##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Year Ended December 31, 2005
 Commission File Number 000-50309
 
 
 Clearant, Inc.
  
 Delaware
    
    91-2190195(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification Number)
 11111 Santa Monica Boulevard, Suite 650, Los Angeles, California 90025
 (310) 479-4570
  Common Stock, par value $0.0001
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



INDEX
 FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2005
 Item
    
    
    PagePART I1.
    
    Business
    
    
    11A.
    
    Risk Factors
    
    
    61B.
    
    Unresolved Staff Comments
    
    
    262.
    
    Properties
    
    
    263.
    
    Legal Proceedings
    
    
    264.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    266.
    
    Selected Financial Data
    
    
    287.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    377A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    388.
    
    Financial Statements and Supplementary Data
    
    
    389.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    389A.
    
    Controls and Procedures
    
    
    389B.
    
    Other Information
    
    
    38PART III10.
    
    Directors and Executive Officers of the Registrant
    
    
    3911.
    
    Executive Compensation
    
    
    3912.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    3913.
    
    Certain Relationships and Related Transactions
    
    
    3914.
    
    Principal Accounting Fees and Services
    
    
    39PART IV15.
    
    Exhibits, Financial Statement Schedules
    
    
    40Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I
 
 Item 1. Business
 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 below.
 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 ® 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 ®
 Clearant Process ® Clearant
Process ®
 1




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##### Table of Contents



Clearant
Process ® Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 Number
    
    Name/Description
    
    Type of Contract Application
    
    Clearant Process® Applied1
    
    Community Blood Center (d/b/a
Community Tissue Services)
    
    Clearant Sterilization Service
    
    Tissue2
    
    Cryolife, Inc.
    
    License
    
    Tissue3
    
    DCI Donor Services, Inc.
    
    License
    
    Tissue4
    
    DCI Donor Services, Inc.
    
    Clearant Sterilization Service
    
    Tissue5
    
    LifeTek LLC
    
    License
    
    Tissue6
    
    Osprey Biomedical
    
    Clearant Sterilization Service
    
    Tissue7
    
    Recombinant manufacturer
    
    License
    
    Recombinant products8
    
    The Blood & Tissue Center
of Central Texas
    
    License
    
    Tissue9
    
    Tissue Banks International
    
    License
    
    Tissue10
    
    Tissue Transplant Technologies
(formerly known as Bone Bank Allograft)
    
    Clearant Sterilization Service
    
    Tissue11
    
    Tissuelab SpA
    
    License
    
    Tissue
 Clearant Process ® Clearant Process ® Clearant Process ®
 The Merger
  Market Opportunity
  2




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##### Table of Contents




    
    Manufacturers to recover, process, store, label, package and distribute human
cells, tissues and cellular and tissue-based products in a way that prevents the
introduction, transmission or spread of communicable diseases (including bacteria and
viruses), and
    
    Tissue banks that wish to label their products "sterilewill need to have a
validated process to demonstrate sterility.
 Clearant Process ® Clearant Process ®
 Clearant Process ®
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant
Process ® Clearant Process ® Clearant
Process ® Clearant Process ®
 Clostridium Clostridium
 3




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##### Table of Contents



The Clearant Solution
 Clearant Process ® Clearant
Process ® Clearant
Process ® Clearant Process ® Clearant Process ®
 Clearant Process ®
 Clearant Process ® Clearant Process ®
 Devitalized Musculoskeletal Tissue Allograft Implants
 The Devitalized Musculoskeletal Tissue Allograft Implant Market
   4




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Clearant Process ® Clearant
Process ®
 Clearant Process ® Clearant
Process ® Clearant Process ® Clearant Process ®
 Clearant Process ®
  Competition
  Non-Sterile Methods. Clearant
Process ® Clostridium
 5




