirements. New rules could make it more difficult or more costly for us to
obtain certain types of insurance, including director and officer liability insurance, and we may
be forced to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. We cannot predict or estimate the amount of the additional
costs we may incur or the timing of such costs to comply with any new rules and regulations, or if
compliance can be achieved.
The Clearant Process® has been commercialized only in the tissue market and our future success
depends on our ability to successfully commercialize the Clearant Process® for use in our other,
larger target markets.
The Clearant Process® must be optimized on an individual basis for each product or class of
products on which it will be used for pathogen inactivation. While the Clearant Process® has been
commercialized for the tissue market, it has not been optimized for all of our target products and
we face the risks of failure inherent in developing new technologies. It may not be possible to
optimize or commercialize the Clearant Process® for any of our target products. The inability to
optimize or commercialize the process in any given case may adversely affect the marketplaces
confidence in the effectiveness of the Clearant Process® in such case or in any other case.
We, and our potential customers, may have to conduct significant additional research and animal or
human testing before the Clearant Process® can be used by other third parties for a significant
number of products. Clinical trials are expensive and have a high risk of failure. If our customers
are unable or unwilling to fund these trials, or if these trials fail, our ability to generate
revenues will be materially and adversely impacted.
To date, there has been only limited use and testing of Clearant Process®-treated products in
humans and, while early indications have been favorable, these limited initial results may not be
statistically significant or predictive of future results, either for the tissue market or new
products which are treated by the Clearant Process® in the future. Our multi-center clinical study
across the U.S. tracks the post-operative results of patients who received tissue that had been
treated with the Clearant Process®. Study evaluations include failure rate, range of motions, and
joint effusion (swelling) among other metrics which had been previously established by the clinical
study committee prior to the start of the study. The twelve-month outcome results of this study are favorable. Notwithstanding such current clinical results, we have
received an indication from a single site, both participating in such multi-center study and with
prior clinical data, that the clinical outcomes are significantly more unfavorable than the current
data collected from the other multi-center sites. Although we investigated the adverse data to
understand this discrepancy and the results were favorable to the Company, if additional data and
results from the multi-center prove to be negative, it would materially impact the adoption of the
Clearant Process® and our success.
To compete effectively with other pathogen inactivation or removal technologies, our processes must
be easy to use, compliant with regulations and cost-effective on a commercial scale. We may not be
able to achieve any of these objectives. The Clearant Process® or third-party products using it may
fail in one or more testing phases or may not attain market acceptance. Third parties may develop
superior products or have proprietary rights that preclude us from marketing the Clearant Process®.
If research and testing are not successful, the Clearant Process® will not be commercially viable,
and our business, financial condition and results of operations will be materially adversely
affected.
The success of our business will depend on our ability to develop new uses of the Clearant Process®
that can be applied cost-effectively on a commercial scale, which may in some cases require
potentially costly and time-consuming modification of the Clearant Process®.
The Clearant Process® has been used in a limited manner on a commercial scale only in the tissue
market. It may be difficult or impossible to use the Clearant Process® economically on a commercial
scale for products other than those in which the Clearant Process® currently is being used. As part
of the commercialization of the Clearant Process®, we transfer the Clearant Process® technology to
our licensees in order to allow the licensees to practice the technology and integrate the
technology into our facility or manufacturing processes. Additionally, in September
6
2005, we
launched a new sterilization service which allows tissue banks to send ready-for-sterilization
tissue to our facility near Chicago, Illinois to be irradiated under Clearant Process® conditions
by us. Under either a license agreement or sterilization service agreement the Clearant Process® is
transferred, at least in part, to the customer and such transfer process consists of providing our
developed standard procedures and supporting data, packaging specifications, supply lists,
irradiator suggestions and irradiation specifications.
To date, we have only completed development of these transfer procedures and specifications for
certain applications of the tissue processors for licenses, and not for customers under a
sterilization service agreement. We may not be able to develop appropriate procedures, packaging
and specifications for other markets and licensees without substantial additional development time
and expense, if at all.
The cost and amount of time required to transfer the technology to a customer is dependent upon
several factors, including the customers current manufacturing processes, facilities, personnel,
product and packaging. In addition, as a result of limitations associated with product-specific
requirements for particular applications of the Clearant Process® or otherwise, we may face future
situations which could require greater cost and time than anticipated to transfer the technology or
where it is unable to effectively transfer the technology at all for use on a commercial scale.
In such case, we would be required to modify the parameters pursuant to which the Clearant Process®
is applied to the applicable product, which could lead to the need for additional testing and
clinical trials by the third party user. If we were required to modify the Clearant Process®, our
development costs would increase and our programs could be delayed significantly, with a similar
delay in receipt of potential licensing and sterilization service revenues. In any such
circumstance, we may not be able to successfully modify the Clearant Process® at all for use on a
particular product on a commercial scale. If we are unable to timely and cost-effectively develop
successful technology transfer procedures for our target markets, including appropriate procedures,
packaging and specifications, our ability to market and license the Clearant Process® and to
generate licensing and sterilization service revenues, and our business, financial condition and
results of operations, will be adversely affected.
The success of our business will depend on our ability to develop and protect our intellectual
property rights, which could be expensive, as well as our ability to conduct our business without
infringing the intellectual property rights of others.
The Clearant Process® and our other technologies will be protected from unauthorized use by others
only to the extent that they are covered by valid and enforceable patents or effectively maintained
as trade secrets. As a result, our success depends in part on our ability to obtain patents,
protect trade secrets, operate without infringing upon the proprietary rights of others and prevent
others from infringing on our proprietary rights. The steps we take to prevent misappropriation of
the Clearant Process® and our other technologies may not be effective, particularly in foreign
countries where laws or law enforcement practices may not protect our proprietary rights as fully
as in the United States.
We cannot be certain that our patents or patents that we license from others will be enforceable
and afford protection against competitors. Our patents or patent applications, if issued, may be
challenged, invalidated or circumvented. Our patent rights may not provide us with proprietary
protection or competitive advantages against competitors with similar technologies. Even if our
patents are valid, we cannot guarantee that competitors will not independently develop alternative
technologies that duplicate the functionality of our technology. Due to the extensive time required
for development, testing and regulatory review of customers use of our processes, our patents may
expire or remain in existence for only a short period following commercialization. This would
reduce or eliminate any advantage of the patents. In addition, if third parties become aware of
parts of our technology that are covered by pending patent applications, we will be unable to
prevent those parties from using such information until the patents issue. This could delay
commercialization of the Clearant Process®.
We also cannot be certain that we were the first to make the inventions covered by each of our
issued patents or pending patent applications or that we were the first to file patent applications
for such inventions. In that case, the affected patent or patent application would not be valid,
and we may need to license the right to use third-party patents and intellectual property to
continue development and marketing of our processes. We may not be able to acquire such required licenses on acceptable terms, if at all. If we do not obtain such licenses, we may
7
need to design
around other parties patents or we may not be able to proceed with the development, manufacture or
licensing of our processes.
Although we are not aware of any interfering patents or other intellectual property held by others,
such intellectual property may impact our ability to operate in the market segments on which we are
currently focused or may target in the future. Further, we have not conducted a freedom to
operate search with respect to our intellectual property, which is a comprehensive search of
existing patents and pending applications that would (or in the case of pending patent
applications, if granted) prohibit us from protecting our intellectual property. If there are
interfering patents or other intellectual property and we are unable to license such interfering
patents or other intellectual property on commercially reasonable terms or to modify the Clearant
Process® in a cost-effective manner that does not (i) infringe on such intellectual property and
(ii) materially impact the viability of the Clearant Process®, our business, results of operations
and financial condition could be adversely affected.
We may face litigation to defend against claims of infringement, assert claims of infringement,
enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of
others proprietary rights. Patent and other intellectual property litigation is costly. In
addition, we may be required to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine the priority of inventions relating to our patent applications.
Determining the scope of our competitors rights could be costly in terms of our scientists and
managements time and resources.
Furthermore, we may rely on trade secret law to protect technologies and proprietary information
that we cannot or have chosen not to patent. Trade secrets, however, are difficult to protect.
Although we attempt to maintain protection through confidentiality agreements with necessary
personnel, contractors and consultants, we cannot guarantee that such contracts will not be
breached. Further, confidentiality agreements may conflict with other agreements which personnel,
contractors and consultants signed with prior employers or clients. In the event of a breach of a
confidentiality agreement or divulgence of proprietary information, we may not have adequate legal remedies to maintain our trade secret
protection. Litigation to determine the scope of intellectual property rights, even if ultimately
successful, could be costly and could divert managements attention away from business.
We may be subject to products liability with respect to products which are treated with the
Clearant Process® under license, processor representative or sterilization service agreements and
which cause harm to others or damage to products, including related and costly litigation or other
proceedings, and our products liability insurance may not provide adequate coverage and may not be
available in the future.
We are exposed to potential liability risks inherent in the testing, marketing, licensing,
distributing and treating of biotherapeutics and tissue products treated with the Clearant
Process®. We may be liable if it is determined that any of its pathogen inactivation processes, or
the products of any third party which utilize those processes, causes injury, illness or death.
Furthermore, to the extent that a pathogen inactivation process adversely alters a product and such
causes injury, illness, death or damage to the product, we may be liable. The regulatory compliance
of pathogen inactivation levels is measured by the number of pathogens that are inactivated. Thus,
it is possible that biological products heavily contaminated with pathogens could be treated by
customers with the Clearant Process® and achieve levels of pathogen inactivation sufficient to meet
regulatory standards for sterilization or viral inactivation, yet still contain sufficient
pathogens to be harmful to humans.
We have obtained product liability insurance covering the commercial introduction of any product
that utilizes our pathogen inactivation processes, but we do not know whether we will be able to
maintain such insurance on acceptable terms, if at all. Any insurance we have or may obtain in the
future may not provide adequate coverage against potential liabilities. A liability claim,
regardless of merit or eventual outcome, and regardless of whether the user of the Clearant
Process® complied with our standards and procedures for its proper use, could affect manufacturers
and the publics perception of the safety and efficacy of the Clearant Process®, delay, impede or
otherwise reduce the licensing and use of the Clearant Process® by third parties and materially
adversely affect our business, results of operation and financial condition.
In addition, successful product liability claims made against competitors could cause a perception
that we are also vulnerable to similar claims and could negatively affect public perception of the
technology and thus third parties willingness to use the Clearant Process®, and thus
8
adversely
affect our business, results of operation and financial condition.
We face environmental and other liabilities related to certain hazardous materials used in our
operations.
Our research and development involves the controlled use and transport of hazardous materials,
including hazardous chemicals and pathogens. Accordingly, we are subject to federal, state and
local laws governing the use, handling and disposal of these materials. We may incur significant
costs to comply with additional environmental and health and safety regulations in the future.
Although we believe that our safety procedures for handling and disposing of hazardous materials
comply with regulatory requirements, we cannot eliminate the risk of accidental contamination or
injury. If an accident occurs, we could be held liable for any damages that result and could suffer
negative publicity.
If our sterilization technology is not accepted by manufacturers of biological products in our
target markets and the health care community at large, our business will suffer and we will not be
able to successfully implement our business plan.
We believe that our ability to commercialize the Clearant Process® effectively will depend on the
safety, efficacy and cost-effectiveness of the Clearant Process®, as well as the willingness of
manufacturers of biological products to adopt new pathogen inactivation technologies. We believe
that market acceptance will depend on the extent to which manufacturers and distributors of tissues
and other biological products, as well as physicians, patients and health care payers, perceive the
benefits of using the Clearant Process® and, if applicable, that such benefits outweigh any
potential additional cost. As part of our strategy to obtain wide-spread acceptance of the Clearant Process®, we have entered into, and intend to
continue to seek to enter into, sponsored research agreements with potential users of the Clearant
Process® to support research on and validation of potential applications of the Clearant Process®
to such products. While we expect that the Clearant Process®, when optimized for application to a
particular product, will be capable of inactivating a broad range of known types of pathogenic
microorganisms, a product processor or manufacturer may direct us, or may choose, not to optimize
the Clearant Process® to inactivate the broad range of known types of pathogenic microorganisms in
a particular application. If a product produced with such a process results in infections from
pathogens that were not adequately inactivated, the marketplaces overall confidence in the
Clearant Process® may be adversely affected both for that product and for other applications of the
Clearant Process®.
Even if our processes and the third party products on which they will be used receive the necessary
regulatory approvals, our processes may not achieve any significant degree of market acceptance
among biological product manufacturers, physicians, patients and health care payers. For various
reasons, such as implementation costs, ineffectiveness against all types of pathogens, differing
regulatory requirements and logistical concerns, the biological products industry has not always
integrated new inactivation technologies into their processes. Although we believe the Clearant
Process® can significantly improve the safety of tissues and other biological products, we cannot
provide assurances that our technologies will be accepted rapidly or, other than in the tissue
market, at all. If our processes fail to achieve market acceptance, we will be unable to implement
successfully our licensing strategy and our business, results of operations and financial condition
would be materially adversely affected.
We face competition from a number of companies, which may have greater resources or better
technologies than we do, and rapid changes in technology in the sterilization industry could result
in the failure of the Clearant Process® to be accepted in the marketplace or to capture market
share.
We expect the Clearant Process® to encounter significant competition. The Clearant Process® may
compete with other approaches to pathogen inactivation currently in use, as well as with future
processes that may be developed. Similarly, products that are treated with the Clearant Process®
may compete with products that are currently treated with alternative pathogen inactivation or
removal techniques, as well as with future products that may be developed. Our success will depend
in part on our ability to respond quickly to medical and technological changes through the
development and introduction of the Clearant Process® to new and existing products. Product
development is risky and uncertain, and we may not be able to develop our processes successfully.
Competitors processes, products or technologies may make the Clearant Process® obsolete or
non-competitive before we are able to generate any significant revenue. Many of our competitors or
potential competitors have substantially greater financial, human, technical, marketing and other resources than we have.
They may also have greater experience in
9
preclinical testing, human
clinical trials, process implementation and other regulatory approval procedures and have developed
substantial relationships with the small market of potential customers for the Clearant Process®.
Our ability to compete successfully will depend, in part, on our ability to attract and retain
skilled scientific personnel, develop technologically superior processes that can be implemented on
a commercial scale, develop lower cost processes, obtain patent or other proprietary protection for
our technologies and enforce those patents, obtain (or have third parties obtain) required
regulatory approvals for our processes, be early entrants to the market and market and sell our
processes, independently or through collaborations.
Several companies are developing technologies that are, or in the future may be, the basis for
products that will directly compete with or reduce the market for our pathogen inactivation
processes. Most tissue processors currently utilize chemical rinse steps or low levels of gamma
irradiation to reduce pathogens in devitalized human tissue products. Several companies are
developing or have developed other technologies or combinations of existing technologies (including
BioCleanse used by Regeneration Technologies, Inc.). Some of these technologies may have more
animal and clinical data than we do to support the efficacy of their processes. There are currently
no regulatory requirements that establish specific pathogen inactivation or sterility requirements
for these products. If tissue processors choose to maintain their current processing methods or
elect to adopt technologies other than the Clearant Process®, it could materially impact our
ability to market and earn revenue from the Clearant Process®.
For biotherapeutic products comprising protein concentrates (e.g., plasma derivatives, monoclonal
antibodies, recombinant and transgenic proteins), other technologies exist to inactivate or remove
viruses, including the application of heat, certain chemicals like solvent-detergent,
nanofiltration and partitioning during purification. Other technologies are in various stages of
research and development, including novel uses of heat and other physical processes (e.g.,
microwave and supercritical fluids), new chemical agents including photosensitizers (e.g.,
Inactine, riboflavin, psoralens), and applications of radiation other than the Clearant Process®
(e.g., broad spectrum visible light, ultraviolet light and high energy electrons). If any of these
technologies is successfully developed, it could have an adverse effect on our business, financial
condition and results of operations.
One or more of these technologies could prove to be superior to the Clearant Process® in one or
more of our target markets by virtue of being more effective, safer, more cost-effective or easier
to implement. Our prospective clients may choose alternative technologies over ours for any of
these reasons or for other reasons. If this were the case, we may not be able to successfully
market the Clearant Process® to manufacturers of biological products, which could have a material
adverse effect on our business, results of operations and financial condition.
Under our new processor representative arrangement, uncertainties regarding future health care
reimbursement exist and may affect the amount and timing of revenues.
Even though we do not receive payments directly from third-party health care payors, their
reimbursement methods and policies impact the demand for Clearant Process®-treated tissue and other
services and products. Third-party healthcare payors provide reimbursement for medical procedures
at a specified rate without additional reimbursement for tissue, services and products used in such
procedures. Our ability to act as a processors representative by providing tissue to the
marketplace and to collect payment of tissues may be particularly susceptible to third-party cost
containment measures.
Changes in the reimbursement methods and policies utilized by third-party health care payors,
including Medicare, with respect to Clearant Process®-treated tissue could have a material adverse
effect on the Company. Significant uncertainty exists as to the reimbursement status of newly
introduced health care products and services and there can be no assurance that adequate
third-party coverage will be available for us to maintain price levels sufficient for realization
of an appropriate return on our investment in developing new products.
Government, hospitals, and other third-party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new products. If adequate
coverage and reimbursement levels are not provided by government and other third-party payors for
uses of our products, market acceptance of these products would be adversely affected, which could
have a material adverse effect on our business, financial condition, results of operations and cash
flows.
10
Risks Related To Our Industry
Our ability to commercialize our technology in our target markets will depend on the rates charged
by operators of commercial gamma irradiation facilities at which the Clearant Process® will be
applied.
The use of the Clearant Process® on a commercial scale requires the use of commercial gamma
irradiation facilities. While there are a number of commercial gamma irradiation service providers
in the United States and internationally, the vast majority of facilities in the United States are
owned and operated by two commercial gamma irradiation service providers. If we, or our customers,
in the provision of the sterilization services, are not able to negotiate or maintain favorable
terms with such service providers to treat their products, our efforts to commercialize the process
with additional customers may be hindered.
Products which could utilize the Clearant Process® are in general subject to extensive regulation
by domestic and foreign government agencies, which could result in significant delays in approval,
or rejection, of the Clearant Process® for use in connection with a particular product or
significant additional costs to the manufacturers of such products, which would hinder the widespread adoption
of the Clearant Process®.
New, planned and future third-party products which could utilize the Clearant Process® and
anticipated future uses that result from the Clearant Process® are subject to extensive and
rigorous regulation by local, state, federal and foreign regulatory authorities. These regulations
are wide-ranging and govern, among other things, product development, product testing, product
manufacturing, product labeling, product storage, product pre-market clearance or approval, product
sales and distribution, product advertising and promotion. The irradiation facilities in which the
Clearant Process® will be carried out commercially are also subject to state and federal safety,
environmental and licensing requirements. Failure by manufacturers and processors to meet any of
these regulatory requirements could prevent the manufacturing or marketing of a product made with
the Clearant Process® and could adversely affect our future revenues.
The FDA and other agencies in the United States and in foreign countries impose substantial
requirements upon the manufacturing and marketing of third party products (whether currently
available or under development) which will or could utilize our processes for pathogen
inactivation. The process of obtaining FDA and other required regulatory approvals is long,
expensive and uncertain. The time required for regulatory approvals is uncertain and the process
typically takes a number of years, depending on the type, complexity and novelty of the process or
product. Third parties to whom we intend to market our pathogen inactivation processes may
encounter significant delays or excessive costs in their efforts to secure necessary approvals or
licenses. These delays would result in similar delays in our receipt of licensing revenues from
these third parties. Similarly, if third parties suffer excessive costs in connection with
obtaining required regulatory approvals, the third parties could decide not to introduce products
treated with the Clearant Process®, which would adversely affect our ability to generate licensing
revenues and thus adversely affect our business, financial condition and results of operations.
Sponsors of innovative biotherapeutic products or medical devices incorporating biological
materials must obtain biological products licenses or pre-market approvals before legally marketing
these products, regardless of whether the Clearant Process® is used in their manufacture. Future
revenues from the use of the Clearant Process® for innovative biotherapeutic products will depend
on the sponsors success and timeliness in obtaining initial FDA or other required regulatory
approval for these products.
Manufacturers of existing, approved products would have to submit supplements to their licenses or
pre-market approvals in order to incorporate the Clearant Process® into the manufacturing processes
for these products. In most cases, the FDA would have to review and approve these supplements prior
to marketing an already approved product made with the Clearant Process®. These requirements or FDA
or other regulatory delays in approving these initial applications or supplements may deter some
biological product manufacturers from using our processes. Sponsors and manufacturers that submit
initial applications or supplements may face disapproval or delays in approval that could provide
further delay or deter them from using our processes. The regulatory impact on potential customers
could slow or limit the potential market for our processes. In addition, it is unclear what affect
the FDAs adoption of the GTP regulations will have on potential customers. The GTP requirements
may cause tissue processors to delay the implementation of new processes or procedures and the
delay may impact the timing of revenue to us.
11
Some tissue products for surgical implantation have been exempted by the FDA from the requirements
for licensing new products or having manufacturing changes approved prior to implementation. While
this may expedite adoption of the Clearant Process® for these products by eliminating the
regulatory review period, distributors must nevertheless satisfy themselves of the safety and
effectiveness of tissue manufactured using the Clearant Process®, and tissue processors and
distributors must still meet the other regulatory requirements discussed below.
The products enabled by or utilizing the Clearant Process® may not receive FDA or other required
regulatory approval in a timely manner, if at all. Even if approvals are obtained, the marketing
and manufacturing of such products are subject to continuing FDA and other regulatory requirements,
such as requirements to comply with good manufacturing practices. The failure to comply with such
requirements could result in enforcement action against third party manufacturers which utilize our
processes, which could adversely affect our business because our revenues from users of the Clearant Process® would
be reduced or eliminated. Later discovery of problems with a product, manufacturer or facility may
result in additional restrictions on the product or manufacturer, including withdrawal of the
product from the market or a prohibition against the use of the Clearant Process®. Problems with a
product, manufacturer or facility which utilizes the Clearant Process® may harm other
manufacturers and the publics perception of the safety of the Clearant Process® generally, which
would result in decreased utilization of the Clearant Process® and a decrease or elimination of our
revenues, which would adversely affect our business, financial condition and results of operations.
The government may impose new regulations as a result of a problem or otherwise that could further
delay or preclude regulatory approval of third parties potential processes and products that might
incorporate the Clearant Process®. Products enabled by or utilizing the Clearant Process® may not
meet new regulations and use of the Clearant Process® may be precluded by new regulations. We
cannot predict the impact of adverse governmental regulation that might arise from future
legislative or administrative action. However, any such regulations which delayed implementation of
the Clearant Process® in our target markets would delay our receipt of revenues, potentially
increase our development costs or the costs for third parties to treat products with the Clearant
Process®, and adversely affect our business, financial condition and results of operations.
We also intend to generate revenue from marketing and licensing our pathogen inactivation processes
outside the United States. Distribution of products made with our processes outside the United
States will be subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market, the time required for regulatory review and the
sanctions imposed for violations, vary by jurisdiction. In the developed markets (e.g., the
European Union, Japan and Canada), the regulatory framework and requirements are similar to those
in the United States. It is uncertain whether the users of our processes will obtain regulatory
approvals in such countries, and they may incur significant costs in obtaining or maintaining
foreign regulatory approvals. Failure of third parties to obtain necessary regulatory approvals or
any other failure to comply with regulatory requirements could result in reduced revenue from users
of the Clearant Process®.
The success of our business depends on the results of clinical trials performed by third parties
incorporating the Clearant Process® into their products and no such clinical trials have been
completed to date.
Most third parties incorporating our processes into their products, other than tissue, will have to
provide the FDA and foreign regulatory authorities with data that demonstrate the safety and
efficacy of such products before they are approved for commercial use in the case of new products,
or demonstrate clinical comparability in the case of existing products. Clinical development,
including preclinical testing, is a long, expensive and uncertain process. Because the Clearant
Process® itself is not expected to be subject to regulatory approval on its own, most prospective
customers will undertake any applicable testing required to gain approval of products incorporating
the Clearant Process®. Some products may require several years to complete applicable testing, and
failure can occur at any stage of testing. In addition, this testing may need to be repeated for
each application of the Clearant Process® to a new third-party product. Third parties incorporating
our processes cannot rely on interim results of trials to predict their final results, and
acceptable results in early trials might not be repeated in later trials.
Any preclinical or clinical trial may fail to produce results satisfactory to the FDA or other
regulatory authorities with jurisdiction. Preclinical and clinical data can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive
results or adverse medical events during a trial could cause a trial to be repeated or a
program to be terminated. Third parties incorporating our
12
processes into their products may rely on
third-party clinical investigators to conduct their clinical trials and other third-party
organizations to perform data collection and analysis, and as a result, certain additional factors
outside our control may delay regulatory approvals needed by third parties using our processes.
These factors include difficulty in enrolling qualified subjects, inadequately trained or
insufficient personnel at the study site, and delays in approvals from a study sites review board.
The occurrence of any of these factors could delay the commercialization of our processes.
We cannot provide assurances that planned trials will begin on time or be completed on schedule or
at all, that any trials will result in marketable products or that the Clearant Process® will be
commercially successful in one or more applications even if they have been approved by the FDA for
marketing. Our process development costs will increase if any third party incorporating our
processes has delays in testing or approvals. Similarly, our process development costs will
increase if we experience any delays in any testing or studies we undertake as part of its
marketing strategy. If any of these delays is significant, our business, financial condition and
results of operations will be adversely affected.
