Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-50309
Clearant, Inc.
(Name of small business issuer in its charter)
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Delaware
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91-2190195 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1801 Avenue of the Stars, Suite 435
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Los Angeles, California 90067 |
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(Address of principal executive offices)
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(City, State and Zip Code) |
Issuers telephone number: (310) 479-4570
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $0.0001 par value per share
(Title of class)
Check whether issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. o
Check whether issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this Form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. 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
State issuers revenues for its most recent fiscal year: $1,084,463
State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the average bid and
asked price of such common equity, as of a specified date within the past 60 days: $9,047,397 as of
March 27, 2008.
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: 48,957,445 shares of common stock as of March 27, 2008.
Transitional Small Business Disclosure Format (Check one): Yes o No þ
Forward Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results of operations,
business strategies, operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, plans and objectives of management, markets for stock of
Clearant, Inc. and other matters. Statements in this report that are not historical facts are
forward-looking statements for the purpose of the safe harbor provided by Section 21E of the
Exchange Act and Section 27A of the Securities Act. Such forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues and income of
Clearant, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the
senior management of Clearant, Inc. on the date on which they were made, or if no date is stated,
as of the date of this report. These forward-looking statements are subject to risks, uncertainties
and assumptions, including those described in the Risk Factors 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 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 report as anticipated, believed, estimated, expected or
intended.
Except to the extent required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or any other
reason. All subsequent forward-looking statements attributable to us or any person acting on our
behalf are expressly qualified in their entirety by the cautionary statements contained or referred
to herein. In light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report may not occur.
1
PART I
Item 1. Description of Business
Business Development
We were 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 including, but not limited to HIV, West Nile, and Hepatitis C; |
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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). Beginning in 2005, we started to shift our focus from research and
development to the commercialization of the Clearant Process®. Subsequently we closed the
laboratory and sold the related laboratory equipment in 2006 and 2007.
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The net losses from the disposal
are approximately
$130,000 and $35,000 for the years ending December 31, 2007 and 2006, respectively. In addition,
in the first quarter of 2006 we reduced our research and development staff from six employees to
one. From time to time, we may explore 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. Our research and development expenses for the years ended December 31, 2007
and 2006 were $80,000 and $926,000, respectively
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; |
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Recombinant protein therapeutics; |
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Medical devices; and |
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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 us and then we coordinate 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 we
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 or cleaned 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 that we have generated 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.
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In order to maximize recognition of the increased value of the safety improvements provided by the
Clearant Process®, we support our outside sales representatives efforts by marketing directly to
surgeons, scientists and medical professionals, or through leaders in the industry, and supporting
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
We are currently focusing our 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 us: (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 gaining market acceptance of the Clearant Process®.
We have achieved the following milestones in the devitalized human tissue industry:
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Two direct sales representatives and approximately eleven indirect sales groups,
for a total of approximately 94 sales representatives; |
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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. We are currently
gathering information on 24-month results. |
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, five 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 December 2007, four of the six
licensees have launched tissue products that were treated using the Clearant Process®, however not
all of the tissue they are processing is being treated using 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. Of the four
Sterilization agreements, only one of the tissue banks has implemented the Sterilization Service,
and we cannot estimate when or if the remaining three tissue banks will do so. In addition to the
sterilization service and license agreements, we are doing some exploratory research oriented work
at our sterilization facility in Illinois, which is preliminary in nature and no contract has been
entered into.
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. As we continue to
adopt this new strategy, revenue potential under the licensing model may be limited and direct
distribution could have a direct adverse affect on our licensing model. While we intend to
continue to pursue the license and sterilization agreements, the direct distribution revenue model
may have an adverse impact on the pursuit of such agreements.
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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 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 in 2002. 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 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 us no
significant difference between patients receiving Clearant Process®-treated tissues as compared to
those receiving traditional tissues. Furthermore, we 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
beginning of the study. The twelve-month outcome results of this study are favorable and we are
currently gathering data on the 24-month results. 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, we have 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.
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We currently distribute Clearant Process® tissue to surgeons, hospitals and surgery centers through
a direct and indirect sales force. In addition, we provide sterilization service to tissue
processors as an alternative to complete
implementation of the Clearant Process®. We also license 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 us.
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: (1)
methods that can achieve sterility; and (2) 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.
We have conducted studies which 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 cannot 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. However, 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, using
some protein products.
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Our strategy would be 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. However, we are not actively pursuing this market at this time, but 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 sterilization of recombinant products, we believe
that there are opportunities to utilize the technology to improve and provide solutions for
problematic in-process sterilization protocols used in certain recombinant products.
Our strategy would be 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. However, we are not actively pursuing this market at this time, but
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 our 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.
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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 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, the
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 the 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.
8
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 us 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.
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. We 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 December 31, 2007, we have a total of 96 issued or pending patents. We currently have twelve
issued U.S. patents, which will expire between 2013 and 2023, and twenty-five 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.
9
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.
Employees
As of December 31, 2007, we have approximately eight total employees of which seven are full-time
employees: one executive officer, one research and development employee, three sales and marketing
employees and three 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 to 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. In addition, we are an
electronic filer, and the SEC maintains a website that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The
website can be found at http://www.sec.gov. All reports filed with the SEC are also 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.
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 REPORT.
Risks Related to Our Business
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 raise additional capital through the incurrence of debt, our
business may be affected by the amount of leverage we incur, and our borrowings may subject us to
restrictive covenants. 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 and we may be required to delay, reduce or stop operations, any of which would have a
material adverse effect on our business. Furthermore, if we issue additional equity securities,
current stockholders could experience dilution of their ownership in our Company.
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Our limited operating history may make it difficult to evaluate and forecast our business to date,
revenue potential and project our future viability.
We were 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, we were 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 we 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-$0.3 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 during
approximately the second quarter 2008 or before if we are not 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 Clearant Process® to increase 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 2008 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 we begin to be a processor representative for certain tissue of our
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.
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. We are 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 and we are currently gathering data on the
24-month results. 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, 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 adverse than the current
data collected from the other multi-center sites. We are 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.
We are experiencing material cash flow constraints.
We are past due on many of our accounts with vendors, suppliers, distributors, sales
representatives and other service providers. We are in discussions with many of these accounts and
are actively trying to resolve these past due amounts. No assurances can be made that we 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 us on similar terms or at all. If this happens, it could materially impact operations
and revenue.
We utilize Independent Sales Representatives and Distributors.
We utilize a strategy to contract with independent sales representatives and distributors. These
sales teams are not our employees but are independent contractors, and in some cases sell many
other product lines. We cannot give any assurances that these sales teams will continue to market
our products or how much time and effort they will devote to us versus other product lines.
Further, we expect 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.
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.
12
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 and
Chief Financial 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 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.
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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 and we are currently gathering data on the 24-month results. 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 us,
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 their facility or manufacturing processes. Additionally, in September 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 completed development of these transfer procedures and specifications for
musculo-skeletal applications of allograft tissue processor licensees, some of which use the
Chicago facility. We may not be able to develop appropriate procedures, packaging and
specifications for other (tissue and non-tissue) 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.
14
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 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.
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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 our 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 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.
16
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 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®.
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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 us. 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.
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 products, our efforts to commercialize the process with
additional customers may be hindered.
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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.
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.
19
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 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 our
marketing strategy. If any of these delays is significant, our business, financial condition and
results of operations will be adversely affected.
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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.
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.
We depend heavily upon limited sources of human tissue, and any failure to obtain tissue from these
sources in a timely manner will interfere with our ability to process and distribute allografts.
In 2007 we relied on three suppliers for the sourcing of our human tissue. The limited supply of
human tissue has at times limited our growth, and may not be sufficient to meet our future needs.
If we were to lose any of these major suppliers, there can be no assurances that we would be able
to locate new suppliers or that we would be able to fulfill our current needs with the existing
suppliers.
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In addition, due to seasonal changes in mortality rates, some scarce tissues that we use for our
allografts are at times in particularly short supply. We cannot be sure that our supply of tissue
will continue to be available at current levels
or will be sufficient to meet our needs. If we are no longer able to obtain tissue from these
sources sufficient to meet our needs, we may not be able to locate replacement sources of tissue on
commercially reasonable terms, if at all. Any interruption of our business caused by the need to
locate additional sources of tissue would significantly impair our revenues, which could cause the
market price of our common stock to decline. We expect our revenues would continue to suffer for at
least as long as needed tissue is in short supply.
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; 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:
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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 opinion on our financial statements for the year ended December 31, 2007 contained an
explanatory paragraph that expresses doubt about our ability to continue as a going concern due to
recurring negative cash flows from operations, 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. We have
and continue 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 our stockholders may significantly impact the market price of our common
stock.
The sale of shares by our stockholders may significantly affect the market price of our stock. Once
shares of our common stock are registered, we have no control over which of the stockholders will
actually sell all or any portion of their shares, or at what price. Sales of substantial amounts of
our common stock, including approximately 46,000,000 shares that we issued in connection with the
April and August 2007 private placements may impact the market price of our common stock.
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.
23
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.
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.
Item 2: 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, under a lease
which expires March 31, 2009. This facility operates our sterilization service. We pay rent of
approximately $1,800 per month at that location.
We believe that the current leased space is adequate, 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.
24
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 December 31, 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.
Item 3: 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, we entered into a renewable two-year supply and distribution agreement (the
Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement, Osprey
granted us exclusive rights to place current and future Osprey cervical and lumbar allografts
treated with the Clearant Process® in certain geographic territories with an option for additional
geographic territories. In exchange for the exclusive rights under the Osprey Agreement, we were
obligated to pay Osprey $500,000 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 we receive debt or equity financing of at least $1 million, or (ii) October 31,
2006. In addition, we were required to make the following quarterly payments to be applied to
payments for ordered products: $650,000 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 December 31, 2007, all tissue orders had not been delivered by Osprey and we have not made
the prepayments. In February 2007, we received notice from Osprey of its termination of the Osprey
Agreement, effective within thirty days from receipt of the notification if we did not timely cure
certain alleged payment defaults. We are in ongoing discussions with Osprey to resolve these
issues, which could include, but is not limited to, reduction in exclusive territories or
termination of the Osprey Agreement. The termination of the agreement has resulted in the
discontinuation or disruption of the spinal bone implant supply, which has had a material adverse
impact on our ability to distribute spinal bone implants treated with the Clearant Process®. In
addition, the lack of supply of the ordered products has had a material impact on our revenues and
cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year ended December 31, 2007.
25
PART II
Item 5: Market for Common Equity and Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
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, 2006 1 |
|
|
|
|
|
|
|
|
|
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, 2007 1 |
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
0.28 |
|
|
$ |
0.11 |
|
|
Second quarter |
|
|
0.17 |
|
|
|
0.02 |
|
|
Third quarter 2 |
|
|
1.99 |
|
|
|
0.40 |
|
|
Fourth quarter |
|
|
1.03 |
|
|
|
0.24 |
|
|
|
|
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 |
|
On August 3, 2007, after recommendation by our board of directors, the holders of a
majority of our common stock approved an amendment to our Certificate of Incorporation to permit us
to effect a 1:14 reverse stock split of our common stock. The reverse stock split is effective as
of August 23, 2007. The prices quoted reflect the reverse stock split. |
Holders
As of March 27, 2008, there were approximately 177 holders of record of our common stock. This
number does not include beneficial owners of common stock whose shares are held in the names of
various dealers, clearing agencies, banks, brokers and other fiduciaries.
