e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2006
Commission File Number 000-50309
Clearant, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
91-2190195 |
(State or other jurisdiction of incorporation)
|
|
(I.R.S. Employer Identification Number) |
11111 Santa Monica Boulevard, Suite 650, Los Angeles, California 90025
(Address of principal executive offices, including zip code)
(310) 479-4570
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated file. See definition of accelerated file and large accelerated file in Rule
12b-2 of the Exchange Act (Check one):
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
August 1, 2006, there were 39,912,659 shares of registrants common stock, $0.0001 par
value, outstanding.
CLEARANT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,595 |
|
|
$ |
10,141 |
|
Accounts receivable |
|
|
199 |
|
|
|
208 |
|
Inventory |
|
|
56 |
|
|
|
|
|
Prepaids and other assets |
|
|
1,141 |
|
|
|
381 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,991 |
|
|
|
10,730 |
|
|
|
|
|
|
|
|
Property and equipment, net of $1,002 and
$1,148 of accumulated depreciation at
June 30, 2006 and December 31, 2005, respectively |
|
|
316 |
|
|
|
415 |
|
Identifiable intangibles, net of $776 and
$545 of accumulated amortization at June
30, 2006 and December 31, 2005, respectively |
|
|
1,312 |
|
|
|
1,403 |
|
Deposits and other assets |
|
|
98 |
|
|
|
244 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,717 |
|
|
$ |
12,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,173 |
|
|
$ |
1,292 |
|
Accrued liabilities |
|
|
1,006 |
|
|
|
1,664 |
|
Deferred revenue |
|
|
22 |
|
|
|
48 |
|
Bridge loans, net |
|
|
106 |
|
|
|
106 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,307 |
|
|
|
3,110 |
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
57 |
|
|
|
60 |
|
Other liabilities |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,364 |
|
|
|
3,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock ($0.0001 par value;
200,000 shares authorized; 39,913 and
39,759 issued and outstanding at June
30, 2006 and December 31, 2005,
respectively) |
|
|
4 |
|
|
|
4 |
|
Additional paid-in capital |
|
|
82,777 |
|
|
|
82,179 |
|
Accumulated deficit |
|
|
(77,428 |
) |
|
|
(72,571 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,353 |
|
|
|
9,612 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
7,717 |
|
|
$ |
12,792 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
F-3
CLEARANT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
89 |
|
|
$ |
48 |
|
|
$ |
168 |
|
|
$ |
92 |
|
Direct distribution |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
Fee for service |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
Contract research and milestones |
|
|
1 |
|
|
|
108 |
|
|
|
62 |
|
|
|
151 |
|
Grants |
|
|
7 |
|
|
|
35 |
|
|
|
27 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
106 |
|
|
|
191 |
|
|
|
296 |
|
|
|
298 |
|
|
Cost of sales |
|
|
58 |
|
|
|
5 |
|
|
|
113 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
48 |
|
|
|
186 |
|
|
|
183 |
|
|
|
289 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
2,312 |
|
|
|
2,005 |
|
|
|
4,789 |
|
|
|
3,997 |
|
Research and development |
|
|
143 |
|
|
|
508 |
|
|
|
468 |
|
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,455 |
|
|
|
2,513 |
|
|
|
5,257 |
|
|
|
5,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,407 |
) |
|
|
(2,327 |
) |
|
|
(5,074 |
) |
|
|
(4,970 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
64 |
|
|
|
|
|
|
|
135 |
|
|
|
(1,786 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
1,329 |
|
Other (loss) gain |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes |
|
|
(2,343 |
) |
|
|
(2,327 |
) |
|
|
(4,857 |
) |
|
|
(5,427 |
) |
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(2,343 |
) |
|
|
(2,327 |
) |
|
|
(4,857 |
) |
|
|
(5,427 |
) |
Add: Preferred stock dividend and financing
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,343 |
) |
|
$ |
(2,327 |
) |
|
$ |
(4,857 |
) |
|
$ |
(7,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
39,849 |
|
|
|
35,860 |
|
|
|
39,807 |
|
|
|
21,850 |
|
See accompanying notes to condensed financial statements.
F-4
CLEARANT, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 |
|
|
|
|
|
|
|
|
|
|
|
|
par value |
|
|
Additional Paid-in |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
Balance, December 31, 2005 |
|
|
39,759 |
|
|
$ |
4 |
|
|
$ |
82,179 |
|
|
$ |
(72,571 |
) |
|
$ |
9,612 |
|
|
Exercise of common stock options |
|
|
44 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Issuance of common stock to consultants for services |
|
|
110 |
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
168 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,857 |
) |
|
|
(4,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
39,913 |
|
|
$ |
4 |
|
|
$ |
82,777 |
|
|
$ |
(77,428 |
) |
|
$ |
5,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
F-5
CLEARANT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,343 |
) |
|
$ |
(2,327 |
) |
|
$ |
(4,857 |
) |
|
$ |
(5,427 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
158 |
|
|
|
81 |
|
|
|
348 |
|
|
|
247 |
|
Non-cash stock-based compensation |
|
|
196 |
|
|
|
|
|
|
|
404 |
|
|
|
|
|
Issuance of common stock to consultants for services rendered |
|
|
38 |
|
|
|
452 |
|
|
|
89 |
|
|
|
452 |
|
Non-cash interest expense associated with convertible debt
financings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,786 |
|
Gain on extinguishment of debt and other, net |
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
(1,329 |
) |
Warrant exchange for common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables and prepaids |
|
|
(597 |
) |
|
|
(77 |
) |
|
|
(747 |
) |
|
|
21 |
|
Inventory |
|
|
(35 |
) |
|
|
|
|
|
|
(56 |
) |
|
|
|
|
Accounts payable |
|
|
77 |
|
|
|
(360 |
) |
|
|
42 |
|
|
|
(334 |
) |
Accrued liabilities |
|
|
120 |
|
|
|
(796 |
) |
|
|
(639 |
) |
|
|
(1,384 |
) |
Deferred revenue |
|
|
(8 |
) |
|
|
(83 |
) |
|
|
(29 |
) |
|
|
(104 |
) |
Other assets and liabilities |
|
|
183 |
|
|
|
(111 |
) |
|
|
173 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,211 |
) |
|
|
(3,221 |
) |
|
|
(5,354 |
) |
|
|
(5,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(72 |
) |
|
|
(50 |
) |
|
|
(140 |
) |
|
|
(101 |
) |
Capital expenditures |
|
|
(19 |
) |
|
|
(35 |
) |
|
|
(72 |
) |
|
|
(35 |
) |
Cash received in 2005 merger activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(91 |
) |
|
|
(85 |
) |
|
|
(212 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,455 |
|
Issuance of convertible notes payable, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,811 |
|
Exercise of common stock options |
|
|
24 |
|
|
|
17 |
|
|
|
26 |
|
|
|
19 |
|
Principal payments on bridge loans |
|
|
|
|
|
|
(366 |
) |
|
|
|
|
|
|
(366 |
) |
Principal payments on capital lease obligations |
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
18 |
|
|
|
(349 |
) |
|
|
20 |
|
|
|
10,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustments on cash and cash equivalents |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(2,284 |
) |
|
|
(3,654 |
) |
|
|
(5,546 |
) |
|
|
4,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
6,879 |
|
|
|
8,653 |
|
|
|
10,141 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,595 |
|
|
$ |
4,999 |
|
|
$ |
4,595 |
|
|
$ |
4,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-cash Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
six months ended June 30, 2006, the Company paid
accounts payable of $38 with 10,259 shares of common stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
See accompanying notes to condensed financial statements.