To date, we have commercialized the Clearant Process® only for the tissue market, for which neither
we nor the tissue processors were required to obtain any regulatory approval. However, based upon
public disclosures, we believe that a certain tissue processor has not been prohibited by the FDA
from labeling certain tissues as sterile based upon a comprehensive validation of its manufacturing
process including but not limited to the Clearant Process® as the terminal pathogen inactivation
step. We do not have any direct or other experience to date with respect to the ability of
third-party manufacturers to obtain regulatory approval for use of the Clearant Process® in their
manufacturing processes.
Because our business model is partially based on the receipt of royalties or service payments from
users of the Clearant Process®, our success may be dependent on the ability of our customers to
successfully market their products which have been treated by the Clearant Process®, which is
dependent on events and developments in their businesses which are beyond our control.
Our business model is partially based on receiving royalties or service payments from users of the
Clearant Process® in our target markets. The success of that model depends on our ability to
successfully optimize and commercialize the Clearant Process® for use in our target markets and to
successfully license the Clearant Process® to customers in those markets and ultimately on the
ability of those customers to sell sufficient dollar volumes of their products that have been
treated with the Clearant Process® to provide us with a substantial revenue stream. Accordingly,
any events or developments in the business of our customers which adversely affect their ability to
sell their Clearant Process®-treated products, even if unrelated to the efficacy of the Clearant
Process®, will adversely affect our ability to generate revenues and thus our business, financial
condition and results of operations. We will not have control over any such events or developments.
Our success will depend in part on the availability of a sufficient volume of biological products,
including tissues, for sale by the third party manufacturers, and thus potentially being available
for treatment by the Clearant Process®. For example, allograft providers depend heavily upon a
limited number of sources of human tissue, and any failure to obtain tissue from these sources in a
timely manner would interfere with their ability to process and distribute allografts. If a
provider so affected was utilizing the Clearant Process® for sterilization of its products, that
would result in a reduction in our revenues.
Our success will also be subject to the widespread acceptance of the customers end products.
Negative publicity, both in the United States and internationally, concerning improperly sterilized
biological products leading to transmission of disease or death, whether or not those products were
treated by the Clearant Process®, could limit widespread market acceptance of those products, and
thus reduce the ability of users of the Clearant Process® to sell such products and thus generate
revenue for us. For example, recent instances of bacterial transmission through
traditionally-processed tissues, one of which resulted in death, resulted in the withdrawal of
tissue from the market by one major processor, and may affect the willingness of patients and
surgeons to use allografts. Thus, our customers in the tissue market, or any other targeted market
which experiences a similar safety crises, may have to overcome a public perception that their
products may be unsafe, whether or not they have been treated with the Clearant Process®. If our
customers are unable to overcome such a perception, our ability to generate revenues and thus our
business, financial condition and results of operations may be adversely affected.
13
In addition, development of alternatives to biological products which may be sterilized more easily
and cost-effectively would likely result in decreased consumer demand for biological products in
medical procedures. This would result in a decrease in sales by manufacturers which utilize, or
could potentially utilize, the Clearant Process® and thus reduce our current and potential future revenue streams.
For example, if synthetic technologies are successfully developed which stimulate the growth of
tissue surrounding an implant, it could result in a decline in demand for tissue allografts, which
is one of our target markets.
Potential users of the Clearant Process® may depend on third party payers for reimbursement for the
use of their products by the end consumer, who may not be willing to reimburse the users at levels
sufficient to permit us to generate significant payments.
Potential users of the Clearant Process® may depend on third party payers for reimbursement for the
use of their products by the end consumer. To the extent that users of the Clearant Process® depend
on reimbursement of patients medical expenses by government health care programs and private
health insurers, the willingness of governments and private insurers to cover the applicable
procedure and if so, the level of payment which may apply will affect the revenues they receive for
their products and thus the revenues that we ultimately receive. Third-party payers may not
reimburse users of the Clearant Process® at levels which will, in turn, be profitable to us.
Outside influences on healthcare regulation may negatively impact our revenues or increase our
expenses.
Political, economic and regulatory influences subject the healthcare industry in the United States
to fundamental change. Any new federal or state legislation could result in significant changes in
the availability, delivery, pricing or payment for healthcare services and products. While we
cannot predict what form any new legislation will take, it is possible that any significant
healthcare legislation, if adopted, could lower the amounts paid to biologic product providers for
their products, which would decrease their revenues and thus our revenue.
Because the markets for our technology are dominated by a small number of participants, if we fail
to properly market, price or license the Clearant Process® to even a small number of the large
potential customers in our markets, our business could be substantially harmed.
Our target markets are generally characterized by a small number of market participants. For
example, the tissue market segment is controlled by a small number of entities in the United
States: Musculoskeletal Tissue Foundation; AlloSource; Community Tissue Services; University of
Florida Tissue Bank; Lifenet; Northwest Tissue Center; Tissue Bank International; Regeneration
Technologies; CryoLife, Inc.; and Northern California Tissue Center.
If we fail to properly market, price or license our processes to even a small number of the large
customers in these markets, our business, financial condition and results of operations could be
adversely affected.
Guidelines and recommendations published by various organizations could reduce the use of products
made with the Clearant Process®.
Government agencies promulgate regulations and guidelines directly applicable to us and to products
made with the Clearant Process®. Also, professional societies, practice management groups, private
health/science foundations, and organizations involved in various diseases from time to time may
also publish guidelines or recommendations to the health care and patient communities. Changes in
the regulations, or recommendations or guidelines that are followed by patients and health care
providers could result in decreased use of products made with the Clearant Process® which could
adversely affect prevailing market prices for our common stock.
If we acquire any companies or technologies in the future, they could prove difficult to integrate,
disrupt our business, dilute stockholder value and adversely affect our operating results.
We may acquire or make investments in complementary companies, services and technologies in the
future. We have not made any acquisitions or investments to date, and therefore our ability as an
organization to make acquisitions or investments is unproven. Acquisitions and investments involve
numerous risks, including:
14
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difficulties in integrating operations, technologies, services and personnel; |
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diversion of financial and managerial resources from existing operations; |
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risk of entering new markets; |
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potential write-offs of acquired assets or investments; |
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potential loss of key employees; |
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inability to generate sufficient revenue to offset acquisition or investment
costs; and |
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delays in customer purchases due to uncertainty. |
In addition, if we finance acquisitions by issuing convertible debt or equity securities, our
existing stockholders may be diluted which could affect the market price of our stock. Furthermore,
any such acquisition may increase our expenses and therefore change our requirements and timing for
additional capital. As a result, if we fail to properly evaluate and execute acquisitions or
investments, our business and prospects may be seriously harmed.
Risks Related to Our Common Stock
Our audit opinion could adversely affect our stock price.
Our auditors opinions on our financial statements for the year ended December 31, 2006 contained
an explanatory paragraph that expresses doubt about our ability to continue as a going concern due
to recurring negative cash flows from operations, significant debt and limited working capital.
Our stock price may be subject to substantial volatility, and you may lose all or a substantial
part of your investment.
Our common stock is traded on the OTC Bulletin Board (the OTCBB). There is a limited public
float, and trading volume historically has been limited and sporadic. As a result, the current
price for our common stock on the OTCBB is not necessarily a reliable indicator of our fair market
value. The price at which our common stock will trade may be highly volatile and may fluctuate as a
result of a number of factors, including, without limitation, the number of shares available for
sale in the market, quarterly variations in our operating results and actual or anticipated
announcements of new products or services by us or competitors, regulatory investigations or
determinations, acquisitions or strategic alliances by us or our competitors, recruitment or
departures of key personnel, the gain or loss of significant customers, changes in the estimates of
our operating performance, market conditions in our industry and the economy as a whole. The
Company has and continues to evaluate listing on another market or exchange but there can be no
assurance of our ability to move our listing. Issues such as market price, trading volume and
volatility all contribute to lack of ability to move to another market or exchange.
The sale of shares by the Investors may significantly impact the market price of our common stock.
The sale of Shares by the Investors, as contemplated in this prospectus, may significantly affect
the market price of our stock. Once the Shares are registered, we have no control over which of the
Investors will actually sell all or any portion of their Shares, or at what price.
In addition, future sales of substantial amounts of our common stock, including approximately 25
million shares that we issued in connection with our March 31, 2005 merger transaction, or the
expectation of such sales, could adversely affect the market price of our common stock. As of April 1, 2007 the
contractual lock-up period on the shares expired and all remaining shares can be freely traded.
15
We will need additional financing to fund our business.
We will require additional financing in order to carry out our business plan. Such financing may
take the form of the issuance of common or preferred stock or debt securities, or may involve bank
financing. There can be no assurance that we will obtain such additional capital on a timely basis,
on favorable terms, or at all. If we are unable to generate the required amount of additional
capital, our ability to meet our financial obligations and to implement our business plan may be
adversely affected. Furthermore, if additional equity securities in the Company are issued,
investors in this offering could experience dilution of their ownership in the Company.
We have never paid cash dividends and do not intend to do so.
We have never declared or paid cash dividends on our common stock. We currently plan to retain any
earnings to finance the growth of our business rather than to pay cash dividends. Payments of any
cash dividends in the future will depend on our financial condition, results of operations and
capital requirements, as well as other factors deemed relevant by our board of directors.
We may incur increased costs as a result of recently enacted and proposed changes in laws and
regulations relating to corporate governance matters.
Recently enacted and proposed changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the SEC
and the NASD will result in increased costs to us as we evaluate the implications of any new rules
and respond to their requirements. New rules could make it more difficult or more costly for us to
obtain certain types of insurance, including director and officer liability insurance, and we may
be forced to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our board of directors, our board
committees or as executive officers. We cannot predict or estimate the amount of the additional
costs we may incur or the timing of such costs to comply with any new rules and regulations.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable federal and state regulations.
The development, distribution, pricing, sales and marketing of our products, together with our
general operations, is subject to extensive federal and state regulation. While we have developed
and instituted a corporate compliance program based on current best practices, we cannot assure you
that we or our employees are, or will be, in compliance with all potentially applicable federal and
state laws and regulations. If we fail to comply with any of these laws or regulations, a range of
actions could result, including, but not limited to, the termination of clinical trials,
restrictions on products made with the Clearant Process®, including withdrawal of products made
with the Clearant Process® from the market, significant fines, exclusion from government healthcare
programs, or other sanctions or litigation.
Our common stock may be considered a penny stock and may be difficult to sell when desired.
The SEC has adopted regulations which generally define penny stock to be an equity security that
has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock is currently less than $5.00
per share. This designation requires any broker or dealer selling these securities to disclose
specified information concerning the transaction, obtain a written agreement from the purchaser and
determine that the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may affect the ability of stockholders to sell their shares. In addition, since
our common stock is currently quoted on the OTCBB, stockholders may find it difficult to obtain
accurate quotations of our common stock and may experience a lack of buyers to purchase our shares
or a lack of market makers to support the stock price.
16
The possible issuance of additional shares may impact the price of our stock.
Our board of directors has the power to issue additional common stock without stockholder approval.
Potential investors should be aware that any stock issuances might result in a reduction of the
book value or market price, if any, of the then outstanding common stock. If we were to issue
additional common stock, such issuance will reduce proportionate ownership and voting power of the
other stockholders. Also, any new issuance of common stock may result in a change of control.
17
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
This prospectus 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 the
Company and other matters. Statements in this prospectus that are not historical facts are
forward-looking statements for the purpose of the safe harbor provided by Section 21E of the
Securities 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 the Company, wherever they occur, are necessarily estimates reflecting the best judgment of the
senior management of the Company on the date on which they were made, or if no date is stated, as
of the date of this prospectus. These forward-looking statements are subject to risks,
uncertainties and assumptions, including those described in the Risk Factors described above,
that may affect the operations, performance, development and results of our business. Because the
factors discussed in this prospectus could cause actual results or outcomes to differ materially
from those expressed in any forward-looking statements made by us or on our behalf, you should not
place undue reliance on any such forward-looking statements. New factors emerge from time to time,
and it is not possible for us to predict which factors will arise. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
You should understand that the following important factors, in addition to those discussed in the
Risk Factors section could affect our future results and could cause those results to differ
materially from those expressed in such forward-looking statements:
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general economic conditions; |
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the effectiveness of our planned advertising, marketing and promotional
campaigns; |
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physician and patient acceptance of our products and services, including newly
introduced products; |
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anticipated trends and conditions in the industry in which we operate,
including regulatory changes; |
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our future capital needs and our ability to obtain financing; and |
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other risks and uncertainties as may be detailed from time to time in our
public announcements and filings with the SEC. |
Although we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this annual report as anticipated, believed, estimated, expected
or intended.
Except to the extent required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or any other
reason. All subsequent forward-looking statements attributable to us or any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements contained or referred
to herein. In light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus may not occur.
USE OF PROCEEDS
All of the Shares being offered under this prospectus are being sold by or for the account of the
selling stockholders. The Company will not receive any proceeds from the sale of the Shares by or
for the account of the selling stockholders.
DETERMINATION OF OFFERING PRICE
The offering price of the Shares will be determined at the time of sale by the selling stockholders
and is not within our control.
18
SELLING SECURITY HOLDERS
The Shares being offered by the selling stockholders were sold to them in private placements on
April 3 and August 3, 2007. The selling stockholders were also granted customary demand
registration rights, obligating us to use our best efforts to file this registration statement
covering the Shares. We are registering the Shares in order to permit the selling stockholders to
offer the Shares for resale from time to time. Except as noted below, the selling stockholders have
not had any position, office, or material relationship with us or any of our affiliates within the
past three years.
The table below lists the selling stockholders and other information regarding the beneficial
ownership of the shares of common stock by each of the selling stockholders. The second column
lists the number of shares of common stock beneficially owned by each selling stockholder. The
third column lists the shares of common stock being offered by this prospectus by each selling
stockholder. The fourth column assumes the sale of all of the shares offered by the selling
stockholders pursuant to this prospectus, and the fifth column lists the percentage of common stock
owned by the selling stockholders after completion of the offering. The selling stockholders may
sell all, some or none of their shares in this offering. See Plan of Distribution.
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Number of |
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Maximum |
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Company |
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Number of Shares |
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Percentage of |
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Securities |
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to be sold |
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Number of |
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Shares owned |
Name and delivery address of |
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owned prior to |
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pursuant to this |
|
Shares owned |
|
after the |
selling stockholder |
|
offering |
|
prospectus |
|
after offering1 |
|
offering1 |
Planet Capital Group, Ltd. |
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1,428,572 |
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1,428,572 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Loninton Enterprises, Ltd. |
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1,428,572 |
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1,428,572 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Gaddo Cardini is the beneficial owner of these |
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Shares. Mr. Cardini was a director of the |
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Company from April 5, 2007 - May 21, 2007 |
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Rowland W. Day II, Trustee of the Day Family |
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2,865,458 |
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2,857,143 |
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8,315 |
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0 |
%* |
Trust Dated 4/11/90 |
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c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Rowland W. Day II is the beneficial owner of |
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these Shares. Mr. Day is currently a director |
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of the Company |
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Advanced Technology Holdings, LLC |
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4,285,715 |
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4,285,715 |
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0 |
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0 |
% |
11150 Santa Monica Blvd. |
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Suite 1500 |
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Los Angeles, CA 90025 |
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19
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Number of |
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Maximum |
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Company |
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Number of Shares |
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Percentage of |
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Securities |
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to be sold |
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Number of |
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Shares owned |
Name and delivery address of |
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owned prior to |
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pursuant to this |
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Shares owned |
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after the |
selling stockholder |
|
offering |
|
prospectus |
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after offering1 |
|
offering1 |
Attention: Terren S. Peizer |
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Derinton Financial Ltd. |
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2,157,356 |
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2,142,858 |
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14,498 |
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0 |
%* |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Ardee Trading Corp. |
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2,142,858 |
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2,142,858 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Zenica Properties, Inc. |
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2,142,858 |
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2,142,858 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Acuarius Associates Corp. |
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2,142,858 |
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2,142,858 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Miraflores Corp. |
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1,428,572 |
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1,428,572 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Granada Enterprises, Inc. |
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2,142,858 |
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2,142,858 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Norpot Corp. |
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1,428,572 |
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1,428,572 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
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3 Imperial Promenade, Suite 960 |
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Santa Ana, CA 92707 |
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Attention: Rowland W. Day II |
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Summerlight Trading Corp. |
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1,428,572 |
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1,428,572 |
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0 |
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0 |
% |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snowball Overseas SA |
|
|
1,428,572 |
|
|
|
1,428,572 |
|
|
|
0 |
|
|
|
0 |
% |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Maximum |
|
|
|
|
|
|
|
|
Company |
|
Number of Shares |
|
|
|
|
|
Percentage of |
|
|
Securities |
|
to be sold |
|
Number of |
|
Shares owned |
Name and delivery address of |
|
owned prior to |
|
pursuant to this |
|
Shares owned |
|
after the |
selling stockholder |
|
offering |
|
prospectus |
|
after offering1 |
|
offering1 |
Bayonne Group Corp. |
|
|
1,428,572 |
|
|
|
1,428,572 |
|
|
|
0 |
|
|
|
0 |
% |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cherwell Assets Corp. |
|
|
1,428,572 |
|
|
|
1,428,572 |
|
|
|
0 |
|
|
|
0 |
% |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rowland W. Day II Rollover IRA |
|
|
271,545 |
|
|
|
269,015 |
|
|
|
2,530 |
|
|
|
0 |
%* |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rowland W. Day II is the beneficial owner of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
these Shares. Mr. Day is currently a director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rachel Glicksman |
|
|
1,079,865 |
|
|
|
1,071,429 |
|
|
|
8,436 |
|
|
|
0 |
%* |
c/o CEOCast, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369 Lexington Ave., 4th Floor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York, NY 10017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Michael Wachs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jon M. Garfield |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
Clearant, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1801 Avenue of the Stars, Suite 435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles, CA 90067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jon M. Garfield is currently the Chief Executive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer, Chief Financial Officer, Secretary and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
director of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert A. Shaheen |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
17040 Grand Bay Drive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boca Raton, FL 33496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. King |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
7780 Royal Coast Drive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacksonville, FL 32256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald Nash |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
c/o Offices of Rowland Day |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Imperial Promenade, Suite 960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA 92707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Rowland W. Day II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander Sapega |
|
|
571,429 |
|
|
|
571,429 |
|
|
|
0 |
|
|
|
0 |
% |
123 N. Providence Road |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Maximum |
|
|
|
|
|
|
|
|
Company |
|
Number of Shares |
|
|
|
|
|
Percentage of |
|
|
Securities |
|
to be sold |
|
Number of |
|
Shares owned |
Name and delivery address of |
|
owned prior to |
|
pursuant to this |
|
Shares owned |
|
after the |
selling stockholder |
|
offering |
|
prospectus |
|
after offering1 |
|
offering1 |
Wallingford, PA 19086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Harris Sacks, Trustee of the Richard |
|
|
357,143 |
|
|
|
357,143 |
|
|
|
0 |
|
|
|
0 |
% |
Harris Sacks Revocable Self Declaration of Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated 5/28/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510 Brierhill Road |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deerfield, IL 60015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay and Mel Seid, JTWROS |
|
|
2,857,143 |
|
|
|
2,857,143 |
|
|
|
0 |
|
|
|
0 |
% |
1150 First Avenue, Suite 600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
King of Prussia, PA 19406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas O. Layman |
|
|
72,547 |
|
|
|
71,429 |
|
|
|
1,118 |
|
|
|
0 |
%* |
9404 Arrowdell Road |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond, VA 23229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytix LDC Life Science Hedge AC |
|
|
1,428,572 |
|
|
|
1,428,572 |
|
|
|
0 |
|
|
|
0 |
% |
425 Fifth Avenue, Suite 28D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York, NY 10016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Theodore E. Kalem |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytix, LDC |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
425 Fifth Avenue, Suite 28D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York, NY 10016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attention: Theodore E. Kalem |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Buehler |
|
|
357,143 |
|
|
|
357,143 |
|
|
|
0 |
|
|
|
0 |
|
303 Viewmont Drive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yakima, WA 98908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerry Pogue |
|
|
215,141 |
|
|
|
214,286 |
|
|
|
855 |
|
|
|
0 |
%* |
2375 E. Tropicana Avenue, #101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Las Vegas, NV 89119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur H. Boelter, Administrator of the Arthur |
|
|
215,814 |
|
|
|
214,286 |
|
|
|
1,528 |
|
|
|
0 |
%* |
H. Boelter PS, Inc. Retirement Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
c/o Merrill Lynch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1215 4th Avenue, 26th Floor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seattle, WA 98161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John S. Edison |
|
|
714,286 |
|
|
|
714,286 |
|
|
|
0 |
|
|
|
0 |
% |
161 Ottawa Avenue, N.W., Suite 511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Rapids, MI 49503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John McGinnis |
|
|
1,836,736 |
|
|
|
1,836,736 |
|
|
|
0 |
|
|
|
0 |
% |
991 C Lomas Santa Fe #249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solana Beach, CA 92075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMR Asset Management Co. |
|
|
1,428,572 |
|
|
|
1,428,572 |
|
|
|
0 |
|
|
|
0 |
% |
961 Cordova Drive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chula Vista, CA 91910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Valley Financial Management |
|
|
1,785,715 |
|
|
|
1,785,715 |
|
|
|
0 |
|
|
|
0 |
% |
445 Marine View Ave #390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Del Mar, CA 92014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
46,034,338 |
|
|
|
|
|
|
|
|
|
22
|
|
|
* |
|
Less than one percent. |
|
1 |
|
Assumes the sale of all shares of common stock listed in this prospectus. |
PLAN OF DISTRIBUTION
We are registering these Shares to permit the resale of these Shares by the selling stockholders
from time to time after the date of this prospectus. We will not receive any of the proceeds from
the sale by the selling stockholders of the Shares. We will bear all fees and expenses incident to
our obligation to register the Shares.
The selling stockholders may sell all or a portion of the Shares beneficially owned by them and
offered hereby from time to time directly or through one or more underwriters, broker-dealers or
agents. If the Shares are sold through underwriters or broker-dealers, the selling stockholders
will be responsible for underwriting discounts or commissions or agents commissions. The Shares
may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of
the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales
may be effected in transactions, which may involve crosses or block transactions:
|
|
|
on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale; |
|
|
|
|
in the over-the-counter market; |
|
|
|
|
in transactions otherwise than on these exchanges or systems or in the
over-the-counter market; |
|
|
|
|
through the writing of options, whether such options are listed on an options
exchange or otherwise; |
|
|
|
|
in ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers; |
|
|
|
|
in block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; |
|
|
|
|
through purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; |
|
|
|
|
via an exchange distribution in accordance with the rules of the applicable
exchange; |
|
|
|
|
through privately negotiated transactions; |
|
|
|
|
through short sales; |
|
|
|
|
in sales pursuant to Rule 144; |
|
|
|
|
through broker-dealers who may agree with the selling security holders to sell
a specified number of such shares at a stipulated price per share; |
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|
via a combination of any such methods of sale; or |
|
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|
in any other method permitted pursuant to applicable law. |
If the selling stockholders effect such transactions by selling Shares to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in
the form of discounts, concessions or commissions from the selling stockholders or commissions from
purchasers of the Shares for whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular underwriters, broker-dealers or
agents may be in excess of those customary in the types of transactions involved). In connection
with sales of the Shares or otherwise, the selling stockholders may enter into hedging transactions
with broker-dealers, which may in turn engage in short sales of the Shares in the course of hedging
in positions they assume. The selling stockholders may also sell Shares short and deliver Shares
covered by this prospectus to close out short positions and to return borrowed
23
shares in connection
with such short sales. The selling stockholders may also loan or pledge Shares to broker-dealers
that in turn may sell such shares.
The selling stockholders may pledge or grant a security interest in some or all of the common stock
owned by them and, if they default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell the Shares from time to time pursuant to this prospectus or any
amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer and donate the Shares in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
The selling stockholders and any broker-dealer participating in the distribution of the Shares may
be deemed to be underwriters within the meaning of the Securities Act, and any commission paid,
or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular offering of the Shares
is made, a prospectus supplement, if required, will be distributed which will set forth the
aggregate amount of Shares being offered and the terms of the offering, including the name or names
of any broker-dealers or agents, any discounts, commissions and other terms constituting
compensation from the selling stockholders and any discounts, commissions or concessions allowed or
reallowed or paid to broker-dealers.
Under the securities laws of some states, the Shares may be sold in such states only through
registered or licensed brokers or dealers. In addition, in some states the Shares may not be sold
unless such shares have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of the Shares
registered pursuant to the registration statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such distribution will be subject to
applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the Shares by the selling stockholders and any
other participating person. Regulation M may also restrict the ability of any person engaged in
the distribution of the Shares to engage in market-making activities with respect to the Shares.
All of the foregoing may affect the marketability of the Shares and the ability of any person or
entity to engage in market-making activities with respect to the Shares.
We will pay all expenses of the registration of the Shares pursuant to the registration rights
agreement, including, without limitation, Securities and Exchange Commission filing fees and
expenses of compliance with state securities or blue sky laws; provided, however, that a selling
stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify
the selling stockholders against liabilities, including some liabilities under the Securities Act,
in accordance with the registration rights agreements, or the selling stockholders will be entitled
to contribution. We may be indemnified by the selling stockholders against civil liabilities,
including liabilities under the Securities Act, that may arise from any written information
furnished to us by the selling stockholder specifically for use in this
prospectus, in accordance with the related registration rights agreement, or we may be entitled to
contribution.