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##### Table of Contents



Clostridium
 Sterile Methods.    Clearant Process ®  Clearant
Process ®
 The Clearant Solution for the Tissue Market
 Clearant Process ® Clearant Process ® Clearant Process ®
  Clearant Process ® Clearant Process ® Clearant Process ®
 Clearant Process ® Clearant Process ®
 Clearant Process ®
 Commercialization Strategy
 Clearant
Process ® Clearant Process ®
 6




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Clearant Process ® Clearant Process ®
  
    
    Ten signed agreements with tissue banks
 
    
    Six signed license agreements with tissue banks
    
    Four signed sterilization service agreements with tissue banks
 
    
    Commercial release of Clearant Process®-treated
tissue by four of Clearants customers to date, with additional
tissue bank licensees anticipated to launch products during 2006
    
    The six-month outcome results of Clearants clinical study, collected
as of January 2006, 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 patients
non-operated contralateral knee
    
    Implantation by surgeons of Clearant Process®-treated tissue
in over 6,000 patients with comparable performance to that of
traditionally-processed tissues as reported to the Company by physicians
 Protein Therapeutic Products
 The Plasma Protein Therapeutics Market
  Clearant Process ® Clearant Process ®
 Clearant Process ®
 The Recombinant Products Market
  7




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Clearant Process ®
 Clearant Process ®
 Competition
    8




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The Clearant Solution for Protein Therapeutic Products
 Clearant Process ® Clearant Process ®
   Other Market Opportunities
 The Medical Device Market
 Clearant
Process ® Clearant Process ®
 Regulatory Strategy
 Clearant Process ® Clearant Process ® Clearant Process ®
 9




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Clearant Process ® Clearant
Process ® Clearant
Process ® Clearant
Process ® Clearant Process ®
  Clearant Process ® Clearant Process ® Clearant Process ® "  Clearant Process ®
 Clearant
Process ®
  Intellectual Property
  Clearant Process ®
 10




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##### Table of Contents



Clearant Process ®
 Financial Information about Segments
 Clearant Process ® Clearant
Process ® Clearant Process ® Clearant Process ®
 Employees
  Executive Officers
  Code of Ethics
  Available Information
  
 Item 1A. Risk Factors
  11




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##### Table of Contents



Risks Related to Our Business
 Our limited operating history may make it difficult to evaluate our business to date and our
future viability.
 Clearant Process ® Clearant Process ®
 We have a history of and expect to continue to generate substantial losses, may not become
profitable and will need to expand our licensing of the Clearant Process ® and
sterilization services generate significant revenues.
  Clearant Process ® Clearant Process ®
 the Clearant Process ®
 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.
  
    
    Continue to successfully demonstrate the efficacy of the Clearant Process® in tissue;
    
    Successfully demonstrate the efficacy of the Clearant Process® in sterilizing other biological
products, including plasma protein, recombinant proteins and medical devices;
 12




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##### Table of Contents




    
    Enter into additional license, sterilization service and processor representative agreements with
manufacturers and providers of biological products;
    
    Develop and protect our intellectual property rights;
    
    Complete product-specific development of the Clearant Process® for our target markets; and
    
    Obtain (or have the users of the Clearant Process® obtain) required product regulatory approvals.
 Clearant Process ® Clearant
Process®. Clearant Process® . Clearant
Process®
 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 and became effective on May 25, 2005.
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant
Process ®
 Clearant Process ® Clearant Process ®
 Our success will depend on our ability to retain our managerial personnel and to attract
additional personnel.
  Clearant Process ®
 13




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We need to develop our financial and reporting processes, procedures and controls to support
our anticipated growth.
   The Clearant Process ® has been commercialized only in the tissue market and our
future success depends on its ability to successfully commercialize the Clearant
Process ® for use in our other, larger target markets.
 Clearant Process ® Clearant
Process ® Clearant Process ®  Clearant Process ®
 Clearant Process ®
 Clearant Process ® Clearant Process ® Clearant Process®.
 14




