The Inflection Point's  Instablog

For the past few years, Clarient Inc. (CLRT) has produced exceptional top line growth but investors have remained wary due to liquidity concerns and existing debt with a 14% interest rate.  On March 26^th, those concerns were finally alleviated as Clarient entered into a private placement of up to $50 million in convertible preferred stock with Oak Investment Partners.  The injection of capital will serve several functions that should greatly increase shareholder value over the long term. 

Before examining how the deal will affect Clarient, let’s briefly look at the terms.  The agreement called for $40 million in preferred stock to be sold in two tranches.  The sale of the first tranche was completed on March 26^th for $29.1 million with an average purchase price of $1.90.  The second tranche, which will generate $10.9 million in proceeds, is expected to be completed within the next 60 days.  An additional $10 million of preferred stock may be sold at some point in the future for a yet to be determined price if both parties can reach an agreement. 

The deal comes with a few stipulations.  Oak Investment Partners can convert one preferred share into four common shares.  Also, after one year, if Clarient’s stock trades above $4.75 for 20 days in any consecutive 30 trading day period, Oak’s shares will be converted.  After four years, Clarient may redeem all unconverted preferred shares for $7.60 per share.  The preferred shares do not accrue dividends and no warrants were issued.

With the proceeds from the sale of the first tranche of shares, Clarient will retire $23.8 million of debt.  This action will bring the Company’s debt total below $3 million.  Retiring most of their debt is a monumental achievement for Clarient.  The debt carried a 14% interest rate and will save Clarient $11 million (or $0.14 in EPS) in 2009.  Additionally, questions about Clarient’s cash reserve being sufficient for continued top-line growth have been answered by the agreement.  Finally, the deal will dilute the ownership position of Safeguard, a growth stage technology and life sciences holding company, from 60% to 47%, which some analysts thought of as an overhang.

As a result of the agreement, Clarient now has sufficient working capital, the guidance of a seasoned venture capital group and should see a return of investor confidence.  The Company has generated 18 consecutive quarters of revenue growth, including 71.5% year over year growth in 2008 as reported on March 12^th.  Management is looking to double its sales force to 40 in 2009 and reiterated its FY2009 rev guidance of $93-$98 million a few weeks ago.  New customer acquisitions have continued to exceed expectations as Clarient signed on 63 new customers in 2008 that are expected to generate between $500,000 and $2,000,000 in annual sales.    Clarient is also rolling out a new product in Q1 ’09, the DX Breast Cancer Profile, which is expected to be a significant revenue contributor in the near term.  With the dark cloud liquidity questions and high borrowing costs finally dissipated, Clarient should see the significant top-line growth it has enjoyed for the past few years finally start to drop to the bottom-line.

 A look at the 1 year chart shows that CLRT has just broken out of a long 1 year consolidation.  The 50 day average has also just crossed above the 200 day and the stock came close to touching a new 5 year high earlier today.

Source: eSignal

type="text/css">

Disclosure:  I am currently long of CLRT and am looking to add more to my position on a pullback to $2.35-$2.4