Once sold under the registration statement, of which this prospectus forms a part, the Shares will
be freely tradable in the hands of persons other than our affiliates.
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. We are currently
involved in the following material legal
proceedings:
On September 27, 2006, Clearant entered into a renewable two-year supply and distribution agreement
(the Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement,
Osprey granted Clearant exclusive rights to place current and future Osprey
24
cervical and lumbar
allografts treated with the Clearant Process® in a number of geographic territories and an option
for additional geographic territories. In exchange for the exclusive rights under the Osprey
Agreement, Clearant is obligated to pay Osprey $500,000 as a prepayment for certain ordered products to
be delivered after October 1, 2006. This prepayment was due upon the earlier of the following: (i)
within three business days after Clearant receives debt or equity financing of at least $1 million,
or (ii) October 31, 2006. In addition, Clearant was required to make the following quarterly
payments to be applied to payments for ordered products: $650,000 by October 31, 2006; $750,000 by January
1, 2007; $850,000 by April 1, 2007; $1 million by July 1, 2007; $1.2 million by October 1, 2007; $1.3
million by January 1, 2008; $1.5 million by April 1, 2008; and $1.75 million by July 1, 2008. As of
the end of the second quarter 2007, all tissue orders had not been delivered by Osprey and the
prepayments had not been made by the Company. In February 2007, Clearant received notice from
Osprey of its termination of the Osprey Agreement, effective within thirty (30) days from receipt
of this notification if certain alleged payment defaults were not timely cured by Clearant.
Clearant is in ongoing discussions with Osprey to resolve these issues, which could include but is
not limited to, reduction in exclusive territories or termination of the Osprey Agreement. The
termination of the Osprey Agreement may result in the disruption of the spinal bone implant supply
from Osprey, which may have a material adverse impact on Clearants ability to distribute spinal
bone implants treated with the Clearant Process®.
On July 27, 2007, Irell & Manella, LLP sent the Company a notice of the Companys right to
arbitrate. Irell alleges that the Company failed to pay its fees and/or costs for professional
services in the amount of $353,360.60 plus interest pursuant to the terms of an engagement agreement
between Irell and the Company. On August 21, 2007, the Company entered into a settlement agreement
with Irell & Manella, LLP, pursuant to which we paid $92,000 to Irell & Manella, LLP in return for
a release of all claims.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our current officers, directors and significant employees are listed below. Each of our directors
will serve for one year or until their respective successors are elected and qualified. Our
officers serve at the pleasure of the board of directors.
|
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Name |
|
Age |
|
Position |
|
Since |
|
Jon M. Garfield
|
|
|
43 |
|
|
Chief Executive Officer
|
|
January 25, 2007 |
|
|
|
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Chief Financial Officer
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August 2, 2005 |
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Director
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|
August 3, 2007 |
|
|
|
|
|
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Secretary
|
|
August 2, 2005 |
Rowland W. Day II
|
|
|
51 |
|
|
Director
|
|
August 3, 2007 |
Michael Elek
|
|
|
45 |
|
|
Director
|
|
August 3, 2007 |
Maurice J. DeWald
|
|
|
67 |
|
|
Director
|
|
September 13, 2007 |
Jon M. Garfield, age 43, was appointed as the Companys Chief Executive Officer, effective January
25, 2007. Mr. Garfield is also the Chief Financial Officer and Secretary of the Company. Mr.
Garfield was re-elected to the Companys board of directors on August 3, 2007. From 2001 until
August 2005, Mr. Garfield served as an independent financial consultant, including SEC reporting obligations and
Sarbanes-Oxley compliance. From 1998 until January 2001, he served as Chief Financial Officer of a
telecom service provider and a software developer. From 1996 to 1998, he served as Vice President
of Acquisitions for formally New York Stock Exchange listed ground transportation consolidator
Coach USA, Inc. From 1991 to 1996, Mr. Garfield served as Corporate Assistant Controller of Maxxim
Medical, Inc. Maxxim was a formally New York Stock Exchange listed manufacturer and distributor of
medical products. From 1986 to 1991 Mr. Garfield practiced public accounting with Arthur Andersen
and PricewaterhouseCoopers. Mr. Garfield received a Bachelor of Business Administration in
Accounting from the University of Texas, Austin.
Rowland W. Day II, age 51, was re-elected to the Companys board of directors on August 3, 2007.
Mr. Day has been a corporate lawyer, representing public and private companies for over twenty
years. From 2006 to present, Mr. Day has been a sole practitioner. From 2003 to 2006, Mr. Day was a
partner of Day and Campbell, LLP. Prior to that time, he was of counsel to Tressler, Soderstrom,
Maloney and Priess. Mr. Day serves as a member of the boards of directors of Restaurants on the Run
and RE3W Worldwide. He is a member of the State Bar
25
of California. He received a bachelors degree
from California State University, Fullerton, and a J.D. from Whittier Law School.
Michael Elek, age 45, was re-elected to the Companys board of directors on August 3, 2007. Mr.
Elek is a private investor in varied interests such as European real estate and private equity. Mr.
Elek received an undergraduate degree from McGill University of Montreal, and an MBA with honors
from St. Johns University.
Maurice J. DeWald, age 67, was appointed to the Companys board of directors on September 13, 2007.
Mr. DeWald is Chairman and Chief Executive Officer of Verity Financial Group, Inc., a private
financial advisory firm that he founded in 1992. From 1962-1991, Mr. DeWald was employed by KPMG
LLC, a Big Four accounting and tax consulting firm, where he served at various times as director,
and as the Managing Partner of the Orange County, Chicago and Los Angeles offices. Mr. DeWald is a
director of Integrated Healthcare Holdings, Inc., Advanced Materials Group, Inc., NNN
Healthcare/Office REIT, Inc. and fileSCAN, Inc. He also sits on the Advisory Council of the
University of Notre Dame Mendoza School of Business. Mr. DeWald is a past Chairman and director of
United Way of Greater Los Angeles. Mr. DeWald received a B.B.A. degree from the University of Notre
Dame. He is also a Certified Public Accountant.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings and no judgments,
injunctions, orders or decrees material to the evaluation of the ability and integrity of any
director, executive officer or significant employee of our Company during the past five years.
Committees
We do not currently have an operating Audit Committee, Corporate Governance and Nominating
Committee or Compensation Committee. We are in the process of identifying and recruiting
additional board and committee members. In the meantime, the board of directors will operate as
the Audit Committee until such additional committee members are identified and recruited.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the securities ownership of our directors, named executive officers,
and any person or group who is known to us to be the beneficial owner of more than five percent
(5%) of our common stock as of September 26, 2007
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Amount and nature |
|
|
|
|
of beneficial |
|
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Name and address of beneficial owner1 |
|
ownership1 |
|
Percent of class |
Terren S. Peizer 2 |
|
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4,695,391 |
|
|
|
9.6 |
% |
Rowland W. Day II 3 |
|
|
3,137,003 |
|
|
|
6.4 |
% |
Jay and Mel Seid, JTWROS |
|
|
2,857,143 |
|
|
|
5.8 |
% |
Jon M. Garfield 4 |
|
|
760,119 |
|
|
|
1.6 |
% |
Michael Elek 5 |
|
|
0 |
|
|
|
0 |
% |
Maurice J. DeWald |
|
|
0 |
|
|
|
0 |
% |
All directors and officers as a group (4 persons) |
|
|
3,897,122 |
|
|
|
8.0 |
% |
|
|
|
1 |
|
Applicable percentage ownership is based on 48,957,445 shares of common stock
outstanding at September 26, 2007. The number of shares of common stock owned are those
beneficially owned as determined under the rules of the SEC, including any shares of common stock
as to which a person has sole or shared voting or investment power and any shares of common stock
which the person has the right to acquire within 1801 Avenue of the Stars, Suite 435, Los Angeles,
California 90067, unless otherwise noted. |
26
|
|
|
2 |
|
Includes 37,429 options, 277,634 shares by Bowmore, LLC, 14,613 shares by Porfidio,
LLC, and 4,285,715 shares by Advanced Technology Holdings, LLC. Excludes 17,858 shares by Reserva
Capital, LLC previously pledged as security for a loan as to which interest payments have not been
made. Mr. Peizers business address is 11150 Santa Monica Blvd., Suite 1500, Los Angeles,
California 90025. |
|
3 |
|
Includes 3,137,003 shares of common stock issued to Rowland W. Day II, as trustee of
the Day Family Trust (2,865,458 shares) and the Rowland W. Day II Rollover IRA (271,545 shares),
with Rowland W. Day in his individual capacity as the beneficial owner of all 3,137,003 shares, 3
Imperial Promenade, Suite 960, Santa Ana, CA 92707. |
|
4 |
|
Includes 714,286 shares of common stock, and outstanding options issued, vested and
exercisable within sixty (60) days of September 26, 2007 to purchase an aggregate 45,833 shares of
common stock. |
|
5 |
|
Excludes 428,572 shares beneficially owned by a family member of Mr. Elek. Mr. Elek
disclaims any controlling or beneficial interest in such shares. |
Unless otherwise indicated, we believe that all persons named in the table have sole voting and
investment power with respect to all Shares beneficially owned by them. A person is deemed to be
the beneficial owner of securities which may be acquired by such person within sixty (60) days from
the date on which beneficial ownership is to be determined, upon the exercise of options, warrants
or convertible securities. Each beneficial owners percentage ownership is determined by assuming
that options, warrants and convertible securities that are held by such person (but not those held
by any other person) and which are exercisable, convertible or exchangeable within such 60 day
period, have been so exercised, converted or exchanged.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 200,000,000 shares of common stock, $0.0001 par value. As of
September 26, 2007, there were 48,957,445 shares of our common stock issued and outstanding. There
are 156,780 shares of our common stock reserved for issuance upon the exercise of warrants and
3,286,842 shares of common stock reserved for issuance upon the exercise of options. On August 3,
2007, after recommendation by the Companys board of directors, the holders of a majority of the
Companys common stock approved an amendment to the Companys Certificate of Incorporation to
permit the Company to effect a 1:14 reverse stock split of its common stock. The reverse stock
split is effective as of August 23, 2007.
Holders of common stock are entitled to one vote per share on all matters to be voted upon by
stockholders. Holders of common stock are entitled to receive ratably dividends as may be declared
by the board of directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities. The common stock has no preemptive or
conversion rights, other subscription rights, or redemption or sinking fund provisions. All issued
and outstanding shares of common stock are fully paid and non-assessable.
We have not declared or paid dividends on our common stock since our formation, and we do not
anticipate paying dividends in the foreseeable future. Declaration or payment of dividends, if
any, in the future will be at the discretion of our board of directors and will depend on our then
current financial condition, results of operations, capital requirements and other factors deemed
relevant by the board of directors.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity of the securities offered in this prospectus are being passed upon for us by Dreier
Stein & Kahan, LLP, Santa Monica, California. The firm and its attorneys hold no shares of our
common stock, but a partner with the firm is in current discussions to receive a warrant to
purchase shares of our common stock.
27
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation and bylaws limit the liability of directors and executive officers
to the maximum extent permitted by Delaware law. The limitation on our directors and executive
officers liability may not apply to liabilities arising under the federal securities laws. Our
certificate of incorporation and bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to the fullest extent
permitted by law. Insofar as indemnification for liabilities arising under the Securities Act, may
be permitted to our directors and executive officers pursuant to our certificate of incorporation
and bylaws, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable only if the
Company is requesting acceleration of the effective date of the registration statement under Rule
461 under the Securities Act, include the previous sentence.
At present, there is no pending litigation or proceeding involving any of our directors, officers,
employees or agents where indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such indemnification.
ORGANIZATION WITHIN LAST FIVE YEARS
Directors and Director Independence
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Name |
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Age |
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Position |
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Since |
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Jon M. Garfield
|
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43 |
|
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Director
|
|
|
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August 3, 2007 |
Rowland W. Day II
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51 |
|
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Chairman of the Board
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|
|
August 3, 2007 |
Michael Elek
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45 |
|
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Director
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|
August 3, 2007 |
Maurice J. DeWald
|
|
|
67 |
|
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Director
|
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|
September 13, 2007 |
After review of all of the relevant transactions or relationships between each director (and his
family members) and us, our senior management and our independent registered public accountants,
our board of directors has determined that Mr. Elek, Mr. Day and Mr. DeWald are independent as
defined by applicable rules and listing standards. There are no family relationships among any of
our directors, executive officers or key employees.
DESCRIPTION OF BUSINESS
Business Development
The Company was incorporated as a corporation 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., and entered into
a reverse triangular merger with Clearant, Inc., which was incorporated in the state of California
on April 30, 1999. Because Clearant, Inc. was the sole operating company at the time of the merger,
the transaction was accounted for as a reverse acquisition, with Clearant, Inc. deemed the acquirer
for accounting purposes. On June 30, 2005, we reincorporated from Nevada to Delaware. On December
31, 2005, we merged the subsidiary created by the earlier merger into Clearant, Inc., a Delaware
corporation.
Business of Issuer
We acquire and develop our pathogen inactivation technology, the Clearant Process®, and market it
to producers of biological products, most notably devitalized musculoskeletal tissue allograft
implants (tissue).
The Clearant Process®
The Clearant Process® is designed to:
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Inactivate a broad range of known pathogens irrespective of size, origin or
structure; |
28
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Achieve sterility, in some cases with margins of safety greater than that of a
medical device; |
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Be used in both intermediate and final stages of production; |
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Protect the mechanical and biological properties of the biological product being
treated; and |
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Be applied to a product after it has been sealed into its final package. |
The Clearant Process® uses a combination of patented and trade secret technology, based on a
proprietary application of gamma irradiation. The process does not require the use of toxic
chemicals and is designed to maintain the integrity and functionality of the biologic product. By
reducing the impact of free radicals on proteins, the destructive effects of gamma radiation on
proteins can be controlled by the Clearant Process®, allowing sufficiently high doses of radiation
to be applied to the product to inactivate a broad range of known types of bacteria. We believe
that the Clearant Process®, when properly optimized for a particular product, is capable of
achieving a significant level of sterility against a broad range of known types of pathogens in a
single irradiation step, and that, for tissue, the Clearant Process® is able to validate sterility
claims under certain governmental regulations.
We believe the advantage of gamma irradiation, over other currently available sterilization
technologies, is that it is inherently reliable, predictable, non-toxic, penetrating and scalable.
Traditional uses of gamma irradiation have been proven to be among the best methods for
inactivating pathogens that contaminate inanimate material medical devices. However, prior to the
development of the Clearant Process®, it was not possible to apply this technology to the pathogen
inactivation of biologics because the necessary high levels of gamma irradiation to achieve
sterility also damaged the active proteins present in the biologics, compromising its integrity and
functionality.
The Clearant Process® is designed to provide increased safety to biologic products to which it is
applied by virtue of its lack of specificity (it inactivates a broad range of known types of
pathogens irrespective of size, origin or structure), and in some cases by being a terminal
sterilization process (capable of achieving pathogen inactivation after the product has been sealed
into its final package). Our research and development expenses for the years ended December 31,
2006 and 2005 were $926,000 and $2,050,000, respectively and for the six months ended June 30, 2007
and 2006 were $59,000 and $468,000, respectively. During the fourth quarter of 2005 and first
quarter of 2006, we reduced our research and development personnel and related expenses due to the
limitations in our cash position and our shift in focus from research and development to the
commercialization of the Clearant Process®. From December 31, 2005 to December 31, 2006, we reduced
our research and development staff from six employees to one. We anticipate that we will continue
to reduce research and development costs. In addition, we are exploring opportunities to complement
in-house research and development with a third party research and development consulting firm,
which we believe will provide a broader expertise in research and development and allow us to
maintain a low research and development headcount.
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. The Clearant Process® enables our customers to meet the
medical need for safer biological products and to satisfy current and future product regulatory
safety guidelines. We believe the Clearant Process® can be a cost-effective technology applicable
across multiple market segments, with minimal capital requirements to implement.
Our initial area of focus is the application of the Clearant Process® on tissue used in surgical
procedures such as anterior cruciate ligament (ACL) reconstruction, spinal fusion and general
orthopedic repair procedures. Additionally, we will continue to evaluate the opportunity to utilize
the Clearant Process® in the following areas as capital resources and customer demand warrant:
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|
|
Plasma protein therapeutics; |
|
|
|
|
Recombinant protein therapeutics; |
29
|
|
|
Medical devices; and |
|
|
|
|
Blood and blood-related products. |
We believe that the tissue market represents a continuing source of near-term revenue and that the
medical devices market, the plasma protein therapeutic market and the recombinant protein market
present the possibility of an intermediate to longer-term opportunity.
Area of Focus: The Tissue Market
We believe the Clearant Process® will address a long-standing problem for patients, surgeons and
tissue banks without significantly impacting the current tissue processing cycle. Using the
Clearant Process®, the tissue bank prepares and packages its tissues and ships the containers to
one of the FDA-licensed gamma irradiation facilities in the United States, where the containers are
irradiated using the Clearant Process® without being opened. Turnaround time in the irradiation
facility is generally a few days.
Alternatively, using the Clearant sterilization service, the devitalized human tissue bank prepares
and packages its tissues and ships the tissue to the Company and then the Company coordinates the
irradiation of the tissue at an FDA-licensed gamma irradiation facility in the United States. The
sterilization service allows devitalized human tissue banks to outsource the irradiation thereby
allowing the customer to better utilize internal resources, as well as benefit from economies of
scale that the Company can achieve. In both cases, the tissue never leaves the original packaging
and arrives in the operating room for implantation in sterile condition.
Currently, tissues used in surgical allograft procedures that are not treated with the Clearant
Process® are not sterilized in the final package, and are processed aseptically often incorporating
additional steps to reduce bioburden. Our preliminary research indicates that when applied to
tissue, the Clearant Process® sterilizes tissue to a standard consistent with, or exceeding, the
FDA definition of bacterial sterility for medical devices. The validation protocols, methodologies
and the resulting database generated by the Company to establish the sterility of these products
signify advancement of the standards of product safety in the tissue industry. We believe that the
additional level of safety possible through the use of the Clearant Process® has the potential to
shift surgical preference towards the use of allografts and away from autografts, which require
more complicated surgical procedures due to the need for two surgical sites (the harvest site and
the implant site) and are more painful for patients, but are used today in part due to the safety
risks associated with allografts harvested from cadavers.
In order to maximize recognition of the increased value of the safety improvements provided by the
Clearant Process®, the Company supports its customers efforts by marketing directly to surgeons,
scientists and medical professionals, or through leaders in the industry, and supporting customer
sales representatives with data and other marketing support materials. We believe that educating
surgeons and patients about the availability of safer tissue will ultimately increase demand for
use of products treated with the Clearant Process®.
We believe that the Clearant Process® provides tissue processors with sterilization (bacterial)
steps and related support that can be validated, which will become increasingly important as the
FDA increases regulation in the industry, including through the GTP regulations.
Commercialization Strategy
The Company is currently focusing its development and commercialization efforts relating to the
Clearant Process® on products involving tissue, with a longer-term focus on plasma proteins,
recombinant proteins and medical devices. We believe the application of the Clearant Process® in
these markets will generate a two-fold benefit for the Company: (1) an opportunity to generate
near-term cash flow from direct distribution of Clearant Process®-treated tissue, royalties from
Clearant Process®-treated tissue product sales and service fees from the Clearant sterilization
service agreements, (2) while simultaneously allowing the Company to validate the Clearant Process®
more broadly and build an extensive intellectual property portfolio.
30
The Company has achieved the following milestones in the devitalized human tissue industry:
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|
|
Two direct sales representatives and seven indirect sales groups, for a total of
approximately 47 sales representatives; |
|
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|
|
Ten signed agreements with tissue banks, five of which are active; and |
|
|
|
|
The twelve-month initial results of our clinical study are favorable, and the
occurrence of complications, stability and strength in the anterior cruciate ligament
reconstructions using tissue treated with the Clearant Process® are comparable to the
patients non-operated contralateral knees. |
Customer Agreements
To date, we have entered into a total of ten agreements with customers to utilize the Clearant
Process® with their products. Of these agreements, six are licensing agreements with tissue banks
and one is an agreement with a manufacturer of recombinant protein products, in return for
milestone payments and royalties on end-product sales. Through June 2007, three of these licensees
have launched tissue products that were treated using the Clearant Process®, but are not treating
all of their tissue with the Clearant Process®. Additionally, in September 2005, we launched a new
sterilization service (the Clearant Sterilization Service or Sterilization Service) which
allows customers to send ready for sterilization tissue to our facility near Chicago, Illinois to
be irradiated under Clearant Process® conditions by us. Through 2007, we have signed four such
Sterilization Service agreements with tissue banks. Most of the companies have not yet implemented
the Clearant Process®, and we cannot estimate when or if they will do so.
Based on these license and Sterilization Service results we implemented a plan to better market and
promote adoption of the Clearant Process®, which is to directly distribute Clearant Process®
sterile implants 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.
Market Opportunity
We hope to take advantage of the changes facing the devitalized musculoskeletal human tissue
allograft implant (tissue) market. A number of serious and even deadly infections have been shown
to be transmitted through tissues. Based on an investigation precipitated by the November 2001
death of a 23-year-old Minnesota man three days after receiving a tissue implant during
reconstructive knee surgery, the Centers for Disease Control (CDC) reported to the FDA in July
2002 that it had received 54 reports of tissue-associated infections. All of these involved
traditionally-processed tissue. Additionally in October 2005, due to illegal harvesting of cadavers
provided to tissue banks for processing and the falsification of donor medical records, the FDA
ordered a recall of certain tissue. Prior to such recall, many of the tissues had been implanted by
unsuspecting surgeons raising concerns of bacterial and viral transmissions. Affected tissue had
been distributed to organizations in New York, Tennessee, Illinois, Iowa and Texas, among other
states. As of February 2006, the FDA has determined that at least 761 donors were illegally
accessed for tissue. Due to the adverse patient consequences that can result from communicable
disease transmission through the use of tissue, U.S. regulatory authorities have called for the
development of validated methods for claims of sterilizing tissue.
While bacterial contamination of tissue is more prevalent, viral transmission remains a concern as
demonstrated by the transmission of Hepatitis C to at least six patients (including one resulting
in death) by contaminated tissues from a single cadaver tissue donor. The CDC determined that the
donor was in the window period (a period shortly after infection during which the virus or
antibody is not detectible by standard tests), which resulted in the Hepatitis C not being detected
during standard donor screening. There have only been two cases of HIV infection through allograft
tissue, and both incidents occurred in the 1980s. These reported infections occurred with frozen
bone as the vector, but none of the freeze dried grafts from the same donor transmitted the disease
(Source: AAOS 2004: All About Allografts Select Highlights of the 71st Annual Meeting of the
American Academy of Orthopedic Surgeons, 2004). Tissue processors today generally do not utilize
any clinically meaningful viral inactivation technologies. Thus, the demand for new pathogen
inactivation technologies applicable to biological products is fueled by the fact that historically
there have been no effective methods capable of completely removing or inactivating
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a broad range of known types of pathogens, including non-enveloped viruses, while
maintaining the integrity and functionality of the underlying biologic product.
The FDA is engaged in an ongoing effort to regulate tissue banks, which resulted in the publication
and implementation of its current good tissue practices regulations (GTP regulations) on May 25,
2005 (21 CFR 1271.145 through 320). The GTP regulations require, among other things:
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Manufacturers to recover, process, store, label, package and distribute human
cells, tissues and cellular and tissue-based products in such a way that prevents
the introduction, transmission or spread of communicable diseases (including
bacteria and viruses), and |
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Tissue banks that wish to label their products sterile will need to have a
validated process to demonstrate sterility. |
We believe the Clearant Process® can support a validated sterility claim by tissue processors under
the GTP regulations. As validated sterile tissues become widely available, we believe that there
will be increasing demand by doctors, buying groups, insurance providers and risk managers for the
use of only sterile tissue. In addition we believe there may be a shift from the use of autografts
(a patients own tissue) to the use of allografts (donor tissue). Allografts require only one
surgical site (the implant site), reduce recovery time and decrease post-operative problems as
compared to autografts, which require two surgical sites. To date doctors have reported to the
company no significant difference between patients receiving Clearant Process®-treated tissues as
compared to those receiving traditional tissues. Furthermore, the Company conducted a multi-center
clinical study at eight separate facilities across the U.S. The clinical study tracked the
post-operative results of patients who received human soft allograft tissue that had been treated
with the Clearant Process®. Study evaluations include failure rate, range of motion, and joint
effusion (swelling) among other metrics which had been previously established by the clinical study
committee prior to the start of the study. The twelve-month outcome results of this study are
favorable. The occurrence of complications, stability and strength in the anterior cruciate
ligament reconstructions using tissue treated with the Clearant Process® are comparable to the
patients non-operated contralateral knee. Notwithstanding such current clinical results, the
Company has received an indication from one participating site that has prior clinical data in
addition to that collected in connection with our study that the clinical outcomes are
significantly more unfavorable than the current data collected from the other multi-center sites.
We investigated the unfavorable data to understand this discrepancy and the result was favorable to
us.
The Company currently distributes Clearant Process® tissue to surgeons, hospitals and surgery
centers through a direct and indirect sales force. In addition, the Company provides sterilization
service to tissue processors as an alternative to complete implementation of the Clearant Process®.
The Company also licenses the Clearant Process® on a non-exclusive basis to tissue processors and
biopharmaceutical companies in return for milestone payments and royalties on end-product sales.