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.
26
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, 2007:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities remaining |
|
|
|
|
|
|
|
|
|
|
|
available for future |
|
|
|
Number of |
|
|
|
|
|
|
issuance under |
|
|
|
securities to be |
|
|
|
|
|
|
equity |
|
|
|
issued upon exercise |
|
|
Weighted-average |
|
|
compensation plans |
|
|
|
of outstanding |
|
|
exercise price of |
|
|
(excluding securities |
|
|
|
options, warrants |
|
|
outstanding options, |
|
|
reflected in column |
|
|
|
and rights1 |
|
|
warrants and rights |
|
|
(a))2 |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
3,573,624 |
|
|
$ |
2.20 |
|
|
|
7,018,308 |
|
|
Equity compensation
plans not approved
by security holders |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
Total |
|
|
3,573,624 |
|
|
$ |
2.20 |
|
|
|
7,018,308 |
|
|
|
|
1 |
|
On August 3, 2007, at our annual meeting, the stockholders approved a 6,000,000
share increase in our 2005 Stock Award Plan. As of December 31, 2007, there were 156,780 shares of
our common stock reserved for issuance upon the exercise of warrants and 3,416,844 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 7,018,306 shares were available for issuance under the 2005 Stock Award Plan. |
Item 6: Managements Discussion and Analysis or Plan of Operation
Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the years ended December 31, 2007 and 2006
At December 31, 2007, we had working capital deficit of $585,000 which included accounts payable
and accrued liabilities of $1,943,000. At December 31, 2007, our total assets were $2,609,000,
which consisted primarily of intangible assets and cash from the sale of our common stock.
Revenues
Our total revenue increased by $314,000 or 41%, to $1,084,000 for the year ended December 31, 2007,
from $770,000 for the year ended December 31, 2006. Revenues from direct distribution of Clearant
Process® sterile implants were $696,000 during the year ended December 31, 2007, which was the
first full 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.
27
Revenues from licensing activities decreased $237,000 or 73%, to $90,000 for the year ended
December 31, 2007, from $327,000 for the year ended December 31, 2006, as a result of the loss of
one licensing customer in the first
quarter of 2007 as well as our strategy of focusing on direct distribution rather than depending on
licensing fees. Revenues from fees for service activities increased $25,000 or 28%, to $115,000 for
the year ended December 31, 2007 from $90,000 for the year ended December 31, 2006 as we continued
to offer customers the opportunity to use our sterilization service. These figures are consistent
with our strategy of moving away from a royalty model and aggressively targeting a direct
distribution strategy. While we are continuing to service the existing license and fee for service
agreements, we are not actively pursuing new license or fee for service agreements, and it is
unlikely that there will be near-term material growth in licensing or fee for service revenue.
Revenues from contract research and milestones increased $89,000 or 95% to $183,000 for the year
ended December 31, 2007, from $94,000 for the year ended December 31, 2006. This increase is
primarily the result of a one-time termination fee from one of our licensing customers in the first
quarter of 2007. Grant revenue decreased by $27,000 or 100%, to $0 for the year ended December 31,
2007 from $27,000 for the year ended December 31, 2006, as a result of the completion of a grant
research projects in 2006.
Beginning in 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 Revenues
Our total cost of revenues decreased by $228,000, or 19% to $981,000 for the year ended December
31, 2007, from $1,209,000 for the year ended December 31, 2006. This decrease is primarily related
to a reserve of inventory during 2007 of $444,000 compared to an $811,000 inventory and inventory
related prepayment reserve during 2006. There were no inventory related prepayments in 2007. We do
not expect any further reserves based upon current inventory levels. This was partially offset by
increased cost of sales related to an increase in our direct distribution related revenue in 2007.
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 $4,965,000 or 57%, to $3,742,000 for the
year ended December 31, 2007, from $8,707,000 for the year ended December 31, 2006.
Included in the $3,742,000 for the year ended December 31, 2007, are approximately $368,000 of
non-cash stock-based compensation and $103,000 of non-cash stock grants to consultants,
$299,000 of non-cash patent-related write-offs in accordance with SFAS 144, and approximately
$406,000 of legal costs associated with on-going legal matters, including the legal dispute with
one of our suppliers of hard tissue.
We incurred $368,000 in non-cash stock-based compensation for the year ended December 31, 2007
compared to $490,000 for the year ended December 31, 2006. The reduction is primarily related to
the downsizing of personnel in the first quarter of 2007. In addition, we issued common stock and
stock options to outside consultants for services rendered during the year ended December 31, 2007
and 2006, resulting in non-cash expense of $103,000 and $278,000, respectively. This decrease was
due to a non-recurring grant of stock options to non-employees made during the year ended December
31, 2006. From time to time, we may issue common stock to consultants for services rendered and
incur patent-related costs.
The $4,965,000 decrease in sales, general and administrative expense for the year ended December
31, 2007, from the year ended December 31, 2006 was principally due to the downsizing of personnel
in the first quarter of 2007 as well as an overall concerted effort
to decrease expenses in 2007. Reimbursement expense related to the
Chief Executive Officers travel related expenses to our Los
Angeles office was approximately $36,000 for the year ending
December 31, 2007. 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.
28
During the first quarter of 2007, we reduced the number of employees from 25 to 8, eliminated
several marketing, public and investor relations initiatives, and prepared to move into less
expensive office space, which had the result of decreasing ongoing expenses. We 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 February 29, 2008, we had cash
on-hand of approximately $839,000.
Our ability to have sufficient capital through the end of 2008 is dependent on successful
settlement of vendor claims, and we will need to raise additional capital prior to the end of the
second quarter 2008.
Research and Development Expenses
Research and development expenses decreased by $846,000 or 91%, to $80,000 for the year ended
December 31, 2007, from $926,000 for the year ended December 31, 2006. 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 and further cost reductions throughout the first
half of 2007. 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 expect to
maintain minimal research & development costs in 2008, however we cannot make any assurances that
we will stay ahead of competition at these low levels of expenditures. From time to time we may
complement our in-house research and development with universities and third party research and
development consulting firms, which we believe, provides a broader expertise in research and
development and allows us to maintain a low research and development headcount.
Other Income/Expense
For the year ended December 31, 2007, we recognized $20,000 in net interest income compared to
$192,000 in net interest income for the same time last year. The decrease in net interest income is
due to having reduced funds to earn interest in 2007 over 2006. For the year ended December 31,
2007 we recognized $382,000 as a gain of settlement of obligations compared to $117,000 for the
year ended December 31, 2006. This increase relates to the settlement of outstanding payables in
2007. In addition, we incurred a $130,000 and $35,000 loss on disposal of fixed assets during the
year ended December 31, 2007 and 2006, respectively. The increase in the loss on disposal of fixed
asset was due to the downsizing of employees in 2007 as well as the sale of the remaining assets
related to the closing of our research & development facility. We have $1,062,000 cash on hand as
of December 31, 2007, 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.
Liquidity and Capital Resources
Net cash used in operating activities was $2,530,000 for the year ended December 31, 2007, compared
to $9,253,000 for the year ended December 31, 2006. During the year ended December 31, 2007, cash
used by operations resulted in a $3,447,000 net loss. Significant non-cash adjustments to operating
activities for the year ended December 31, 2007, included depreciation and amortization expense of
$407,000, provision for inventory reserve of $444,000, non-cash charges of $368,000 for stock-based
compensation. These were offset by a gain on settlement of obligations of $382,000 for the
settlement of outstanding payables.
During 2006, cash used in operations resulted in a $9,798,000 net loss and a $422,000 decrease in
accounts payable and accrued liabilities. The decrease in accounts payable and accrued liabilities
are primarily related to wages and decreased professional fees, such as public relations,
accounting, and outside legal fees. Significant non-cash adjustments to operating activities for
2006, included depreciation and amortization expense of $532,000, and non-cash charges of $490,000
for stock-based compensation.
Our net cash used in investing activities was $46,000 for the year ended December 31, 2007 compared
to net cash used in investing activities of $337,000 for the year ended December 31, 2006. During
2007 and 2006, our investing activities consisted primarily of intellectual property expenditures
and capital expenditures.
29
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 $3,075,000 for the year ended December 31,
2007, compared to $12,000 for the year ended December 31, 2006. Cash provided by financing
activities for the year ended December 31, 2007 consisted primarily of the net proceeds from the
issuance of common stock in conjunction with the capital raise in 2007, leaving a balance of
approximately $1,062,000 in cash and cash equivalents at December 31, 2007. Cash provided by
financing activities in 2006 consisted primarily of $26,000 from the exercise of stock options
offset by $14,000 for principal payments on capital lease obligations.
We have been unprofitable since our inception and we expect to incur additional operating losses
through at least the end of 2008 and into 2009 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 2008 and into 2009.
Going Concern
As of February 28, 2008, we had cash on-hand of approximately $804,000. Our ability to have
sufficient capital through the end of 2008 is dependent on successful settlement of vendor claims,
and we will need to raise additional capital prior to the end of the second quarter 2008. 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. Our current monthly
negative cash flow is approximately $175,000 $250,000. This amount does not include potential
payments for settlement of past due accounts payable balances and potential inventory purchase
requirements.
Contractual Obligations and Commercial Commitments
We lease facilities and equipment under non-cancelable operating leases with various expirations
through 2010. The future minimum lease payments under these leases and other contractual
obligations as of December 31, 2007 are as follows
($ in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Less than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
than 5 |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Lease obligations |
|
$ |
143 |
|
|
$ |
123 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
Bridge loan |
|
$ |
106 |
|
|
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
249 |
|
|
$ |
229 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. Generally accepted accounting principles require management to make
estimates, judgments and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities. We base our
estimates on experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that may not be readily apparent from other sources. Our actual results
may differ from those estimates.
We consider our critical accounting policies to be those that involve significant uncertainties,
require judgments or estimates that are more difficult for management to determine or that may
produce materially different results when using different assumptions. We consider the following
accounting policies to be critical:
Revenue Recognition and Deferred Revenue
We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104). Our revenue sources are direct distribution of Clearant Process®
sterile implants, 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 or the contract research
activities commence. In the event advanced 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 (EITF) No. 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 December 31, 2007, we
reserved for credit losses of $26,000.
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 years ended
December 31, 2007 and 2006, we had inventory reserves of $444,000 and $811,000, respectively, which
were recorded as a cost of revenue.
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 reserved from time to time based on market conditions or other factors. For the
years ended December 31, 2007, we had inventory reserves of
$444,000.
In accordance with the terms of the spinal Supply and Distribution Agreement (See Note 13), 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.
31
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.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under Statements 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.
Stock-Based Compensation
On January 1, 2006, we adopted 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, 2007 and 2006, reflect the
impact 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.
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 in Item 3. Legal Proceedings, 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.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (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 September 2006, the SEC issued SAB 108 which was issued to address diversity in practice in
quantifying financial statement misstatements and the potential under current practice for the
buildup of improper amounts on the balance sheet effective for any fiscal year beginning after
November 15, 2006. We adopted this bulletin beginning January 1, 2007; it has had no material
impact on our financial statements.
