##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended March 31, 2006
 Commission File Number 000-50309
 
 Clearant, Inc.
  
 Delaware
(State or other jurisdiction of incorporation)
    
    91-2190195
(I.R.S. Employer Identification Number)
 11111 Santa Monica Boulevard, Suite 650, Los Angeles, California 90025
 (310) 479-4570
 þ o
 o þ o
 o þ




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##### 



INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005Condensed Statements of Operations for the three months ended March 31, 2006 and
2005 (unaudited)Condensed Statement of Stockholders Equity for the three months ended March 31,
2006 (unaudited)Condensed Statements of Cash Flows for the three months ended March 31, 2006 and
2005 (unaudited)Notes to Condensed Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Securities HoldersItem 5. Other InformationItem 6. ExhibitsSignaturesExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



CLEARANT, INC.
 
 CONDENSED BALANCE SHEETS
(in thousands)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,879
    
    
    $
    10,141Accounts receivable
    
    
    275
    
    
    
    208Inventory
    
    
    21
    
    
    
    Prepaids and other assets
    
    
    413
    
    
    
    381Total current assets
    
    
    7,588
    
    
    
    10,730Property and
equipment, net of $952 and $1,131 of accumulated depreciation at
March 31, 2006 and 2005, respectively
    
    
    330
    
    
    
    415Identifiable intangibles, net of $649 and $454 of accumulated
amortization at March 31, 2006 and 2005, respectively
    
    
    1,365
    
    
    
    1,403Deposits and other assets
    
    
    244
    
    
    
    244Total assets
    
    $
    9,527
    
    
    $
    12,792Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,102
    
    
    $
    1,292Accrued liabilities
    
    
    885
    
    
    
    1,664Deferred revenue
    
    
    28
    
    
    
    48Bridge loans, net
    
    
    106
    
    
    
    106Total current liabilities
    
    
    2,121
    
    
    
    3,110Deferred revenue  noncurrent
    
    
    59
    
    
    
    60Other liabilities
    
    
    
    
    
    
    10Total liabilities
    
    
    2,180
    
    
    
    3,180Stockholders equity (deficit):Common stock ($0.0001 par value;
200,000 shares authorized; 39,772 and
39,759 issued and outstanding at March
31, 2006 and December 31, 2005,
respectively)
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    82,427
    
    
    
    82,179Accumulated deficit
    
    
    (75,084
    )
    
    
    (72,571
    )Total stockholders equity
    
    
    7,347
    
    
    
    9,612Total liabilities and stockholders equity
    
    $
    9,527
    
    
    $
    12,792
 See accompanying notes to condensed financial statements.
 F-3




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CLEARANT, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
 Three Months EndedMarch 31,2006
    
    
    2005Revenues:Licensing
    
    $
    79
    
    
    $
    44Fee for service
    
    
    30
    
    
    
    Contract research and milestones
    
    
    61
    
    
    
    43Grants
    
    
    20
    
    
    
    20Total revenues
    
    
    190
    
    
    
    107Cost of sales
    
    
    54
    
    
    
    4Gross Profit
    
    
    136
    
    
    
    103Operating expenses:Sales, general and administrative
    
    
    2,475
    
    
    
    1,992Research and development
    
    
    327
    
    
    
    754Total operating expenses
    
    
    2,802
    
    
    
    2,746Loss from operations
    
    
    (2,666
    )
    
    
    (2,643
    )Other income (expense):Interest income (expense), net
    
    
    71
    
    
    
    (1,786
    )Gain on extinguishment of debt
    
    
    117
    
    
    
    1,290Other (loss) gain
    
    
    (35
    )
    
    
    39Loss before provision (benefit) for incomes taxes
    
    
    (2,513
    )
    
    
    (3,100
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    Net loss
    
    
    (2,513
    )
    
    
    (3,100
    )Add: Preferred stock dividend and financing
costs
    
    
    
    
    
    
    (2,161
    )Net loss attributable to common stock
    
    $
    (2,513
    )
    
    $
    (5,261
    )Net loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.71
    )Number of shares used in per share calculation:Basic and diluted
    
    
    39,764
    
    
    
    7,370
 See accompanying notes to condensed financial statements.
 F-4




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CLEARANT, INC.
 