F-6
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and reflect all adjustments,
consisting solely of normal recurring adjustments, needed to fairly present the financial results
for these interim periods. These financial statements include some amounts that are based on
managements best estimates and judgments. These estimates may be adjusted as more information
becomes available, and any adjustment could be significant. The impact of any change in estimates
is included in the determination of earnings in the period in which the change in estimate is
identified. The results of operations for the three and six months ended June 30, 2006 are not
necessarily indicative of the results that may be expected for the entire 2006 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, 2005 and 2004 and notes thereto in
the Companys Form 10-K dated December 31, 2005, filed with the Securities and Exchange Commission
on March 16, 2006. The December 31, 2004 consolidated balance sheet has been derived from the
audited financial statements on Form 8-K/A filed with the Securities and Exchange Commission on May
16, 2005. All share data has been restated to reflect any reverse stock splits that took place
following the periods presented. Certain reclassifications, where needed, were made in prior
periods to be consistent with current period presentation. These unaudited condensed financial
statements should be read together with the financial statements for the year ended December 31,
2005, and footnotes thereto.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No.
104, Revenue Recognition (SAB 104). The Companys revenue sources are direct distribution of
Clearant Process® sterile implants, and licensing fees and sterilization services to customers who
incorporate the Clearant Process® technology into their product and manufacturing processes, which
may include performance milestones and contract research activities. In addition, the Company
recognizes revenues from government grants. The Company recognizes direct distribution revenue upon
the sourcing of tissue by a customer. Licensing revenue is recognized when a customer distributes
products incorporating the Clearant Process® and revenue related to the sterilization service is
recognized when the service is substantially complete. Revenue related to a performance milestone
is recognized upon customer acceptance of the achievement of that milestone, as defined in the
respective agreements. Revenue related to contract research activities is recognized on a
percentage-of-completion basis. In the event cash is received in advance of service performed, the
Company will defer the related revenue recognition until the underlying performance milestone is
achieved and or the contract research activities commence. In the event advance cash payments are
not attributable to any performance milestone and or contract research activity, the Company will
recognize the underlying amounts into revenue on a straight-line basis over the term of the
underlying agreement. The Company includes shipping charges in the gross invoice price to
customers and classifies the total amount as revenue in accordance with Emerging Issues Task Force
Issue (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping costs are
recorded as cost of sales.
The Company evaluates the collectability of accounts receivables and provides a reserve for credit
losses, as appropriate.
Grants
The Company receives certain grants that support a portion of the Companys research efforts in
defined research projects, usually specific product applications of the Clearant
Process ® . These grants generally provide for reimbursement of approved costs
incurred as defined in the various grants. Revenue associated with these grants is generally
recognized ratably over each grant period and as costs under each grant are incurred.
F-7
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
Cost of Revenues
Cost of revenues consists of costs associated with direct distribution of Clearant Process® sterile
implants to a customer and with providing sterilization services to customers. Prior to 2006,
cost of revenues consists of minimum royalties paid on certain contracting activities and are
recognized when the related revenue is recognized.
Extinguishment of Debt
Extinguishment of debt consists of a gain recognized for the settlement of outstanding payables for
the six months ended June 30, 2006, which, while unusual in nature, is not an infrequent
transaction for the Company. For the six months ended June 30, 2005, a gain was recognized for the
exchange of warrants for outstanding debt in conjunction with the merger transaction.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
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.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes (SFAS 109), using the liability method. Under SFAS 109, deferred tax
assets and liabilities are determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The significant components of the provision for income taxes for the six months ended June 30, 2006
and 2005 were $0 and $0, respectively, for the current state provision. There was no state
deferred and federal tax provision.
F-8
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
Due to its current net loss position, the Company has provided a valuation allowance in full on its
net deferred tax assets in accordance with SFAS 109 and in light of the uncertainty regarding
ultimate realization of the net deferred tax assets.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statements of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning
in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day of the
Companys fiscal year 2006. The financial statements as of and for the three and six months ended
June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the financial statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123(R). There was no stock-based compensation expense
related to employees or directors stock options recognized during the three and six months ended
June 30, 2005. Stock-based compensation expense recognized under SFAS 123(R) for employees and
directors for the three and six months ended June 30, 2006 was $196 and $404, respectively. Basic
and diluted loss per share for the three and six months ended June 30, 2006 would have been $0.05
and $0.11 respectively, if the Company had not adopted SFAS 123(R), compared to reported basic and
diluted loss per share of $0.06 and $0.12 respectively.
The estimated fair value of options granted to employees and directors during the three and six
months ended June 30, 2006, was $1,005 and $1,213, respectively. Assumptions used to value the
options granted were as follows:
|
|
|
|
|
Expected volatility |
|
|
79.6%-89.0 |
% |
Risk-free interest rate |
|
|
4.46%-5.18 |
% |
Expected life in years |
|
|
5.17-6.25 |
|
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 to stock-based awards granted under the
Companys stock option plans for the three and six months ended June 30, 2005. For purposes of
this pro-forma disclosure, the fair value of the options is estimated using the
Black-Scholes-Merton option-pricing formula (Black-Scholes model) and amortized to expense over the
options contractual term.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net loss as reported |
|
$ |
(2,327 |
) |
|
$ |
(7,588 |
) |
Less: Stock-based expense
determined under fair value
based method |
|
|
(34 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(2,361 |
) |
|
$ |
(7,754 |
) |
|
|
|
|
|
|
|
|
Net loss per share |
|
|
|
|
|
|
|
|
As reported basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.35 |
) |
Pro forma basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.35 |
) |
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 three months ended June 30, 2005, as all services related to the
options had been completed.