These sales make up a portion of the U.S. tissue market comprised of ligament, tendon and bone
allografts, estimated to grow to over $1.26 billion by 2008 (Source: MedMarket Diligence LLC,
Emerging Trends, Technologies and Opportunities in the Markets for Orthopedic Biomaterials,
Worldwide Report #M625, Pg. 2-5, December 2006). We will continue to maintain and service the
existing royalty and sterilization service contracts; however, we are not actively pursuing
additional royalty and sterilization service agreements and do not expect this to be the primary
source of revenue growth for the Company.
Competition: Existing Methods
There are a number of existing methods used to attempt to decrease the risk of pathogen
transmission in the processing of tissue. These other methods fall into two categories; methods
that can achieve sterility and methods that reduce pathogen transmission but do not achieve medical
device sterility levels.
Non-Sterile Methods. The majority of tissue processors today utilize chemical rinse steps for
cleaning bone and soft tissue of lipids, fats and bone marrow. While these chemical rinse
techniques reduce the level of surface contaminants on the tissue, they have traditionally been
limited in their ability to penetrate the tissue effectively to destroy pathogens potentially
residing in the interior of tissue. Because of this inability to penetrate the tissue effectively,
sterility cannot be assured. Another widely used technique utilizes gamma radiation at
significantly lower doses (historical average dose of 18kGy) than those used under the Clearant
Process® on tissue products.
32
Results of studies conducted by the Company indicate that, doses of 18kGy of radiation to tissues
are inadequate to sufficiently inactivate resistant bacteria such as Clostridium spores, and do not
significantly inactivate viruses, and thus sterility can not be assured. The CDC determined that a
Clostridium-infected tissue was the source of the infection that resulted in the death of a 23-year
old man after an otherwise ordinary knee tissue transplant surgical procedure in 2001.
Sterile Methods. The BioCleanse process marketed by Regeneration Technologies, Inc. (RTI) is a
specific chemical method of pathogen inactivation that claims sterility. While RTI claims that the
BioCleanse process has been validated to eliminate bacteria, fungi, spores and viruses from
tissue, BioCleanse uses additives that must be removed from the final container prior to final
packaging, requires a substantial capital investment to build the equipment required and is not
commonly licensed commercially to other tissue processors. Unlike the Clearant Process®, the
BioCleanse procedure is not reported to be a terminal pathogen inactivation process. Finally,
traditionally higher doses of radiation without the Clearant Process® could achieve higher levels
of sterility but destroy the integrity and functionality of the tissue and therefore have not been
commercially used. There may be other entrants into the market that make claims of sterility which
could adversely impact our ability to gain market acceptance.
Other Potential Commercialization Markets: The Plasma Protein Therapeutics Market
The plasma industry develops and manufactures plasma protein therapeutic products which are mainly
derived by fractioning human plasma. Plasma protein therapeutic products include intravenous
immunoglobulin (IGIV), Factor VIII, albumin and alpha-one proteinase inhibitor and are produced
by companies such as Baxter, Bayer, Octapharma and CSL. Because these products are derived from
human plasma, the sterility of these products for therapeutic applications is crucial to their
safety and efficacy when used in patients. Today, the manufacturing and processing of these plasma
protein therapeutic products involves extensive in-process steps that attempt to ensure the
sterility of the final product. However, we believe there is currently no commercially available
technology to sterilize plasma protein therapeutic products in their final packaging (i.e. terminal
sterilization).
We believe that there is a desire in the marketplace to increase the safety of the plasma protein
therapeutics by adopting a manufacturing process that incorporates a terminal sterilization step or
an intermediate robust sterilization step that can provide a greater margin of safety with respect
to sterility. Terminal sterilization may also better enable new packaging and delivery options,
such as medical devices that contain plasma protein therapeutics in a final package. To date, we
have been successful in applying the Clearant Process® on a laboratory scale at day zero.
Our strategy is to leverage the developed technology and the intellectual property created with
these products to develop the Clearant Process® as a terminal sterilization technology for plasma
protein therapeutics.
Although we are not actively pursuing this market at this time, we will continue to evaluate
opportunities as capital resources and customer demands warrant.
Other Potential Commercialization Markets: The Recombinant Products Market
The biotechnology industry develops and manufactures recombinant products, the majority of which
are used for therapeutic purposes. Recombinant products are genetically engineered biological
products and include, among others, products such as insulin, erythropoietin, monoclonal
antibodies, vaccines, interferon, cell growth factors and colony stimulating factors produced by
companies such as Amgen, Genentech, Wyteh, Bayer and Baxter Healthcare. Understandably, the
sterility of these products for therapeutic applications is crucial to their safety and efficacy
when used in patients. Today, the manufacturing and processing of these recombinant products
involves extensive in-process steps that attempt to ensure the sterility of the final product.
However, we believe there is currently no commercially available technology to sterilize
recombinant products in their final packaging (i.e. terminal sterilization).
We believe, based on precedents established in the drug industry that adopting a manufacturing
process that incorporates a terminal sterilization step should provide a greater margin of safety
at a lower cost relative to those processes that depend on in-process sterilization procedures.
Such terminal sterilization may also better enable new packaging and delivery options,
such as pre-filled syringes. In addition to the terminal
33
sterilization of recombinant products, we believe that there are opportunities to utilize its
technology to improve and provide solutions for problematic in-process sterilization protocols used
in certain recombinant products.
Our strategy is to leverage the technology developed and the intellectual property created with
these products and the visibility of working with plasma protein manufacturers to develop the
Clearant Process® as a terminal sterilization technology for new recombinant protein products that
can be economically scaled to accommodate this growth with minimal disruption of an existing
manufacturing infrastructure.
Although we are not actively pursuing this market at this time, we will continue to evaluate
opportunities as capital resources and customer demands warrant.
Other Potential Commercialization Markets: The Medical Device Market
We have generated laboratory scale data that suggests that the Clearant Process® can be used in
connection with the sterilization of a medical device which incorporates a biologic into such
device. We successfully processed, and subsequently performed, mechanical integrity testing of a
development-stage medical device in final packaging through the Clearant sterilization service. We
believe that traditional sterilization methods for medical devices will not be appropriate when
such device incorporates a biologic because traditional uncontrolled irradiation for medical
devices would destroy the integrity of the protein. Further, any filtrated biologic would still
need to be aseptically applied to the device where contamination could occur. The application of
the Clearant Process® can be a terminal sterilization step thereby sterilizing both the medical
device and biologic in its final packaging. While medical devices are not areas of near term focus,
we will continue to evaluate their commercial potential through sponsored research agreements or
license agreements that are of economic or strategic value to us.
Competition
The majority of therapeutic proteins on the market today are manufactured under controlled
conditions by fractionating human plasma or from genetically engineered cells. Products
manufactured by genetically engineered cells are generally considered to present a very low risk of
viral transmission; however, products manufactured by fractionating human plasma contain risks of
viral and bacterial transmission from the collection of human plasma. In addition, all therapeutics
have a risk of bacterial contamination during manufacturing and filling operations (i.e., the
placement of the end-product in the final vial or packaging). The risk of bacterial contamination
requires companies to aseptically manufacture and fill their products and perform substantial
bacterial testing during the manufacturing process and at its conclusion before releasing batches
of product. Maintaining and validating aseptic manufacturing conditions to the level required by
the FDA for drugs and related products is extremely expensive and subject to failure. Contamination
of therapeutic protein products by bacteria costs biotech companies millions of dollars per year
because of the need to rework or destroy product. Such contamination could have clinical
consequences and can arise from the contamination of the source cell lines themselves or from
unintended introduction of viruses during production.
Plasma protein therapeutic products have always been under increasing stringent standards and
despite their generally favorable safety record, biotechnology recombinant products are coming
under increasingly stringent standards intended to decrease the risk of transmitting infectious
agents through their use, including standards meant to address emerging pathogenic agents. Our
expectation is that manufacturers will incorporate into their production processes multiple,
independent viral inactivation and removal steps. This standard is described in detail in a
guidance document governing biotechnology recombinant products developed through the International
Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human
Use and which has now been adopted by the United States, the European Union and Japan.
The most commonly used method for pathogen removal for protein therapeutic products is filtration.
Filtration methods, currently being marketed by companies such as Asahi Kaisai Corporation,
Millipore Corporation and Pall Corporation, can be used only with intermediate liquid materials and
cannot be used for terminal sterilization in the final packaging. The efficacy of filters in
removing pathogens is further limited by the size of the agent to be removed and the size of the
biological product molecule. The molecular size of the active biological product dictates the pore
size of the filter used in the process. Thus, any pathogen smaller than this pore size cannot be
removed from
34
the biological product using the filter. Many non-enveloped viruses are small (e.g., B19 Parvovirus
and transfusion transmitted viruses) and therefore, are unlikely to be removed from the majority of
biological products using these filtration methods. As a result, the filtration step may not fully
meet the evolving requirements of the regulatory authorities for the safety of biological products
(i.e., removal or inactivation of known and unknown lipid-enveloped and non-enveloped viruses
including small size viruses). In addition, in plasma protein therapeutic products, many companies
use chemicals like solvent-detergent as an additional step for pathogen inactivation. However, to
date, methods such as solvent-detergent treatment have failed to significantly inactivate
non-enveloped viruses and thereby are an inefficient means of obtaining inactivation of all known
types of pathogens.
The Clearant Process® offers manufacturers of therapeutic protein products the ability to provide
inactivation of a wide spectrum of pathogens at various stages in the manufacturing process,
including treatment of source materials, growth media, in-process intermediates or terminal
sterilization of the final product. We believe that once the Clearant Process® is successfully
customized for a customers product, this level of inactivation, including inactivation of
non-lipid enveloped viruses, should enable therapeutic protein products manufacturers to meet the
increasingly more rigorous regulatory standards being imposed on a worldwide basis and supplement
the performance of existing filtration and solvent-detergent processes.
Based on existing regulatory guidelines for small molecule drugs, which require terminal
sterilization whenever possible, we believe that, once established commercially, terminal
sterilization may be required by regulators for new protein medicines and new presentations of
existing drugs (e.g. novel packaging in pre-filled syringes versus bulk packaging). Developers of
new products may prefer terminal sterilization due to the greater assurance of product quality and
safety it provides and anticipated lower costs. In addition, eventually terminal sterilization is
anticipated to reduce the cost and shipping delays caused by the bacterial testing that must be
done to support the processes by which these products are manufactured today. The convergence of
all of these factors over several years may position our technology to become a manufacturing
standard for new recombinant products, much as in-process filtration is a standard today.
Based on experience with sterile pharmaceutical products, the FDA requires sterility testing and
expensive in-process testing for every batch of products that is manufactured using aseptic
sterilization techniques. Sterility testing is destructive (consumes product for testing).
Sterility testing and other aspects of quality control/assurance (including facilities monitoring)
for aseptically processed products are also expensive to carry out. Terminally sterilized
pharmaceutical products can be released for distribution to the public by parametric methods
(statistical sampling of product batches) this approach is supported by the FDA and is routine
for the pharmaceutical industry. In addition, if a product is sterilized in its final packaging,
the quality assurance requirements for facilities monitoring is also considerably less stringent
than is the case for aseptically-processed products.
Regulatory Strategy
Commercial products manufactured incorporating the Clearant Process® will be regulated by
governmental agencies, including the FDA and equivalent regulatory authorities in other countries.
Although it will be the responsibility of our customers whose products incorporate the Clearant
Process® to obtain any appropriate regulatory approvals for their products, these third parties may
rely in part on studies and tests conducted by the Company as part of our commercialization
strategy to demonstrate the efficacy of the Clearant Process®.
We do not anticipate that the Clearant Process® itself will be directly regulated, either as a
drug, biologic or device, since gamma irradiation should be considered a manufacturing method for
regulated products. The commercial gamma irradiation facilities in which the Clearant Process® is
carried out, and the equipment therein, are regulated as manufacturing facilities (i.e., subject to
registration, product listing, licensing and good manufacturing practice requirements by the FDA).
There are a significant number of such facilities which are currently licensed by the FDA
throughout the world which currently sterilize such products as medical devices, syringes and
surgical gloves. Manufacturers of individual products may also be required to obtain approval from
the applicable regulatory bodies to incorporate the Clearant Process® into their products
manufacturing processes. Incorporation of the Clearant Process® into a manufacturing process may be
accomplished as a manufacturing change for an existing product, or as part of the product
development process in the case of a new product. In the case of tissue processors, the
incorporation of the Clearant Process® does not require regulatory approval prior to marketing as
these products are currently not subject to pre-marketing approval by regulators.
35
With the introduction of the Clearant sterilization service, the Clearant sterilization service
facility became registered with the FDA in February 2006 as a tissue processor for the processing
of the devitalized human tissue allografts, and is subject to the applicable rules and regulations
of the Current Good Tissue Practice for Human, Cell, Tissue and Cellular and Tissue Based Products
(HCT/Ps), 21 CFR Parts 16, 1270, and 1271.
To the extent that our customers products are subject to pre-market approval, manufacturers and
processors of individual products that wish to incorporate the Clearant Process® into their own
products are required to submit product-specific data to regulators. The Company may conduct some
of the in vitro studies, including pathogen inactivation studies, to support these submissions,
although some manufacturers will likely choose to conduct these studies themselves or through other
contract research organizations. In some cases, clinical data may be required to establish the
safety and efficacy of products sterilized by the Clearant Process®. For a new product, these
studies will be incorporated into the basic clinical development plan for that product. For
existing products for which the introduction of the Clearant Process® represents a manufacturing
change, these studies may take the form of comparability studies, an abbreviated type of clinical
trial. Such trials will be the responsibility of the individual manufacturers and processors. If
required, an investigational device exemption for medical devices, or an investigational new drug
application for drugs or biologics, may be submitted to the FDA by the manufacturer or processor.
Tissue processors are not required under current regulations to perform any type of clinical trial
prior to offering Clearant Process® minimally manipulated treated allografts for sale. At the
successful conclusion of such studies as may be required by the FDA, the manufacturers or
processors will apply for registration of their biologics incorporating the Clearant Process®. Upon
approval by the FDA, the new license for the product will reside with the manufacturer or
processor. In the developed markets (e.g., the European Union, Japan and Canada), the regulatory
framework and requirements are similar to those in the United States.
Intellectual Property
Our success depends in part on our ability to obtain patents and protect trade secrets. We must
also operate without infringing upon the proprietary rights of others, while preventing others from
infringing upon our rights. We have been building, and intend to continue to build, a patent
portfolio to protect our position in the market.
As of July 31, 2007, the Company has a total of 91 issued or pending patents. We currently have
twelve issued U.S. patents, which will expire between 2013 and 2023, and twenty-six foreign patents
protecting our technology. We intend to continue to file patent applications, detailing the optimal
process conditions for the application of the Clearant Process® to particular products.
We review intellectual property held by others to determine if it may be complementary to our
intellectual property portfolio or would impact our ability to operate in the market segments on
which we are currently focused. To date we are not aware of any competing intellectual property
that would materially limit our ability to operate as currently planned.
In 2001, we licensed, with the right to sub-license, certain patents which relate to a narrow
aspect of the use of gamma irradiation on biologics to bolster our intellectual property position.
In July 2001, we entered into an agreement granting us full ownership of intellectual property,
trade secrets and data underlying a portion of the Clearant Process® in exchange for future
payments and a royalty of 6% on revenue received from licensing the technology, subject to an
annual maximum.
Financial Information about Segments
We currently have three business segments, direct distribution, fee for service and licensing of
the Clearant Process®, which generated 30%, 12% and 42%, respectively of our revenues for the year
ended December 31, 2006. The remaining revenue is derived from milestone payments from outstanding
contracts and the finalization of our grant revenue projects.
36
Employees
As of August 31, 2007, we have approximately six (6) total employees of which six (6) are full-time
employees: one (1) executive officer, one (1) research and development employee, two (2) sales and
marketing employees and two (2) clerical and administrative personnel.
Reports to Security Holders
We send an annual report including audited financial statements to all of our stockholders of
record. Anyone may obtain a copy of our annual report without charge by writing us at: Investor
Relations, Clearant, Inc, 1801 Avenue of the Stars, Suite 435, Los Angeles, California 90067.
We file reports with the SEC in accordance with the Exchange Act, including annual reports on Form
10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy statements and other
information.
The public may read and copy any materials we file with the SEC at the SECs Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and
the SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC, which can be found at
http://www.sec.gov. Additionally, all reports filed with the SEC are available, free of charge on
our corporate website as soon as reasonably practicable after such reports are filed with, or
furnished to, the SEC. Our corporate website is located at www.clearant.com. The information
contained on our website is not part of this prospectus or incorporated by reference herein.
MANAGEMENTS DISCUSSION AND ANALYSIS
Managements Discussion and Analysis of Financial Condition and Results of Operations for the years
ended December 31, 2006 and 2005
At December 31, 2006, we had working capital deficit of $1,074,000 which included accounts payable
and accrued liabilities of $2,260,000. At December 31, 2006, our total assets were $3,021,000,
which consisted primarily of intangible assets and cash from the sale of our common stock.
Revenues
Our total revenue increased by $229,000 or 42%, to $770,000 for the year ended December 31, 2006,
from $541,000 for the year ended December 31, 2005. Revenues from direct distribution of Clearant
Process® sterile implants were $232,000 during the year ended December 31, 2006, which was the
first year of implementation. We expect revenue from direct distribution to increase as our sales
force becomes fully integrated into the marketplace. This is our primary source of revenue
generation and growth by the Company.
Revenues from licensing activities increased $112,000 or 52%, to $327,000 for the year ended
December 31, 2006, from $215,000 for the year ended December 31, 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®. Revenues from fees for
service activities were $90,000 for the year ended December 31, 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®. While the Company is
continuing to grow the existing license and fee for service agreements, it is not actively pursuing
new license or fee for service agreements, and it is unlikely that there will be near-term material
growth in licensing or fee for service revenue.
Revenues from contract research and milestones decreased $137,000 or 59% to $94,000 for the year
ended December 31, 2006, from $231,000 for the year ended December 31, 2005. The decrease is
primarily related to non-recurring contract milestone payments and contract research completed
during 2005. Grant revenue decreased by $68,000 or 72%, to $27,000 for the year ended December 31,
2006 from $95,000 for the year ended December 31, 2005, as a result of the completion of a majority
of our grant research projects in 2005.
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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 direct distribution, license and
sterilization revenue to be more characteristic of recurring revenue.
Cost of Sales
Our total cost of sales increased by $1,192,000 to $1,209,000 for the year ended December 31, 2006,
from $17,000 for the year ended December 31, 2005. This increase is due to the implementation of
the direct distribution and sterilization service revenue models and the write down of $811,000 in
inventory and inventory related prepayments during 2006. In addition, we expect that the costs
associated with the direct distribution and sterilization services to increase in conjunction with
the revenue increase.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased by $856,000 or 9%, to $8,707,000 for the year
ended December 31, 2006, from $9,563,000 for the year ended December 31, 2005.
Included in the $8,707,000 for the year ended December 31, 2006, are approximately $490,000 of
non-cash stock-based compensation and $278,000 of non-cash stock option grants to consultants,
$280,000 of non-cash patent-related write-offs in accordance with SFAS 144, $250,000 for a one-time
consulting expense for services rendered, $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 year, regulatory matters and due diligence efforts.
We incurred $490,000 in non-cash stock-based compensation for the year ended December 31, 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 year ended December 31,
2006 and 2005, resulting in non-cash expense of $278,000 and $626,000, respectively. This decrease
was due to a non-recurring grant of stock options to non-employees made during the year ended
December 31, 2005. In addition, there was an increase in non-cash patent-related write-offs of
$280,000 for the year ended December 31, 2006, compared to $148,000 for the same period in 2005.
From time to time, we may issue common stock to consultants for services rendered and incur
patent-related costs.
The $856,000 decrease for the year ended December 31, 2006, from the year ended December 31, 2005
was principally due to a concerted effort to decrease our overall expenses during the fourth
quarter of 2006. 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.
During the first quarter of 2007, the Company reduced the number of employees from 25 to 8,
eliminated several marketing, PR & IR initiatives, and prepared to move into less expensive office
space, which had the result of decreasing ongoing expenses. After the reduction in these expenses,
the Companys monthly SG&A is reduced to approximately $200,000 to $400,000. The Company cannot
make any assurances that operations can be maintained at this reduced expense level and may be
required to increase expenses or employee count to properly continue normal operations. As of
December 31, 2006, we had a working capital deficit of $1,074,000 and approximately $2,260,000 of
accounts payable and accrued liabilities of which a significant amount was past due.
Research and Development Expenses
Research and development expenses decreased by $1,124,000 or 55%, to $926,000 for the year ended
December 31, 2006, from $2,050,000 for the year ended December 31, 2005. This decrease was largely
a result of reduced research and development costs associated with the closing of the Maryland
facility during the year ended December 31, 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
38
from research and development to the commercialization of the Clearant Process®. Further
reductions in research and development costs were achieved in the 1st quarter of 2007, to
approximately $30,000.
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 year ended December 31, 2006, we recognized $192,000 in net interest income compared to
$1,802,000 in net interest expense for the same year 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 $563,000 cash on hand as of December 31, 2006, which we are currently investing in short-term
conservative money market funds. We expect to earn interest income in 2007, 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 year ended December 31, 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 for the year ended December 31, 2006,
from $2,161,000 for the year ended December 31, 2005. The decrease was principally due to the
conversion of preferred stock in conjunction with the reverse merger transaction during 2005. As of
December 31, 2006, there were no shares of preferred stock outstanding.
Liquidity and Capital Resources
Net cash used in operating activities was $9,253,000 for the year ended December 31, 2006, compared
to $11,829,000 for the year ended December 31, 2005. During the year ended December 31, 2006, cash
used by operations resulted in a $9,798,000 net loss along with a $422,000 decrease in accounts
payable and accrued liabilities, which was related to unpaid wages as of December 31, 2005 and
decreased accrued professional fees such as public relations, accounting and outside legal fees.
Significant non-cash adjustments to operating activities for the year ended December 31, 2006,
included depreciation and amortization expense of $532,000 and non-cash charges of $490,000 for
stock-based compensation.
During 2005, cash used in operations resulted in an $11,590,000 net loss and a $1,915,000 decrease
in accounts payable and accrued liabilities. The decrease in accounts payable and accrued
liabilities are primarily related to wages, public relations and marketing fees that were accrued
as of December 31, 2004, and paid in 2005. Significant non-cash adjustments to operating activities
for 2005, included depreciation and amortization expense of $470,000, non-cash charges of
$1,795,000 in interest expense, $1,173,000 in merger-related gains and $626,000 for stock-based
compensation.
Our net cash used in investing activities was $337,000 for the year ended December 31, 2006
compared to net cash used in investing activities of $236,000 for the year ended December 31, 2005.
During 2006 and 2005, our investing activities consisted primarily of intellectual property
expenditures 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 $12,000 for the year ended
December 31, 2006, compared to $22,042,000 for the year ended December 31, 2005. Cash provided by
financing activities for the year ended December 31, 2006 consisted primarily of the exercise of
stock options, leaving a balance of approximately $563,000 in cash and cash equivalents at December
31, 2006. Cash provided by financing activities in 2005 consisted primarily of $19,554,000 in net
proceeds from issuance of common stock in conjunction with our reverse merger transaction completed
in March 2005 and our secondary placement completed in November 2005. Additionally, cash was
provided by the issuance of bridge loans for $2,811,000 in January 2005, leaving a balance of
approximately $10,141,000 in cash and cash equivalents at December 31, 2005.
39
We have been unprofitable since our inception and we expect to incur additional operating losses
through at least the end of 2007 and into 2008 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, payment of outstanding accounts payable and accrued liabilities, the ramp-up of
revenue from our existing and new contracts, future decisions to purchase tissue, 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. We expect to continue to
incur negative cash flows and net losses through at least the end of 2007. In addition, during the
first and second quarters of 2007, the Company was unable to make regular payments to trade vendors
which resulted in the increase of accounts payable and accrued liabilities to $2,641,000 as of
March 31, 2007. The Companys ability to settle these payments with vendors will have a material
impact to the Companys cash flow and the timing for the Company to raise additional capital.
The Companys ability to have sufficient capital through the end of 2007 is dependant on successful
settlement of these vendor claims, and the Company will need to raise additional capital prior to
the end of 2007. As of December 31, 2006, we had a working capital deficit of $1,074,000 and
approximately $2,260,000 of accounts payable and accrued liabilities of which a significant amount
was past due. As of March 31, 2007, the Company had accounts payable and accrued liabilities of
$2,641,000 and has been unable to meet cash obligations as they become due. To date, most of these
amounts continue to be past due. We are in settlement discussions with many of these vendors.
Failure to raise additional capital and to reach settlements with these vendors could result in the
discontinuation of operations. Also, changes in our business strategy, technology development or
marketing plans or other events affecting our operating plans and expenses may result in the
expenditure of existing cash before that time. If this occurs, our ability to meet our cash
obligations as they become due and payable will depend on our ability to sell securities, borrow
funds or some combination thereof. We may not be successful in raising necessary funds on
acceptable terms, or at all.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under non-cancelable operating leases with various expirations
through 2011. The future minimum lease payments under these leases and other contractual
obligations as of December 31, 2006 are as follows ($ in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
than 5 |
Contractual Obligations |
|
Total |
|
Year |
|
1 -3 Years |
|
3 - 5 Years |
|
Years |
Lease Obligations |
|
$ |
67 |
|
|
$ |
44 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
Bridge Loan |
|
$ |
106 |
|
|
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations |
|
$ |
9,500 |
|
|
$ |
4,950 |
|
|
$ |
4,550 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,673 |
|
|
$ |
5,100 |
|
|
$ |
4,573 |
|
|
|
|
|
|
|
|
|
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 $1,150,000 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
40
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 December 31, 2006, the $1,150,000
payment has not been made by the Company, and all tissue orders have not been delivered by the
supplier. In February 2007, the Company received notification of termination of the Agreement. The
Company is in ongoing discussions with the supplier to resolve the issues, which could include but
is not limited to, reduction in exclusive territories or termination. The termination of the
Agreement may result in the disruption of the spinal bone implant supply, which would have a
material adverse impact to the Companys ability to distribute spinal bone implants treated with
the Clearant Process®.