 CONDENSED STATEMENT OF STOCKHOLDERS EQUITY 
(in thousands)
 Common Stock, $0.0001par value
    
    
    Additional Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance, December 31, 2005
    
    
    39,759
    
    
    $
    4
    
    
    $
    82,179
    
    
    $
    (72,571
    )
    
    $
    9,612Exercise of common stock options
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Issuance of common stock to
consultants for services
    
    
    10
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    208Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,513
    )
    
    
    (2,513
    )Balance at March 31, 2006 (unaudited)
    
    
    39,772
    
    
    $
    4
    
    
    $
    82,427
    
    
    $
    (75,084
    )
    
    $
    7,347
 See accompanying notes to condensed financial statements.
 F-5




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CLEARANT, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months EndedMarch 31,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (2,513
    )
    
    $
    (3,100
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    190
    
    
    
    166Stock-based compensation
    
    
    208
    
    
    
    Issuance of common stock to consultants for services rendered
    
    
    51
    
    
    
    Non-cash interest expense associated with convertible debt financings
    
    
    
    
    
    
    1,786Gain on extinguishment of debt and other, net
    
    
    (82
    )
    
    
    (1,329
    )Warrant exchange for common stock
    
    
    
    
    
    
    158Changes in operating assets and liabilities:Receivables and prepaids
    
    
    (150
    )
    
    
    98Inventory
    
    
    (21
    )
    
    
    Accounts payable
    
    
    (35
    )
    
    
    24Accrued liabilities
    
    
    (760
    )
    
    
    (588
    )Deferred revenue
    
    
    (21
    )
    
    
    (21
    )Other assets and liabilities
    
    
    (10
    )
    
    
    56Net cash used in operating activities
    
    
    (3,143
    )
    
    
    (2,750
    )Investing activitiesCost of identified intangibles
    
    
    (68
    )
    
    
    (51
    )Capital expenditures
    
    
    (53
    )
    
    
    Cash received in 2005 merger activities
    
    
    
    
    
    
    17Net cash used in investing activities
    
    
    (121
    )
    
    
    (34
    )Financing activitiesIssuance of common stock, net of costs
    
    
    
    
    
    
    8,455Issuance of convertible notes payable, net of costs
    
    
    
    
    
    
    2,811Exercise of common stock options
    
    
    2
    
    
    
    2Principal payments on capital lease obligations
    
    
    
    
    
    
    (1
    )Net cash provided by financing activities
    
    
    2
    
    
    
    11,267Effect of translation adjustments on cash and cash equivalents
    
    
    
    
    
    
    (7
    )Change in cash and cash equivalents
    
    
    (3,262
    )
    
    
    8,476Cash and cash equivalents, beginning of period
    
    
    10,141
    
    
    
    177Cash and cash equivalents, end of period
    
    $
    6,879
    
    
    $
    8,653Supplemental Disclosure of Non-cash Financing Activities:During the
three months ended March 31, 2006, the Company paid accounts payable of $38 with 10,259 shares of common stock
    
    $
    38
    
    
    $
    
 See accompanying notes to condensed financial statements.
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CLEARANT, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 NOTE 1  BASIS OF PRESENTATION
   NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Revenue Recognition and Deferred Revenue
 Revenue Recognition Clearant Process® Clearant Process®
  Grants
 Clearant
Process ®
 F-7




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CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 Cost of Revenues
  Extinguishment of Debt
  Use of Estimates
  Cash and Cash Equivalents
  Property and Equipment
  Identifiable Intangibles
  Research and Development Costs
  Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
  F-8




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CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
   Net loss as reported
    
    $
    (5,261
    )Less: Stock-based expense determined under fair value based method
    
    
    (132
    )Pro forma net loss
    
    $
    (5,393
    )Net loss per shareAs reported  basic and diluted
    
    $
    (0.71
    )Pro forma  basic and diluted
    
    $
    (0.73
    )
  Accounting for Stock-Based Compensation
    F-9




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CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Fair Value of Financial Instruments
  New Accounting Pronouncements
 Accounting for Certain Hybrid Financial Instruments Accounting for Derivatives Instruments and Hedging
Activities Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140
 NOTE 3  NET LOSS PER SHARE
 Earnings Per Share .
  Three Months EndedMarch 31,2006
    