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. Clearant
Process®
 Clearant Process ® Clearant Process ® Clearant
Process ®
 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 ® .
 Clearant Process ® Clearant Process ® Clearant
Process ® Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ®
  Clearant Process ®
 Clearant
Process ® Clearant Process ® Clearant
Process ® Clearant Process ®
 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.
 Clearant Process ®
 15




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Clearant Process ®
  Clearant Process ®
 
 "  Clearant
Process ® Clearant Process ®
    
 
 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.
 Clearant
Process ®
 16




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Clearant Process ®
 Clearant
Process ®  Clearant
Process ® Clearant
Process ®
  Clearant
Process ®
 We face environmental and other liabilities related to certain hazardous materials used in our
operations.
  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.
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant
Process ® Clearant Process ®  Clearant Process ® Clearant
Process ®
 Clearant Process ®
 17




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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.
 Clearant Process ® Clearant
Process ® Clearant Process ® Clearant Process ®  Clearant
Process ® Clearant Process ®
 TM Clearant Process ® Clearant Process ®
 TM Clearant Process ®
 Clearant
Process ® Clearant Process ®
 Under our new processor representative arrangement, uncertainties regarding future health care
reimbursement exist and may affect the amount and timing of revenues.
 Clearant Process ®
 18




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Clearant Process ®
  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.
 Clearant Process ®
 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 ® .
 Clearant
Process ® Clearant Process ® Clearant Process ® Clearant
Process ®
 Clearant Process ®
 19




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Clearant Process ® Clearant Process ®  Clearant Process ® Clearant Process ® 
 Clearant Process ® Clearant
Process ®
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®   Clearant Process ® Clearant Process ®
  Clearant Process ® Clearant Process ® Clearant
Process ® Clearant Process ® Clearant Process ®
 Clearant Process ®
 20




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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.
 Clearant Process ® Clearant Process ® Clearant Process ®
 
 Clearant
Process ®
 Clearant Process ® Clearant
Process ® Clearant Process ®
 Because our business model is based significantly on the receipt of royalties or service
payments from users of the Clearant Process ® , our success is ultimately 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.
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 21




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Clearant Process ® Clearant Process ®
  Clearant Process ® Clearant Process ® Clearant
Process ®
 Clearant Process ®
 Potential users of the Clearant Process ® may depend on third party payers for
reimbursement for the use of their products by the end consumer, which may not be willing to
reimburse the users at levels sufficient to permit us to generate significant payments.
 Clearant Process ® Clearant Process ®  Clearant Process ®
 Outside influences on healthcare regulation may negatively impact our revenues or increase our
expenses.
 
 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.
  22




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Guidelines and recommendations published by various organizations could reduce the use of
products made with the Clearant Process ® .
 Clearant Process ® Clearant Process ®
 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.
  
    
    difficulties in integrating operations, technologies, services and personnel;
    
    diversion of financial and managerial resources from existing operations;
    
    risk of entering new markets;
    
    potential write-offs of acquired assets or investments;
    
    potential loss of key employees;
    
    inability to generate sufficient revenue to offset acquisition or investment costs; and
    
    delays in customer purchases due to uncertainty.
  Risks Related to Our Common Stock
 Our stock price may be subject to substantial volatility, and you may lose all or a
substantial part of your investment.
  The sale of shares by our stockholders may significantly impact the market price of our common
stock.
 23




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We may need additional financing to fund our business.
  We have never paid cash dividends and do not intend to do so.
  We may incur increased costs as a result of recently enacted and proposed changes in laws and
regulations relating to corporate governance matters.
  Our corporate compliance program cannot guarantee that we are in compliance with all
potentially applicable federal and state regulations.
 Clearant Process ® Clearant Process ®
 24




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##### Table of Contents



Our common stock may be considered a penny stock and may be difficult to sell when desired.
  The possible issuance of additional shares may impact the price of our stock.
  CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
   
    
    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,
    
    anticipated trends and conditions in the industry in which we
operate, including regulatory changes,
    
    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.
 25




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Item 1B. Unresolved Staff Comments
 None
 