F-9
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards to
employees and directors on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Statements of Operations. Prior to the adoption of SFAS 123(R),
the Company accounted for stock-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had
been recognized in the Statements of Operations for awards to employees and directors because the
exercise price of our stock options equaled the fair market value of the underlying stock at the
date of grant.
Stock-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Stock-based
compensation expense recognized in the Statements of Operations for the three and six months ended
June 30, 2006 included compensation expense for share-based payment awards granted prior to, but
not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance
with the pro-forma provisions of SFAS 123 and compensation expense for the share-based payment
awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). For stock-based awards issued to employees and
directors, stock-based compensation is attributed to expense using the straight-line single option
method, which is consistent with how the prior-period pro formas were provided. As stock-based
compensation expense recognized in the Statements of Operations for the first three and six months
ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures which the Company estimates to be approximately 8% from 2% as of March 31,
2006. To date, stock-based compensation expense has been reduced by forfeitures of approximately
$35. 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 compensation, and to determine the subsequent impact on the APIC pool and
Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123(R).
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued liabilities approximate fair value
because of the immediate or short-term maturity of these financial instruments. Bridge Loans are
estimated to approximate fair value based upon current market borrowing rates for loans with
similar terms and maturities.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43 (SFAS 151). SFAS 151 requires idle facility expenses, freight, handling
costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that
allocation of fixed overheads to the costs of conversion be based on the normal capacity of the
production facilities. This statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS 151 in the 2006 did not have a material impact
on our financial reporting and disclosures.
F-10
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
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 Company is currently assessing the impact that the adoption of SFAS
156 will have on its results of operations and financial position.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns. This statement is
effective for fiscal years beginning after December 15, 2006. The Company is currently in the
process of evaluating the expected effect of FIN 48 on its results of operations and financial
position.
NOTE 3 NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share (SFAS
128). Under the provisions of SFAS 128, basic loss per share is computed by dividing net loss by
the weighted average number of common stock shares outstanding during the periods presented.
Diluted earnings would customarily include, if dilutive, potential common stock shares issuable
upon the exercise of stock options and warrants. The dilutive effect of outstanding stock options
and warrants is reflected in earnings per share in accordance with SFAS 128 by application of the
treasury stock method. For the periods presented, the computation of diluted loss per share
equaled basic loss per share as the inclusion of any dilutive instruments would have had an
antidilutive effect on the earnings per share calculation in the periods presented.
The following potential common shares have been excluded from the computation of diluted net loss
per share for the six months ended June 30, 2006 and 2005, since their effect would have been
antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Stock Options |
|
|
4,135,000 |
|
|
|
1,904,000 |
|
Warrants |
|
|
5,512,000 |
|
|
|
3,317,000 |
|
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stock |
|
$ |
(2,343 |
) |
|
$ |
(2,327 |
) |
|
$ |
(4,857 |
) |
|
$ |
(7,588 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock
shares outstanding |
|
|
39,849 |
|
|
|
35,860 |
|
|
|
39,807 |
|
|
|
21,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
NOTE 4 COMMON STOCK
Common Stock Transactions and Non-cash Financing Activities
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 to be 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.
During the six months ended June 30, 2006, the Company paid accounts payable of $38 with 10,259
shares of common stock.
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 our common stock at an exercise price of $4.96 per share
with a fair value of $98,922 as of March 31, 2006, in connection with a settlement of disputed
claims, at the discretion of the Company.
During 2005, the Company issued 57,979 shares of common stock with a fair value of $235 to
consultants for services rendered to the Company. A portion of the fair value, $203, is for
services to be rendered over a twelve month contract. Accordingly, $67 and $66 is reflected in
sales, general and administrative expenses for the six months ended June 30, 2006 and 2005,
respectively.
Lock-up Period
For a period beginning on March 25, 2005 and ending on March 25, 2006, the existing holders of
Clearants common stock immediately prior to the 2005 merger cannot (i) sell, offer to sell,
contract or agree to sell, hypothecate, pledge, grant any option, right or warrant to purchase,
make any short sale or otherwise transfer or dispose of or agree to dispose of, directly or
indirectly, any common stock of the Corporation or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences of ownership of
any of the common stock in cash or otherwise, whether or not for consideration, and in each of the
four consecutive three-month periods beginning on March 25, 2006 will not transfer, on a
non-cumulative basis, more than 25% of the common stock held by any such person as of March 25,
2005. As of March 25, 2007, there shall be no further transfer restrictions except as provided by
law.
NOTE 5 - STOCK-BASED AWARDS
Stock Options
Effective March 31, 2005 and in conjunction with its reverse merger consummated March 31, 2005, the
Company cancelled all stock options previously issued to employees and non-employees with exercise
prices greater than $3.50 per share (2005 Option Cancellations). As a result of the 2005 Options
Cancellations, the Company retained stock options to employees and non-employees at March 31, 2005
of approximately 1,918,588 shares (Existing Options), which are grandfathered under the Companys
2000 Stock Option Plan, as amended (2000 Plan). As of December 31, 2005, there are no future grants
available under the 2000 Plan.
On June 30, 2005, the stockholders approved the Clearant, Inc. 2005 Stock Award Plan (2005 Plan).
There are 5,081,412 shares of common stock authorized for issuance under the Plan. Accordingly, an
aggregate of 7,000,000 shares of common stock are reserved for issuance upon exercise of options
under the 2000 Plan and 2005 Plan. The terms of the 2005 Plan provide for grants of stock options
(NSO), stock appreciation rights, restricted stock, deferred stock, bonus stock, dividend
equivalents, other stock-related awards and performance awards that may be settled in cash, stock
or other property. Employees, officers, directors and consultants are eligible for awards under the
2005 Plan. However, incentive stock options (ISO) may only be granted to employees. An ISO will
have the terms stated in the option agreement, provided, however, that the term shall be no more
than ten years from the date of grant and the exercise price shall be no less than 100% of the estimated fair market value per share on the date
of grant. NSOs shall
F-12
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
have a term of no more than 10 years from the date of grant and an exercise
price of no less than 85% of the estimated fair market value per share on the date of grant.
Options granted to an individual who, at the time of grant of such option, owns stock representing
more than 10% of the voting power of all classes of stock of the Company, shall have an exercise
price equal to no less than 110% of fair market value and a term of no more than five years from
the date of grant. The vesting period for ISOs and NSOs is generally four years from the date of
grant.