    2005Stock Options
    
    
    2,862,000
    
    
    
    4,997,000Warrants
    
    
    5,512,000
    
    
    
    3,317,000
 F-10




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##### Table of Contents



CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Three Months Ended March 31,2006
    
    
    2005Basic and diluted net loss per share:Numerator:Net loss attributable to common stock
    
    $
    (2,513
    )
    
    $
    (5,261
    )Denominator:Weighted average common stock shares outstanding
    
    
    39,764,000
    
    
    
    7,370,000Net loss per share, basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.71
    )
 NOTE 4  COMMON STOCK
 Common Stock Transactions and Non-cash Financing Activities
    Lock-up Period
  NOTE 5 STOCK-BASED AWARDS
 Stock Options
   F-11




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CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
   Employees
    
    
    Non-Employees
    
    
    TotalExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
December 31, 2004
    
    
    5,253,000
    
    
    $
    0.60-$7.94
    
    
    
    319,000
    
    
    $
    0.60-$7.22
    
    
    
    5,572,000
    
    
    $
    0.60-$7.94Granted
    
    
    1,254,000
    
    
    $
    3.86-$4.51
    
    
    
    120,000
    
    
    $
    4.12
    
    
    
    1,374,000
    
    
    $
    3.86-$4.51Exercised
    
    
    (86,000
    )
    
    $
    0.60
    
    
    
    
    
    
    $
    
    
    
    
    (86,000
    )
    
    $
    0.60Change in status
    
    
    (266,000
    )
    
    $
    0.60-$2.30
    
    
    
    226,000
    
    
    $
    0.60-$2.30
    
    
    
    
    
    
    
    Canceled
    
    
    (3,799,000
    )
    
    $
    0.60-$7.94
    
    
    
    (285,000
    )
    
    $
    0.60-$7.22
    
    
    
    (4,084,000
    )
    
    $
    0.60-$7.94Outstanding at
December 31, 2005
    
    
    2,396,000
    
    
    $
    0.60-$7.94
    
    
    
    380,000
    
    
    $
    0.60-$7.22
    
    
    
    2,776,000
    
    
    $
    0.60-$7.94Granted
    
    
    175,000
    
    
    $
    1.64
    
    
    
    
    
    
    $
    
    
    
    
    175,000
    
    
    $
    1.64Exercised
    
    
    (3,000
    )
    
    $
    0.60
    
    
    
    
    
    
    $
    
    
    
    
    (3,000
    )
    
    $
    0.60Change in status
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Canceled
    
    
    (81,000
    )
    
    $
    0.60-$4.51
    
    
    
    (5,000
    )
    
    $
    2.30
    
    
    
    (86,000
    )
    
    $
    0.60-$4.51Outstanding at
March 31, 2006
    
    
    2,487,000
    
    
    $
    0.60-$7.94
    
    
    
    375,000
    
    
    $
    0.60-$7.22
    
    
    
    2,862,000
    
    
    $
    0.60-$7.94
  WeightedWeighted
    
    AverageNumber
    
    Average
    
    RemainingOf
    
    Exercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Life (Years)
    
    ValueAs of December 31, 2005:Employees  Outstanding
    
    
    2,396,000
    
    
    $
    2.83
    
    
    
    7.17
    
    
    $
    692,000Employees  Expected to Vest
    
    
    2,376,000
    
    
    $
    2.82
    
    
    
    7.16
    
    
    $
    692,000Employees  Exercisable
    
    
    1,563,000
    
    
    $
    2.25
    
    
    
    6.03
    
    
    $
    692,000Non-Employees  Outstanding
    
    
    380,000
    
    
    $
    2.04
    
    
    
    5.78
    
    
    $
    287,000Non-Employees  Expected to Vest
    
    
    380,000
    
    
    $
    2.04
    
    
    
    5.78
    
    
    $
    287,000Non-Employees  Exercisable
    
    
    380,000
    
    
    $
    2.04
    
    
    
    5.78
    
    
    $
    287,000As of March 31, 2006:Employees  Outstanding
    
    
    2,487,000
    
    
    $
    2.71
    
    
    