 Item 2. Properties
   
 Item 3. Legal Proceedings
  
 Item 4. Submission Of Matters To A Vote Of Security Holders
  26




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##### Table of Contents



PART II
 
 Item 5. Market For Registrants Common Equity And Related Stockholder Matters
  High
    
    LowFiscal year ended December 31, 2004First quarter
    
    $
    
    
    
    $
    Second quarter
    
    
    
    
    
    
    Third quarter (1)
    
    
    
    
    
    
    Fourth quarter
    
    
    0.23
    
    
    
    0.14Fiscal year ended December 31, 2005First quarter (2)
    
    $
    5.50
    
    
    $
    2.00Second quarter
    
    
    4.35
    
    
    
    3.00Third quarter
    
    
    4.79
    
    
    
    2.16Fourth quarter
    
    
    4.49
    
    
    
    2.35
 
 (1)
    
    We have no information concerning any trades reported on the OTC Bulletin
Board prior to October 15, 2004. All listed share prices are post-split adjusted for an 8.67 for
one stock split effective February 22, 2005.(2)
    
    Clearant, Inc. merged with the registrant on March 31, 2005.    27




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Item 6. Selected Financial Data
  Statement of Operations Data:
    
    Fiscal Year Ended December 31,(In thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Total revenues
    
    
    541
    
    
    
    1,006
    
    
    
    408
    
    
    
    108
    
    
    
    123Cost of sales
    
    
    17
    
    
    
    33
    
    
    
    26
    
    
    
    35
    
    
    
    Gross margin
    
    
    524
    
    
    
    973
    
    
    
    382
    
    
    
    73
    
    
    
    123Total operating expenses
    
    
    11,643
    
    
    
    14,935
    
    
    
    12,831
    
    
    
    11,188
    
    
    
    6,764Loss from operations
    
    
    (11,119
    )
    
    
    (13,962
    )
    
    
    (12,449
    )
    
    
    (11,115
    )
    
    
    (6,641
    )Other (expense) income, net
    
    
    (471
    )
    
    
    (867
    )
    
    
    (254
    )
    
    
    613
    
    
    
    (92
    )Net loss
    
    
    (11,590
    )
    
    
    (14,829
    )
    
    
    (12,703
    )
    
    
    (10,502
    )
    
    
    (6,733
    )Add: Preferred stock dividend and financing costs
    
    
    (2,161
    )
    
    
    (1,628
    )
    
    
    (1,526
    )
    
    
    
    
    
    
    Net loss attributable to common stock
    
    $
    (13,751
    )
    
    $
    (16,457
    )
    
    $
    (14,229
    )
    
    $
    (10,502
    )
    
    $
    (6,733
    )Net loss per share  Basic and diluted
    
    $
    (0.47
    )
    
    $
    (2.23
    )
    
    $
    (1.93
    )
    
    $
    (1,43
    )
    
    $
    (0.95
    )Number of shares  Basic and diluted
    
    
    29,498
    
    
    
    7,370
    
    
    
    7,369
    
    
    
    7,368
    
    
    
    7,052Balance Sheet Data:(In thousands)Cash and cash equivalents
    
    $
    10,141
    
    
    $
    177
    
    
    $
    1,174
    
    
    $
    5,176
    
    
    $
    9,091Working capital
    
    
    7,620
    
    
    
    (9,277
    )
    
    
    2,738
    
    
    
    (1,895
    )
    
    
    6,905Total assets
    
    
    12,792
    
    
    
    3,078
    
    
    
    7,645
    
    
    
    7,420
    
    
    
    11,304Stockholders Equity (Deficit)
    
    
    9,612
    
    
    
    (24,995
    )
    
    
    (11,167
    )
    
    
    (14,614
    )
    
    
    (2,900
    )Long-term obligations and redeemable preferred stock
    
    
    66
    
    
    
    18,141
    
    
    
    17,030
    
    
    
    16,298
    
    
    
    13,647
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 The forward-looking comments contained in the following 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 following discussion, as well as under the Risks Factors heading in Item 1.
Business, above.
 Overview
 Clearant
Process ®
 
    
    Devitalized musculoskeletal tissue allograft implants (tissue),
 28




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##### Table of Contents




    
    Plasma protein therapeutics
    
    Recombinant protein therapeutics,
    
    Medical devices, and
    
    Blood and blood-related products.
 The Merger
  Our Business
 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 ®
 Clearant Process ® Clearant
Process ®
 29




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##### Table of Contents



Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 
    
    Ten signed agreements with tissue banks.
 