A summary of activity under the 2000 and 2005 Plans as of December 31, 2005 and for the year then
ended, and as of June 30, 2006 and for the six months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at December 31, 2004 |
|
|
5,253,000 |
|
|
$ |
0.60-$7.94 |
|
|
|
319,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
5,572,000 |
|
|
$ |
0.60-$7.94 |
|
Granted |
|
|
1,254,000 |
|
|
$ |
3.86-$4.51 |
|
|
|
120,000 |
|
|
$ |
4.12 |
|
|
|
1,374,000 |
|
|
$ |
3.86-$4.51 |
|
Exercised |
|
|
(86,000 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
$ |
|
|
|
|
(86,000 |
) |
|
$ |
0.60 |
|
Change in status |
|
|
(226,000 |
) |
|
$ |
0.60-$2.30 |
|
|
|
226,000 |
|
|
$ |
0.60-$2.30 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(3,799,000 |
) |
|
$ |
0.60-$7.94 |
|
|
|
(285,000 |
) |
|
$ |
0.60-$7.22 |
|
|
|
(4,084,000 |
) |
|
$ |
0.60-$7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
2,396,000 |
|
|
$ |
0.60-$7.94 |
|
|
|
380,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
2,776,000 |
|
|
$ |
0.60-$7.94 |
|
Granted |
|
|
1,616,000 |
|
|
$ |
0.75-$1.64 |
|
|
|
25,000 |
|
|
$ |
0.91 |
|
|
|
1,641,000 |
|
|
$ |
0.75-$1.64 |
|
Exercised |
|
|
(3,000 |
) |
|
$ |
0.60 |
|
|
|
(41,000 |
) |
|
$ |
0.60 |
|
|
|
(44,000 |
) |
|
$ |
0.60 |
|
Change in status |
|
|
(63,000 |
) |
|
$ |
0.60 |
|
|
|
63,000 |
|
|
$ |
0.60 |
|
|
|
|
|
|
$ |
0.60 |
|
Canceled |
|
|
(196,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
(42,000 |
) |
|
$ |
2.30 |
|
|
|
(238,000 |
) |
|
$ |
0.60-$4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
3,750,000 |
|
|
$ |
0.60-$7.94 |
|
|
|
385,000 |
|
|
$ |
0.60-$7.22 |
|
|
|
4,135,000 |
|
|
$ |
0.60-$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, 2005 and June 30, 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
Number |
|
Average |
|
Remaining |
|
|
|
|
Of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Value |
As of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
2,396,000 |
|
|
$ |
2.83 |
|
|
|
7.17 |
|
|
$ |
692,000 |
|
Employees Expected to Vest |
|
|
2,376,000 |
|
|
$ |
2.82 |
|
|
|
7.16 |
|
|
$ |
692,000 |
|
Employees Exercisable |
|
|
1,563,000 |
|
|
$ |
2.25 |
|
|
|
6.03 |
|
|
$ |
692,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Outstanding |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Expected to Vest |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Exercisable |
|
|
380,000 |
|
|
$ |
2.04 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,750,000 |
|
|
$ |
2.02 |
|
|
|
7.97 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
3,567,000 |
|
|
$ |
2.03 |
|
|
|
7.90 |
|
|
$ |
|
|
Employees Exercisable |
|
|
1,658,000 |
|
|
$ |
2.48 |
|
|
|
5.93 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Options Outstanding |
|
|
385,000 |
|
|
$ |
1.83 |
|
|
|
5.86 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
385,000 |
|
|
$ |
1.83 |
|
|
|
5.86 |
|
|
$ |
|
|
Non-Employees Options Exercisable |
|
|
360,000 |
|
|
$ |
1.92 |
|
|
|
5.48 |
|
|
$ |
|
|
The total intrinsic value of options exercised for the year ended December 31, 2005 was $297.
Prior to 2005, options exercised were immaterial. Cash received from stock options exercised
during the year ended December 31, 2005 and
F-13
CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
(Unaudited)
the six months ended June 30, 2006 and 2005 were $50,
$26, and $19, respectively. The total intrinsic value of options exercised during the three and
six months ended June 30, 2006 was $14 and $18, respectively. The total fair value of shares
vested during the years ended December 31, 2005, 2004 and 2003, were approximately $1,480, $3,270,
and $2,680, respectively.
Included in the table above, at June 30, 2006 and 2005, were options outstanding for 385,000 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 June 30, 2006, there was $2,103 of total unrecognized compensation costs related to
non-vested share-based compensation arrangements granted under the 2005 Plan. That cost is
expected to be recognized over the weighted-average period of 3.6 years.
When options are exercised, our policy is to issue previously unissued shares of common stock to
satisfy share option exercises. As of June 30, 2006 the Company had 2,579,130 shares of unissued
shares reserved for issuance under our 2005 Plan.
NOTE 6 REVERSE MERGER TRANSACTION
In March 2005, a wholly-owned subsidiary of the Company merged with and into Clearant. The Company
had approximately $17 in cash and no operations as of the date of the merger. Concurrent with the
merger, the Company raised gross proceeds of approximately $11,080 through a private placement of
shares of its Common Stock at $3.00 per share, including the conversion of approximately $2,350 of
bridge loans in the form of promissory notes. The Company completed the merger and placement
effective March 31, 2005. Because the registrant had substantially no other operating assets or
liabilities and Clearant was the sole operating business as of the merger date, the merger was
accounted for as a reverse acquisition. Accordingly, Clearants financial statements now reflect
the Companys financial results and operations on a carry over basis.
Details and analysis of the capital transactions and adjustments recorded to the Companys balance
sheet in conjunction with the merger are more fully described in the Companys December 31, 2005
Form 10-K filed with the Securities and Exchange Commission on March 16, 2006.
F-14
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes, and the other financial
information included in this report.
Forward-Looking Statements
The forward-looking comments contained in this report involve risks and uncertainties. Our
actual results may differ materially from those discussed here due to factors such as, among
others, limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, results of additional clinical studies, acceptance and success of our direct
distribution of allografts, intense competition and substantial regulation in the healthcare
industry. Additional factors that could cause or contribute to such differences can be found in the
following discussion and in the Risks Factors set forth in Item 1A of our Form 10-K for the year
ended December 31, 2005.