    7.06
    
    
    $
    337,000Employees  Expected to Vest
    
    
    2,465,000
    
    
    $
    2.71
    
    
    
    7.05
    
    
    $
    337,000Employees  Exercisable
    
    
    1,556,000
    
    
    $
    2.25
    
    
    
    5.78
    
    
    $
    337,000Non-Employees  Options Outstanding
    
    
    375,000
    
    
    $
    2.04
    
    
    
    5.49
    
    
    $
    146,000Non-Employees  Expected to Vest
    
    
    375,000
    
    
    $
    2.04
    
    
    
    5.49
    
    
    $
    146,000Non-Employees  Options Exercisable
    
    
    375,000
    
    
    $
    2.04
    
    
    
    5.49
    
    
    $
    146,000
 F-12




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CLEARANT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
   NOTE 6  REVERSE MERGER TRANSACTION
   NOTE 7  SUBSEQUENT EVENTS
 Clearant Process ® Clearant Process ®
 F-13




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes, and the other financial
information included in this report.
 Forward-Looking Statements
 The forward-looking comments contained in this report involve risks and uncertainties. Our
actual results may differ materially from those discussed here due to factors such as, among
others, limited operating history, difficulty in developing, exploiting and protecting proprietary
technologies, intense competition and substantial regulation in the healthcare industry. Additional
factors that could cause or contribute to such differences can be found in the following discussion
and in the Risks Factors set forth in Item 1A of our Form 10-K for the year ended December 31,
2005.
 Overview
 Clearant
Process ®
 
    
    Devitalized musculoskeletal tissue allograft implants (tissue),
    
    Plasma protein therapeutics,
    
    Recombinant protein therapeutics,
    
    Medical devices, and
    
    Blood and blood-related products.
 Clearant
Process ® Clearant
Process ®
 
    
    Inactivate a broad range of known pathogens irrespective of size, origin or structure,
    
    Achieve sterility, in some cases with margins of safety greater than that of a medical device,
    
    Be used in both intermediate and final stages of production,
    
    Protect the mechanical and biological properties of the biological product being treated, and
    
    Be applied to a product after it has been sealed into its final package.
 Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 
    
    Ten signed agreements with tissue banks
     Six license agreementsFour sterilization service agreements
    
    One signed license agreement with a recombinant manufacturer.
 14




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Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 Results of Operations
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 Revenues
 Clearant
Process ®  Clearant Process ® Clearant
Process ®
   Sales, General and Administrative Expenses
 Clearant Process ®
  Research and Development Expenses
  15




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Clearant Process®
  Other Income/Expense
  Preferred Stock Dividend and Financing Costs
  Liquidity and Capital Resources
      16




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Contractual Obligations and Commercial Commitments
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    5 yearsLease obligations
    
    $
    219
    
    
    $
    177
    
    
    $
    41
    
    
    $
    1
    
    
    $
    $
    219
    
    
    $
    177
    
    
    $
    41
    
    
    $
    1
    
    
    $
    Bridge loans
    
    
    106
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    121
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    $
    446
    
    
    $
    404
    
    
    $
    41
    
    
    $
    
    
    
    $
    
 Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Revenue Recognition and Deferred Revenue
 Revenue Recognition
 ® ® ® ®
 17




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Identifiable Intangibles
  Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial
Instruments Accounting for Derivatives Instruments and
Hedging Activities Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140
 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
  18




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PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Securities Holders
  
 ITEM 5. Other Information
 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
  19




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##### Table of Contents




    
    general economic conditions,
    
    the effectiveness of our planned advertising, marketing and promotional campaigns,
    
    physician and patient acceptance of our products and services, including newly introduced products,
    
    competition among addiction treatment centers,
    
    anticipated trends and conditions in the industry in which we operate, including regulatory changes,
    
    development of new treatment modalities,
    
    our future capital needs and our ability to obtain financing, and
    
    other risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the SEC.
  
 ITEM 6. Exhibits
      20




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SIGNATURES
  CLEARANT, INC.Date: May 10, 2006
    By:
    /s/ ALAIN DELONGCHAMPAlain DelongchampChief Executive OfficerDate: May 10, 2006
    By:
    /s/ JON GARFIELDJon GarfieldChief Financial Officer 21