    
    Six signed license agreements with tissue banks.
    
    Four signed sterilization service agreements with tissue banks.
 
    
    One signed license agreement with a recombinant manufacturer.
 Clearant
Process ® Clearant Process ® Clearant Process ®
 Our Offices
  Results of Operations  2005 Compared to 2004
 Revenues
 Clearant
Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®
 30




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Sales, General and Administrative Expenses
 Clearant Process ®
 Research and Development Expenses
 Clearant Process ®
 Stock-based Compensation
  Net Interest Expense
  Preferred Stock Dividend and Financing Costs
  Results of Operations  2004 Compared to 2003
 Revenues
 31




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Clearant Process ® Clearant Process ®
 Sales, General and Administrative Expenses
 Clearant Process ® Clearant Process ®
 Research and Development Expenses
  Stock-based Compensation
  Net Interest Expense
  Preferred Stock Dividend and Financing Costs
  Liquidity and Capital Resources
  32




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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
    
    $
    407
    
    
    $
    341
    
    
    $
    64
    
    
    $
    2
    
    
    $
    Other obligations  facility closing
    
    
    298
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    $
    705
    
    
    $
    639
    
    
    $
    64
    
    
    $
    2
    
    
    $
    
 Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Revenue Recognition and Deferred Revenue
 Revenue Recognition
 Clearant Process ® Clearant Process ® Clearant Process ®
 34




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Clearant Process ®
  Cost of Revenues
  Cash Equivalents and Concentration of Credit Risk
  Property and Equipment
  Identifiable Intangibles
  Research and Development Costs
  Other Comprehensive Loss
  Marketable Securities
 Accounting for Certain Investments in Debt and Equity Securities,
 Income Taxes
 Accounting for Income Taxes
 35




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##### Table of Contents



Stock-Based Compensation
 Accounting for Stock-Based Compensation-Transition and Disclosure Accounting for Stock-Based Compensation
 Accounting for Stock Issued to Employees
 Net Loss Per Share
 Earnings Per Share .
 Fair Value of Financial Instruments
  Recent Accounting Pronouncements
 Share-Based Payment
 Exchanges of Nonmonetary Assets
 36




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##### Table of Contents



Accounting for Conditional
Asset Retirement Obligations conditional asset
retirement obligation Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements
 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
 Effects of Inflation
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
   37




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##### Table of Contents



Item 8. Financial Statements And Supplementary Data
  
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
      
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Managements report on internal control over financial reporting
  Changes in internal control
  
 Item 9B. Other Information
  38




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##### Table of Contents



PART III
  39




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##### Table of Contents



PART IV
 
 Item 15. Exhibits And Financial Statement Schedules
 (a) 1. Financial Statements
  2. Financial Statement Schedules
  3. Exhibits
 Exhibit No.
    
    Description2.1
    
    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 Rufh(1)2.2
    
    Asset Purchase Agreement, dated March 31, 2005, by and among Clearant, Inc., Bliss
Essentials Corp., and Thomas Gelfand, Howard Gelfand and Kathleen
Rufh(1)2.3
    
    Merger Agreement and Plan of Merger, dated June 30, 2005, by and between Clearant,
Inc. and CI Merger Corporation(2)3.1
    