The forward-looking comments contained in the above discussion involve risks and uncertainties. Our
actual results may differ materially from those discussed here due to factors such as, among
others, limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, intense competition and substantial regulation in the healthcare industry. Additional
factors that could cause or contribute to such differences can be found in the discussion in Item
7, as well as under the Risk Factors section above.
Managements Discussion and Analysis of Financial Condition and Results of Operations for the Six
Months ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Revenues
Our total revenue increased by $307,000 or 104%, to $603,000 for the six months ended June 30,
2007, from $296,000 for the six months ended June 30, 2006.
Revenues from direct distribution of Clearant Process® sterile implants were $304,000 and $9,000
during the six months ended June 30, 2007 and 2006, respectively. This is a 3278% increase over the
six months ending June 30, 2006 direct distribution revenue of $9,000. Due to cash constraints the
Company experienced in the first half of 2007, the Company was not able to hire independent
distributors, direct sales employees, or otherwise aggressively grow the direct distribution
operations. In addition, growth in this business line is dependent on adequate supply, which will
cause the Company to balance the increase in sales force with the supply. As a result of not hiring
sales people in the first half of 2007, not securing tissue supply, and inadequate cash to fulfill
vendor obligations, the Company did experience a second quarter 2007 decline in revenue, but
believes this will be a temporary fluctuation and will more aggressively pursue additional sales
and supply efforts. Direct distribution continues to be the primary strategy of the Companys
growth plan.
Revenues from licensing activities decreased 64% to $61,000 in the six months ended June 30, 2007,
from $168,000 in the six months ended June 30, 2006. The decrease primarily related to the loss of
one licensing customer in the first quarter of 2007. Revenues from fee for service activities
increased 130% to $69,000 for the six months ended June 30, 2007 from $30,000 in the six months
ended June 30, 2006. This increase was a result of greater implementation of the Clearant Process®
into our customers manufacturing processes and greater market acceptance of human tissue treated
with the Clearant Process®. We are continuing to market the license and Sterilization Service to
gain further adoption in addition to the direct distribution revenue model.
Revenues from contract research, milestones and grants increased to $169,000 in the six months
ended June 30, 2007, from $89,000 in the same six months last year. The increase is primarily
related to a one-time non-recurring license agreement termination fee in that six months. The
reason for the termination was due to the customers discontinuation of orthopedic activities in
January 2007.
During 2007 and 2006 we changed our emphasis away from one-time, generally non-recurring research
and grant revenue to direct distribution of Clearant Process® sterile implants and obtaining
license and Sterilization Service customers. We expect to continue this strategy and expect
contract research and grant revenue to decrease. We expect these direct distribution, license and
sterilization revenue to be more characteristic of recurring revenue. In addition, we expect that
the costs associated with the direct distribution and Sterilization Services to increase in
conjunction with the revenue increase.
41
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased by $2,754,000 or 58%, to $2,035,000 for the
six months ended June 30, 2007, from $4,789,000 for the six months ended June 30, 2006.
The $2,754,000 decrease in sales, general and administrative expenses for the six months ended June
30, 2007, from the six months ended June 30, 2006, was principally due to the downsizing of
personnel in the first quarter of 2007, as well as the reduction in overall expenses. Future sales
and marketing expense increases or decreases will be affected by the revenue, effort and timing
required to provide Clearant Process® sterile implants to the marketplace.
We incurred $160,000 in non-cash stock-based compensation for the six months ended June 30, 2007
from $404,000 for the six months ended June 30, 2006. The reduction primarily relates to the
downsizing of personnel in the first quarter of 2007. We issued common stock and stock options to
outside consultants for services rendered during the six months ended June 30, 2007 and 2006,
resulting in non-cash expense of $48,000 and $89,000, respectively. From time to time, we may issue
common stock to consultants for services rendered.
Research and Development Expenses
Research and development expenses decreased 87% to $59,000 for the six months ended June 30, 2007,
from $468,000 for the six months ended June 30, 2006. This decrease was largely a result of reduced
research and development costs associated with the reduction of our research and development
personnel and related expenses. This was accomplished due to our shift in focus from research and
development to the commercialization of the Clearant Process®. Further reductions in research and
development costs may be achieved.
In addition to the elimination of certain costs and the completion of certain projects, we have
complemented in-house research and development with universities and third party research and
development consulting firms, which we believe provides a broader expertise in research and
development and allows us to maintain a low research and development headcount.
Other Income/Expense
For the six months ended June 30, 2007, we recognized $1,000 in net interest expense compared to
$135,000 of net interest income for the same six months last year. We had $1,675,000 cash on hand
as of June 30, 2007, which we invested in short-term conservative money market funds.
Preferred Stock Dividend and Financing Costs
As of June 30, 2007 and 2006, there were no shares of preferred stock outstanding and therefore no
dividends.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred significant operating losses and negative
cash flows from operating activities since its inception. As of June 30, 2007, these conditions
raised substantial doubt as to the Companys ability to continue as a going concern. In April 2007,
the Company raised additional capital to supplement its operations. There can be no assurance that
the Company will be successful in its efforts to generate, increase, or maintain revenue or raise
additional capital on terms acceptable to the Company or that the Company will be able to continue
as a going concern. The financial statements do not include any adjustments relating to the
recoverability of the carrying amount of the recorded assets or the amount of liabilities that
might result from the outcome of this uncertainty.
We expect to incur operating losses and negative cash flows for the foreseeable future. Our ability
to execute on our current business plan is dependent upon our ability to develop and market our
products, and, ultimately, to generate revenue.
42
As of June 30, 2007, we had net cash on hand of approximately $1,675,000. Excluding non-current
accounts payable, accrued liability payments, and inventory related payments, we are currently
expending cash at a rate of approximately $200,000 to $400,000 per month, and at present rates,
including the April 2007 funding, we anticipate that we will need to seek additional financing
prior to the end of 2007. The Company cannot make any assurances that operations can be maintained
at this reduced expense level and we may need to increase expenses or expand our staff to properly
continue normal operations. As of June 30, 2007 the Company has $2,945,000 of accounts payable and
accrued liabilities, most of which are non-current.
Research and Development
For the coming year we plan to focus on generating revenue through our direct distribution revenue
model and will expend cash to facilitate that process. In the long term, we plan to re-initiate our
research and development spending surrounding blood plasma derivatives and recombinant products.
Direct Distribution Strategy
On November 28, 2006, Clearant entered into a two-year supply agreement with a tissue bank for the
supply of Clearant Process® sports medicine implants. Clearant has agreed to pay a transfer fee for
the sports medicine implants. The Agreement shall automatically renew for successive one-year terms
unless either party terminates upon written notice to the other party.
On September 27, 2006, Clearant entered into a renewable two-year supply and distribution agreement
(the Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement,
Osprey granted Clearant exclusive rights to place current and future Osprey cervical and lumbar
allografts treated with the Clearant Process® in a number of geographic territories and an option
for additional geographic territories. In exchange for the exclusive rights under the Osprey
Agreement, Clearant is obligated to pay Osprey $500,000 as a prepayment for certain ordered
products to be delivered after October 1, 2006. This prepayment was due upon the earlier of the
following: (i) within three business days after Clearant receives debt or equity financing of at
least $1 million, or (ii) October 31, 2006. In addition, Clearant was required to make the
following quarterly payments to be applied to payments for ordered products: $650,000 by October
31, 2006; $750,000 by January 1, 2007; $850,000 by April 1, 2007; $1 million by July 1, 2007; $1.2
million by October 1, 2007; $1.3 million by January 1, 2008; $1.5 million by April 1, 2008; and
$1.75 million by July 1, 2008. As of the end of the second quarter 2007, all tissue orders had not
been delivered by Osprey and the prepayments had not been made by the Company. In February 2007,
Clearant had received notice from Osprey of its termination of the Osprey Agreement, effective
within thirty (30) days from receipt of this notification if certain alleged payment defaults were
not timely cured by Clearant. Clearant is in ongoing discussions with Osprey to resolve these
issues, which could include but is not limited to, reduction in exclusive territories or
termination of the Osprey Agreement. The termination of the Osprey Agreement may result in the
disruption of the spinal bone implant supply from Osprey, which may have a material adverse impact
on Clearants ability to distribute spinal bone implants treated with the Clearant Process®.
Our operating plan, this acquisition of inventory, higher levels of historic accounts receivable
and the related sales and marketing costs associated with the direct distribution strategy have had
an impact on our cash requirements, and have created the need for additional financing.
Limited Cash Availability
Net cash used in operating activities was $1,106,000 for the six months ended June 30, 2007,
compared to $5,354,000 for the six months ended June 30, 2006. During the six months ended June 30,
2007, cash used by operations resulted in a $70,000 increase in inventory of Clearant Process®
sterile implants, a $204,000 increase in accounts payable due to the slowing down of payments made
by the Company, and a $290,000 increase in accrued liabilities primarily related to costs
associated with the financing in April 2007. Significant non-cash adjustments to operating
activities for the six months ended June 30, 2007, included depreciation and amortization expense
of $277,000, non-cash charges of $160,000 for stock-based compensation, $93,000 for common stock
issued to consultants for services rendered, and an $86,000 loss on sale of fixed assets.
43
Our net cash used by investing activities was $8,000 for the six months ended June 30, 2007
compared to net cash used of $212,000 for the six months ended June 30, 2006. Our investing
activities consist primarily of patent-related intellectual property expenses and capital
expenditures.
We have financed our operations since inception primarily through the sale of shares of our stock
and convertible notes. Our net cash provided by financing activities was $2,226,000 for the six
months ended June 30, 2007, compared to net cash provided by financing activities of $20,000 for
the six months ended June 30, 2006. Cash provided by financing activities for the six months ended
June 30, 2007 consisted of $2,026,000 from the issuance of common stock and $200,000 from the
issuance of a bridge loan.
Doubt About Our Ability To Continue As Going Concern
We have incurred significant operating losses and negative cash flows from operating activities,
and have limited available cash, which raises substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent upon our ability to obtain
additional equity or debt financing, reduce expenditures, attain further operating efficiencies,
and, ultimately, to generate greater revenue.
As of June 30, 2007, we had approximately $1,675,000 in cash and cash equivalents. Excluding
non-current accounts payable, accrued liability payments, and inventory related payments, we are
non-inventory related expending cash at a rate of approximately $200,000 to $400,000 per month, and
at present rates, including the proceeds from the April 2007 private placement we will need to seek
additional financing prior to the end of 2007. Any equity financing may result in substantial
dilution of existing stockholders, and financing may not be available on acceptable terms, or at
all.
Options for raising capital include issuing common stock, preferred stock, convertible stock,
warrants, or a combination of these equity securities. Equity financing may be supplemented with
additional debt financing for inventory, accounts receivable and working capital.
We may not be successful in obtaining financing, and if funding is obtained it may be on terms
considered unfavorable to us or our existing shareholders. The inability or failure to raise
capital before our available cash is depleted will have a material adverse effect on our business
and may result in bankruptcy or discontinuation of operations.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various expirations
through 2011. The future minimum lease payments under these leases and other contractual
obligations as of June 30, 2007 are as follows ($ in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
than 5 |
Contractual Obligations |
|
Total |
|
Year |
|
1 -3 Years |
|
3 - 5 Years |
|
Years |
Lease Obligations |
|
$ |
139 |
|
|
$ |
91 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge Loan |
|
$ |
312 |
|
|
$ |
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
451 |
|
|
$ |
403 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes renewable two-year spinal supply and distribution agreement which was terminated in
February 2007. |
The forward-looking comments contained in the above discussion involve risks and uncertainties. Our
actual results may differ materially from those discussed here due to factors such as, among
others, limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, intense competition and substantial
44
regulation in the healthcare industry. Additional factors that could cause or contribute to such
differences can be found under the Risk Factors section in our Form 10-KSB.
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of June 30, 2007, we had no off-balance
sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. Generally accepted accounting principles require
management to make estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We
base our estimates on experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that may not be readily apparent from other sources. Our
actual results may differ from those estimates.
We consider our critical accounting policies to be those that involve significant uncertainties,
require judgments or estimates that are more difficult for management to determine or that may
produce materially different results when using different assumptions. We consider the following
accounting policies to be critical:
Revenue Recognition and Deferred Revenue.
We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104). Our revenue sources are direct distribution of Clearant Process®
sterile implants, and licensing fees and Sterilization Services to customers who incorporate the
Clearant Process® technology into their product and manufacturing processes, which may include
performance milestones and contract research activities. In addition, we recognize revenues from
government grants. We recognize direct distribution revenue upon the sourcing of tissue by a
customer. Licensing revenue is recognized when a customer distributes products incorporating the
Clearant Process® and revenue related to the Sterilization Service is recognized when the service
is substantially complete. Revenue related to a performance milestone is recognized upon customer
acceptance of the achievement of that milestone, as defined in the respective agreements. Revenue
related to contract research activities is recognized on a percentage-of-completion basis. In the
event cash is received in advance of service performed, we will defer the related revenue
recognition until the underlying performance milestone is achieved and or the contract research
activities commence. In the event advance cash payments are not attributable to any performance
milestone and or contract research activity, we will recognize the underlying amounts into revenue
on a straight-line basis over the term of the underlying agreement. We include shipping charges in
the gross invoice price to customers and classify the total amount as revenue in accordance with
Emerging Issues Task Force Issue (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs.
Shipping costs are recorded as cost of revenues. We evaluate the collectability of accounts
receivables and provide a reserve for credit losses, as appropriate. As of June 30, 2007, we
reserved for credit losses of $20,000.
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. For the quarters
ended June 30, 2007 and 2006, we had no inventory write-downs.
Inventory and Inventory Related Prepayments
Inventory is primarily comprised of implantable donor tissue treated with the Clearant Process® and
is valued at the lower of cost or market with cost determined using the first-in, first-out method.
Inventory is located at contracted tissue banks and on consignment in hospitals. Inventory may be
written down from time to time based on market conditions or other factors.
45
In accordance with the terms of the spinal supply and distribution agreement (see Note 9 in the
accompanying footnotes to the interim financial statements), we are required to make prepayments. Upon
receipt of the inventory the prepayments will be reclassified as inventory until distributed.
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized as
incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. We evaluate the recoverability of its patent costs and trademarks
quarterly based on estimated undiscounted future cash flows.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes (SFAS 109), using
the liability method. Under SFAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that are expected to be in effect when the differences
reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Stock-Based Compensation
On January 1, 2006, we adopted Statements of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning
in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 107 (SAB 107) relating to SFAS 123(R). We have applied the provisions of SAB 107
in our adoption of SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective transition method, which requires the
application of the accounting standard as of January 1, 2006, the first day of our fiscal year
2006. The financial statements as of and for the year ended December 31, 2006 reflect the impact of
SFAS 123(R). In accordance with the modified prospective transition method, the financial
statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R).
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. Bridge loans are estimated to
approximate fair value based upon current market borrowing rates for loans with similar terms and
maturities.
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. Except as described under Legal Proceedings on page
24, as of the date of this registration statement we are not currently involved in any legal
proceedings that we believe would have a material adverse effect on our business, financial
condition or operating results.
46
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. We are required to adopt the provision
of SFAS 157, as applicable, beginning in fiscal year 2008. We do not believe the adoption of SFAS
157 will have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November
15, 2007. We have not decided if we will early adopt SFAS 159 or if it will choose to measure any
eligible financial assets and liabilities at fair value.
In May 2007, the FASB issued FSP No. FIN 48-1 Definition of Settlement in FASB Interpretation No.
48, (FSP FIN 48-1). FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should
determine whether a tax provision is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The term effectively settled replaces the term ultimately settled
when used to describe recognition, and the terms settlement or settled replace the terms
ultimate settlement or ultimately settled when used to describe measurement of a tax position
under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax
positions considered effectively settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to be sustained based solely on the
basis of its technical merits and the statute of limitations remains open. We do not anticipate
that the adoption of FSP FIN 48-1 will have a material affect on its results of operations or
financial position, although we are continuing to evaluate the full impact of the adoption of FSP
FIN 48-1.
DESCRIPTION OF PROPERTY
Our principal executive offices, including all of our sales, marketing and administrative
functions, are located in approximately 2500 square feet of office space at 1801 Avenue of the
Stars, Suite 435, Los Angeles, California 90067, under a lease which expires on December 31, 2008.
We pay rent of approximately $7,500 per month including operating expenses. We have also entered
into a lease of approximately 2,300 square feet of space in Mundelein, Illinois, which runs through
March 31, 2009. We pay rent of $1,800 per month at that location.
We believe that the current leased space is adequate even after planned reductions to meet our
current needs, and that additional facilities will be available for lease to meet any future needs.
If we expand, we may lease additional regional office facilities, as necessary, to service our
customer base.
Investment Policies
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.
As of
September 26, 2007, 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.
47
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the OTCBB under the symbol CLRA. The following table shows the high
and low bid prices of our common stock, as quoted on the OTCBB, by quarter during each of our last
two fiscal years. These quotes reflect inter-dealer prices, without retail markup, markdown or
commissions and may not represent actual transactions. The information below was obtained from the
OTCBB, for the respective periods.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Fiscal year ended December 31, 20051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter2 |
|
$ |
5.50 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
|
4.35 |
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
Third quarter |
|
|
4.79 |
|
|
|
2.16 |
|
|
Fourth quarter |
|
|
4.49 |
|
|
|
2.35 |
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, 20061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
2.39 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
|
1.31 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
Third quarter |
|
|
0.53 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
|
0.42 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, 20073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
0.28 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
|
0.17 |
|
|
|
0.02 |
|
|
|
|
1 |
|
Over-the-counter market quotations may reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual transactions. |
|
2 |
|
Clearant, Inc. merged with the Clearant on March 31, 2005. |
|
3 |
|
On August 3, 2007, after recommendation by the Companys board of directors, the
holders of a majority of the Companys common stock approved an amendment to the Companys
Certificate of Incorporation to permit the Company to effect a 1:14 reverse stock split of its
common stock. The reverse stock split is effective as of August 23, 2007. |
Holders
As of
September 26, 2007, there were approximately 210 holders of record of our common stock. As
of July 2, 2007, there were approximately 4,140 beneficial owners of our common stock.
Dividends
We have never declared or paid any dividends. We anticipate, as our board of directors deems
appropriate, that we will continue to retain all earnings for use in our business.
48
Securities Authorized For Issuance Under Equity Compensation Plans
The following table provides information about our common stock that may be issued upon the
exercise of equity instruments under all of our existing equity compensation plans as of December
31, 2006:
Equity Compensation Plan Information 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of |
|
|
|
|
|
|
|
|
|
|
| securities remaining |
|
|
| Number of |
|
|
|
|
|
| available for future |
|
|
| securities to be |
|
|
|
|
|
| issuance under |
|
|
| issued upon |
|
Weighted-average | |
|
| equity |
|
|
| exercise |
|
exercise price of | |
|
| compensation plans |
|
|
| of outstanding |
|
outstanding |
| |
| (excluding securities |
Plan |
|
| options, warrants |
|
options, warrants |
|
|
| reflected in column |
Category |
|
| and rights 2 |
|
and rights |
|
|
| (a)) 3 |
|
|
(a) |
|
(b) |
|
(c) |
Equity compensation
plans approved by
security holders |
|
|
9,511,958 |
|
|
$ |
3.35 |
|
|
|
2,488,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
Total |
|
|
9,511,958 |
|
|
$ |
3.35 |
|
|
|
2,488,652 |
|
|
|
|
1 |
|
On August 3, 2007, at the Companys annual meeting, the stockholders approved a
6,000,000 share increase in our 2005 Stock Award Plan. Not including this increase,
as of September 26, 2007, there were 156,780 shares of our common
stock reserved for issuance upon the exercise of warrants and 3,286,842 shares of common stock reserved for issuance upon the exercise of options. |
|
2 |
|
These options were issued under the 2000 and 2005 Stock Award Plans. |
|
3 |
|
Of this amount no shares were available for issuance under the 2000 Stock Award Plan
and 2,488,652 shares were available for issuance under the 2005 Stock Award Plan. |
EXECUTIVE COMPENSATION
The following table sets forth the total compensation received by the named executive officer
during the fiscal years ended December 31, 2006 and 2005:
SUMMARY COMPENSATION TABLE 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Nonqualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Option |
|
Incentive Plan |
|
Deferred |
|
All Other |
|
|
Name and principal |
|
|
|
|
|
Salary |
|
Bonus |
|
Awards |
|
Awards |
|
Compensation |
|
Compensation |
|
Compensation |
|
|
position |
|
Year |
|
($) |
|
($) 2 |
|
($) |
|
($) 3 |
|
($) |
|
Earnings ($) |
|
($) |
|
Total ($) |
Alain Delongchamp,
Chief Executive |
|
|
2006 |
|
|
$ |
350,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
350,000 |
|
Officer 4 |
|
|
2005 |
|
|
$ |
331,244 |
|
|
$ |
60,000 |
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
391,244 |
|
|
Jon Garfield,
Chief Financial |
|
|
2006 |
|
|
$ |
240,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240,000 |
|
Officer 5 |
|
|
2005 |
|
|
$ |
90,000 |
|
|
$ |
25,000 |
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
115,000 |
|
49
|
|
|
1 |
|
On September 13, 2007, 1,200,000 stock options were
granted to Mr.
Garfield in his capacity as director, Chief Executive Officer and
Chief Financial Officer. These shares are
unvested and not immediately exercisable and vest 25% annually over
four years. |
|
2 |
|
Bonuses are based on performance. |
|
3 |
|
All options were granted under the 2005 Stock Award Plan. The
intrinsic value of the options granted to Mr. Delongchamp and
Mr. Garfield in 2006 and 2005 is $0. |
|
4 |
|
Mr. Delongchamp was appointed as the Chief Executive Officer
and Director in February 2005 and resigned in January 2007.
Mr. Delongchamp was granted 900,000 and 150,000 stock options
for the years ended December 31, 2006 and 2005, respectively,
for his role as Chief Executive Officer; however, all of
these stock options have expired as of September 26, 2007. In
connection with his services as a Director, Mr. Delongchamp
received $0. |
|
5 |
|
Mr. Garfield joined the Company as the Chief Financial
Officer in August 2005 and was appointed as Chief Executive
Officer in January 2007. Mr. Garfield was granted 550,000 and
200,000 stock options for the years ended December 31, 2006
and 2005, respectively, for his role as Chief Financial
Officer. Upon appointment as Chief Executive Officer, Mr.
Garfields employment agreement was extended for 3 years.
Under the terms of the agreement his salary was increased to
$280,000 to be effective upon the Company raising capital, no
adjustment to his salary has been made to date. In addition,
in April 2007 Mr. Garfield was granted 400,000 stock options
which vested immediately upon grant. |
50
Outstanding Equity Awards At Fiscal Year-End
The following table sets forth information concerning unexercised options; stock that has not
vested; and equity incentive plan awards for each named executive officer outstanding as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 1 |
OPTION AWARDS |
|
STOCK AWARDS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
Plan |
|
Awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Awards: |
|
Market |
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Number |
|
of |
|
Number |
|
or Payout |
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
|
|
|
of |
|
Shares |
|
of |
|
Value of |
|
|
|
|
|
|
|
|
|
|
Plan |
|
|
|
|
|
Shares |
|
or |
|
Unearned |
|
Unearned |
|
|
|
|
|
|
Awards: |
|
|
|
|
|
or Units |
|
Units |
|
Shares, |
|
Shares, |
|
|
Number of |
|
Number of |
|
Number of |
|
|
|
|
|
of |
|
of |
|
Units or |
|
Units or |
|
|
Securities |
|
Securities |
|
Securities |
|
|
|
|
|
Stock |
|
Stock |
|
Other |
|
Other |
|
|
Underlying |
|
Underlying |
|
Underlying |
|
|
|
|
|
That |
|
That |
|
Rights |
|
Rights |
|
|
Unexercised |
|
Unexercised |
|
Unexercised |
|
Option |
|
|
|
Have |
|
Have |
|
That |
|
That |
|
|
Options |
|
Options |
|
Unearned |
|
Exercise |
|
Option |
|
Not |
|
Not |
|
Have Not |
|
Have Not |
|
|
(#) |
|
(#) |
|
Options |
|
Price |
|
Expiration |
|
Vested |
|
Vested |
|
Vested |
|
Vested |
Name |
|
Exercisable 2 |
|
Unexercisable 3 |
|
(#) |
|
($) |
|
Date |
|
(#) |
|
($) |
|
(#) |
|
(#) |
Alain
Delongchamp
4
|
|
437,500 |
|
|
1,012,500 |
|
|
|
|
76,000 @ $0.60;
324,000 @ $2.80;
150,000 @ $4.12;
150,000 @ $1.64;
25,000 @ $1.12;
725,000 @ $0.91
|
|
76,000 @ 7/22/12;
324,000 @ 2/1/14;
150,000 @ 7/1/15;
150,000 @ 1/27/16;
25,000 @ 4/14/16;
725,000 @ 5/1/16
|
|
|
|
|
|
|
|
|
Jon Garfield
|
|
50,000 |
|
|
700,000 |
|
|
|
|
200,000 @ $3.86;
25,000 @ $1.64;
25,000 @ $1.12;
500,000 @ $0.91
|
|
200,000 @ 8/30/15;
25,000 @ 1/27/16;
25,000 @ 4/14/16;
500,000 @ 5/1/16
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
On September 13, 2007, 1,200,000 stock options were granted to
Mr. Garfield in his capacity as director, Chief Executive
Officer and Chief Financial Officer. These shares are unvested and not immediately
exercisable and vest 25% annually over four years. |
|
2 |
|
Represents shares that are vested and/or immediately exercisable.