Overview
We acquire, develop and market our pathogen inactivation technology, the Clearant
Process ® , to producers of biological products such as:
|
|
|
Devitalized musculoskeletal tissue allograft implants (tissue), |
|
|
|
|
Plasma protein therapeutics, |
|
|
|
|
Recombinant protein therapeutics, |
|
|
|
|
Medical devices, and |
|
|
|
|
Blood and blood-related products. |
We develop and market a proprietary pathogen inactivation technology that reduces the risk of
contamination to biological products by inactivating a broad range of pathogens. The Clearant
Process ® is based on exposing a biological product to gamma-irradiation under
specialized, proprietary or patented conditions that deliver a predetermined amount of radiation to
inactivate a desired level of pathogens, thereby reducing the risk of contamination, while
preserving the functionality and integrity of the treated product. The Clearant
Process ® is designed to:
|
|
|
Inactivate a broad range of known pathogens irrespective of size, origin or structure, |
|
|
|
|
Achieve sterility, in some cases with margins of safety greater than that of a medical device, |
|
|
|
|
Be used in both intermediate and final stages of production, |
|
|
|
|
Protect the mechanical and biological properties of the biological product being treated, and |
|
|
|
|
Be applied to a product after it has been sealed into its final package. |
To date, we have signed a total of 11 agreements with customers to utilize the Clearant
Process® with their products. Through June 2006, we have signed six licensing
agreements with tissue banks, and one with a manufacturer of recombinant protein products, in
return for milestone payments and royalties on end-product sales. Clearant
Process®-treated tissues produced by our licensees have been implanted by doctors in
more than 8,000 patients since January 2004. Additionally, in September 2005, we launched a new
sterilization service which allows tissue banks to send tissue that is ready for sterilization to
our facility in Chicago. This tissue will then be irradiated under Clearant Process®
conditions by us. To date in 2006, we have signed four such sterilization service agreements with
tissue banks and five customers have launched tissue products that were treated using the Clearant
Process®.
Despite
these agreements being signed the adoption from our licenscees and sterilization service customers
has been unpredictable and slower than desired. Examples of this include one tissue bank who
postponed the application of bone implants, despite indicating earlier that the Clearant
15
Process
® would be applied to these products in the 2nd quarter of
2006. Currently, the customer has indicated adoption in the 4th quarter of 2006, but a
final timetable is still being established. Another example is a tissue bank who has not
successfully scaled up its operations and is estimating that this will delay their implementation
of the Clearant
Process ® by six months. A third example is a tissue bank that
has not established a timetable for adopting and marketing the Clearant
Process
®
despite having signed an agreement. We plan to continue
pursuing adoption of these license and sterilization service
contracts and pursue additional contracts, in addition to the recent
implementation of our direct distribution plan.
Based
on these license and sterilization service results we implemented a
plan to better market and promote adoption of the Clearant
Process® which is
to directly
distribute Clearant Process® sterile implants
of our customers.
In February 2006, we ordered approximately $240,000 of tissues that were treated with
the Clearant Process®. In April 2006, we entered into a tissue supply and inventory
agreement whereby we have the exclusive rights to six territories. Under this agreement we paid
$600,000 which can be applied to the future purchase of tissues treated with the Clearant
Process®. Under the terms of this agreement a prepayment is required upon ordering
tissue. This payment and future payments under this agreement will be classified as a prepayment.
Upon receipt of the inventory it will be reclassified as inventory until distributed. We began
hiring salespeople in the second quarter 2006 and had 5 salespeople employed as of June
30th, 2006. We expect to hire additional sales people in the second half of 2006. In
the second half of June 2006, our sales people began to directly distribute Clearant Process®
sterile implants.
Results of Operations
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Revenues
Our total revenue decreased by $85,000 or 45%, to $106,000 for the quarter ended June 30,
2006, from $191,000 for the quarter ended June 30, 2005. Revenues from licensing activities
increased 85% to $89,000 in the quarter ended June 30, 2006, from $48,000 in the quarter ended June
30, 2005, as a result of greater implementation of the Clearant Process® into
our customers manufacturing processes and greater market acceptance of human tissue treated with
the Clearant Process®. We are continuing to market the license and sterilization service to gain
further adoption.
Revenues from direct distribution of
Clearant Process® sterile implants were $9,000 during the
quarter ended June 30, 2006, marking approximately two weeks of
the newly adopted direct distribution revenue model. We
expect revenue from direct distribution to increase as our sales
force becomes fully integrated into the marketplace.
Revenues from contract research, milestones and grants decreased to $1,000 in the quarter
ended June 30, 2006, from $108,000 in the same quarter last year. The decrease is primarily
related to non-recurring milestones reached during the three months ended June 30, 2005.
During 2005 and 2006 we changed our emphasis away from one-time, generally non-recurring
research and grant revenue to direct distribution of Clearant Process® sterile implants and
obtaining license and sterilization service customers. We expect to continue this strategy and
expect contract research and grant revenue to decrease. We expect these direct distribution,
license and sterilization revenue to be more characteristic of recurring revenue. In addition, we
expect that the costs associated with the direct distribution and sterilization services to
increase in conjunction with the revenue increase.
Sales, General and Administrative Expenses
Sales, general and
administrative expenses increased by $307,000 or 15%, to $2,312,000 for the quarter ended
June 30, 2006,
from $2,005,000 for the quarter ended June 30, 2005.
Included in the $2,312,000
for the quarter ended June 30, 2006, are approximately $196,000 of non-cash stock-based
compensation and $38,000 of stock option grants to consultants, $90,000 of non-cash
patent-related expenses, $88,000 of sales-related expenses associated with the
initial setup of the direct distribution sales force, and approximately $156,000 of
legal costs associated with civil action involving certain statements
regarding a competitors product claim and regulatory matters.
We incurred $196,000 in non-cash stock-based compensation for the quarter ended June 30, 2006, which is related to the implementation of SFAS 123(R) in 2006. We issued common stock and stock options to outside consultants for services rendered during the quarter ended June 30, 2006 and 2005, in the amount of $38,000 and $452,000,
respectively. This decrease was due to a non-recurring
grant of stock options to non-employees made during the quarter
ended June 30, 2005. From time to time, we may issue common stock
to consultants for services rendered and incur patent-related costs.
The $307,000 increase for the
quarter ended June 30, 2006, from the quarter ended June 30, was principally
due to increased sales and marketing expenses, recruiting fees and legal fees related to a civil action involving
statements regarding a competitors product claim and regulatory matters.
We do
not believe that the claim is likely to have a material effect on our financial results,
or that ongoing litigation expenses
related to this matter will be material. We expect our sales,
general and administrative expenses to correlate with the revenue from
our direct distribution revenue model. Sales and marketing expenses
increases or decreases will be affected by the revenue, effort and timing
required to provide Clearant Process® sterile implants
to the marketplace.
16
Research and Development Expenses
Research and development expenses decreased 72% to $143,000 for the quarter ended June 30,
2006, from $508,000 for the quarter ended June 30, 2005. This decrease was largely a result of
reduced research and development costs associated with the reduction of our R&D personnel and
related expenses. This was accomplished due to our shift in focus from research and development to
the commercialization of the Clearant Process®. We anticipate that we will continue to reduce
research and development costs.