    Certificate of Incorporation of Clearant, Inc., a Delaware corporation(2)3.2
    
    By-Laws of Clearant, Inc., a Delaware corporation(2)4.1
    
    Specimen Common Stock Certificate(6)10.1*
    
    2005 Stock Award Plan(3)10.2
    
    Form of Subscription Agreement(1)10.3
    
    Form of Registration Rights Agreement(1)10.4
    
    Form of Warrant(4)10.5
    
    Securities Purchase Agreement, dated November 7, 2005(4)10.6
    
    Registration Rights Agreement, dated November 7, 2005(4)14.1
    
    Code of Ethics for Financial Executives(5)16.1
    
    Letter from former accountant BDO Seidman, LLP(6)21.1
    
    Subsidiaries23.1
    
    Consent of Singer Lewak Greenbaum
& Goldstein LLP, Independent Registered Accounting Firm23.2
    
    Consent of BDO Seidman LLP, Independent Registered Accounting Firm31.1
    
    Certification by the Chief Executive Officer, pursuant to Rule 13-a-14(a) and
15d-14(a), as adopted
 40




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##### Table of Contents



Exhibit No.
    
    Descriptionpursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer, pursuant to Rule 13-a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted 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
Securities and Exchange Commission on April 4, 2005.(2)
    
    Incorporated by reference to Appendix G to our Proxy Statement on Form DEF14A for
our annual meeting of stockholders held on June 30, 2005, filed with the Securities and Exchange
Commission on April 4, 2005.(3)
    
    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 Securities and Exchange
Commission on April 4, 2005.(4)
    
    Incorporated by reference to our Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 10, 2005.(5)
    
    Incorporated by reference to Appendix D to our Proxy Statement on Form DEF14A for
our annual meeting of stockholders held on June 30, 2005, filed with the Securities and Exchange
Commission on April 4, 2005.(6)
    
    Incorporated by reference to our Registration Statement on Form S-3, filed with the
Securities and Exchange Commission on November 23, 2005. 41




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##### Table of Contents



SIGNATURES
  CLEARANT, INC.Date:  March 16, 2006
    By:
    /s/ ALAIN DELONGCHAMPAlain DelongchampChief Executive Officer  Signature
    
    Title(s)
    
    Date/s/ ALAIN DELONGCHAMP

Alain Delongchamp
    
    Chief Executive Officer (Principal Executive Officer)
and Director
    
    March 16, 2006/s/ JON GARFIELD

Jon Garfield
    
    Secretary and Chief Financial
Officer (Principal
Financial and Accounting Officer)
    
    March 16, 2006/s/ JOHN S. WEHRLE

John S. Wehrle
    
    Chairman of the Board of Directors
    
    March 16, 2006/s/ HERVÉ DE KERGROHEN

Hervé de Kergrohen
    
    Director
    
    March 16, 2006/s/ ALEXANDER MAN-KIT NGAN

Alexander Man-Kit Ngan
    
    Director
    
    March 16, 2006/s/ NOLAN H. SIGAL

Nolan H. Sigal
    
    Director
    
    March 16, 2006
 42




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Managements Report on Internal Control over Financial Reporting
    
    
    F-2Reports of Independent Registered Public Accounting Firms
    
    
    F-3Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
    
    
    F-4Balance Sheets as of December 31, 2005 and 2004
    
    
    F-6Statements of Operations for the three years ended December 31, 2005.
    
    
    F-7Statements of Stockholders Equity (Deficit) for the three years ended December 31, 2005
    
    
    F-8Statements of Cash Flows for the three years ended December 31, 2005
    
    
    F-10Notes to Financial Statements
    
    
    F-12
 F-1




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    Internal
ControlIntegrated Framework
    F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO)
  
 F-3




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on
Internal Control over Financial Reporting criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
    criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
   
 F-4




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-5




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##### Table of Contents



CLEARANT, INC.
 