32
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 are required to adopt the provision of SFAS 159, as applicable, beginning in fiscal
year 2008. We do not believe the adoption of SFAS 159 will have a material impact on our financial
position or results of operations.
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 our results of operations or
financial position, although we are continuing to evaluate the full impact of the adoption of FSP
FIN 48-1.
On November 5, 2007, the SEC issued SAB No. 109, Written Loan Commitments Recorded at Fair Value
Through Earnings (SAB 109). SAB 109 provides guidance on the accounting for written loan
commitments recorded at fair value under generally accepted accounting principles (GAAP).
Specifically, the SAB revises the Staffs views on incorporating expected net future cash flows
related to loan servicing activities in the fair value measurement of a written loan commitment.
SAB 109, which supersedes SAB 105, Application of Accounting Principles to Loan Commitments,
requires the expected net future cash flows related to the associated servicing of the loan be
included in the measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 is effective in fiscal quarters beginning after December 15, 2007. We are
currently evaluating the potential impact, if any, that the adoption of SAB 109 will have on our
financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which replaces SFAS
No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for calendar year companies on January 1, 2009. We
do not anticipate that the adoption of SFAS 141(R) will have a material affect on accounting for
business combinations once adopted, but the effect is dependent upon acquisitions at that time.
In December 2007, the SEC issued SAB 110. SAB 110 expresses the views of the staff regarding the
use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of
expected term of plain vanilla share options in accordance with SFAS No. 123 (revised 2004). We
do not believe that the adoption of SAB 110 will have a material impact on our financial
statements.
Off-Balance Sheet Arrangements
Except for operating lease commitments disclosed above, as of December 31, 2007, we had no
off-balance sheet arrangements.
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. Financial Statements, as well as under the Risk Factors section above.
33
Item 7: Financial Statements
CONTENTS
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|
PAGE |
|
|
F-2 |
|
|
|
FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
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F-5 |
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F-6 |
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|
F-7 F-19 |
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|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Clearant, Inc.
Los Angeles, California
We have audited the balance sheet of Clearant, Inc. (the Company) as of December 31, 2007, and
the related statements of operations, stockholders equity and cash flows for each of the two
years in the period ended December 31, 2007. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We
conducted our audits 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 audits provide 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, 2007, and the results of our
operations and our cash flows for each of the two years in the period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has adopted the provisions of
Statement of Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 on January 1, 2007.
We were not engaged to examine managements assertion about the effectiveness of the Companys
internal control over financial reporting as of December 31,
2007 included in Item 8A. Controls and Procedures and, accordingly, we do not
express an opinion thereon.
The 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
March 31, 2008
F-2
CLEARANT, INC.
BALANCE SHEET
(in thousands, except par value amounts)
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
1,062 |
|
Accounts receivable, net of allowances of $26 |
|
|
341 |
|
Inventory, net of $849 inventory allowance |
|
|
0 |
|
Inventory related prepayments, net of $406 inventory allowance |
|
|
0 |
|
Prepaids and other assets |
|
|
68 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,471 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of $83 of accumulated depreciation |
|
|
87 |
|
Identifiable intangibles, net of $1,217 of accumulated amortization |
|
|
991 |
|
Deposits and other assets |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,609 |
|
|
|
|
|
|
|
|
|
|
Liabilities, Redeemable Preferred Stock and Stockholders Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
|
$ |
1,210 |
|
Accrued liabilities |
|
|
733 |
|
Bridge loans, net |
|
|
106 |
|
Deferred revenue |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,056 |
|
|
|
|
|
|
|
|
|
|
Deferred revenue noncurrent |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
Common stock ($0.0001 par value; 200,000 shares authorized; 48,957
shares issued and outstanding) |
|
|
5 |
|
Additional paid-in capital |
|
|
86,360 |
|
Accumulated deficit |
|
|
(85,816 |
) |
|
|
|
|
|
Total stockholders equity |
|
|
549 |
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable preferred stock and stockholders equity |
|
$ |
2,609 |
|
|
|
|
|
See accompanying notes to financial statements.
F-3
CLEARANT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
Licensing |
|
$ |
90 |
|
|
$ |
327 |
|
Direct distribution |
|
|
696 |
|
|
|
232 |
|
Fee for service |
|
|
115 |
|
|
|
90 |
|
Contract research and milestones |
|
|
183 |
|
|
|
94 |
|
Grants |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,084 |
|
|
|
770 |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
981 |
|
|
|
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (Loss) |
|
|
103 |
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
3,374 |
|
|
|
8,217 |
|
Stock based compensation |
|
|
368 |
|
|
|
490 |
|
Research and development |
|
|
80 |
|
|
|
926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,822 |
|
|
|
9,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,719 |
) |
|
|
(10,072 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
20 |
|
|
|
192 |
|
Gain on settlement of obligation |
|
|
382 |
|
|
|
117 |
|
Loss on disposal of property and equipment |
|
|
(130 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes |
|
|
(3,447 |
) |
|
|
(9,798 |
) |
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(3,447 |
) |
|
$ |
(9,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.16 |
) |
|
$ |
(3.44 |
) |
|
|
|
|
|
|
|
|
|
Number of weighted average shares used in per
share calculation: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
21,517 |
|
|
|
2,849 |
|
See accompanying notes to financial statements.
F-4
CLEARANT, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except par value amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock- |
|
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
|
holders |
|
|
|
$0.0001 par value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Equity |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
(Deficit) |
|
Balance at December 31,
2005 |
|
|
2,840 |
|
|
$ |
|
|
|
$ |
82,183 |
|
|
$ |
(72,571 |
) |
|
$ |
9,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
3 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Issuance of common
stock to consultants
for services |
|
|
27 |
|
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
254 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,798 |
) |
|
|
(9,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006 |
|
|
2,870 |
|
|
$ |
|
|
|
$ |
82,953 |
|
|
$ |
(82,369 |
) |
|
$ |
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock to consultants
for services |
|
|
22 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
60 |
|
Issuance of common
stock as settlement of
debt |
|
|
31 |
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
Issuance of common stock |
|
|
46,034 |
|
|
|
5 |
|
|
|
3,214 |
|
|
|
|
|
|
|
3,219 |
|
Issuance costs |
|
|
|
|
|
|
|
|
|
|
(344 |
) |
|
|
|
|
|
|
(344 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
368 |
|
|
|
|
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,447 |
) |
|
|
(3,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2007 |
|
|
48,957 |
|
|
$ |
5 |
|
|
$ |
86,360 |
|
|
$ |
(85,816 |
) |
|
$ |
549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-5
CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands, except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,447 |
) |
|
$ |
(9,798 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Provision for inventory and inventory related prepayments write down |
|
|
444 |
|
|
|
811 |
|
Loss on sale of property and equipment |
|
|
130 |
|
|
|
35 |
|
Depreciation and amortization |
|
|
407 |
|
|
|
532 |
|
Stock-based compensation |
|
|
368 |
|
|
|
490 |
|
Issuance of common stock to consultants for accounts payable |
|
|
109 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to consultants for services rendered |
|
|
103 |
|
|
|
154 |
|
Non-cash interest expense associated with convertible debt financings |
|
|
|
|
|
|
|
|
Gain on settlement of obligations |
|
|
(382 |
) |
|
|
(117 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(67 |
) |
|
|
(66 |
) |
Inventory |
|
|
(59 |
) |
|
|
(683 |
) |
Inventory related prepayments |
|
|
|
|
|
|
(513 |
) |
Prepaids |
|
|
(82 |
) |
|
|
3 |
|
Accounts payable |
|
|
12 |
|
|
|
616 |
|
Accrued liabilities |
|
|
(37 |
) |
|
|
(1,038 |
) |
Deferred revenue |
|
|
(61 |
) |
|
|
(37 |
) |
Other assets and liabilities |
|
|
32 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,530 |
) |
|
|
(9,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Cost of identified intangibles |
|
|
(58 |
) |
|
|
(203 |
) |
Capital expenditures |
|
|
(10 |
) |
|
|
(134 |
) |
Proceeds from sales of property and equipment, net |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(46 |
) |
|
|
(337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Issuance of
common stock, net of costs of $344 |
|
|
2,875 |
|
|
|
|
|
Issuance of bridge loan |
|
|
200 |
|
|
|
|
|
Exercise of common stock options |
|
|
|
|
|
|
26 |
|
Principal payments on capital lease obligations |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,075 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
499 |
|
|
|
(9,578 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
563 |
|
|
|
10,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,062 |
|
|
$ |
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for accounts payable |
|
$ |
109 |
|
|
$ |
124 |
|
Issuance of common stock to consultants for services |
|
$ |
103 |
|
|
$ |
154 |
|
Conversion of debt to equity |
|
$ |
200 |
|
|
$ |
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
2 |
|
See accompanying notes to financial statements.
F-6
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
We were incorporated as a California corporation and commenced operations on April 30, 1999. We
have 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. Our primary business model is to distribute Clearant Process®
tissue to surgeons, hospitals and surgery centers through a direct and indirect sales force.
Clearant continues to provide customers the ability to apply the Clearant Process® internally or
through our sterilization service. Customers pay us for assistance in applying the process to their
manufacturing processes or to apply the process for them at our sterilization service center.
During 2003 and 2004, our primary sources of revenue were contract research and government grants.
During 2005, we changed our emphasis from one-time, generally non-recurring research and grant
revenue to obtaining license and sterilization service customers. During 2006, we implemented a
plan to better market and promote adoption of the Clearant Process®, which is to directly
distribute Clearant Process® sterile implants to customers in order to facilitate market
penetration. While we intend to continue to pursue the license and sterilization agreements, the
direct distribution revenue model will be our primary focus, which may have an adverse impact on
the pursuit of such agreements. Our ability to achieve a profitable level of operations will depend
on our 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, in August 2007, we closed a private placement of 46,034,338
shares of our common stock for an aggregate purchase price of approximately $3,200 at a unit price
of $0.005. We also consummated a 1-for-14 reverse stock split in August 2007 All references to
common stock and per share amounts for all prior periods presented have been retroactively restated
to reflect this split.
In June 2005, we (formerly known as Bliss Essentials Corp.) changed our state of incorporation from
Nevada to Delaware. In conjunction with the reincorporation, we had authorized common stock
consisting of 200 million shares, $0.0001 par value, of which 48,957,445 shares are issued and
outstanding as of December 31, 2007, and 50 million shares of preferred stock, $0.0001 par value,
none of which are issued and outstanding as of December 31, 2007. Additional information pertaining
to our reincorporation in Delaware can be found on Form 14A filed with the Securities and Exchange
Commission on June 16, 2005. The carrying value of the common stock has been revalued in accordance
with the reincorporation. On December 31, 2006, we merged with Clearant Licensing, Inc.
NOTE 2 GOING CONCERN
The accompanying financial statements have been prepared on the basis that we will continue as a
going concern. We have incurred significant operating losses and negative cash flows from operating
activities since our inception. As of December 31, 2007, these conditions raised substantial doubt
as to our ability to continue as a going concern. In April and August 2007, we raised additional
capital (See Note 10) to supplement our operations. There can be no
assurance that we will be successful in our efforts to generate, increase or maintain revenue or
raise additional capital on terms acceptable to us or that we will be able to continue as a going
concern. The financial statements do not include any adjustments relating to the recoverability of
the carrying amount of the recorded assets or the amount of liabilities that might result from the
outcome of this uncertainty.