In addition, we have complemented in-house research and development with universities and
third party research and development consulting firms, which we believe provides a broader
expertise in research and development and allows us to maintain a low research and development
headcount.
Other Income/Expense
For the quarter ended June 30, 2006, we recognized $64,000 in net interest income compared to
$0 for the same quarter last year. We have $4,595,000 cash on hand as of June 30, 2006, which we
are currently investing in short-term conservative money market funds. We expect to earn interest
income in 2006, although this amount will decrease as the cash is depleted.
Preferred Stock Dividend and Financing Costs
As of June 30, 2006 and 2005, there were no shares of preferred stock outstanding and
therefore no dividends.
Six
Months Ended June 30, 2006 Compared to Six Months Ended
June 30, 2005
Revenues
Our total revenue decreased by $2,000 to $296,000 for the six months ended June 30, 2006, from
$298,000 for the six months ended June 30, 2005. Revenues from licensing activities increased 83%
to $168,000 in the quarter ended June 30, 2006, from $92,000 in the quarter ended June 30, 2005, as
a result of greater implementation of the Clearant Process® into our
customers manufacturing processes and greater market acceptance of human tissue treated with the
Clearant Process®. Additionally, sterilization service revenue was $30,000 for the six month ended
June 30, 2006, as we introduced an opportunity for potential customers to try the Clearant
Process®. We are continuing to market the license and sterilization service to gain further
adoption.
Revenues from direct distribution of
Clearant Process® sterile implants were $9,000 during the
six months ended June 30, 2006, marking approximately two weeks
of the newly adopted direct distribution revenue model. We
expect revenue from direct distribution to increase as our sales
force becomes fully integrated into the marketplace.
Revenues from contract research, milestones and grants decreased 59% to $62,000 in the six
months ended June 30, 2006, from $151,000 in the same six months last year. The decrease is
primarily related to a greater amount of non-recurring milestones reached during the three months
ended June 30, 2005.
During 2005 and 2006 we changed our emphasis away from one-time, generally non-recurring
research and grant revenue to direct distribution of Clearant Process® sterile implants and
obtaining license and sterilization service customers. We expect to continue this strategy and
expect contract research and grant revenue to decrease. We expect these direct distribution,
license and sterilization revenue to be more characteristic of recurring revenue. In addition, we
17
expect that the costs associated with the direct distribution and sterilization services to
increase in conjunction with the revenue increase.
Sales, General and Administrative Expenses
Sales, general and administrative expenses
increased by $792,000 or 20%, to $4,789,000 for the six months ended June 30, 2006,
from $3,997,000 for the six months ended June 30, 2005.
Included in the $4,789,000 for the
six months ended June 30, 2006, are
approximately $404,000 of non-cash stock-based compensation and $89,000 of
stock option grants to consultants, $178,000 of non-cash patent-related
expenses, $118,000 of sales-related expenses associated with the initial setup
of the direct distribution sales force, and approximately $156,000 of legal
costs associated with civil action involving certain statements
regarding a competitors product claim and regulatory matters.
We incurred $404,000 in non-cash stock-based compensation for the six-months ended June 30, 2006, which is related to the implementation of SFAS 123(R) in 2006. In addition, we issued common stock and stock options to outside consultants for services rendered during the six months ended June 30, 2006 and 2005, in the amount of $89,000 and $452,000,
respectively. This decrease was due to a non-recurring grant of stock
options to non-employees made
During the six months ended June 30, 2005. In addition,
there was an increase in non-cash patent-related expenses of $178,000 for
the six months ended June 30, 2006, compared to $79,000 to the same six
months in 2005. From time to time, we may issue common stock to consultants
for services rendered and incur patent-related costs.
The $792,000 increase for the
six months ended June 30, 2006, from the six months ended June 30, 2005 was
principally due to increased sales and marketing expenses,
recruiting fees and legal fees related to a civil action involving certain statements regarding a
competitors product claim and regulatory matters. We do not
believe that the claim is likely to have a material effect on our financial
results, or that ongoing litigation expenses related to this matter will be
material. We expect our sales, general and administrative expenses to correlate
with the revenue from our direct distribution revenue model. Sales and marketing
expense increases will be affected by the revenue, effort and timing required to provide
Clearant Process® sterile implants to the marketplace.
Research and Development Expenses
Research and development expenses decreased 63% to $468,000 for the six months ended June 30,
2006, from $1,262,000 for the six months ended June 30, 2005. This decrease was largely a result of
reduced research and development costs associated with the closing of the Maryland facility during
the six months ended June 30, 2006, compared to the same period in 2005. Throughout the latter part
of 2005 and during the first quarter of 2006, we closed our Maryland facility and reduced our R&D
personnel and related expenses due to our shift in focus from research and development to the
commercialization of the Clearant Process®. We anticipate that we will continue to reduce research
and development costs.
In addition, 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, 2006, we recognized $135,000 in net interest income compared
to $1,786,000 in net interest expense for the same quarter last year. The expense was primarily
the result of the issuance of additional bridge loans in the beginning of 2005 and subsequent
payoff of all outstanding loan interest prior to the reverse merger transaction during 2005. In
addition, we have $4,595,000 cash on hand as of June 30, 2006, which we are currently investing in
short-term conservative money market funds. We expect to earn interest income in 2006, although
this amount will decrease as the cash is depleted. Additionally there was an $117,000 gain on
extinguishment of debt and a $35,000 loss on disposal of fixed assets in connection with the
closing of the Maryland facility for the six months ended June 30, 2006. From time to time, we may
participate in these infrequent events.
Preferred Stock Dividend and Financing Costs
Preferred stock dividend and financing costs decreased to $0 from $2,161,000 for the six
months ended June 30, 2006 and 2005, respectively. The decrease was principally due to the
conversion of preferred stock in conjunction with the reverse merger transaction during 2005. As of
June 30, 2006 and 2005, there were no shares of preferred stock outstanding and therefore no
dividends.
18
Liquidity and Capital Resources
As of June 30, 2006,
cash and marketable securities totaled approximately $4,595,000. Net cash used in operating activities was $5,354,000 for the six months ended June 30, 2006,
compared to $5,971,000 for the six months ended June 30, 2005. During the six months ended June 30,
2006, cash used by operations resulted in a $4,857,000 net loss, a $747,000 increase in prepaid
expenses and accounts receivable which primarily relates to a prepayment of Clearant Process®
sterile implants, and a $639,000 decrease in accrued liabilities, primarily related to Maryland
facility closing expenses accrued for in 2005 and paid in 2006. Significant non-cash adjustments
to operating activities for the six months ended June 30, 2006, included depreciation and
amortization expense of $348,000, non-cash charges of $404,000 for stock-based compensation,
$89,000 for common stock issued to consultants for services rendered, and a non-cash gain on
extinguishment of debt and other of $82,000.