 BALANCE SHEETS
 (in thousands, except
par value amount)
 December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,141
    
    
    $
    177Accounts receivable, net
    
    
    208
    
    
    
    127Prepaids and other assets
    
    
    381
    
    
    
    502Total current assets
    
    
    10,730
    
    
    
    806Property and equipment, net
    
    
    415
    
    
    
    595Identifiable intangibles, net
    
    
    1,403
    
    
    
    1,453Deposits and other assets
    
    
    244
    
    
    
    224Total assets
    
    $
    12,792
    
    
    $
    3,078Liabilities, Redeemable Preferred Stock and Stockholders Equity (Deficit)Current liabilities:Accounts payable
    
    $
    1,292
    
    
    $
    1,847Accrued liabilities
    
    
    1,664
    
    
    
    3,061Deferred revenue
    
    
    48
    
    
    
    178Bridge loans, net
    
    
    106
    
    
    
    4,997Total current liabilities
    
    
    3,110
    
    
    
    10,083Deferred revenue  noncurrent
    
    
    60
    
    
    
    91Other liabilities
    
    
    10
    
    
    
    70Total liabilities
    
    
    3,180
    
    
    
    10,244Commitments and ContingenciesSeries A Redeemable Preferred stock:Series A redeemable convertible preferred stock (50,000 shares authorized;
-0- and 6,454 shares issued and outstanding at December 31, 2005 and 2004,
respectively)
    
    
    
    
    
    
    17,829Stockholders equity (deficit):Series B preferred stock (-0- shares authorized; -0- and 6,630 shares issued
and outstanding at December 31, 2005 and 2004, respectively)
    
    
    
    
    
    
    16,386Series C junior preferred stock (-0- shares authorized; -0- and 37 shares
issued and outstanding at December 31, 2005 and 2004, respectively)
    
    
    
    
    
    
    86Common stock ($0.0001 par value; 200,000 shares authorized; 39,759 and 7,372
issued and outstanding at December 31, 2005 and 2004, respectively)
    
    
    4
    
    
    
    1Additional paid-in capital
    
    
    82,179
    
    
    
    17,398Accumulated deficit
    
    
    (72,571
    )
    
    
    (58,820
    )Other comprehensive loss
    
    
    
    
    
    
    (46
    )Total stockholders equity (deficit)
    
    
    9,612
    
    
    
    (24,995
    )Total liabilities, redeemable preferred stock and stockholders equity (deficit)
    
    $
    12,792
    
    
    $
    3,078
 See accompanying notes to financial statements.
 F-6




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##### Table of Contents



CLEARANT, INC.
 
 STATEMENTS OF
OPERATIONS
 (in thousands, except
per share amounts)
 Fiscal Year Ended December 31,2005
    
    
    2004
    
    
    2003Revenues:Licensing
    
    $
    215
    
    
    $
    121
    
    
    $
    Contract research and milestones
    
    
    231
    
    
    
    615
    
    
    
    250Grants
    
    
    95
    
    
    
    270
    
    
    
    158Total revenues
    
    
    541
    
    
    
    1,006
    
    
    
    408Cost of sales
    
    
    17
    
    
    
    33
    
    
    
    26Gross margin
    
    
    524
    
    
    
    973
    
    
    
    382Operating expenses:Sales, general and administrative
    
    
    8,967
    
    
    
    9,400
    
    
    
    6,597Research and development
    
    
    2,050
    
    
    
    5,190
    
    
    
    6,142Stock-based compensation
    
    
    626
    
    
    
    345
    
    
    
    92Total operating expenses
    
    
    11,643
    
    
    
    14,935
    
    
    
    12,831Loss from operations
    
    
    (11,119
    )
    
    
    (13,962
    )
    
    
    (12,449
    )Other income (expense):Interest expense, net
    
    
    (1,802
    )
    
    
    (867
    )
    
    
    (254
    )Gain on extinguishment of debt and other
    
    
    1,331
    
    
    
    
    
    
    
    Loss before
provision (benefit) for income taxes
    
    
    (11,590
    )
    
    
    (14,829
    )
    
    
    (12,703
    )Provision
(benefit) for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (11,590
    )
    
    
    (14,829
    )
    