F-7
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 include 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
or the contract research activities commence. In the event advanced 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 (EITF) No. 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 December 31, 2007, we reserved for credit losses of $26.
Grants
We receive certain grants that support our 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, 2007 and 2006, we had inventory reserves of $444 and $811, respectively, which were
recorded as a cost of revenue.
Settlement of Obligation
Settlement of obligation consists of a gain recognized for the settlement of outstanding payables
for the fiscal years ended December 31, 2007 and 2006, which, while unusual in nature, is not an
infrequent transaction for us.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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.
F-8
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Cash Equivalents and Concentration of Credit Risk
We consider all highly liquid investments with an original maturity of three months or less to be
cash equivalents. Financial instruments that potentially subject us to a concentration of credit
risk consist of cash and cash equivalents, short-term investments, and accounts receivable. Cash is
deposited with what we believe are highly credited, quality financial institutions and may exceed
FDIC insured limits. For and at the years ended December 31, 2007 and 2006, three customers
accounted for approximately 33% and 49% of revenues, respectively, and three customers accounted
for approximately 24% and 35% 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 reserved from time to time based on market conditions or other factors. For the
years ended December 31, 2007, we had inventory reserves of $444.
In accordance with the terms of our spinal Supply and Distribution Agreement (See Note 13), we are
required to make prepayments. Upon receipt of the inventory the prepayments will be reclassified as
inventory until distributed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method
based upon estimated useful lives of the assets, which are generally three to seven years.
Leasehold improvements are amortized over the estimated useful lives of the assets or related lease
terms, whichever is shorter. Repair and maintenance expenditures are charged to appropriate expense
accounts in the period incurred.
Long-Lived Assets
We review and evaluate our long-lived assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An impairment loss is measured
as the amount by which the asset carrying value exceeds its fair value. Fair value is generally
determined using valuation techniques such as estimated future cash flows. An impairment is
considered to exist if total estimated future cash flows on an undiscounted basis are less than the
carrying amount of the asset. An impairment loss is measured and recorded based on discounted
estimated future cash flows. Assumptions underlying future cash flow estimates are subject to risks
and uncertainties. No impairment losses were recorded during the years ended December 31, 2007 and
2006.
Identifiable Intangibles
Certain costs associated with obtaining and licensing patents and trademarks are capitalized as
incurred and are amortized on a straight-line basis over the shorter of their estimated useful
lives or their legal lives of 17 to 20 years. Amortization of such costs begins once the patent or
trademark has been issued. We evaluate the recoverability of our patent costs and trademarks
quarterly based on estimated undiscounted future cash flows. In accordance with 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 our valuation assessments of our patents, no impairment exists for the year ended December
31, 2007.
Research and Development Costs
Research and development costs are expensed as incurred.
F-9
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Income Taxes
Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes (SFAS 109),
using the liability method. Under SFAS 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that are expected to be in effect when the
differences reverse. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
The significant components of the provision for income taxes for the fiscal year ended December 31,
2007 and 2006 were $0 and $0, respectively, for the current state provision. There was no state
deferred and federal tax provision.
Due to our current net loss position, we have provided a valuation allowance in full on our net
deferred tax assets in accordance with SFAS 109 and in light of the uncertainty regarding ultimate
realization of the net deferred tax assets.
Stock-Based Compensation
On January 1, 2006, we adopted 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, 2007 and 2006, reflect the
impact of SFAS 123(R). Beginning January 1, 2006, we adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based Payment, using the modified prospective application method.
Stock-based compensation expense recognized under SFAS 123(R) for employees, directors, and
consultants for the year ended December 31, 2007 and 2006 was $368 and $490, respectively.
Options issued to consultants are being accounted for in accordance with the provisions of Emerging
Issues Task Force (EITF) No. 96-18 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
There were 3,267,180 and 1,716,000 options granted to employees, directors, and consultants during
the year ended December 31, 2007 and 2006, respectively. The estimated fair value of options
granted to employees, directors, and consultants during the year ended December 31, 2007 and 2006
was $1,402 and $1,245, respectively. Assumptions used to value the options granted were as follows:
|
|
|
|
|
Expected volatility |
|
|
102.3%-201.0 |
% |
Risk-free interest rate |
|
|
4.04%-4.60 |
% |
Expected life in years |
|
|
5-9.88 |
|
Expected dividend yield |
|
|
0 |
% |
As stock-based compensation expense recognized in the Statement of Operations for the twelve months
ending December 31, 2007 and 2006 is based upon awards ultimately expected to vest, it has been
reduced for estimated forfeitures which we estimate to be approximately 9% and 49%, respectively.
The 2006 forfeiture rate takes into
consideration the significant downsizing of personnel in the first quarter of 2007. As of December
31, 2007 and 2006, stock-based compensation expense has been reduced by estimated forfeitures of
approximately $56 and $280, respectively.
F-10
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
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 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. Management does not believe the adoption
of SFAS 157 will have a material impact on our financial position or results of operations.
In September 2006, the SEC issued SAB 108 which was issued to address diversity in practice in
quantifying financial statement misstatements and the potential under current practice for the
buildup of improper amounts on the balance sheet effective for any fiscal year beginning after
November 15, 2006. We adopted this bulletin beginning January 1, 2007; it has had no material
impact on our financial statements.
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 are required to adopt the provision of SFAS 159 , as applicable, beginning in
fiscal year 2008. Management does not believe the adoption of SFAS 159 will have a material impact
on our financial position or results of operations.
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 impact on our financial position or results
of operations.
On November 5, 2007, the SEC issued SAB No. 109, Written Loan Commitments Recorded at Fair Value
Through Earnings (SAB 109). SAB 109 provides guidance on the accounting for written loan
commitments recorded at fair value under generally accepted accounting principles (GAAP).
Specifically, the SAB revises the Staffs views on incorporating expected net future cash flows
related to loan servicing activities in the fair value measurement of a written loan commitment.
SAB 109, which supersedes SAB 105, Application of Accounting Principles to Loan Commitments,
requires the expected net future cash flows related to the associated servicing of the loan be
included in the measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 is effective in fiscal quarters beginning after December 15, 2007. We are
currently evaluating the potential impact, if any, that the adoption of SAB 109 will have on our
financial statements.
F-11
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which replaces SFAS
No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes
disclosure requirements which will enable users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for calendar year companies on January 1, 2009. We
do not anticipate that the adoption of SFAS 141(R) will have a material affect on accounting for
business combinations once adopted, but the effect is dependent upon acquisitions at that time.
In December 2007, the SEC issued SAB 110. SAB 110 expresses the views of the staff regarding the
use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of
expected term of plain vanilla share options in accordance with SFAS No. 123 (revised 2004). We
do not believe that the adoption of SAB 110 will have a material impact on our financial
statements.
NOTE 4 NET LOSS PER SHARE
We compute net loss per share in accordance with SFAS No. 128, Earnings Per Share (SFAS 128).
Under the provisions of SFAS 128, basic loss per share is computed by dividing net loss by the
weighted average number of common stock shares outstanding during the periods presented. Diluted
earnings would customarily include, if dilutive, potential common stock shares issuable upon the
exercise of stock options and warrants. The dilutive effect of outstanding stock options and
warrants is reflected in earnings per share in accordance with SFAS 128 by application of the
treasury stock method. For the periods presented, the computation of diluted loss per share equaled
basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive
effect on the earnings per share calculation in the periods presented.
The following potential common shares have been excluded from the computation of diluted net loss
per share since their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Stock Options |
|
|
3,416,844 |
|
|
|
285,743 |
|
Warrants |
|
|
156,780 |
|
|
|
393,683 |
|
The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(3,447 |
) |
|
$ |
(9,798 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding |
|
|
21,517 |
|
|
|
2,849 |
|
Net loss per share, basic and diluted |
|
$ |
(0.16 |
) |
|
$ |
(3.44 |
) |
|
|
|
|
|
|
|
NOTE 5 INVENTORY AND INVENTORY RELATED PREPAYMENTS
Inventory is comprised of implantable donor tissue, which we fully reserved in 2007 due to the
Supply and Distribution Agreement (See Note 13). For the years ended December 31, 2007 and 2006,
we had inventory reserves of $444 and $811, respectively.
F-12
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2007:
|
|
|
|
|
|
|
2007 |
|
Equipment |
|
$ |
69 |
|
Computer equipment and software |
|
|
66 |
|
Furniture and fixtures |
|
|
27 |
|
Leasehold improvements |
|
|
8 |
|
|
|
|
|
|
|
|
170 |
|
Less accumulated depreciation |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
87 |
|
|
|
|
|
We had no property or equipment that was leased as part of a capital lease agreement at December
31, 2007. Depreciation expense was $61 and $205 for the years ended December 31, 2007 and 2006,
respectively.
NOTE 7 IDENTIFIABLE INTANGIBLES
Identifiable intangibles consist of the following at December 31, 2007:
|
|
|
|
|
|
|
2007 |
|
Trademarks |
|
$ |
37 |
|
Patents |
|
|
2,171 |
|
|
|
|
2,208 |
|
|
|
|
|
Less accumulated amortization |
|
|
(1,217 |
) |
|
|
|
|
|
|
$ |
991 |
|
|
|
|
|
Over the period January 1, 2008 to December 31, 2012, we project cumulative amortization expense
related to our patents and trademarks issued at December 31, 2007 to be approximately $192,
expensed equally over the five years. Because we evaluate the recoverability of our intangibles on
a quarterly basis, and anticipate that new patents will be granted and issued in 2008 through 2012,
actual amortization expense recorded over January 1, 2008 to December 31, 2012 could fluctuate
significantly from the projected amount over the same period.
During the year ended December 31, 2007 and 2006, we recorded approximately $345 and $280,
respectively, of expense associated with amortization and patent impairment.
NOTE 8 RESTRICTED CASH
As of December 31, 2007, we had cash deposits of approximately $10, 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, 2007
and 2006 were $0 and $0, 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, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
27,790 |
|
|
$ |
26,716 |
|
Purchase in-process research and development |
|
|
521 |
|
|
|
496 |
|
Research and development credits |
|
|
1,369 |
|
|
|
1,379 |
|
Depreciation, accrued expenses and other |
|
|
718 |
|
|
|
471 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
30,398 |
|
|
|
29,062 |
|
Less valuation allowance |
|
|
(30,398 |
) |
|
|
(29,062 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-13
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Our valuation allowance on deferred tax assets increased from $29,062 as of December 31, 2006 to
$30,398 as of December 31, 2007, 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, 2007 and 2006 was approximately
$3,447 and $0, respectively, $9,798 and $0, respectively.
We have provided a valuation allowance in full on our net deferred tax assets in accordance with
SFAS 109 and in light of the uncertainty regarding ultimate realization of the net deferred tax
assets. The difference between the effective tax rate and that computed under the federal statutory
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Federal statutory rate |
|
|
(34 |
%) |
|
|
(34 |
%) |
State taxes |
|
|
(6 |
%) |
|
|
(5 |
%) |
Tax credits & other |
|
|
(9 |
%) |
|
|
3 |
% |
Foreign loss with no benefit |
|
|
0 |
% |
|
|
0 |
% |
Valuation allowance |
|
|
49 |
% |
|
|
36 |
% |
At December 31, 2007 and 2006, we had net operating losses (NOL) for federal and state income tax
purposes of approximately $146,502 and $141,642, respectively, which begin expiring in 2000.