Our net cash used in investing activities was $212,000 for the six months ended June 30, 2006
compared to $119,000 for the six months ended June 30, 2005. Our investing activities consist
primarily of intellectual property expenses and capital expenditures. Compared to the first six
months of 2005, there were more intangible investments and capital expenditures during the six
months ended June 30, 2006.
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 $20,000 for the six
months ended June 30, 2006, compared to net cash provided by financing activities of $10,918,000
for the six months ended June 30, 2005. Cash provided by financing activities for the six months
ended June 30, 2006 consisted of $26,000 in the exercise of common stock options partially offset
by $6,000 in principal payments on capital lease obligations.
We have been unprofitable since our inception and we expect to incur additional operating
losses for the foreseeable future as we incur expenditures on sales and marketing, commercial
operations, and research and development. Our activities to date are not as broad in depth or scope
as the activities we may undertake in the future, and our historical operations and financial
information are not necessarily indicative of our future operating results, financial condition or
ability to operate profitably as a commercial enterprise.
Our future capital requirements will depend upon many factors, including progress with
marketing our technologies, the ramp-up of revenue from our existing and new contracts, future
decisions to purchase Clearant Process® sterile implants, costs required to represent the tissue
banks in the distribution of the tissue, the time and costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other proprietary rights, the necessity
of, and time and costs involved in obtaining, regulatory approvals, competing technological and
market developments, and our ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements. We expect to continue to incur
negative cash flows and net losses for the foreseeable future.
Based upon our current plans,
we believe that our existing capital resources will be
sufficient to meet our non-inventory related operating expenses and capital requirements through at
least the end of 2006. Changes in our business
strategy, technology development or marketing
plans or other events affecting our operating plans, including market acceptance, and expenses may
result in the expenditure of existing cash before that time.
During the second quarter of 2006, we implemented a direct
distribution strategy. As a part of this strategy, we will acquire fully packaged and ready to
distribute inventory of Clearant
Process®
sterile implants and generate higher levels of accounts receivable than historically incurred. This
acquisition of finished goods inventory, higher levels of historic accounts receivable and the related sales and
marketing costs associated with the direct distribution strategy will have an impact on our cash
requirements and may create the need to raise debt financing, equity financing, or a combination
thereof prior to the end of 2006. In February 2006, we ordered approximately $240,000 of tissues
that were treated with the Clearant Process
®. In April 2006, we entered into a tissue
supply and inventory agreement whereby we have the exclusive rights to six territories. Under this
agreement we paid $600,000 which can be applied to the future purchase of tissues treated with the
Clearant Process
®. As of the six months ended June 30, 2006, we have made
inventory-related payments of $749,000. We began hiring salespeople in the second quarter 2006 and
expect to hire additional sales people in the second half of 2006. These salespeople are paid a
base salary and have the ability to earn a significant portion of their compensation through
commissions. In the second half of June 2006, our sales people began to directly distribute
Clearant Process® sterile implants. We have
experienced some positive results from this direct
distribution strategy, but these results are preliminary and based on
some sales people being in the field since the latter part of June
2006. As these events occur, our ability to meet our cash obligations as they become due and payable
will depend on our ability to
19
sell
securities, borrow funds or some combination thereof. We may not be successful in raising necessary
funds on acceptable terms, or at all. If we cannot obtain additional
funding, we may be required to curtail or discontinue our
operations.
We may seek to raise additional funding through public or private financing or through
collaborative arrangements with strategic partners. We may also seek to raise additional capital
through public or private placement of shares of equity securities, in order to increase the amount
of our cash reserves on hand.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under noncancelable operating leases with various
expirations through 2011. The future minimum lease payments under these leases and other
contractual obligations as of June 30, 2006 are as follows ($ in 000s):
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Less than |
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More than |
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Contractual Obligations |
|
Total |
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|
1 year |
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|
1 - 3 years |
|
|
3 - 5 years |
|
|
5 years |
|
Lease obligations |
|
$ |
166 |
|
|
$ |
130 |
|
|
$ |
35 |
|
|
$ |
1 |
|
|
$ |
|
|
Bridge loans |
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|
106 |
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|
|
106 |
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|
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|
Purchase obligations |
|
|
600 |
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|
|
600 |
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$ |
872 |
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|
$ |
836 |
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$ |
35 |
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$ |
1 |
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|
$ |
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|
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of June 30, 2006, we had no
off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. Generally accepted accounting principles require
management to make estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We
base our estimates on experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that may not be readily apparent from other sources. Our
actual results may differ from those estimates.
We consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for management to determine
or that may produce materially different results when using different assumptions. We consider the
following accounting policies to be critical:
Revenue Recognition and Deferred Revenue
We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104). Our revenue sources are direct distribute Clearant Process®
sterile implants, licensing fees, sterilization services, performance milestones and contract
research activities, with additional revenues generated from government grants.
We directly distribute Clearant Process® sterile implants to third parties for allograft
implant usage. We also license the Clearant Process ® to third parties who
intend to incorporate our technology into their product and manufacturing processes. Customers may
require contract research or commercial scale-up activities to support and validate the commercial
applicability and eventual licensing of the Clearant Process ® . In addition,
we provide customers the option of using our sterilization services whereby we apply irradiation
and certain other proprietary steps of the Clearant Process® for our customers. We recognize
direct distribution revenue upon the customers sourcing of the Clearant Process® sterile implant.
We recognize licensing revenue when a customer distributes
products incorporating the Clearant Process ® . Revenue related to our
sterilization service is recognized when the service is substantially complete. Revenue related to
a performance milestone is recognized upon customer acceptance of the achievement of that
milestone, as defined in the respective agreements and ability to pay. Revenue related to contract
research activities is recognized on a percentage-of-completion basis, provided the customer has
the ability to pay. In the event cash is
20
received in advance of services performed, we will defer
the related revenue recognition until the underlying performance milestone is achieved or the
contract research activities commence. In the event advance cash payments are not attributable to
any performance milestone or contract research activity, we will recognize the underlying amounts
into revenue on a straight-line basis over the term of the underlying agreement or up to a maximum
of fifteen years. We include shipping charges in the gross invoice price to customers and classify
the total amount as revenue in accordance with Emerging Issues Task Force Issue (EITF) 00-10,
Accounting for Shipping and Handling Fees and Costs. Shipping costs are recorded as cost of sales.