All option shares were granted under either the 2000 or 2005 Stock
Award Plan. |
|
3 |
|
Represents shares that are unvested and not immediately exercisable. |
|
4 |
|
Mr. Delongchamp was appointed as the Chief Executive Officer and
Director in February 2005 and resigned in January 2007. As of
May 11, 2007 Mr. Delongchamp has not exercised any of his options
and all of his options have expired. |
51
Compensation Of Directors
The following table reflects the compensation of directors for our fiscal year ended December
31, 2006:
2006 DIRECTOR COMPENSATION 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
Qualified |
|
All |
|
|
|
|
Fees Earned |
|
|
|
|
|
|
|
|
|
Plan |
|
Deferred |
|
Other |
|
|
|
|
or Paid |
|
Stock |
|
Option |
|
Compensation |
|
Compensation |
|
Compensation |
|
|
Name |
|
in Cash ($) |
|
Awards ($) |
|
Awards ($) |
|
($) |
|
Earnings ($) |
|
($) |
|
Total ($) |
John S. Wehrle2 |
|
$ |
46,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46,000 |
|
Nolan H. Sigal2 |
|
$ |
18,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,000 |
|
Herve de Kergrohen2 |
|
$ |
20,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,000 |
|
Alexander Man-Kit Ngan3 |
|
$ |
12,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,000 |
|
Richard A. Anderson4 |
|
$ |
2,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,000 |
|
Rowland W. Day II5 |
|
$ |
66,375 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
66,375 |
|
Michael Elek5 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Gaddo Cardini6 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
|
|
|
1 |
|
On September 13, 2007, the following stock options were granted to the directors at an
exercise price of $0.45: Mr. Garfield 1,200,000; (in his capacity as director Chief Executive Officer
and Chief Financial Officer) Mr. Elek 400,000; Mr. Day -
400,000; and Mr. DeWald 400,000. These shares are unvested and not
immediately exercisable and vest 25% annually over four years. |
|
2 |
|
Resigned as a member of the board of directors of the Company effective April 26, 2007. |
|
3 |
|
Resigned as a member of the board of directors of the Company effective January 16,
2007. As of May 11, 2007, Mr. Ngan has not exercised any of his options and all of his
options have expired. |
|
4 |
|
Resigned as a member of the board of directors of the Company effective March 6, 2006. |
|
5 |
|
Appointed as a member of the board of directors of the Company effective April 5, 2007. |
|
6 |
|
Appointed as a member of the board of directors of the Company effective April 5, 2007
and resigned as such on May 21, 2007. |
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC.
You may read and copy, at prescribed rates, any document we have filed at the SECs public
reference room at 100 F Street, N.E., Washington, D.C. The SEC also maintains a website that
contains reports, proxy and information statements and other information regarding registrants that
file electronically with the SEC (http://www.sec.gov).
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference information filed with it, which means that we can
disclose important information to you by referring you to the documents containing such
information. The information incorporated by reference is an important part of this prospectus, and
information filed later by us with the SEC will automatically update and supersede this
information.
We incorporate by reference the documents listed below and any future filings made with the SEC by
us under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
|
|
|
Our Annual Report on Form 10-KSB for the year ended December 31, 2006; |
|
|
|
|
Our Current Reports on Form 8-K (to the extent filed and not furnished with the
SEC) filed with the SEC on January 5, 2007, January 19, 2007, January 26, 2007,
April 4, 2007, April 11, 2007, May 23, 2007, May 25, 2007, June 1, 2007, August 9, 2007, |
52
|
|
|
August 24, 2007 and
September 18, 2007; |
|
|
|
|
Our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007; |
|
|
|
|
Our Definitive Proxy Statement filed with the SEC on July 10, 2007; and |
|
|
|
|
Our Quarterly Report on Form 10-QSB for the quarter ended June 30, 2007. |
All documents and reports filed by us pursuant to Section 13(a), 13(c), 14, or 15(d) of the Exchange Act after the
date of this prospectus are deemed to be incorporated by reference in this prospectus from the date of filing of such
documents or reports, except as to any portion of any future annual or quarterly reports or proxy statements which is
not deemed to be filed under those sections. Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus will be deemed to be modified or superseded for purposes of this
prospectus to the extent that any statement contained herein or in any other subsequently filed document which also
is or is deemed to be incorporated by reference in this prospectus modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of
this prospectus.
53
ANNUAL FINANCIAL STATEMENTS
CONTENTS
|
|
|
|
|
PAGE |
|
|
AFS-2 |
FINANCIAL STATEMENTS |
|
|
|
|
AFS-3 |
|
|
AFS-4 |
|
|
AFS-5 |
|
|
AFS-6 |
|
|
AFS-7 |
AFS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Clearant, Inc.
Los Angeles, California
We have audited the balance sheet of Clearant, Inc. (the Company) as of December 31, 2006, and
the related statements of operations, stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2006. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2006, and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the financial statements, in 2006 the Company adopted Statement of
Financial Accounting Standards No 123 (Revised 2004), Share-Based Payment.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from operations and negative cash flow from operations. This raises substantial
doubt about the Companys ability to continue as a going concern. Managements plans in regard to
these matters are also described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 17, 2007
AFS-2
CLEARANT, INC.
BALANCE SHEET
(in thousands, except par value amounts)
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
563 |
|
Accounts receivable, net of allowances of $20 |
|
|
274 |
|
Inventory, net of $405 of inventory allowance |
|
|
278 |
|
Inventory related prepayments, net of $406 of inventory allowance |
|
|
107 |
|
Prepaids and other assets |
|
|
137 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of $1,076 of accumulated depreciation |
|
|
290 |
|
Identifiable intangibles, net of $871 of accumulated amortization |
|
|
1,279 |
|
Deposits and other assets |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,021 |
|
|
|
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock and Stockholders Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
|
$ |
1,653 |
|
Accrued liabilities |
|
|
607 |
|
Bridge loans, net |
|
|
106 |
|
Deferred revenue |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,437 |
|
|
|
|
|
|
|
|
|
|
Series A Redeemable Preferred Stock: |
|
|
|
|
Series A Redeemable Convertible preferred stock (50,000 shares
authorized; 0 issued and outstanding |
|
|
0 |
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
Common stock ($0.0001 par value; 200,000 shares authorized; 40,178
issued and outstanding) |
|
|
4 |
|
Additional paid-in capital |
|
|
82,949 |
|
Accumulated deficit |
|
|
(82,369 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
584 |
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable preferred stock and stockholders equity |
|
$ |
3,021 |
|
|
|
|
|
See accompanying notes to financial statements.
AFS-3
CLEARANT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Licensing |
|
$ |
327 |
|
|
$ |
215 |
|
Direct distribution |
|
|
232 |
|
|
|
|
|
Fee for service |
|
|
90 |
|
|
|
|
|
Contract research and milestones |
|
|
94 |
|
|
|
231 |
|
Grants |
|
|
27 |
|
|
|
95 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
770 |
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,209 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Gross profit (Loss) |
|
|
(439 |
) |
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
8,707 |
|
|
|
9,563 |
|
Research and development |
|
|
926 |
|
|
|
2,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,633 |
|
|
|
11,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(10,072 |
) |
|
|
(11,119 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
192 |
|
|
|
(1,802 |
) |
Gain on extinguishment of debt and other |
|
|
82 |
|
|
|
1,331 |
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes |
|
|
(9,798 |
) |
|
|
(11,590 |
) |
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(9,798 |
) |
|
|
(11,590 |
) |
Add: Preferred stock dividend and financing costs |
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(9,798 |
) |
|
$ |
(13,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.47 |
) |
|
|
|
|
|
|
|
|
|
Number of shares used in weighted average per
share calculation: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
39,883 |
|
|
|
29,498 |
|
See accompanying notes to financial statements.
AFS-4
CLEARANT, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock- |
|
|
|
Series B Preferred |
|
|
Series C Preferred |
|
|
Common Stock, $0.0001 |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
holders |
|
|
|
Stock |
|
|
Stock |
|
|
par value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Equity |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
(Deficit) |
|
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 stockholders
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
52 |
|
Issuance of common stock
to consultants for
services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
278 |
|
Compensation expenses
incurred in connection
with issuance of options
and warrants to
non-employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
458 |
|
Secondary placement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,774 |
|
|
|
|
|
|
|
11,036 |
|
|
|
|
|
|
|
|
|
|
|
11,036 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,590 |
) |
|
|
|
|
|
|
(11,590 |
) |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(13 |
) |
Cumulative translation
loss attributable to the
dissolution of foreign
subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,590 |
) |
|
|
46 |
|
|
|
(11,544 |
) |
Preferred stock dividend
and financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
254 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,798 |
) |
|
|
|
|
|
|
(9,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
40,178 |
|
|
$ |
4 |
|
|
$ |
82,949 |
|
|
$ |
(82,369 |
) |
|
$ |
|
|
|
$ |
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
AFS-5
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,798 |
) |
|
$ |
(11,590 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Provision for inventory and inventory related prepayments write down |
|
|
811 |
|
|
|
|
|
Provision for accounts receivable allowance |
|
|
|
|
|
|
20 |
|
Depreciation and amortization |
|
|
532 |
|
|
|
470 |
|
Stock-based compensation |
|
|
490 |
|
|
|
|
|
Issuance of common stock to consultants for services rendered |
|
|
154 |
|
|
|
626 |
|
Non-cash interest expense associated with convertible debt financings |
|
|
|
|
|
|
1,795 |
|
Gain on extinguishment of debt and other |
|
|
(82 |
) |
|
|
(1,331 |
) |
Warrants exchanged for common stock |
|
|
|
|
|
|
158 |
|
Cumulative translation loss attributable to the dissolution of foreign
subsidiaries |
|
|
|
|
|
|
59 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(66 |
) |
|
|
(101 |
) |
Inventory |
|
|
(683 |
) |
|
|
|
|
Inventory related prepayments |
|
|
(513 |
) |
|
|
|
|
Prepaids |
|
|
127 |
|
|
|
223 |
|
Accounts payable |
|
|
616 |
|
|
|
(555 |
) |
Accrued liabilities |
|
|
(1,038 |
) |
|
|
(1,360 |
) |
Deferred revenue |
|
|
(37 |
) |
|
|
(161 |
) |
Other assets and liabilities |
|
|
234 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(9,253 |
) |
|
|
(11,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(203 |
) |
|
|
(129 |
) |
Capital expenditures |
|
|
(134 |
) |
|
|
(132 |
) |
Proceeds from sales of fixed assets, net |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(337 |
) |
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs |
|
|
|
|
|
|
19,554 |
|
Issuance of convertible notes payable, net of costs |
|
|
|
|
|
|
2,811 |
|
Exercise of common stock options |
|
|
26 |
|
|
|
50 |
|
Payments on bridge loans |
|
|
|
|
|
|
(366 |
) |
Principal payments on capital lease obligations |
|
|
(14 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
12 |
|
|
|
22,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustments on cash and cash equivalents |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(9,578 |
) |
|
|
9,964 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
10,141 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
563 |
|
|
$ |
10,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, the Company paid accounts payable
of $124 with 275,987 shares of common stock |
|
$ |
124 |
|
|
$ |
|
|
Cash paid for interest |
|
$ |
2 |
|
|
$ |
9 |
|
Cash paid for taxes |
|
$ |
1 |
|
|
$ |
1 |
|
Accumulated preferred stock dividend and amortization of financing costs |
|
$ |
0 |
|
|
$ |
2,161 |
|
AFS-6
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock into common stock |
|
$ |
0 |
|
|
$ |
17,883 |
|
Conversion of Series B Preferred Stock into common stock |
|
$ |
0 |
|
|
$ |
16,386 |
|
Conversion of Series C Preferred Stock into common stock |
|
$ |
0 |
|
|
$ |
188 |
|
Conversion of Publico bridge loan into common stock |
|
$ |
0 |
|
|
$ |
2,373 |
|
Issuance of warrants to 2005 bridge loan holders |
|
$ |
0 |
|
|
$ |
103 |
|
Exchange of all warrants issued and outstanding in conjunction
with the 2005 and 2004 bridge loan financings into common stock |
|
$ |
0 |
|
|
$ |
1,350 |
|
Issuance of common stock to consultants for services |
|
$ |
0 |
|
|
$ |
278 |
|
Property and equipment financed through capital lease obligations |
|
$ |
0 |
|
|
$ |
42 |
|
See accompanying notes to financial statements.
AFS-7
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Clearant, Inc. (Clearant or the Company) was incorporated as a California corporation and
commenced operations on April 30, 1999. The Company has developed a proprietary technology, the
Clearant Process® that inactivates pathogens that may contaminate biological products such as
tissue allograft implants, recombinant protein therapeutics, plasma protein therapeutics, blood and
blood-related products. The Clearant Process® enables customers to meet the medical need for safer
biological products and to satisfy current and future product safety guidelines. The Companys
primary business model is to provide customers the ability to apply the Clearant Process®
internally or through the Companys sterilization service. Customers pay the Company for assistance
in applying the process to their manufacturing processes or to apply the process for them at the
Companys sterilization service center. During 2003 and 2004, the Companys primary sources of
revenue were contract research and government grants. During 2005, the Company changed its emphasis
from one-time, generally non-recurring research and grant revenue to obtaining license and
sterilization service customers. During 2006, the Company implemented a plan to better market and
promote adoption of the Clearant Process®, which is to directly distribute Clearant Process®
sterile implants of customers in order to facilitate market penetration. The Company intends 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. The Companys ability
to achieve a profitable level of operations will depend its ability to continue to increase
customer acceptance of the Clearant Process® and increased recognition by end users of the value of
the Clearant Process® in assuring sterile products.
The accompanying financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and reflect all adjustments, consisting solely
of normal recurring adjustments, needed to fairly present the financial results. 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.
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.
As described more fully in Note 10, the Company consummated a reverse merger with a public company
in the first quarter of 2005, whereby the Company raised capital through a private placement of
common stock. Just prior to the closing, the Company effected a 1-for-1.15 reverse stock split of
common stock. All references to common stock and per share amounts for all prior periods presented
have been retroactively restated to reflect this split. In connection with the closing, the Company
raised gross proceeds of $11,080, net of costs of approximately $242, and converted all bridge
loans and preferred stock issued and outstanding at December 31, 2004, and a majority of the bridge
loans issued in the first quarter of 2005, into common shares.
In June 2005, the registrant, Clearant, Inc., formerly known as Bliss Essentials Corp., changed its
state of incorporation from Nevada to Delaware. In conjunction with the reincorporation, Clearant
had authorized common stock consisting of 200 million shares, $0.0001 par value, of which
40,103,387 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 SEC on June 16, 2005. The
carrying value of the common stock has been revalued in accordance with the reincorporation. On
December 31, 2005, the Company merged Clearant Licensing, Inc. into Clearant, Inc., a Delaware
corporation.
In November 2005, the Company closed a secondary 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. The Company received approximately
$11,036, which is net of costs of approximately $967. 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.
AFS-8
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred significant operating losses and negative
cash flows from operating activities since its inception. As of December 31, 2006, these conditions
raised substantial doubt as to the Companys ability to continue as a going concern. In April 2007,
the Company raised additional capital (See Note 18) to supplement its operations. There can be no
assurance that the Company will be successful in its efforts to generate, increase, or maintain
revenue or raise additional capital on terms acceptable to the Company or that the Company will be
able to continue as a going concern. The financial statements do not include any adjustments
relating to the recoverability of the carrying amount of the recorded assets or the amount of
liabilities that might result from the outcome of this uncertainty.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No.
104, Revenue Recognition (SAB 104). The Companys revenue sources are direct distribution of
Clearant Process® sterile implants, and licensing fees and sterilization services to customers who
incorporate the Clearant Process® technology into their product and manufacturing processes, which
may include performance milestones and contract research activities. In addition, the Company
recognizes revenues from government grants. The Company recognizes direct distribution revenue upon
the sourcing of tissue by a customer. Licensing revenue is recognized when a customer distributes
products incorporating the Clearant Process® and revenue related to the sterilization service is
recognized when the service is substantially complete. Revenue related to a performance milestone
is recognized upon customer acceptance of the achievement of that milestone, as defined in the
respective agreements. Revenue related to contract research activities is recognized on a
percentage-of-completion basis. In the event cash is received in advance of service performed, the
Company will defer the related revenue recognition until the underlying performance milestone is
achieved and or the contract research activities commence. In the event advance cash payments are
not attributable to any performance milestone and or contract research activity, the Company will
recognize the underlying amounts into revenue on a straight-line basis over the term of the
underlying agreement. The Company includes shipping charges in the gross invoice price to customers
and classifies the total amount as revenue in accordance with Emerging Issues Task Force Issue
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping costs are recorded as
cost of sales. The Company evaluates the collectability of accounts receivables and provides a
reserve for credit losses, as appropriate. As of December 31, 2006 and 2005, the Company reserved
for credit losses of $20 and $20, respectively.
Grants
The Company receives certain grants that support 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. For the years ended
December 31, 2006 and 2005, the Company had inventory write-downs of $811, and $0, respectively,
which were recorded as a cost of revenue. 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 fiscal year ended December 31, 2006, which, while unusual in nature, is not an infrequent
transaction for the Company. For the
AFS-9
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
twelve months ended December 31, 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 Equivalents and Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term investments, and
accounts receivable. Cash is deposited with what the Company believes are highly credited, quality
financial institutions and may exceed FDIC insured limits. For and at the years ended December 31,
2006 and 2005, three customers accounted for approximately 49% and 59% of revenues, respectively,
and three customers accounted for approximately 35% and 38% of accounts receivable, respectively.
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.
Inventories may be written down from time to time based on market conditions or other factors. For
the year ended December 31, 2006 the Company had inventory and inventory related prepayment
write-downs of $811.
In accordance with the terms of the Companys spinal Supply and Distribution Agreement (See Note
14), 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.
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized as
incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. The Company evaluates the recoverability of its patent costs and
trademarks quarterly based on estimated undiscounted future cash flows. In accordance with
Statement of Financial Accounting Standards (FAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets the carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. Based on the Companys valuation assessments of its patents no impairment
exists for the year ended December 31, 2006.
Research and Development Costs
Research and development costs are expensed as incurred.
AFS-10
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments recorded upon
consolidation of our foreign subsidiaries. In 2005, the Companys wholly-owned foreign subsidiaries
were consolidated into Clearant, Inc.
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 fiscal year ended December 31,
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 the Companys 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 SEC 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 year ended December 31, 2006 reflect
the impact of SFAS 123(R). In accordance with the modified prospective transition method, the
financial statements for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123(R). There was no stock-based compensation expense related to employees or
directors stock options recognized during the year ended December 31, 2005. Stock-based
compensation expense recognized under SFAS 123(R) for employees and directors for the year ended
December 31, 2006 was $490. Basic and diluted loss per share for the year ended December 31, 2006
would have been $0.23, if the Company had not adopted SFAS 123(R), compared to reported basic and
diluted loss per share of $0.25.
The estimated fair value of options granted to employees and directors during the year ended
December 31, 2006 was $1,245. 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 |
|
|
5.17-10 |
|
Expected dividend yield |
|
|
0 |
% |
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 year ended December 31, 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.
AFS-11
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
Net loss as reported |
|
$ |
(13,751 |
) |
Less: Stock-based expense determined under fair value based method |
|
|
(682 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(14,433 |
) |
|
|
|
|
Net loss per share |
|
|
|
|
As reported basic and diluted |
|
$ |
(0.47 |
) |
Pro forma basic and diluted |
|
$ |
(0.49 |
) |
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 year ended December 31,
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 year ended December 31,
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 year ended December 31, 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated forfeitures which the Company
estimates to be approximately 49%. The forfeiture rate takes into consideration the significant
downsizing of the business in the first quarter of 2007 (See Note 18). In 2007, the forfeiture rate
will be approximately 11%. To date, stock-based compensation expense has been reduced by
forfeitures of approximately $280. 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 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
AFS-12
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
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 2006 did not have a material impact on the Companys 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. The adoption of SFAS 156 in 2006 did not have a material impact on the Companys
financial reporting and disclosures.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires a new evaluation
process for all tax positions taken. If the probability for sustaining said tax position is greater
than 50%, then the tax position is warranted and recognition should be at the highest amount which
would be expected to be realized upon ultimate settlement. FIN 48 requires expanded disclosure at
each annual reporting period unless a significant change occurs in an interim period. For interim
periods in the year of initial adoption, all disclosures required by FIN 48 will be presented.
Differences between the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment
to the beginning balance of retained earnings. FIN 48 will be adopted by the Company on January 1,
2007. The Company does not anticipate that the adoption of FIN 48 will have a material affect on
its results of operations or financial position, although the Company is continuing to evaluate the
full impact of the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is required to adopt the
provision of SFAS 157, as applicable, beginning in fiscal year 2008. Management does not believe
the adoption of SFAS 157 will have a material impact on the Companys financial position or results
of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. (SAB) 108 (Topic 1N), Considering
the Effects of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires SEC registrants (i) to quantify misstatements using a
combined approach that considers both the balance-sheet and income-statement approaches, (ii) to
evaluate whether either approach results in quantifying an error that is material in light of
relevant quantitative and qualitative factors, and (iii) to adjust their financial statements if
the new combined approach results in a conclusion that an error is material. SAB 108 is effective
for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have an impact on
the Companys results of operations and financial position.
AFS-13
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company has not decided if it will early adopt SFAS 159 or if it will choose
to measure any eligible financial assets and liabilities at fair value.
In May 2007, the FASB issued FSP No. FIN 48-1 Definition of Settlement in FASB Interpretation No.
48, (FSP FIN 48-1), was issued. FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity
should determine whether a tax provision is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. The term effectively settled replaces the term ultimately
settled when used to describe recognition, and the terms settlement or settled replace the
terms ultimate settlement or ultimately settled when used to describe measurement of a tax
position under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon
the completion of an examination by a taxing authority without being legally extinguished. For tax
positions considered effectively settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to be sustained based solely on the
basis of its technical merits and the statute of limitations remains open. We do not anticipate
that the adoption of FSP FIN 48-1 will have a material affect on its results of operations or
financial position, although we are continuing to evaluate the full impact of the adoption of FSP
FIN 48-1.
NOTE 4 NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share (SFAS
128). Under the provisions of SFAS 128, basic loss per share is computed by dividing net loss by
the weighted average number of common stock shares outstanding during the periods presented.
Diluted earnings would customarily include, if dilutive, potential common stock shares issuable
upon the exercise of stock options and warrants. The dilutive effect of outstanding stock options
and warrants is reflected in earnings per share in accordance with SFAS 128 by application of the
treasury stock method. For the periods presented, the computation of diluted loss per share equaled
basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive
effect on the earnings per share calculation in the periods presented.
The following potential common shares have been excluded from the computation of diluted net loss
per share since their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
Stock Options |
|
|
4,000,000 |
|
|
|
2,776,000 |
|
Warrants |
|
|
5,512,000 |
|
|
|
5,179,000 |
|
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(9,798 |
) |
|
$ |
(13,751 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding |
|
|
39,883 |
|
|
|
29,498 |
|
Net loss per share, basic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.47 |
) |
|
|
|
|
|
|
|
NOTE 5 INVENTORY AND INVENTORY RELATED PREPAYMENTS
Inventories as of December 31 are comprised of the following:
AFS-14
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
Tissue in process, net |
|
$ |
107 |
|
Implantable donor tissue, net |
|
|
254 |
|
Radio protectant solution |
|
|
24 |
|
|
|
|
|
|
|
$ |
385 |
|
|
|
|
|
For the years ended December 31, 2006 and 2005, the Company had inventory write-downs of $811, and
$0, respectively.
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
|
|
|
|
|
|
|
2006 |
|
Equipment |
|
$ |
764 |
|
Computer equipment and software |
|
|
524 |
|
Furniture and fixtures |
|
|
68 |
|
Leasehold improvements |
|
|
10 |
|
|
|
|
|
|
|
|
1,366 |
|
Less accumulated depreciation |
|
|
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
290 |
|
|
|
|
|
Included in property and equipment is equipment leased under capital leases of $30 at December 31,
2006. Accumulated depreciation relating to these capital leases for the years ended December 31,
2006 was $10. Depreciation expense was $205 and $282 for the years ended December 31, 2006 and
2005, respectively.
NOTE 7 IDENTIFIABLE INTANGIBLES
Identifiable intangibles consist of the following at December 31:
|
|
|
|
|
|
|
2006 |
|
Trademarks |
|
$ |
37 |
|
Patents |
|
|
2,113 |
|
|
|
|
|
|
|
|
2,150 |
|
Less accumulated amortization |
|
|
(871 |
) |
|
|
|
|
|
|
$ |
1,279 |
|
|
|
|
|
Over the period January 1, 2007 to December 31, 2011, the Company projects cumulative amortization
expense related to its patents and trademarks issued at December 31, 2006 to be approximately $210.