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 August 2007 transaction (See Note 10), we
will evaluate whether there are limitations on the use of our NOL carryforwards beyond December 31,
2007 under Section 382, including, as needed, the impact of cumulative changes in the ownership of
our 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, 2007, we have not performed an
analysis in order to determine whether such limitations exist.
We also have federal and state research and development tax credit carryforwards as of December 31,
2007 and 2006, of approximately $1,369 and $1,379, respectively, which begin to expire in 2023.
NOTE 10 CAPITALIZATION
Common Stock Transactions and Non-Cash Financing Activities
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 7,511,875 shares of
our common stock (shares) at $0.005 per share, in a private offering, in exchange for gross
proceeds of approximately $525. This private placement was made in connection with the private
placement we previously entered into on April 3, 2007 (the April private placement), pursuant to
which approximately 20 accredited and institutional investors purchased 6,694,299 shares at $0.025
in exchange for gross proceeds of approximately $2,300. The costs associated with the transaction
are $344. On August 23, 2007, pursuant to the antidilution provisions in the stock purchase
agreements, 7,511,875 shares were issued to the new investors and 26,777,141 additional shares were
issued to the April private placement investors to adjust their selling price to $0.005 per share.
These shares have been recorded as an
adjustment between additional paid in capital and par value as it represents an adjustment to the
original sale price of common stock.
F-14
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
On August 3, 2007, we entered into a Settlement and Conversion Agreement with the bridge lender
pursuant to which the bridge lender would be issued 2,857,143 shares for the $200 loan payable at
$0.005 per share. As part of the Settlement and Conversion Agreement, the lender purchased an
additional 2,142,859 shares at a price of $0.005 per share in exchange for aggregate proceeds of
$142 and interest accrued on the bridge loan of $8. The bridge lender was also issued 51,021
shares as part of the original non-binding term sheet entered into by us in February 2007. The
Settlement and Conversion Agreement directly caused the antidilution provision of the April private
placement investors. The shares were issued on August 23, 2007.
On August 8, 2007, we announced a 1-for-14 reverse stock split which was previously authorized at
our annual meeting of stockholders held on August 3, 2007. The record date for the reverse split
was August 23, 2007 and we began trading on the NASD Electronic Bulletin Board (OTCBB) on a split
adjusted basis on September 6, 2007 under the new symbol CLRA.OB.
During 2007, we paid accounts payable of $109 with 31,092 shares of common stock.
During 2007, we paid consultants $60 with 22,038 shares of common stock.
During 2006, we paid accounts payable of $124 with 19,714 shares of common stock. In addition, we
issued 100,000 shares of common stock with a fair value of $130 to consultants for services
rendered to us over a twelve month contract. Accordingly, $43 and $87 is reflected in sales,
general and administrative expenses for the years ending December 31, 2007 and 2006, respectively.
Series A Redeemable Preferred Stock
We have 50,000,000 shares authorized and 0 shares outstanding as of December 31, 2007.
NOTE 11 STOCK OPTIONS
On June 30, 2005, the stockholders approved our 2005 Stock Award Plan (the 2005 Plan). There are
5,081,412 shares of common stock authorized for issuance under the Plan. In addition, we assumed
options to purchase 137,042 shares of common stock in connection with the reverse merger
consummated on March 31, 2005 from the 2000 Stock Award Plan of which 75,103 remain outstanding as
of December 31, 2007. There are no future grants available under the 2000 stock Award Plan as of
March 31, 2005. On August 3, 2007, at our annual meeting, the stockholders approved a 6,000,000
share increase in our 2005 Stock Award Plan. Accordingly, an aggregate of 11,156,515 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 our stock , 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.
F-15
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
The following table sets forth the activity of the 2000 and 2005 Plan and Non-Plan Options issued
for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees |
|
|
Non-Employees |
|
|
Total |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at
December 31, 2005 |
|
|
171,000 |
|
|
$ |
8.40-$111.16 |
|
|
|
27,000 |
|
|
$ |
8.40-$101.08 |
|
|
|
198,000 |
|
|
$ |
8.40-$111.16 |
|
Granted |
|
|
119,000 |
|
|
$ |
6.16-$22.96 |
|
|
|
4,000 |
|
|
$ |
4.90-$6.72 |
|
|
|
123,000 |
|
|
$ |
4.90-$22.96 |
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
(3,000 |
) |
|
$ |
8.40 |
|
|
|
(3,000 |
) |
|
$ |
8.40 |
|
Change in status |
|
|
(19,000 |
) |
|
$ |
8.40-$44.38 |
|
|
|
19,000 |
|
|
$ |
8.40-$44.38 |
|
|
|
|
|
|
$ |
8.40-$44.38 |
|
Forfeited or expired |
|
|
(28,000 |
) |
|
$ |
8.40-$63.14 |
|
|
|
(4,000 |
) |
|
$ |
32.20-$57.68 |
|
|
|
(32,000 |
) |
|
$ |
8.40-$63.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2006 |
|
|
243,000 |
|
|
$ |
6.16-$63.14 |
|
|
|
43,000 |
|
|
$ |
4.90-$57.68 |
|
|
|
286,000 |
|
|
$ |
4.90-$63.14 |
|
Granted |
|
|
3,137,000 |
|
|
$ |
0.35-0.45 |
|
|
|
130,000 |
|
|
$ |
0.70 |
|
|
|
3,267,000 |
|
|
$ |
0.35-0.70 |
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Change in status |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Forfeited or expired |
|
|
(136,000 |
) |
|
$ |
0.35-$63.14 |
|
|
|
|
|
|
$ |
|
|
|
|
(136,000 |
) |
|
$ |
0.35-$63.14 |
|
Outstanding at
December 31, 2007 |
|
|
3,244,000 |
|
|
$ |
0.35-$63.14 |
|
|
|
173,000 |
|
|
$ |
4.90-$57.68 |
|
|
|
3,417,000 |
|
|
$ |
0.35-$63.14 |
|
Of the 3,137,000 shares issued to employees during 2007, 2,514,000 were issued to our officers and
directors.
The weighted average exercise prices for options granted and exercisable and the weighted average
remaining contractual life for options outstanding as of December 31, 2007 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, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
243,000 |
|
|
$ |
26.46 |
|
|
|
7.17 |
|
|
$ |
692,000 |
|
Employees Expected to Vest |
|
|
152,000 |
|
|
$ |
28.00 |
|
|
|
7.16 |
|
|
$ |
692,000 |
|
Employees Exercisable |
|
|
104,000 |
|
|
$ |
33.60 |
|
|
|
6.03 |
|
|
$ |
692,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Employees Outstanding |
|
|
43,000 |
|
|
$ |
30.66 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Expected to Vest |
|
|
43,000 |
|
|
$ |
30.66 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
Non-Employees Exercisable |
|
|
41,000 |
|
|
$ |
31.78 |
|
|
|
5.78 |
|
|
$ |
287,000 |
|
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees Outstanding |
|
|
3,244,000 |
|
|
$ |
1.31 |
|
|
|
9.57 |
|
|
$ |
|
|
Employees Expected to Vest |
|
|
3,079,000 |
|
|
$ |
1.31 |
|
|
|
9.57 |
|
|
$ |
|
|
Employees Exercisable |
|
|
188,000 |
|
|
$ |
10.69 |
|
|
|
7.85 |
|
|
$ |
|
|
|
Non-Employees Options Outstanding |
|
|
173,000 |
|
|
$ |
8.09 |
|
|
|
8.30 |
|
|
$ |
|
|
Non-Employees Expected to Vest |
|
|
173,000 |
|
|
$ |
8.09 |
|
|
|
8.30 |
|
|
$ |
|
|
Non-Employees Options Exercisable |
|
|
41,000 |
|
|
$ |
31.47 |
|
|
|
3.34 |
|
|
$ |
|
|
Of the shares issued to employees, the number of shares outstanding, expected to vest, and
exercisable to officers and directors is 2,581,000, 2,465,000, and 145,000, respectively.
Cash received from stock options exercised during the year ended December 31, 2007 and 2006 was $0
and $26, respectively. The total intrinsic value of options exercised during the year ended 2007
and 2006 was $0 and $18, respectively. The weighted average grant-date fair value of options
granted during the year ended December 31, 2007 and 2006, was $0.43 and $0.73.
F-16
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
Included in the table above, at December 31, 2007 and 2006, were options outstanding for 173,000
and 43,000 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, 2007 and 2006, there were $1,724 and $1,676, 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 3.2 and 2.8
years, respectively.
When options are exercised, our policy is to issue previously unissued shares of common stock to
satisfy share option exercises. As of December 31, 2007, we had 7,018,306 shares of unissued shares
reserved for issuance under our 2005 Plan.
NOTE 12 WARRANTS
There were no warrants granted in 2007.
During 2006, we issued two-year warrants to such holders to purchase an aggregate 23,734 shares of
our common stock at an exercise price of $69.44 per share with a fair value of $99 as of March 31,
2006, in connection with a settlement of disputed claims, at our discretion.
In November 2005 and in conjunction with our secondary placement of common stock, we issued
five-year warrants to such holders to purchase an aggregate 121,324 shares of our common stock at
an exercise price of $69.44 per share. In addition, we issued five-year warrants to the placement
agent to purchase an aggregate 11,728 shares of common stock at an exercise price of $69.44 per
share. Due to the antidilution clause set forth in such holders warrant agreements, the exercise
price of the above-mentioned shares was reduced to $4.21 per share due to the private placement
entered into in 2007 (See Note 10).
Including those described above, all warrants have an exercise price of between $4.21 and $69.44
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, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding |
|
Number |
|
|
Exercise |
|
|
Weighted Average of Remaining |
|
of Shares |
|
|
Price |
|
|
Contractual Life (Years) |
|
|
133,052 |
|
|
$ |
4.21 |
|
|
|
2.85 |
|
23,734 |
|
|
$ |
69.44 |
|
|
|
0.15 |
|
All of the warrants granted to non-employees are valued based on our 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, 2007 and 2006 were $0.00 and $0.30 per share, respectively.
F-17
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 13 COMMITMENTS AND CONTINGENCIES
Leases
We lease 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,
2007, are as follows:
|
|
|
|
|
2008 |
|
$ |
123 |
|
2009 |
|
|
13 |
|
2010 and thereafter |
|
|
7 |
|
|
|
|
|
Net minimum lease payments |
|
$ |
143 |
|
Rental expense on non-cancelable operating leases for the years ended December 31, 2007 and 2006
was $165 and $341, respectively.
We have obligations under capital leases for the years ended December 31, 2007 and 2006 of $0 and
$27, respectively. As of December 31, 2007, we have no capital leases for equipment.
Litigation
From time-to-time, we are involved in litigation relating to claims arising in the normal course of
business. Other than the Osprey legal dispute discussed under Supply and Distribution Agreements
below we do not believe that any currently pending or threatening litigation will have a material
adverse effect on our results of operations or financial condition as of December 31, 2007.