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized
as incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. We evaluate the recoverability of our patent costs and trademarks
quarterly based on estimated undiscounted future cash flows.
Stock-Based Compensation
On January 1, 2006, we adopted Statements of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning
in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 107 (SAB 107) relating to SFAS 123(R). We have applied the provisions of SAB
107 in its adoption of SFAS 123(R).
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43 (SFAS 151). SFAS 151 requires idle facility expenses, freight, handling
costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed
when incurred. It also requires that allocation of fixed overheads to the costs of conversion be
based on the normal capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
151 in the 2006 first quarter did not have a material impact on our financial reporting and
disclosures.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 156). The provisions of SFAS 156 are effective for
fiscal years beginning after September 15, 2006. This statement was issued to simplify the
accounting for servicing rights and to reduce the volatility that results from using different
measurement attributes. We are currently assessing the impact that the adoption of SFAS 156 will
have on our results of operations and financial position.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a
comprehensive model for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This
statement is effective for fiscal years beginning after December 15, 2006. We are currently in the
process of evaluating the expected effect of FIN 48 on its results of operations and financial
position.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Historically, we have invested our cash in short term commercial paper, certificates of
deposit, money market accounts and marketable securities. We consider any liquid investment with an
original maturity of three months or less when purchased to be cash equivalents. We classify
investments with maturity dates greater than three months
when purchased as marketable securities, which have readily determined fair values as
available-for-sale securities. We adhere to an investment policy which requires that all
investments be investment grade quality and no more than ten percent of our portfolio may be
invested in any one security or with one institution.
21
At June 30, 2006, we had no investments that would create market risk. It is our intention to
invest in highly liquid, high grade commercial paper, variable rate securities and certificates of
deposit. Investments in both fixed rate and floating rate interest earning instruments carry a
degree of interest rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities with shorter maturities
may produce less income if interest rates fall. The market risk associated with our investments in
debt securities is substantially mitigated by the frequent turnover of the portfolio.
ITEM 4. Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our system of disclosure controls and procedures as of the
end of the period covered by this report. Based on this evaluation our Chief Executive Officer and
our Chief Financial Officer have determined that our disclosure controls and procedures are
effective in timely alerting them to material information required to be included in this report.
There has been no change in our internal control over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonable likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. As of the date of this report, we are not currently
involved in any legal proceeding that we believe would have a material adverse effect on our
business, financial condition or operating results.
ITEM 1A. Risk Factors
Our results of operations and financial condition are subject to numerous risks and
uncertainties described in our Annual Report on Form 10-K for 2005, filed on March 16, 2006, and
incorporated herein by reference. You should carefully consider these risk factors in conjunction
with the other information contained in this report. Should any of these risks materialize, our
business, financial condition and future prospects could be negatively impacted. As of June 30,
2006, there have been no material changes to the disclosures made on the above-referenced Form
10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended June 30, 2006, we issued 100,000 shares of common stock with
a fair value of $130,000 for services to be recognized over a twelve month contract. These securities were issued without registration
pursuant to the exemption afforded by Section 4(2) of the Securities Act of 1933, as a transaction
by us not involving any public offering.
ITEM 3. Defaults Upon Senior Securities
None.
22
ITEM 4. Submission of Matters to a Vote of Securities Holders
Our annual meeting of stockholders was held on June 27, 2006. There were 15,591,173 shares
present in person or by proxy. Our stockholders elected elected all of the boards nominees for
director and also voted to ratify the approval of our independent registered accounting firm.
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For |
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Withheld |
(1) Election of Directors: |
|
|
|
|
|
|
|
|
John S. Wehrle |
|
|
15,434,171 |
|
|
|
157,002 |
|
Alain Delongchamp |
|
|
15,434,470 |
|
|
|
156,703 |
|
Nolan H. Sigal |
|
|
15,434,771 |
|
|
|
156,402 |
|
Herve de Kergrohen, M.D. |
|
|
15,434,571 |
|
|
|
156,602 |
|
Alexander Man-Kit Ngan |
|
|
15,425,221 |
|
|
|
165,952 |
|
|
|
|
|
|
|
|
|
|
(2) Ratify appointment of
Singer Lewak Greenbaum &
Goldstein LLP as our
independent registered
accounting firm for the current
year: |
|
|
|
|
|
|
|
|
For |
|
|
15,449,702 |
|
|
|
|
|
Against |
|
|
|
|
|
|
60,986 |
|
Abstain |
|
|
|
|
|
|
80,485 |
|
ITEM 5. Other Information
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results of operations,
business strategies, operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, plans and objectives of management, markets for stock of
Clearant and other matters. Statements in this report that are not historical facts are
forward-looking statements for the purpose of the safe harbor provided by Section 21E of the
Exchange Act and Section 27A of the Securities Act. Such forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues and income of
Clearant, wherever they occur, are necessarily estimates reflecting the best judgment of the senior
management of Clearant on the date on which they were made, or if no date is stated, as of the date
of this report. These forward-looking statements are subject to risks, uncertainties and
assumptions, including those described in the Risk Factors described below, that may affect the
operations, performance, development and results of our business. Because the factors discussed in
this report could cause actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by us or on our behalf, you should not place undue reliance on any
such forward-looking statements. New factors emerge from time to time, and it is not possible for
us to predict which factors will arise. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
You should understand that the following important factors, in addition to those discussed
above and in the Risk Factors could affect our future results and could cause those results to
differ materially from those expressed in such forward-looking statements:
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general economic conditions, |
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|
|
|
limited operating history, |
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|
|
|
difficulty in developing, exploiting and protecting proprietary technologies, |
|
|
|
|
results of additional clinical studies, |
|
|
|
|
acceptance and success of our direct distribution of allografts, |
23
|
|
|
intense competition and substantial regulation in the healthcare industry, |
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|
|
|
our future capital needs and our ability to obtain financing, and |
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|
|
|
other risks and uncertainties as may be detailed from time to time in our
public announcements and filings with the SEC. |
We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or any other reason. All subsequent
forward-looking statements attributable to the Company or any person acting on our behalf are
expressly qualified in their entirety by the cautionary statements contained or referred to herein.
In light of these risks, uncertainties and assumptions, the forward-looking events discussed in
this report may not occur.
ITEM 6. Exhibits
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CLEARANT, INC.
|
|
Date: August 4, 2006 |
By: |
/s/ ALAIN DELONGCHAMP
|
|
|
|
Alain Delongchamp |
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date: August 4, 2006 |
By: |
/s/ JON GARFIELD
|
|
|
|
Jon Garfield |
|
|
|
Chief Financial Officer |
|
25