Because the Company evaluates the recoverability of its intangibles on a quarterly basis, and
anticipates that new patents will be granted and issued in 2007 throughout 2011, actual
amortization expense recorded over January 1, 2007 to December 31, 2011 could fluctuate
significantly from the projected amount over the same period.
During the year ended December 31, 2006 and 2005, the Company recorded approximately $280 and $148,
respectively, of expense associated with patent impairment.
NOTE 8 RESTRICTED CASH
AFS-15
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
As of December 31, 2006, the Company had cash deposits of approximately $42, which is included in
deposits and other assets on the balance sheet.
NOTE 9 INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31, 2006
and 2005 were $1 and $1, respectively, for the current state provision. There was no state deferred
and federal tax provision.
The significant components of the deferred tax assets and liabilities, along with the related
valuation allowance at December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
26,716 |
|
|
$ |
23,178 |
|
Purchase in-process research and development |
|
|
496 |
|
|
|
549 |
|
Research and development credits |
|
|
1,379 |
|
|
|
1,338 |
|
Depreciation, accrued expenses and other |
|
|
471 |
|
|
|
462 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
29,062 |
|
|
|
25,527 |
|
Less valuation allowance |
|
|
(29,062 |
) |
|
|
(25,527 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
During 2006, the Companys valuation allowance on deferred tax assets increased from $25,527 as of
December 31, 2005 to $29,062 as of December 31, 2006, due to continued operating losses as
management has concluded that it is not more likely than not such assets will be realized.
The U.S. and foreign pretax losses for the years ended December 31, 2006 and 2005 was approximately
$9,798 and $0, respectively, $11,160 and $430, respectively.
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. The difference between the effective tax rate and that computed under the federal
statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Federal statutory rate |
|
|
(34 |
%) |
|
|
(34 |
%) |
State taxes |
|
|
(5 |
%) |
|
|
(5 |
%) |
Tax credits & other |
|
|
3 |
% |
|
|
(1 |
%) |
Foreign loss with no benefit |
|
|
0 |
% |
|
|
7 |
% |
Valuation allowance |
|
|
36 |
% |
|
|
33 |
% |
At December 31, 2006 and 2005, the Company had net operating losses (NOL) for federal and state
income tax purposes of approximately $141,642 and $123,237, which begin expiring in 2020 and 2007,
respectively. Section 382 of the Internal Revenue Code (Section 382) imposes, amongst other things,
annual limitations restricting the timing and amounts of the future use of available NOL
carryforwards at the time a change in ownership occurs. The utilization of these NOL carryforwards
could be restricted in future periods as a result of any future change in ownership, as defined in
Section 382. Such future change in ownership, if any, may result in significant amounts of these
NOL carryforwards expiring unused. In conjunction with the March 2005 transaction (Note 10), the
Company will evaluate whether there are limitations on the use of its NOL carryforwards beyond
December 31, 2005 under Section 382, including, as needed, the impact of cumulative changes in the
ownership of the Companys common stock. The NOLs and credit carryforwards noted above may be
limited under Internal Revenue Code Sections 382 and 383, respectively. As of December 31, 2006,
the Company has not performed an analysis in order to determine whether such limitations exist.
AFS-16
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
The Company also has federal and state research and development tax credit carryforwards as of
December 31, 2006 and 2005, of approximately $1,440 and $1,401, respectively, which begin to expire
in 2023 and 2019, respectively.
NOTE 10 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 SEC on March 16, 2006.
NOTE 11 CAPITALIZATION
Common Stock Transactions and Non-cash Financing Activities
During 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,
$87 is reflected in sales, general and administrative expenses for 2006.
During 2006, the Company paid accounts payable of $124 with 275,987 shares of common stock.
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 $136 is reflected in
sales, general and administrative expenses for 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 merger (Note 10) 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.
Series A Redeemable Preferred Stock
The Company has 50,000,000 shares authorized and 0 shares outstanding as of December 31, 2006.
For the years ended December 31, 2006 and 2005 the Company recognized $0 and $61, respectively, of
amortization expense associated with the Series A Preferred issuance costs.
AFS-17
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 12 STOCK OPTIONS
Effective March 31, 2005 and in conjunction with the merger (Note 10), 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 shares (the Existing Options), which are grandfathered under the Companys 2000 Stock
Award Plan, as amended (the 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 Company 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 (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 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.
The following table sets forth the activity of the 2000 and 2005 Plan and Non-Plan Options issued
for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
45,000 |
|
|
$ |
0.35-$0.48 |
|
|
|
1,716,000 |
|
|
$ |
0.35-$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 |
|
|
(396,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
(52,000 |
) |
|
$ |
2.30-$4.12 |
|
|
|
(448,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2006 |
|
|
3,405,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
595,000 |
|
|
$ |
0.35-$7.22 |
|
|
|
4,000,000 |
|
|
$ |
0.35-$7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS-18
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
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 December 31, 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 December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding
|
|
|
3,405,000 |
|
|
$ |
1.89 |
|
|
|
8.01 |
|
|
$ |
|
|
Employees Expected to Vest
|
|
|
2,126,000 |
|
|
$ |
2.00 |
|
|
|
7.47 |
|
|
$ |
|
|
Employees Exercisable
|
|
|
1,449,000 |
|
|
$ |
2.40 |
|
|
|
6.45 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Options Outstanding
|
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Expected to Vest
|
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Options Exercisable
|
|
|
570,000 |
|
|
$ |
2.27 |
|
|
|
4.28 |
|
|
$ |
|
|
The total intrinsic value of options exercised for the year ended December 31, 2005 was $297. Cash
received from stock options exercised during the year ended December 31, 2006 and 2005 were $26,
and $50, respectively. The total intrinsic value of options exercised during the year ended 2006
was $18. The total fair value of shares vested during the years ended December 31, 2005, were
approximately $1,480. The weighted average grant-date fair value of options granted during the year
ended December 31, 2006 was $0.73.
Included in the table above, at December 31, 2006 and 2005, were options outstanding for 595,000
and 380,000 shares, respectively, granted to consultants. These options generally vest over zero to
four years and are expensed when the services are performed and benefit is received as provided by
the Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18).
As of December 31, 2006, there was $1,676 of total unrecognized compensation costs related to
non-vested share-based compensation arrangements granted under the 2005 Plan. That cost is expected
to be recognized over the weighted-average period of 2.8 years.
When options are exercised, our policy is to issue previously unissued shares of common stock to
satisfy share option exercises. As of December 31, 2006 the Company had 2,488,652 shares of
unissued shares reserved for issuance under our 2005 Plan.
NOTE 13 WARRANTS
During 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 $99 as of
March 31, 2006, in connection with a settlement of disputed claims, at the discretion of the
Company.
In November 2005 and in conjunction with the Companys secondary placement of common stock, the
Company issued five-year warrants to such holders to purchase an aggregate 1,698,509 shares of the
Companys common
AFS-19
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
stock at an exercise price of $4.96 per share. In addition, the Company issued five-year warrants
to the placement agent to purchase an aggregate 164,189 shares of common stock at an exercise price
of $4.96 per share.
In March 2005 and pursuant to the Merger Agreement and in conjunction with the Transaction (Note
10) all of the Companys outstanding warrants immediately prior to the Reverse Merger were
cancelled and the Company issued two-year warrants to purchase approximately 3,316,645 shares of
the Companys common stock with an exercise price of $4.00 per share to the previous holders of
certain bridge loans, including holders of the Publico Bridge Loans.
In conjunction with the Companys bridge loan financings in 2005, the Company issued five-year
warrants to such holders to purchase an aggregate 167,547 shares of the Companys common stock at
$2.75 per share (collectively, the 2005 Bridge Warrants). The aggregate fair value of the 2005
Bridge Warrants was approximately $92 (calculated in accordance with APB Opinion No. 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants) and was recorded as a discount
to the bridge loan payable in 2005. Both the number of shares purchasable under the 2005 Bridge
Warrants and the exercise price are subject to adjustment based upon the price per share of the
Companys next equity round of financing.
Including those described above, all warrants have an exercise price of between $4.00 and $4.96 per
share and terms of two to five years. The weighted average exercise prices and the weighted average
remaining contractual life for warrants issued as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding |
Number |
|
|
|
Exercise |
|
Weighted Average of Remaining |
of Shares |
|
|
|
Price |
|
Contractual Life (Years) |
|
3,316,645 |
|
|
|
|
$ |
4.00 |
|
|
|
0.25 |
|
|
2,194,918 |
|
|
|
|
$ |
4.96 |
|
|
|
3.46 |
|
All of the warrants granted to non-employees are valued based on the Companys deemed fair value at
the date the warrants are issued, using the Black-Scholes option pricing model prescribed by FAS
No. 123R and the following assumptions:
|
|
|
|
|
Risk-free interest rate |
|
|
3.0%-5.5 |
% |
Expected life in years |
|
|
2-5 |
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
70% to 80% |
The weighted average deemed fair value of warrants granted to non-employees for the years ended
December 31, 2006 and 2005 was $0.30 and $1.66 per share, respectively.
NOTE 14 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under non-cancelable operating leases with
various expirations through 2011. The future minimum lease payments under these leases as of
December 31, 2006, are as follows:
|
|
|
|
|
2007 |
|
$ |
44 |
|
2008 |
|
|
21 |
|
2009 |
|
|
1 |
|
2010 and thereafter |
|
|
1 |
|
|
|
|
|
Net minimum lease payments |
|
$ |
67 |
|
AFS-20
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Rental expense on non-cancelable operating leases for the years ended December 31, 2006 and 2005
was $341 and $744, respectively.
The Company has obligations under capital leases for the years ended December 31, 2006 and 2005 of
$27 and $42, respectively. As of December 31, 2006, the Company has one capital lease for equipment
with a monthly payment including interest, of approximately $1, that expires in two years. The
liabilities related to the capital lease are recorded in accrued liabilities on the Balance Sheet.
Litigation
From time-to-time, the Company is involved in litigation relating to claims arising in the normal
course of business. The Company does not believe that any currently pending or threatening
litigation will have a material adverse effect on the Companys results of operations or financial
condition as of December 31, 2006.
Supply and Distribution Agreements
In September 2006, the Company entered into a renewable two-year spinal supply and distribution
agreement which supersedes its prior supply agreement, pursuant to which the Company has the
exclusive rights to place current and future spinal bone implants treated with the Clearant
Process® in a number of geographic territories and an option for additional geographic territories,
which in aggregate represent approximately 60% or more of the United States market. In exchange for
these exclusive rights, the Company agreed to pay $1,150 as a prepayment on October 31, 2006, for
ordered spinal bone implants to be delivered in 2007. In addition, the Company will be required to
make prepayments to be applied towards future spinal bone implants ordered in the amounts of $3,800
and $4,550 for 2007 and 2008, respectively.
Pursuant to the Companys spinal Supply and Distribution Agreement (Agreement), dated September 27,
2006, in consideration for the exclusive distribution and/or representation in various United
States markets, the Company was required to remit a prepayment in the amount of $1,150 on October
31, 2006. As of December 31, 2006, all tissue orders have not been delivered and this payment has
not been made by the Company. In February 2007, the Company received notification of termination of
the Agreement. The Company is in ongoing discussions with the supplier to resolve the issues, which
could include but is not limited to, reduction in exclusive territories or termination. The
termination of the Agreement may result in the discontinuation or disruption of the spinal bone
implant supply, which would have a material adverse impact to the Companys ability to distribute
spinal bone implants treated with the Clearant Process®.
NOTE 15 401K PLAN
The Company has a defined contribution profit sharing plan covering all full-time employees.
Employees may make pre-tax contributions up to the maximum allowable by the Internal Revenue Code.
Participants are immediately vested in their employee contributions. No employer contributions were
made for the years ended December 31, 2006 and 2005.
NOTE 16 FACILITY CLOSING CHARGES
At December 31, 2004, the Company no longer considered itself a development stage enterprise as
defined by Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by
Development Stage Companies, and accordingly, the accompanying financial statements do not
represent those of a development stage enterprise. Additionally, in 2005, the Company developed an
initiative designed to reduce the workforce and consolidate and move the lab to Los Angeles. The
resulting facility closing charges for 2005 of $305 related to severance costs communicated in 2005
but to be remunerated in 2006. There were additional period costs incurred in 2006 of $53 in
connection with the closing of the lab and moving of the equipment. The plan was approved by the
Companys executive management team and the board of directors.
AFS-21
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents summarized quarterly financial data (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Mar. 31, |
|
Jun. 30, |
|
Sept. 30, |
|
Dec. 31, |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
190 |
|
|
$ |
106 |
|
|
$ |
191 |
|
|
$ |
283 |
|
Gross profit (loss) |
|
|
136 |
|
|
|
48 |
|
|
|
78 |
|
|
|
(701 |
) |
Total operating expenses |
|
|
2,802 |
|
|
|
2,455 |
|
|
|
2,733 |
|
|
|
1,643 |
|
Loss from operations |
|
|
(2,666 |
) |
|
|
(2,407 |
) |
|
|
(2,655 |
) |
|
|
(2,344 |
) |
Other expense, net |
|
|
153 |
|
|
|
64 |
|
|
|
41 |
|
|
|
16 |
|
Net loss |
|
|
(2,513 |
) |
|
|
(2,343 |
) |
|
|
(2,614 |
) |
|
|
(2,328 |
) |
Preferred stock dividend and financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,513 |
) |
|
$ |
(2,343 |
) |
|
$ |
(2,614 |
) |
|
$ |
(2,328 |
) |
Net loss per share Basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.06 |
) |
Number of shares Basic and diluted |
|
|
39,764 |
|
|
|
39,849 |
|
|
|
39,912 |
|
|
|
40,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
107 |
|
|
$ |
191 |
|
|
$ |
154 |
|
|
$ |
89 |
|
Gross margin |
|
|
103 |
|
|
|
186 |
|
|
|
150 |
|
|
|
85 |
|
Total operating expenses |
|
|
2,746 |
|
|
|
2,513 |
|
|
|
2,810 |
|
|
|
3,574 |
|
Loss from operations |
|
|
(2,643 |
) |
|
|
(2,327 |
) |
|
|
(2,660 |
) |
|
|
(3,489 |
) |
Other expense, net |
|
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Net loss |
|
|
(3,100 |
) |
|
|
(2,327 |
) |
|
|
(2,660 |
) |
|
|
(3,503 |
) |
Preferred stock dividend and financing costs |
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(5,261 |
) |
|
$ |
(2,327 |
) |
|
$ |
(2,660 |
) |
|
$ |
(3,503 |
) |
Net loss per share Basic and diluted |
|
$ |
(0.71 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.09 |
) |
Number of shares Basic and diluted |
|
|
7,370 |
|
|
|
35,860 |
|
|
|
35,923 |
|
|
|
38,102 |
|
NOTE 18 SUBSEQUENT EVENTS
On April 3, 2007, the Company agreed to issue approximately 93,720,000 shares of its common stock
at a price of $0.025 per share in private placements to approximately twenty accredited and
institutional investors for gross proceeds of approximately $2,300 subject to adjustment for over
allotted orders. Purchasers included our Chief Executive Officer. The private placements were
exempt from registration pursuant to Section 4(2) of the Securities Act, as transactions not
involving a public offering. However, pursuant to the registration rights agreements with the
investors the Company is using its best efforts to register the stock. Concurrent with the public
offering directors John Wehrle, Nolan Sigal, and Herve de Kergrohan as well as the CEO of the
Company were granted 400,000 stock options at a price of $0.025 per share which vested immediately
upon grant. On April 26, 2007 all three board members resigned.
The Company has received written notice from Rowland W. Day, on behalf of the following investors:
(i) the Day Family Trust; (ii) Rowland W. Day II IRA; and (iii) Ron Nash, alleging that certain
misrepresentations were made in connection with the Stock Purchase Agreements entered into on April
3, 2007 where the Company agreed to issue approximately 93,720,000 shares of common stock at a
price of $0.025 per share. The Company is in discussions with these investors and while no lawsuit
has been filed at this time, there is no certainty that the investors will not, in the future,
seek, among other things, money damages. If successful, this may negatively impact the Companys
cash flow and significantly impair its ability to operate. Rowland W. Day is a member of the board
of directors.
AFS-22
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
In February, 2007 the Company entered into a non-binding term sheet with a bridge lender for $700.
Under the terms of the non-binding term sheet the bridge lender was required to lend the Company
$200 upon the signing of the non-binding term sheet and $500 upon signing of the definitive
agreement. In addition to requiring funding of $700 the non-binding term sheet provided that the
lender would receive 2,500,000 shares of the Companys common stock, a first lien on all of the
assets of the Company including its IP, repayment of the $700 by May 1, 2007, and interest of 10%
per annum. On February 20, 2007 the Company received $200. The $500 was never funded and neither
party entered into a definitive agreement. The Company is currently in discussion with the Bridge
Lender as it relates the non-funding of the remaining $500.
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 December 31, 2006, all tissue orders have not been delivered by the supplier and
the payment has not been made by the Company. In February 2007, the Company received notification
of termination of the Agreement. The Company is in ongoing discussions with the supplier to resolve
the issues, which could include but is not limited to, reduction in exclusive territories or
termination. The termination of the Agreement may result in the disruption of the spinal bone
implant supply, which would have a material adverse impact to the Companys ability to distribute
spinal bone implants treated with the Clearant Process®.
AFS-23
INTERIM FINANCIAL STATEMENTS
CONTENTS
|
|
|
|
|
PAGE |
FINANCIAL STATEMENTS
|
|
|
|
|
IFS-2 |
|
|
IFS-3 |
|
|
IFS-4 |
|
|
IFS-5 |
IFS-1
CLEARANT, INC.
BALANCE SHEETS
(in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,675 |
|
|
$ |
563 |
|
Accounts receivable, net of
allowances of $20 at June 30,
2007 and December 31, 2006,
respectively |
|
|
843 |
|
|
|
274 |
|
Inventory and inventory
related prepayments, net of
reserve of $799 and $811 at
June 30, 2007 and December
31, 2006, respectively |
|
|
455 |
|
|
|
385 |
|
Prepaids and other |
|
|
129 |
|
|
|
137 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,102 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
Property and equipment, net of $249 and
$1,076 of accumulated depreciation at
June 30, 2007 and December 31, 2006,
respectively |
|
|
148 |
|
|
|
290 |
|
Identifiable intangibles, net of $1,113
and $871 of accumulated amortization at
June 30, 2007 and December 31, 2006,
respectively |
|
|
1,067 |
|
|
|
1,279 |
|
Deposits and other assets |
|
|
71 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,388 |
|
|
$ |
3,021 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,748 |
|
|
$ |
1,653 |
|
Accrued liabilities |
|
|
1,197 |
|
|
|
607 |
|
Deferred revenue |
|
|
2 |
|
|
|
67 |
|
Bridge loans, net |
|
|
312 |
|
|
|
106 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,259 |
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,263 |
|
|
|
2,437 |
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock ($0.0001 par value;
200,000 shares authorized; 134,642
and 40,178 issued and outstanding
at June 30, 2007 and December 31,
2006, respectively) |
|
|
13 |
|
|
|
4 |
|
Additional paid-in capital |
|
|
85,296 |
|
|
|
82,949 |
|
Accumulated deficit |
|
|
(84,184 |
) |
|
|
(82,369 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,125 |
|
|
|
584 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,388 |
|
|
$ |
3,021 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
IFS-2
CLEARANT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
21 |
|
|
$ |
89 |
|
|
$ |
61 |
|
|
$ |
168 |
|
Direct distribution |
|
|
125 |
|
|
|
9 |
|
|
|
304 |
|
|
|
9 |
|
Fee for service |
|
|
19 |
|
|
|
|
|
|
|
69 |
|
|
|
30 |
|
Contract research and milestones |
|
|
3 |
|
|
|
1 |
|
|
|
169 |
|
|
|
62 |
|
Grants |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
168 |
|
|
|
106 |
|
|
|
603 |
|
|
|
296 |
|
|
Cost of revenues |
|
|
92 |
|
|
|
58 |
|
|
|
240 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
76 |
|
|
|
48 |
|
|
|
363 |
|
|
|
183 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
901 |
|
|
|
2,312 |
|
|
|
2,035 |
|
|
|
4,789 |
|
Research and development |
|
|
19 |
|
|
|
143 |
|
|
|
59 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
920 |
|
|
|
2,455 |
|
|
|
2,094 |
|
|
|
5,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(844 |
) |
|
|
(2,407 |
) |
|
|
(1,731 |
) |
|
|
(5,074 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(6 |
) |
|
|
64 |
|
|
|
(1 |
) |
|
|
135 |
|
Gain on extinguishment of debt |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
117 |
|
Loss on disposal of fixed assets |
|
|
(1 |
) |
|
|
|
|
|
|
(86 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for (benefit from)
income taxes |
|
|
(848 |
) |
|
|
(2,343 |
) |
|
|
(1,814 |
) |
|
|
(4,857 |
) |
|
Provision for (benefit from) income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(848 |
) |
|
$ |
(2,343 |
) |
|
$ |
(1,814 |
) |
|
$ |
(4,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share
calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
108,894 |
|
|
|
39,849 |
|
|
|
75,014 |
|
|
|
39,807 |
|
See accompanying notes to financial statements.
IFS-3
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,814 |
) |
|
$ |
(4,857 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
277 |
|
|
|
348 |
|
Loss on sale of fixed assets |
|
|
86 |
|
|
|
|
|
Non-cash stock-based compensation |
|
|
160 |
|
|
|
404 |
|
Issuance of common stock to consultants for
services rendered |
|
|
93 |
|
|
|
89 |
|
Gain on extinguishment of debt and other, net |
|
|
|
|
|
|
(82 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(269 |
) |
|
|
10 |
|
Inventory and inventory related prepayments |
|
|
(70 |
) |
|
|
(56 |
) |
Prepaids |
|
|
175 |
|
|
|
(757 |
) |
Accounts payable |
|
|
204 |
|
|
|
42 |
|
Accrued liabilities |
|
|
296 |
|
|
|
(639 |
) |
Deferred revenue |
|
|
(66 |
) |
|
|
(29 |
) |
Other assets and liabilities |
|
|
(178 |
) |
|
|
173 |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,106 |
) |
|
|
(5,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(30 |
) |
|
|
(140 |
) |
Capital expenditures |
|
|
|
|
|
|
(72 |
) |
Net proceeds from sale of fixed assets |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8 |
) |
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs of $316 |
|
|
2,026 |
|
|
|
|
|
Issuance of bridge loan |
|
|
200 |
|
|
|
|
|
Exercise of common stock options |
|
|
|
|
|
|
26 |
|
Principal payments on capital lease obligations |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,226 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
1,112 |
|
|
|
(5,546 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
563 |
|
|
|
10,141 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,675 |
|
|
$ |
4,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-cash Financing Activities: |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2007 and 2006,
the Company paid accounts payable of $109 and $38
with 435,280 and 10,259 shares of common stock |
|
$ |
109 |
|
|
$ |
38 |
|
See accompanying notes to financial statements.
IFS-4
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim financial statements for Clearant, Inc. (the Company or
Clearant) have been prepared in accordance with accounting principles generally accepted in the
United States of America and reflect all adjustments, consisting solely of normal recurring
adjustments, needed to fairly present the financial results for these interim periods. These
financial statements include amounts that are based on managements best estimates and judgments.
These estimates may be adjusted as more information becomes available, and any adjustment could be
significant. The impact of any change in estimates is included in the determination of earnings in
the period in which the change in estimate is identified. The results of operations for the three
and six months ended June 30, 2007 are not necessarily indicative of the results that may be
expected for the entire 2007 fiscal year.
The Company has omitted footnote disclosures that would substantially duplicate the disclosures
contained in the audited financial statements of the Company and should be read in conjunction with
the financial statements for the fiscal years ended December 31, 2006 and 2005 and notes thereto in
the Companys Form 10-KSB dated December 31, 2006, filed with the Securities and Exchange
Commission on May 17, 2007.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared on the basis that the Company will
continue as a going concern. The Company has incurred significant operating losses and negative
cash flows from operating activities since its inception. As of June 30, 2007, these conditions
raised substantial doubt as to the Companys ability to continue as a going concern. In April 2007,
the Company raised additional capital to supplement its operations. There can be no assurance that
the Company will be successful in its efforts to generate, increase, or maintain revenue or raise
additional capital on terms acceptable to the Company or that the Company will be able to continue
as a going concern. The financial statements do not include any adjustments relating to the
recoverability of the carrying amount of the recorded assets or the amount of liabilities that
might result from the outcome of this uncertainty.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No.
104, Revenue Recognition (SAB 104). The Companys revenue sources are direct distribution of
Clearant Process® sterile implants, and licensing fees and Sterilization Services to customers who
incorporate the Clearant Process® technology into their product and manufacturing processes, which
may include performance milestones and contract research activities. In addition, the Company
recognizes revenues from government grants. The Company recognizes direct distribution revenue upon
the sourcing of tissue by a customer. Licensing revenue is recognized when a customer distributes
products incorporating the Clearant Process® and revenue related to the Sterilization Service is
recognized when the service is substantially complete. Revenue related to a performance milestone
is recognized upon customer acceptance of the achievement of that milestone, as defined in the
respective agreements. Revenue related to contract research activities is recognized on a
percentage-of-completion basis. In the event cash is received in advance of service performed, the
Company will defer the related revenue recognition until the underlying performance milestone is
achieved and or the contract research activities commence. In the event advance cash payments are
not attributable to any performance milestone and or contract research activity, the Company will
recognize the underlying amounts into revenue on a straight-line basis over the term of the
underlying agreement. The Company includes shipping charges in the gross invoice price to customers
and classifies the total amount as revenue in accordance with Emerging Issues Task Force Issue
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping costs are recorded as
cost of revenues. The Company evaluates the collectability of accounts receivables and provides a
reserve for credit losses, as appropriate. As of June 30, 2007 and December 31, 2006 the Company
reserved for credit losses of $20.