Supply and Distribution Agreements
On September 27, 2006, we entered into a renewable two-year supply and distribution agreement (the
Osprey Agreement) with Osprey Biomedical Corp. (Osprey). Under the Osprey Agreement, Osprey
granted us exclusive rights to place current and future Osprey cervical and lumbar allografts
treated with the Clearant Process® in certain geographic territories with an option for additional
geographic territories. In exchange for the exclusive rights under the Osprey Agreement, we were
obligated to pay Osprey $500,000 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 we receive debt or equity financing of at least $1 million, or (ii) October 31,
2006. In addition, we were required to make the following quarterly payments to be applied to
payments for ordered products: $650,000 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 December 31, 2007, all tissue orders had not been delivered by Osprey and we have not made
the prepayments. In February 2007, we received notice from Osprey of its termination of the Osprey
Agreement, effective within thirty days from receipt of the notification if we did not timely cure
certain alleged payment defaults. We are in ongoing discussions with Osprey to resolve these
issues, which could include, but is not limited to, reduction in exclusive territories or
termination of the Osprey Agreement. The termination of the agreement has resulted in the
discontinuation or disruption of the spinal bone implant supply, which has had a material adverse
impact on our ability to distribute spinal bone implants treated with the Clearant Process®. In
addition, the lack of supply of the ordered products has had a material impact on our revenues and
cash flows.
NOTE 14 401K PLAN
We have 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, 2007 and 2006.
F-18
CLEARANT, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 15 FACILITY CLOSING CHARGES
In 2006, we developed an initiative designed to reduce the workforce and consolidate and move the
laboratory to Los Angeles, California. 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 laboratory
and moving of the equipment. In addition, we disposed of all lab equipment in both 2006 and 2007.
The plan was approved by our executive management team and the board of directors in 2005.
NOTE 16 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, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
435 |
|
|
$ |
168 |
|
|
$ |
160 |
|
|
$ |
321 |
|
Gross profit (loss) |
|
|
287 |
|
|
|
76 |
|
|
|
57 |
|
|
|
(317 |
) |
Total operating expenses |
|
|
1,174 |
|
|
|
920 |
|
|
|
989 |
|
|
|
739 |
|
Loss from operations |
|
|
(887 |
) |
|
|
(844 |
) |
|
|
(932 |
) |
|
|
(1,056 |
) |
Other expense, net |
|
|
(80 |
) |
|
|
(4 |
) |
|
|
356 |
|
|
|
0 |
|
Net loss |
|
|
(967 |
) |
|
|
(848 |
) |
|
|
(576 |
) |
|
|
(1,056 |
) |
Net loss attributable to common stock |
|
$ |
(967 |
) |
|
$ |
(848 |
) |
|
$ |
(576 |
) |
|
$ |
(1,056 |
) |
Net loss per
share Basic and diluted
1 |
|
$ |
(0.33 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
Number of weighted average shares |
|
|
2,911 |
|
|
|
7,778 |
|
|
|
25,866 |
|
|
|
48,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 income (expense), net |
|
|
153 |
|
|
|
64 |
|
|
|
41 |
|
|
|
16 |
|
Net loss |
|
|
(2,513 |
) |
|
|
(2,343 |
) |
|
|
(2,614 |
) |
|
|
(2,328 |
) |
Net loss attributable to common stock |
|
$ |
(2,513 |
) |
|
$ |
(2,343 |
) |
|
$ |
(2,614 |
) |
|
$ |
(2,328 |
) |
Net loss per share Basic and diluted |
|
$ |
(0.88 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.92 |
) |
|
$ |
(0.82 |
) |
Number of weighted average shares |
|
|
2,840 |
|
|
|
2,846 |
|
|
|
2,851 |
|
|
|
2,857 |
|
|
|
|
1 |
|
Due to the significant number of shares issued on
April 25, 2007 and August 23, 2007, the cumulative sum of
the quarterly net loss
per share is different than what is computed for the 12 months net
loss per share. This is due to how shares are weighted for quarterly
computations in accordance with FAS 128. |
F-19
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
There have not been any disagreements between us and our accountants on any matter of accounting
principles, practices or financial statement disclosure.
Item 8A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer who is also our Chief
Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report (December 31, 2007), as is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. We
conducted an evaluation of the effectiveness of our internal controls over financial reporting
based on the framework in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Our disclosure controls and procedures are
intended to ensure that the information we are required to disclose in the reports that we file or
submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms and (ii) accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as the principal executive and financial officer, to allow
timely decisions regarding required disclosures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this Annual Report, our disclosure controls and procedures
were effective.
Our management has concluded that the financial statements included in this Form 10-KSB present
fairly, in all material respects our financial position, results of operations and cash flows for
the periods presented in conformity with generally accepted accounting principles.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system will be met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events.
Changes in Internal Controls
Management is responsible for establishing and maintaining adequate internal control over our
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of
America.
Our internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors,
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
This
annual report does not include an attestation report on the
Companys independent registered public accounting firm regarding internal
control over financial reporting. Managements report was not
subject to attestation by the Companys independent registered
public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only
managements report in this annual report.
34
There have been no changes in our external controls over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
PART III
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|
|
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act |
Directors and Executive Officers
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 |
|
Start of Term |
Jon Garfield
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|
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44 |
|
|
Chief Executive Officer
Chief Financial Officer
Director
Secretary
|
|
January 25, 2007
August 2, 2005
August 3, 2007
August 2, 2005 |
Rowland W. Day
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|
|
52 |
|
|
Chairman of the Board
|
|
August 3, 2007 |
Michael Elek
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|
|
46 |
|
|
Director
|
|
August 3, 2007 |
Maurice J. DeWald
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|
|
68 |
|
|
Director
|
|
September 13, 2007 |
Jon Garfield, age 44, was appointed as our Chief Executive Officer, effective January 25, 2007. Mr.
Garfield is also our Chief Financial Officer and Secretary. Mr. Garfield has served as a member of
our board of directors since May 24, 2007 and was re-elected on August 3, 2007 to a one year term
or until his respective successor is elected and qualified. 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. During 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 52, has served as a member of our board of directors since April 5, 2007 and
was re-elected on August 3, 2007 to a one year term or until his respective successor is elected
and qualified. 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 of California. He
received a bachelors degree from California State University, Fullerton, and a J.D. from Whittier
Law School.
Michael Elek, age 46, has served as a member of our board of directors since April 5, 2007 and was
re-elected on August 3, 2007 to a one year term or until his respective successor is elected and
qualified. 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 68, was appointed to our board of directors on September 13, 2007 to a one
year term or until his respective successor is elected and qualified. 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 Aperture
Health. 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.
35
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, including judgments finding violations of any federal or state
securities or commodities law, material to the evaluation of the ability and integrity of any of
our directors, executive officers, promoters or control persons during the past five years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and
directors and persons who beneficially own more than 10% of our common stock to file with the SEC
initial reports of ownership and reports of changes in ownership of our common stock. These
insiders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they
file, including Forms 3, 4 and 5. Based solely upon our review of copies of such forms we have
received, and other information available to us, to the best of our knowledge the following
required forms were filed, but were not filed on a timely basis:
For the fiscal year ended December 31, 2007, Jon Garfield filed one late report regarding a
purchase of shares of our common stock. The transaction was reported to the SEC on October 2,
2007. The report was filed late due to a delay in communication between us and Mr. Garfield.
For the fiscal year ended December 31, 2007, Rowland W. Day, II filed one late report regarding a
purchase of shares of our common stock and an award of stock options. The transaction was reported
to the SEC on October 18, 2007. The report was filed late due to a delay in communication between
us and Mr. Day.
For the fiscal year ended December 31, 2007, Michael Elek filed one late report regarding an award
of stock options. The transaction was reported to the SEC on October 4, 2007. The report was filed
late due to a delay in communication between us and Mr. Elek.
Code of Ethics
We have adopted a Code of Ethics that applies to the Chief Executive Officer, Chief Financial
Officer, Controller and other accounting and financial managers and have attached it to this annual
report as Exhibit 14.1.
Nominating Committee of the Board of Directors
We do not currently have an operating Nominating Committee.
There have been no material changes to the procedures by which security holders may recommend
nominees to our board of directors, which we last reported in our Definitive Proxy Statement filed
with the SEC on July 10, 2007.
Audit Committee of the Board of Directors
Our Audit Committee Charter provides for an Audit Committee consisting of at least three
financially literate directors all of whom are independent and at least one of whom meets the
requirements of an audit committee financial expert. On November 1, 2007, we formed an Audit
Committee comprised of Mr. DeWald (Chairman) and Mr. Elek. Prior to this time, the board of
directors was operating as the Audit Committee. We are still in the process of identifying and
recruiting additional committee members for our Audit Committee. In 2007, all committee members
were independent as defined by The NASDAQ Stock Market and met the applicable requirements for
audit committee members, including Rule 10A-3(b) under the Securities Exchange Act of 1934, as
amended. The Board had determined that Mr. DeWald is the audit committee financial expert as such term is
defined in Item 407(d)(5)(ii) of Regulation S-B. On March 4, 2008, Mr. Elek purchased the
beneficial interest of four companies who collectively own 11.7% of our common stock. Consequently,
Mr. Elek is no longer an independent director pursuant to the SEC rules and will not continue as a
member of our Audit Committee.
36
Independent Registered Public Accounting Firm
The firm of Singer Lewak Greenbaum & Goldstein LLP has been appointed to serve as our independent
registered public accounting firm for the 2008 fiscal year unless the Audit Committee deems it
advisable to make a substitution.
Item 10. Executive Compensation
The following table sets forth the total compensation received by the named executive officer
during the fiscal years ended December 31, 2007 and 2006:
SUMMARY COMPENSATION TABLE
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Name |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
Non-Equity |
|
|
Nonqualified |
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|
|
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|
and |
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|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Option |
|
|
Incentive Plan |
|
|
Deferred |
|
|
All Other |
|
|
|
|
principal |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
|
|
position |
|
Year |
|
|
($) |
|
|
($)1 |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
Earnings ($) |
|
|
($) |
|
|
Total ($) |
|
Jon Garfield, |
|
|
2007 |
|
|
$ |
240,000 |
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
0 |
3 |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,869 |
4 |
|
$ |
242,869 |
|
Chief Executive |
|
|
2006 |
|
|
$ |
240,000 |
|
|
$ |
25,000 |
|
|
$ |
|
|
|
$ |
0 |
3 |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,869 |
4 |
|
$ |
267,869 |
|
Officer and Chief
Financial Officer
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan Etzel, |
|
|
2007 |
|
|
$ |
129,896 |
|
|
$ |
10,000 |
|
|
$ |
|
|
|
$ |
0 |
6 |
|
$ |
|
|
|
$ |
|
|
|
$ |
115 |
7 |
|
$ |
139,896 |
|
Controller5 |
|
|
2006 |
|
|
$ |
107,500 |
|
|
$ |
17,500 |
|
|
$ |
|
|
|
$ |
0 |
6 |
|
$ |
|
|
|
$ |
|
|
|
$ |
115 |
7 |
|
$ |
125,000 |
|
Carlo Brigola, |
|
|
2007 |
|
|
$ |
131,937 |
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
0 |
9 |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,315 |
10 |
|
$ |
139,137 |
|
Sales Rep8 |
|
|
2006 |
|
|
$ |
16,192 |
|
|
$ |
0 |
|
|
$ |
|
|
|
$ |
0 |
9 |
|
$ |
|
|
|
$ |
|
|
|
$ |
715 |
10 |
|
$ |
16,792 |
|
|
|
|
1 |
|
Bonuses are based on performance. |
|
2 |
|
Mr. Garfield joined us as the Chief Financial Officer in August 2005 and was
appointed as Chief Executive Officer in January 2007. Upon appointment as Chief Executive Officer,
Mr. Garfields employment agreement was extended for 3 years. Under the terms of the agreement his
salary was to be increased to $280,000, no adjustment to his salary has been made to date. |
|
3 |
|
Mr. Garfield was granted 1,228,572 and 39,287 stock options for the years ended
December 31, 2007 and 2006, respectively, under the terms of his employment agreement for his role
as an officer and director. All options were granted under the 2005 Stock Award Plan. The intrinsic
value of the options granted in 2007 and 2006 is $0. |
|
4 |
|
Mr. Garfield receives $360,000 worth of life insurance for which premiums of $829
is paid annually and a sports club membership for which we pay $2,040. |
|
5 |
|
Ms. Etzel joined us as the Controller in July 2005. |
|
6 |
|
Ms. Etzel was granted 260,258 and 1,608 stock options for the years ended December
31,2007 and 2006, respectively. All options were granted under the 2005 Stock Award Plan. The
intrinsic value of the options granted in 2007 and 2006 is $0. |
|
7 |
|
Ms. Etzel receives $50,000 worth of life insurance for
which premiums of $115 is paid annually. |
|
8 |
|
Mr. Brigola joined us as hard tissue sales representative in November 2005. |
|
9 |
|
Mr. Brigola was granted 136,686 and 0 stock options for the years ended December
31, 2007 and 2006, respectively. All options were granted under the 2005 Stock Award Plan. The
intrinsic value of the options granted in 2007 and 2006 is $0. |
|
10 |
|
Mr. Brigola receives $50,000 worth of life insurance for
which premiums of $115 is paid annually and a $600 per month car allowance. |
Employment Agreements
We have an employment agreement with Jon Garfield, which has been extended through June 2010. The
agreement, as amended upon Mr. Garfields appointment as Chief Executive Officer, provides that Mr.
Garfield will serve as our Chief Executive Officer and Chief Financial Officer. Mr. Garfields
salary for 2007 was $240,000 and may be increased annually in accordance with our compensation
policies. He is also eligible for an annual bonus at our sole discretion, which is targeted at a
minimum of one-hundred percent (100%) of his base salary. In addition, Mr. Garfield is eligible for
stock options in our sole discretion.
37
Mr. Garfield also receives executive benefits including group medical and dental insurance,
$360,000 of term life insurance, accidental death and long-term disability insurance and a sports
club membership.
We may terminate Mr. Garfields employment for cause and he shall be entitled to his pro-rated
salary through the date of termination and all benefits accrued through such date. We shall have no
further obligations to pay any compensation or benefits to Mr. Garfield and all of his unvested
stock options will terminate. If we terminate Mr. Garfield without cause, he is entitled to a lump sum payment of an amount equal to his base salary
through the end of his term and all of his unvested stock options will vest immediately provided
that he signs a full general release.
Mr. Garfields agreement also provides that if he is terminated or his position is materially
reduced within 12 months of a change of control, he shall be entitled to a lump sum payment in an
amount equal to: (i) one and one-half years of salary (at the rate in effect at the time of his
termination); and (ii) one and one-half times his full targeted bonus for that year. In addition,
all of his unvested stock options will immediately vest. To be eligible for these payments, Mr.
Garfield must sign a full general release.
Material Modification to Stock Options
On August 3, 2007, after recommendation by our board of directors, the holders of a majority of our
common stock approved an amendment to our Certificate of Incorporation to permit us to effect a
1:14 reverse stock split of our common stock. The reverse stock split is effective as of August 23,
2007. This reverse stock split reduced all outstanding stock options by 14.
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, 2007:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
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OPTION AWARDS |
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|
STOCK AWARDS |
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Equity |
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Incentive |
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Equity |
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Plan |
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Incentive |
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Awards: |
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Market |
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Plan |
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Market or |
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Equity |
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Number |
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Value |
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Awards: |
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Payout |
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Incentive Plan |
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of |
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of |
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Number of |
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Value of |
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Awards: |
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Shares |
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|
Shares |
|
|
Unearned |
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Unearned |
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Number of |
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Number of |
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Number of |
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or Units |
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or Units |
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Shares, |
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Shares, |
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Securities |
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Securities |
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Securities |
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of Stock |
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|
of Stock |
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Units or |
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Units or |
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Underlying |
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|
Underlying |
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Underlying |
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That |
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That |
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Other |
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Other |
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Unexercised |
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Unexercised |
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Unexercised |
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Have |
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Have |
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Rights That |
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Rights That |
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Options |
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|
Options |
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Unearned |
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Not |
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|
Not |
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Have Not |
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Have Not |
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(#) |
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(#) |
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|
Options |
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|
Option Exercise |
|
|
Option Expiration |
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Vested |
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Vested |
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Vested |
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Vested |
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Name |
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Exercisable1 |
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Unexercisable2 |
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(#) |
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Price ($) |
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Date |
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(#) |
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($) |
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(#) |
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(#) |
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Jon Garfield |
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|
46,431 |
|
|
|
1,235,714 |
|
|
|
|
|
|
|
14,286 @ $54.04 |
|
|
|
14,286 @ 8/30/15 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Chief Executive |
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|
|
|
|
|
|
|
|
|
|
|
|
|
1,786 @ $22.96 |
|
|
|
1,786 @ 1/27/16 |
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|
|
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Officer and Chief |
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|
|
|
|
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|
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|
1,786 @ $15.68 |
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|
1,786 @ 4/14/16 |
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|
Financial Officer |
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|
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|
|
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|
35,715 @ $12.74 |
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|
35,715 @ 5/1/16 |
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|
28,572 @ $0.35 |
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|
28,572 @ 4/4/17 |
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|
1,200,000 @ .45 |
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|
1,200,000 @ 9/12/17 |
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|
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Susan Etzel |
|
|
4,143 |
|
|
|
258,795 |
|
|
|
|
|
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|
1,072 @ $63.14 |
|
|
|
1,072 @ 7/29/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controller |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,072 @ $15.68 |
|
|
|
1,072 @ 4/14/16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
536 @ $12.74 |
|
|
|
536 @ 5/1/16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,115 @ $0.35 |
|
|
|
3,115 @ 4/4/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,143 @ $0.56 |
|
|
|
57,143 @ 8/14/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000 @ $0.45 |
|
|
|
200,000 @ 9/12/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlo Brigola, |
|
|
0 |
|
|
|
136,686 |
|
|
|
|
|
|
|
2,400 @ $0.35 |
|
|
|
2,400 @ 4/4/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Rep |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,286 @ $0.56 |
|
|
|
14,286 @ 8/14/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000 @ $0.45 |
|
|
|
120,000 @ 9/12/17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Represents shares that are vested and/or immediately exercisable. All option shares
were granted under either the 2000 or 2005 Stock Award Plan and are pre-reverse stock split. |
|
2 |
|
Represents shares that are unvested and not immediately exercisable. |
38
Compensation Of Directors
Our directors are compensated with stock options from time to time under our 2005 Stock Award Plan.
The following table reflects the compensation of directors for our fiscal year ended December 31,
2007:
DIRECTOR COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
Non-Qualified |
|
|
All |
|
|
|
|
|
|
Earned or |
|
|
Stock |
|
|
Option |
|
|
Plan |
|
|
Deferred |
|
|
Other |
|
|
|
|
|
|
Paid in |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
|
|
Name |
|
Cash ($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
Earnings ($) |
|
|
($) |
|
|
Total ($) |
|
John S. Wehrle 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Nolan H. Sigal 1 |
|
$ |
7,595 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,595 |
|
|
$ |
15,190 |
|
Herve de Kergrohen 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Alexander Man-Kit Ngan
2 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Rowland W. Day II 3 |
|
$ |
67,500 |
|
|
$ |
|
|
|
$ |
0 |
7 |
|
$ |
|
|
|
$ |
|
|
|
$ |
45,000 |
|
|
$ |
112,500 |
|
Michael Elek 4 |
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
7 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Gaddo Cardini 5 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
Maurice DeWald 6 |
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
7 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0 |
|
|
|
|
1 |
|
Resigned as a member of our board of directors effective April 26, 2007. As of July
26, 2007, none of the directors has exercised any of his options and all of his options have
expired. |
|
2 |
|
Resigned as a member of our board of directors 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. |
|
3 |
|
Appointed as a member of our board of directors effective April 5, 2007. Since that
time, Mr. Day has earned $66,375 for legal services that he has provided to us. He is paid is
monthly installments. On April 1, 2007, Mr. Day began receiving $7,500 a month for his board
services. Payments are for a twelve-month period ending March 31, 2008. |
|
4 |
|
Mr. Elek has received no compensation for his services. |
|
5 |
|
Appointed as a member of our board of directors effective April 5, 2007 and resigned
as such on May 21, 2007. |
|
6 |
|
Appointed as a member of our board of directors effective September 13, 2007. Mr.