IFS-5
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 as 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.
Extinguishment of Debt
Extinguishment of debt consists of a gain recognized for the settlement of outstanding payables for
the quarter ended June 30, 2007, which, while unusual in nature, is not an infrequent transaction
for the Company.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term investments, and
accounts receivable. Cash is deposited with what the Company believes are highly credited, quality
financial institutions. The deposited cash may exceed FDIC insured limits. For the quarter ended
June 30, 2007, three customers accounted for approximately 31% of revenues and three customers
accounted for approximately 33% of accounts receivable.
Inventory and Inventory Related Prepayments
Inventory is primarily comprised of implantable donor tissue treated with the Clearant Process® and
is valued at the lower of cost or market with cost determined using the first-in, first-out method.
Inventory is located at contracted tissue banks and on consignment in hospitals. Inventory may be
written down from time to time based on market conditions or other factors. As of June 30, 2007 and
December 31, 2006 the Company has an inventory and inventory related prepayment reserve of $799 and
$811, respectively.
In accordance with the terms of the Companys spinal supply and distribution Agreement (see Note
9), the Company is required to make prepayments. Upon receipt of the inventory the prepayments will
be reclassified as inventory until distributed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method
based upon estimated useful lives of the assets, which are generally three to seven years.
Leasehold improvements are amortized over the estimated useful lives of the assets or related lease
terms, whichever is shorter. Repair and maintenance expenditures are charged to appropriate expense
accounts in the period incurred. During the three and six-months ended June 30, 2007, Clearant sold
property and equipment with net book value of $7 and $108, respectively.
IFS-6
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized as
incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. The Company evaluates the recoverability of its patent costs and
trademarks quarterly based on estimated undiscounted future cash flows. In accordance with
Statement of Financial Accounting Standards (FAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets the carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. As of June 30, 2007 and December 31, 2006, no impairment existed.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes (SFAS 109), using the liability method. Under SFAS 109, deferred tax
assets and liabilities are determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Due to its current net loss position, the Company has provided a valuation allowance in full on its
net deferred tax assets in accordance with SFAS 109 and in light of the uncertainty regarding
ultimate realization of the net deferred tax assets.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires a new evaluation
process for all tax positions taken. If the probability for sustaining said tax position is greater
than 50%, then the tax position is warranted and recognition should be at the highest amount which
would be expected to be realized upon ultimate settlement. FIN 48 requires expanded disclosure at
each annual reporting period unless a significant change occurs in an interim period. For interim
periods in the year of initial adoption, all disclosures required by FIN 48 will be presented.
Differences between the amounts recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment
to the beginning balance of retained earnings. FIN 48 was adopted by the Company on January 1,
2007. The Company does not anticipate that the adoption of FIN 48 will have a material effect on
its results of operations or financial position, although the Company is continuing to evaluate the
full impact of the adoption of FIN 48.
Stock-Based Compensation
Stock-based compensation expense recognized under SFAS 123(R) for employees and directors for the
three and six months ended June 30, 2007 was $93 and $160, respectively.
There were 1,805,500 options granted to employees and directors during the three and six months
ended June 30, 2007. The estimated fair value of options granted to employees and directors during
the three and six months ended June 30, 2007 was $35. Assumptions used to value the options granted
were as follows:
|
|
|
|
|
Expected volatility |
|
|
102.3 |
% |
Risk-free interest rate |
|
|
4.55 |
% |
Expected life in years |
|
|
5-5.75 |
|
Expected dividend yield |
|
|
0 |
% |
As stock-based compensation expense recognized in the Statements of Operations for the three and
six months ended June 30, 2007 is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures which the Company estimates to be approximately 11%. The forfeiture rate
takes into consideration the significant
IFS-7
downsizing of the business in the first quarter of 2007. As of June 30, 2007, stock-based
compensation expense has been reduced by estimated forfeitures not yet incurred of approximately
$35.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value because of the
immediate or short-term maturity of these financial instruments. Bridge loans are estimated to
approximate fair value based upon current market borrowing rates for loans with similar terms and
maturities.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is required to adopt the
provision of SFAS 157, as applicable, beginning in fiscal year 2008. Management does not believe
the adoption of SFAS 157 will have a material impact on the Companys financial position or results
of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in
financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company has not decided if it will early adopt SFAS 159 or if it will choose
to measure any eligible financial assets and liabilities at fair value.
In May 2007, the FASB issued FSP No. FIN 48-1 Definition of Settlement in FASB Interpretation No.
48, (FSP FIN 48-1). FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should
determine whether a tax provision is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The term effectively settled replaces the term ultimately settled
when used to describe recognition, and the terms settlement or settled replace the terms
ultimate settlement or ultimately settled when used to describe measurement of a tax position
under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax
positions considered effectively settled, an entity would recognize the full amount of tax benefit,
even if the tax position is not considered more likely than not to be sustained based solely on the
basis of its technical merits and the statute of limitations remains open. The Company does not
anticipate that the adoption of FSP FIN 48-1 will have a material effect on its results of
operations or financial position, although the Company is continuing to evaluate the full impact of
the adoption of FSP FIN 48-1.
NOTE 4 NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share (SFAS
128). Under the provisions of SFAS 128, basic loss per share is computed by dividing net loss by
the weighted average number of common stock shares outstanding during the periods presented.
Diluted earnings would customarily include, if dilutive, potential common stock shares issuable
upon the exercise of stock options and warrants. The dilutive effect of outstanding stock options
and warrants is reflected in earnings per share in accordance with SFAS 128 by application of the
treasury stock method. For the periods presented, the computation of diluted loss per share equaled
basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive
effect on the earnings per share calculation in the periods presented.
The following potential common shares have been excluded from the computation of diluted net loss
per share since their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
2007 |
|
2006 |
Stock Options
|
|
|
3,976,000 |
|
|
|
4,135,000 |
|
Warrants
|
|
|
2,195,000 |
|
|
|
5,512,000 |
|
IFS-8
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stock |
|
$ |
(848 |
) |
|
$ |
(2,343 |
) |
|
$ |
(1,814 |
) |
|
$ |
(4,857 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock
shares outstanding |
|
|
108,894 |
|
|
|
39,849 |
|
|
|
75,014 |
|
|
|
39,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Due to the fact that the Company has substantial net operating loss carryforwards, adoption of FIN
48 had no impact on the Companys beginning retained earnings, balance sheets, or statements of
operations.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state
and local income tax examinations by tax authorities for years before 2001.
The Company recognizes accrued interest and penalties on unrecognized tax benefits in income tax
expense. The Company did not have any unrecognized tax benefits as of June 30, 2007 and 2006. As a
result, the Company did not recognize interest expense, and additionally, did not record any
penalties during the three or six months ended June 30, 2007 and 2006. The Company does not expect
that the amounts of unrecognized tax benefits will change significantly within the next 12 months.
NOTE 6 DEBT
In February, 2007 the Company entered into a non-binding term sheet with a bridge lender for $700.
Under the terms of the non-binding term sheet the bridge lender was required to lend the Company
$200 upon the signing of the non-binding term sheet and $500 upon signing of the definitive
agreement. In addition to requiring funding of $700 the non-binding term sheet provided that the
lender would receive 2,500,000 shares of the Companys common stock, a first lien on all of the
assets of the Company including its IP, repayment of the $700 by May 1, 2007, and interest of 10%
per annum. On February 20, 2007 the Company received $200. The $500 was never funded and neither
party entered into a definitive agreement. On March 27, 2007, the Company received notice of a
claim by the bridge lender to preserve his right as outlined in a non-binding term sheet to fund
the $700 bridge credit facility. The bridge lender provided $200 under the non-binding term sheet
and sought return of those funds. Subsequent to June 30, 2007, in an effort to settle the dispute,
the Company issued the bridge lender shares of its common stock at $0.005 per share subsequent to
period end (see Note 10).
NOTE 7 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
During the three and six months ended June 30, 2007, the Company issued 93,720,000 shares of common
stock at a price of $0.025 per share in a private placement to approximately twenty accredited and
institutional investors for gross proceeds of approximately $2,300 net of financing costs of
approximately $316.
IFS-9
During the three and six months ended June 30, 2007, the Company paid accounts payable of $0 and
$109 with 0 and 435,280 shares of common stock, respectively.
During the three and six months ended June 30, 2007, the Company paid consultants $0 and $60 with 0
and 308,529 shares of common stock, respectively.
During the six months ended June 30, 2006, the Company issued two-year warrants to such holders to
purchase an aggregate 332,220 shares of its common stock at an exercise price of $4.96 per share
with a fair value of $98,922 as of March 31, 2006.
During the six months ended June 30, 2006, the Company issued 100,000 shares of common stock with a
fair value of $130 to consultants for services rendered to the Company over a twelve month
contract. Accordingly, $22 is reflected in sales, general and administrative expenses for the six
months ended June 30, 2006.
NOTE 8 STOCK-BASED AWARDS
Stock Options
A summary of activity under the Companys 2000 Stock Option Plan (the 2000 Plan) and 2005 Stock
Option Plan (the 2005 Plan) as of December 31, 2006, and for the six months ended June 30, 2007 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
December 31, 2006 |
|
|
3,405,000 |
|
|
$ |
0.44-$7.94 |
|
|
|
595,000 |
|
|
$ |
0.35-$7.22 |
|
|
|
4,000,000 |
|
|
$ |
0.35-$7.94 |
|
Granted |
|
|
1,806,000 |
|
|
$ |
.025 |
|
|
|
|
|
|
$ |
|
|
|
|
1,806,000 |
|
|
$ |
.025 |
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Change in Status |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Canceled |
|
|
(1,830,000 |
) |
|
$ |
0.025-$4.51 |
|
|
|
|
|
|
$ |
|
|
|
|
(1,830,000 |
) |
|
$ |
0.025-$4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2007 |
|
|
3,381,000 |
|
|
$ |
0.025-$7.94 |
|
|
|
595,000 |
|
|
$ |
0.35-$7.22 |
|
|
|
3,976,000 |
|
|
$ |
0.025-$7.94 |
|
The weighted average exercise prices for options granted and exercisable and the weighted average
remaining contractual life for options outstanding as of December 31, 2006 and June 30, 2007 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
Number |
|
Average |
|
Remaining |
|
|
|
|
Of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,405,000 |
|
|
$ |
1.89 |
|
|
|
8.01 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
2,126,000 |
|
|
$ |
2.00 |
|
|
|
7.47 |
|
|
$ |
|
|
Employees Exercisable |
|
|
1,449,000 |
|
|
$ |
2.40 |
|
|
|
6.45 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Outstanding |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4.49 |
|
|
$ |
|
|
Non-Employees Exercisable |
|
|
570,000 |
|
|
$ |
2.27 |
|
|
|
4.28 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,381,000 |
|
|
$ |
.92 |
|
|
|
8.43 |
|
|
$ |
97 |
|
Employees Expected to Vest |
|
|
3,298,000 |
|
|
$ |
.90 |
|
|
|
8.43 |
|
|
$ |
96 |
|
Employees Exercisable |
|
|
2,652,000 |
|
|
$ |
.77 |
|
|
|
8.33 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Options Outstanding |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
595,000 |
|
|
$ |
2.19 |
|
|
|
4 |
|
|
$ |
|
|
Non-Employees Options Exercisable |
|
|
576,000 |
|
|
$ |
2.25 |
|
|
|
3.84 |
|
|
$ |
|
|
IFS-10
There were no options exercised during the three and six months ended June 30, 2007. Cash received
from stock options exercised during the three and six months ended June 30, 2006 was $24 and $26
respectively. The total intrinsic value of options exercised during the three and six months ended
June 30, 2006 was $14 and $18, respectively.
Included in the table above, at June 30, 2007 and 2006, were options outstanding for 595,000 and
385,000 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 June 30, 2007 and 2006, there were $587 and $2,103, respectively of total unrecognized
compensation costs related to non-vested share-based compensation arrangements granted under the
2005 Plan. That cost is expected to be recognized over the weighted-average period of 2.4 and 3.6
years, respectively.
When options are exercised, the Companys policy is to issue previously unissued shares of common
stock to satisfy share option exercises. As of June 30, 2007 the Company had 1,455,026 shares of
unissued shares reserved for issuance under the 2005 Plan.
NOTE 9 COMMITMENTS AND CONTINGENCIES
On September 27, 2006, Clearant entered into a renewable two-year supply and distribution agreement
(the Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement,
Osprey granted Clearant exclusive rights to place current and future Osprey cervical and lumbar
allografts treated with the Clearant Process® in a number of geographic territories and an option
for additional geographic territories. In exchange for the exclusive rights under the Osprey
Agreement, Clearant is obligated to pay Osprey $500 as a prepayment for certain ordered products to
be delivered after October 1, 2007. This prepayment was due upon the earlier of the following: (i)
within three business days after Clearant receives debt or equity financing of at least $1 million,
or (ii) October 31, 2006. In addition, Clearant was required to make the following quarterly
payments to be applied to payments for ordered products: $650 by October 31, 2006; $750 by January
1, 2007; $850 by April 1, 2007; $1 million by July 1, 2007; $1.2 million by October 1, 2007; $1.3
million by January 1, 2008; $1.5 million by April 1, 2008; and $1.75 million by July 1, 2008. As of
the end of the second quarter 2007, all tissue orders had not been delivered by Osprey and the
prepayments had not been made by the Company. In February 2007, Clearant had received notice from
Osprey of its termination of the Osprey Agreement, effective within thirty (30) days from receipt
of this notification if certain alleged payment defaults were not timely cured by Clearant.
Clearant is in ongoing discussions with Osprey to resolve these issues, which could include but is
not limited to, reduction in exclusive territories or termination of the Osprey Agreement. The
termination of the Osprey Agreement may result in the disruption of the spinal bone implant supply
from Osprey, which may have a material adverse impact on Clearants ability to distribute spinal
bone implants treated with the Clearant Process®.
NOTE 10 SUBSEQUENT EVENTS
On December 18, 2006, Epic Brand Group, Inc. filed a complaint against us in the Superior Court of
California, County of Orange, Case No. 06CC13046, alleging breach of an Agreement for Professional
Services dated as of August 19, 2005, and seeking damages of $48 for advertising and marketing
services and materials, plus interest, attorneys fees and costs. On July 19, 2007, the Company
entered into a settlement agreement with Epic Brand Group, Inc., pursuant to which we paid $41 to
Epic in return for a release of all claims.
On July 27, 2007, Irell & Manella, LLP sent the Company a notice of the Companys right to
arbitrate. Irell alleges that the Company failed to pay its fees and/or costs for professional
services in the amount of $353, plus interest pursuant to the terms of an engagement agreement
between Irell and the Company. The Company has not filed a formal response.
IFS-11
On August 3, 2007, we entered into stock purchase agreements and registration rights agreements
with approximately 11 accredited and institutional investors for the sale of shares of our common
stock (shares) for $0.025 per share, in a private offering, in exchange for gross proceeds of
approximately $525. This private placement (the August private placement) was made in connection
with the private placement we previously entered into on April 3, 2007 (the April private
placement), pursuant to which approximately 20 accredited and institutional investors purchased
shares in exchange for gross proceeds of approximately $2.2 million, as reported on our Current
Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on April 4, 2007.
The stock purchase agreements and registration rights agreements executed in connection with the
August private placement are in the same form as those executed in connection with the April
private placement, as amended, which were filed as exhibits to our Current Report on Form 8-K filed
on April 4, 2007. The shares issued in the August private placement are subject to full-ratchet
antidilution protection pursuant to the Amendment to the Stock Purchase Agreement, filed as Exhibit
10.1 to the Current Report on Form 8-K filed on June 1, 2007. These shares purchased in the August
private placement will be issued upon the effectiveness of the reverse stock split referred to
below.
On August 3, 2007, we entered into a Conversion Agreement, attached to our Current Report on Form
8-K filed with the SEC on August 8, 2007, as Exhibit 10.1, with John McGinnis pursuant to which he
will be issued shares in consideration for a $200 investment at $0.005 per share. The sale of these
shares was made as an effort to resolve a dispute with Mr. McGinnis, as disclosed on our Quarterly
Report for the three month period ended March 31, 2007 on Form 10-QSB filed with the SEC on June
20, 2007. In addition, we entered into a stock purchase agreement, substantially the same as those
executed in connection with the April private placement, with Mr. McGinnis and two additional
investors whereby they purchased shares of our common stock at a price of $0.005 per share in
exchange for aggregate gross proceeds of approximately $142 plus $8 in interest for an aggregate
purchase price of $150. These shares will be issued upon the effectiveness of the reverse stock
split referred to below. Mr. McGinnis purchase triggers the above-referenced full ratchet
anti-dilution protections for the investors who purchased shares in the April private placement and
August private placement.
On August 3, 2007, at our annual meeting of stockholders, the following directors were re-elected:
Jon M. Garfield, Rowland W. Day II and Michael Elek. In addition, a 1:14 reverse stock split and a
6,000,000 share increase in our Stock Award Plan were approved.
IFS-12
|
|
You should only rely on the information contained or incorporated by reference in this
prospectus. We have not authorized any person to provide you with different information. If
anyone provides you with inconsistent or different information, you should not rely on it. |
|
|
|
We are not making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. |
|
|
|
You should assume that the information appearing in this prospectus is accurate as of the
date on the front cover of this prospectus only. |
|
|
|
This prospectus does not constitute an offer to sell, or the solicitation of an offer to
buy, any securities other than the securities to which it relates. |
46,034,338 Shares
CLEARANT, INC.
COMMON STOCK
PROSPECTUS
SEPTEMBER ___, 2007
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation and bylaws limit the liability of directors and executive officers
to the maximum extent permitted by Delaware law. The limitation on our directors and executive
officers liability may not apply to liabilities arising under the federal securities laws. Our
certificate of incorporation and bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to the fullest extent
permitted by law.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various costs and expenses payable by the registrant in
connection with the sale of the common stock being registered. Any broker-dealer discounts and
commissions will be payable by the selling stockholders. Except for the SEC registration fee, all
the amounts shown are estimates.
|
|
|
|
|
SEC Registration Fee |
|
$ |
898.00 |
|
Legal fees and expenses |
|
|
25,000.00 |
|
Accounting fees and expenses |
|
|
5,000.00 |
|
Printing and related expenses |
|
|
2,500.00 |
|
Miscellaneous |
|
|
1,602.00 |
|
|
|
|
|
Total |
|
$ |
35,000.00 |
|
|
|
|
|
RECENT SALES OF UNREGISTERED SECURITIES
On April 3, 2007, we entered into stock purchase agreements and registration rights agreements with
approximately twenty accredited and institutional investors for the sale of shares of our common
stock in a private placement (the April private placement) in exchange for gross proceeds of
approximately $2.3 million. We issued and sold approximately 93,720,000 shares of our common stock
at a price of $0.025 per share in the private placements. Purchasers included our chief executive
officer. The private placements were exempt from registration pursuant to Section 4(2) of the
Securities Act, as transactions not involving a public offering. The Investors were also granted
customary demand registration rights, obligating us to use our best efforts to file this
registration statement in respect of the purchased Shares. On June 1, 2007, we entered into an
amendment (The Amendment) to the stock purchase agreement pursuant to which we were released from
liability to the Investors for our failures to timely file periodic reports or a registration
statement, and from any alleged misrepresentations in connection with the private placement. The
Amendment also provides the Investors with full ratchet antidilution protection for subsequent
sales of common stock at a price lower than paid by the Investors.
On August 3, 2007, we entered into stock purchase agreements and registration rights agreements
with approximately 11 accredited and institutional investors for the sale of shares of our common
stock (shares) for $0.025 per share, in a private offering, in exchange for gross proceeds of
approximately $525,000. This private placement (the August private placement) was made in
connection with the April private placement. The stock purchase agreements and registration rights
agreements executed in connection with the August private placement are in the same form as those
executed in connection with the April private placement, as amended, which were filed as exhibits
to our Current Report on Form 8-K filed on April 4, 2007. The shares issued in the August private
placement are subject to full-ratchet antidilution protection pursuant to the Amendment. The shares
purchased in the August private placement will be issued upon the effectiveness of the reverse
stock split that was approved by our stockholders at the annual meeting held on August 3, 2007.
On August 3, 2007, we entered into a Conversion Agreement, attached to our Current Report on Form
8-K filed with the SEC on August 8, 2007, as Exhibit 10.1, with John McGinnis pursuant to which he
will be issued shares in consideration for a $200,000 investment at $0.005 per share. The sale of
these shares was made in an effort to resolve a dispute with Mr. McGinnis, as disclosed on our
Quarterly Report for the three month period ended March 31, 2007 on Form 10-QSB filed with the SEC
on June 20, 2007. In addition, we entered into a stock purchase agreement and registration rights
agreement, substantially the same as those executed in connection with the April private placement,
with Mr. McGinnis and two additional investors whereby they purchased shares of our common stock at
a price of $0.005 per share in exchange for aggregate gross proceeds of approximately $142,384 plus $7,616 in interest for an aggregate purchase price of $150,000. These shares will
be
issued upon the effectiveness of the reverse stock split referred to above.
Mr. McGinnis purchase triggers the Amendments above-referenced full ratchet anti-dilution
protections for the investors who purchased shares in the April private placement and August
private placement. As a result, 26,777,141 additional shares were issued to the Investors
resulting in an adjusted per share purchase price of $0.005.
Mr. McGinnis was referred to the Company by the Companys financial advisor, Powers & Associates,
LLC. Pursuant to an agreement with Powers & Associates, LLC, the Company is required to pay cash
and warrants equal to 8% of the aggregate gross proceeds of the transaction to Powers & Associates,
LLC.
The shares sold in the April private placement, the August private placement and the additional
shares sold on August 3, 2007 were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public offering and are being
registered under this registration statement.
Each of the purchasers represented their intention to acquire the securities for their own account
for investment purposes and not with a view to the distribution thereof other than in accordance
with applicable law. Appropriate legends were affixed to the stock certificates issued in the
transaction. All purchasers either received or had access to adequate information concerning the
investment. Purchasers were also granted customary demand registration rights, obligating us to use
our best efforts to file this registration statement covering the purchased Shares.
EXHIBITS
|
|
|
|
|
No. |
|
Description |
|
3.1 |
|
|
Certificate of Incorporation(1) |
|
3.2 |
|
|
Bylaws(2) |
|
5.1 |
|
|
Opinion on Legality of the Securities Being Registered of Dreier Stein & Kahan, LLP |
|
10.1 |
|
|
Form of Stock Purchase Agreement, as amended(3) |
|
10.2 |
|
|
Form of Registration Rights Agreement (3) |
|
13.1 |
|
|
Annual Report on Form 10-KSB for the Fiscal Year Ended December 31, 2006(4) |
|
13.2 |
|
|
Quarterly Report on Form 10-QSB for the Quarter Ended June 30, 2007(5) |
|
23.1 |
|
|
Consent of Dreier Stein & Kahan, LLP(6) |
|
23.2 |
|
|
Consent of Singer Lewak Greenbaum & Goldstein LLP |
|
|
|
(1) |
|
Incorporated by reference to our Current Report on Form 8-K, filed with the SEC on
August 24, 2007. |
|
(2) |
|
Incorporated by reference to our Current Report on Form 8-K, filed with the SEC
on April 4, 2005. |
|
(3) |
|
Incorporated by reference to our Current Report on Form 8-K, filed with the SEC
on April 3, 2007 and our Current Report on Form 8-K, filed with the SEC on June 1, 2007. |
|
(4) |
|
Incorporated by reference to our Annual Report on Form 10-KSB, filed with the SEC
on May 17, 2007. |
|
(5) |
|
Incorporated by reference to our Quarterly Report on Form 10-QSB for the Quarter
Ended June 30, 2007, filed with the SEC on August 14, 2007. |
|
(6) |
|
Filed herewith under Exhibit 5.1. |
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
1. File, during any period in which it offers or sells securities, a post-effective amendment
to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the registration statement; and
(iii) Include any additional or changed material information on the plan of distribution.
2. For determining liability under the Securities Act, treat each post-effective amendment as a
new registration statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the securities that
remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Securities Act, and the
registrant will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements of filing on Form
SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in
the City of Los Angeles, State of California on September 27, 2007.
|
|
|
|
|
|
CLEARANT, INC.
|
|
|
By: |
/s/
Jon M. Garfield |
|
|
|
Jon M. Garfield, Chief Executive Officer and |
|
|
|
Chief Financial Officer |
|
|
In accordance with the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates stated:
|
|
|
|
|
Signature |
|
Title(s) |
|
Date |
|
|
|
|
|
/s/ Jon M. Garfield
Jon M. Garfield |
|
Director
|
|
September 27, 2007 |
|
/s/ Rowland W. Day II
Rowland W. Day II |
|
Director
|
|
September 27, 2007 |
|
/s/ Michael Elek
Michael Elek |
|
Director
|
|
September 27, 2007 |
|
/s/ Maurice J. DeWald
Maurice J. DeWald |
|
Director
|
|
September 27, 2007 |