DeWald has received no compensation for his services. |
|
7 |
|
On September 13, 2007, Mr. Day, Mr. Elek and Mr. DeWald were each granted 400,000
stock options. These options are unvested and not immediately exercisable and vest 25% annually
over four years. The intrinsic value of the options granted is $0. |
39
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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, 2007:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities remaining |
|
|
|
|
|
|
|
|
|
|
|
available for future |
|
|
|
|
|
|
|
|
|
|
|
issuance under |
|
|
|
Number of |
|
|
|
|
|
|
equity |
|
|
|
securities to be |
|
|
|
|
|
|
compensation plans |
|
|
|
issued upon exercise |
|
|
Weighted-average |
|
|
(excluding |
|
|
|
of outstanding |
|
|
exercise price of |
|
|
securities |
|
|
|
options, warrants |
|
|
outstanding options, |
|
|
reflected in column |
|
|
|
and rights1 |
|
|
warrants and rights |
|
|
(a))2 |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
3,573,624 |
|
|
$ |
2.20 |
|
|
|
7,018,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
$ |
|
|
|
|
|
|
Total |
|
|
3,573,624 |
|
|
$ |
2.20 |
|
|
|
7,018,306 |
|
|
|
|
1 |
|
On August 3, 2007, at our annual meeting, the stockholders approved a 6,000,000
share increase in our 2005 Stock Award Plan. As of December 31, 2007, there were 156,780 shares of
our common stock reserved for issuance upon the exercise of warrants and 3,416,844 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 7,018,306 shares were available for issuance under the 2005 Stock Award Plan. |
40
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 of
our common stock as of March 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature |
|
|
Percent of |
|
Title of Class |
|
Name and Address of Beneficial Owner1 |
|
of Beneficial Owner1 |
|
|
class |
|
Common stock |
|
Michael Elek 2 |
|
|
5,714,288 |
|
|
|
11.7 |
% |
Common stock |
|
Terren S. Peizer 3 |
|
|
4,695,391 |
|
|
|
9.6 |
% |
Common stock |
|
John McGinnis 4 |
|
|
3,622,451 |
|
|
|
7.4 |
% |
Common stock |
|
Rowland W. Day II 5 |
|
|
3,137,003 |
|
|
|
6.4 |
% |
Common stock |
|
Jay and Mel Seid, JTWROS 6 |
|
|
2,869,591 |
|
|
|
5.9 |
% |
Common stock |
|
Jon M. Garfield 7 |
|
|
769,645 |
|
|
|
1.6 |
% |
Common stock |
|
Maurice J. DeWald |
|
|
0 |
|
|
|
0 |
% |
Common stock |
|
All directors and executive officers as a group (4 persons) |
|
|
9,620,936 |
|
|
|
19.7 |
% |
|
|
|
1 |
|
Applicable percentage ownership is based on 48,957,445 shares of common stock
outstanding at March 27, 2008. 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 sixty days through the exercise of any
option, warrant or right. All addresses are c/o 1801 Avenue of the Stars, Suite 435, Los Angeles,
California 90067, unless otherwise noted. |
|
2 |
|
Includes 1,428,572 shares of common stock held in the name Summerlight Trading
Corp., 1,428,572 shares of common stock held in the name Norpot Corp., 1,428,572 shares of common
stock held in the name Snowball Overseas SA and 1,428,572 shares of common stock held in the name
Cherwell Assets Corp. Excludes 2,571,430 shares beneficially owned by family members of Michael
Elek. Mr. Elek disclaims any controlling or beneficial interest in such shares. |
|
3 |
|
Excludes 17,858 shares of common stock held of record by Reserva Capital, LLC, which
has been previously pledged as security for a loan as to which interest payments have not been
made. Includes 277,634 shares held by Bowmore, LLC, 14,613 shares held by Porfidio, LLC and
4,285,715 shares held by Advanced Technology Holdings, LLC, all of which Terren S. Peizer is the
sole managing member and options held by Mr. Peizer to purchase 21,286 shares of common stock at
$9.24 per share and 16,143 shares at $31.50 per share which expire July 22, 2012 and December 1,
20ll, respectively. Assumes the exercise of all options held by Mr. Peizer. Mr. Peizers business
address is 11150 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025. |
|
4 |
|
Includes 1,785,715 shares issued to West Valley Financial Management. Excludes
1,428,572 shares beneficially owned by RMR Assets Management Co. Mr. McGinnis disclaims any
controlling or beneficial interest in such shares. |
|
5 |
|
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.
Mr. Days business address is 1 Hampshire Court, Newport Beach, CA 92660. |
|
6 |
|
Includes 12,448 shares of common stock held of record by Melvin Seid. |
|
7 |
|
Includes 714,286 shares of common stock, and outstanding options issued, vested and
exercisable within sixty days of March 27, 2008 to purchase an aggregate 55,359 shares of common
stock. |
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 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 sixty day
period, have been so exercised, converted or exchanged.
41
Item 12. Certain Relationships and Related Transactions
Transactions with Related Persons
Rowland W. Day II, a member of our board of directors, and in his capacity as a corporate attorney,
rendered legal services to us and our investors during 2007. As of December 31, 2007, the legal
fees for which we are responsible for total $21,375. An arrangement for payment has been entered
into, and the amount due will be paid in installments in 2008.
Director Independence
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. DeWald is defined as independent by The NASDAQ Stock
Market rules and the SEC rules. There are no family relationships among any of our directors,
executive officers or key employees.
Item 13: Exhibits
|
|
|
|
|
No. |
|
Description |
|
2.1 |
|
|
Merger Agreement and Plan of Reorganization, dated March 31, 2005, by and among
Clearant, Inc., Bliss Essentials Corp., and Thomas Gelfand, Howard Gelfand and Kathleen
Rufh1 |
|
2.2 |
|
|
Asset Purchase Agreement, dated March 31, 2005, by and among Clearant, Inc., Bliss
Essentials Corp., and Thomas Gelfand, Howard Gelfand and Kathleen Rufh1 |
|
2.3 |
|
|
Merger Agreement and Plan of Merger, dated June 30, 2005, by and between Clearant, Inc.
and CI Merger Corporation2 |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation Clearant, Inc., a Delaware corporation |
|
3.2 |
|
|
Bylaws of Clearant, Inc., a Delaware corporation2 |
|
4.1 |
|
|
Specimen Common Stock Certificate3 |
|
10.1 |
* |
|
2005 Stock Award Plan4 |
|
10.2 |
|
|
Amended and Restated Employment Agreement between Clearant, Inc. and Jon M. Garfield
dated as of June 7, 2006, effective as of August 1, 2005. |
|
10.3 |
|
|
Purchase Agreement, dated April 3, 2007 and August 3, 20075 |
|
10.4 |
|
|
Registration Rights Agreement, dated April 3, 2007 and August 3, 20075 |
|
14.1 |
|
|
Codes of Ethics2 |
|
31.1 |
|
|
Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer |
|
32.1 |
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
The referenced exhibit is a compensatory contract, plan or arrangement. |
|
1 |
|
Incorporated by reference to our Current Report on Form 8-K, filed with the
SEC on April 4, 2005. |
|
2 |
|
Incorporated by reference to our Proxy Statement on Form DEF14A for our annual
meeting of stockholders held on June 30, 2005, filed with the SEC on April 4, 2005. |
|
3 |
|
Incorporated by reference to our Registration Statement on Form S-3, filed
with the SEC on November 23, 2005. |
|
4 |
|
Incorporated by reference to Appendix F to our Proxy Statement on Form DEF14A
for our annual meeting of stockholders held on June 30, 2005, filed with the SEC on April 4, 2005. |
|
5 |
|
Incorporated by reference to our Current Report on Form 8-K, filed with the
SEC on April 4, 2007. |
42
Item 14: Principal Accountant Fees and Services
Audit Fees
The following table sets forth the aggregate fees billed to us for the fiscal years ended December
31, 2007 and 2006 by Singer Lewak Greenbaum & Goldstein LLP:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Year |
|
|
|
2007 |
|
|
2006 |
|
Audit Fees |
|
$ |
146,118 |
|
|
$ |
141,746 |
|
Audit-Related Fees |
|
$ |
20,690 |
|
|
$ |
6,722 |
|
Tax Fees |
|
$ |
16,187 |
|
|
$ |
17,440 |
|
All Other Fees |
|
$ |
|
|
|
$ |
|
|
Audit-related fees billed during fiscal years 2007 and 2006 were primarily for services provided in
connection with the filing of the registrations statements and consulting related to stock-based
compensation. All of the foregoing fees were approved by the Audit Committee in accordance with
Rule 2-01(c)(7)(i)(C) of Regulation S-X. During fiscal 2007, no portion of the Audit-Related Fees
or All Other Fees was approved by the Audit Committee after services had been rendered pursuant to
the de minimis exception established by the SEC.
Representatives of Singer Lewak Greenbaum & Goldstein LLP usually attend most meetings of the Audit
Committee. The Audit Committees policy is to pre-approve all audit and permissible non-audit
services provided by our independent auditors. These services may include audit services,
audit-related services, tax services and other services. The independent auditors and management
are required to periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval policy.
Tax Fees
We paid $16,187 and $36,197 for professional services with respect to tax compliance, tax advice or
tax planning to Good Swartz Brown & Berns LLP and Ernst & Young LLP for the fiscal year ended
December 31, 2007 and 2006, respectively.
All Other Fees
Total fees billed for professional services rendered by our auditors for consultation related to
research of various accounting issues addressed in SEC comments and assistance in preparation of
responses to the SEC during the years ended December 31, 2007 and 2006 were $0 and $0,
respectively.
Pre-Approval Policy for Audit Services
Our Audit Committee has responsibility for the approval of all audit and non-audit services before
we engage an accountant. All of the services rendered to us by Singer Lewak Greenbaum & Goldstein
LLP are pre-approved by the Audit Committee before the engagement of the auditors for such
services. Our pre-approval policy expressly provides for the annual pre-approval of all audits,
audit-related and all non-audit services proposed to be rendered by the independent auditor for the
fiscal year, as specifically described in the auditors engagement letter, such annual pre-approval
to be performed by the Audit Committee.
43
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly
caused this Form 10-KSB to be signed on its behalf by its duly authorized representatives.
|
|
|
|
|
|
CLEARANT, INC.
|
|
|
By: |
/s/ Jon Garfield
|
|
|
|
Jon Garfield, |
|
|
|
Chief Executive Officer and Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
|
|
|
|
|
Signature |
|
Title(s) |
|
Date |
/s/ Jon Garfield
Jon Garfield |
|
Chief Executive Officer, Chief
Financial Officer and Director
|
|
March 31, 2008 |
/s/ Rowland Day
Rowland Day |
|
Director
|
|
March 31, 2008 |
/s/
Michael Elek
Michael Elek |
|
Director
|
|
March 31, 2008 |
/s/ Maurice J. DeWald
Maurice J. DeWald |
|
Director
|
|
March 31, 2008 |
/s/ Susan Etzel
Susan Etzel |
|
Controller
|
|
March 31, 2008 |
44
EXHIBIT INDEX
|
|
|
|
|
No. |
|
Description |
|
2.1 |
|
|
Merger Agreement and Plan of Reorganization, dated March 31, 2005, by and among
Clearant, Inc., Bliss Essentials Corp., and Thomas Gelfand, Howard Gelfand and Kathleen
Rufh1 |
|
2.2 |
|
|
Asset Purchase Agreement, dated March 31, 2005, by and among Clearant, Inc., Bliss
Essentials Corp., and Thomas Gelfand, Howard Gelfand and Kathleen Rufh1 |
|
2.3 |
|
|
Merger Agreement and Plan of Merger, dated June 30, 2005, by and between Clearant, Inc.
and CI Merger Corporation2 |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation Clearant, Inc., a Delaware corporation |
|
3.2 |
|
|
Bylaws of Clearant, Inc., a Delaware corporation2 |
|
4.1 |
|
|
Specimen Common Stock Certificate3 |
|
10.1 |
* |
|
2005 Stock Award Plan4 |
|
10.2 |
|
|
Amended and Restated Employment Agreement between Clearant, Inc. and Jon M. Garfield
dated as of June 7, 2006, effective as of August 1, 2005. |
|
10.3 |
|
|
Purchase Agreement, dated April 3, 2007 and August 3, 20075 |
|
10.4 |
|
|
Registration Rights Agreement, dated April 3, 2007 and August 3, 20075 |
|
14.1 |
|
|
Codes of Ethics2 |
|
31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer |
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32.1 |
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Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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The referenced exhibit is a compensatory contract, plan or arrangement. |
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1 |
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Incorporated by reference to our Current Report on Form 8-K, filed with the
SEC on April 4, 2005. |
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2 |
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Incorporated by reference to our Proxy Statement on Form DEF14A for our annual
meeting of stockholders held on June 30, 2005, filed with the SEC on April 4, 2005. |
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3 |
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Incorporated by reference to our Registration Statement on Form S-3, filed
with the SEC on November 23, 2005. |
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4 |
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Incorporated by reference to Appendix F to our Proxy Statement on Form DEF14A
for our annual meeting of stockholders held on June 30, 2005, filed with the SEC on April 4, 2005. |
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5 |
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Incorporated by reference to our Current Report on Form 8-K, filed with the
SEC on April 4, 2007. |
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