    
    (12,703
    )Add: Preferred stock dividend and financing costs
    
    
    (2,161
    )
    
    
    (1,628
    )
    
    
    (1,526
    )Net loss attributable to common stock
    
    $
    (13,751
    )
    
    $
    (16,457
    )
    
    $
    (14,229
    )Net loss per share:Basic and diluted
    
    $
    (0.47
    )
    
    $
    (2.23
    )
    
    $
    (1.93
    )Number of shares used in per share calculation:Basic and diluted
    
    
    29,498
    
    
    
    7,370
    
    
    
    7,369
 See accompanying notes to financial statements.
 F-7




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##### Table of Contents



CLEARANT, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except par value amounts)
 Stock-Series B Preferred
    
    
    Series C Preferred
    
    
    Common Stock,
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    holdersStock
    
    
    Stock
    
    
    $0.0001 par value
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    

(Deficit)Balance, December 31, 2002
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    7,368
    
    
    $
    1
    
    
    $
    13,473
    
    
    $
    (28,082
    )
    
    $
    (6
    )
    
    $
    (14,614
    )Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of warrants in
connection with 2003
bridge loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Conversion of 2002 and
2003 bridge loans and
related interest to
Series B preferred stock
    
    
    2,301
    
    
    
    6,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,328Issuance of Series B
Preferred Stock, net of
costs
    
    
    4,329
    
    
    
    11,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,275Issuance of warrants in
connection with Series B
Preferred Stock
    
    
    
    
    
    
    (1,217
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,703
    )
    
    
    
    
    
    
    (12,703
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,703
    )
    
    
    (24
    )
    
    
    (12,727
    )Accumulated Series A
Preferred Stock dividend
and amortization of
financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,526
    )
    
    
    
    
    
    
    (1,526
    )Balance at December 31,
2003
    
    
    6,630
    
    
    $
    16,386
    
    
    
    
    
    
    $
    
    
    
    
    7,369
    
    
    $
    1
    
    
    $
    14,787
    
    
    $
    (42,311
    )
    
    $
    (30
    )
    
    $
    (11,167
    )Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of warrants in
connection with 2004
bridge loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,862
    
    
    
    
    
    
    
    
    
    
    
    1,862Issuance of Series C
Preferred Stock, net of
costs
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86Issuance of warrants in
connection with Series C
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    (43
    )
    
    
    
    
    
    
    Beneficial conversion
feature recorded on 2004
bridge loans financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    351Beneficial conversion
feature recorded on
Series C Preferred Stock
issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (9
    )
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    345Comprehensive loss:Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,829
    )
    
    
    
    
    
    
    (14,829
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )Total Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,829
    )
    
    
    (16
    )
    
    
    (14,845
    )Accumulated Series A
Preferred Stock dividend
and amortization of
financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,628
    )
    
    
    
    
    
    
    (1,628
    )Balance at December 31,
2004
    
    
    6,630
    
    
    $
    16,386
    
    
    
    37
    
    
    $
    86
    
    
    
    7,372
    
    
    $
    1
    
    
    $
    17,398
    
    
    $
    (58,820
    )
    
    $
    (46
    )
    
    $
    (24,995
    )
 See accompanying notes to financial statements
 F-8




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##### Table of Contents



CLEARANT, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except par value amounts)
 Stock-Series B Preferred
    
    
    Series C Preferred
    
    
    Common Stock, $0.0001
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    holdersStock
    
    
    Stock
    
    
    par value
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    (Deficit)Balance, December 31, 2004
    
    
    6,630
    
    
    $
    16,386
    
    
    
    37
    
    
    $
    86
    
    
    
    7,372
    
    
    $
    1
    
    
    $
    17,398
    
    
    $
    (58,820
    )
    
    $
    (46
    )
    
    $
    (24,995
    )Issuance of warrants to
January 2005 Bridge Holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    93Settlement of debt for
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Exchange of warrants for
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158Beneficial return to
preferred shareholders from
allocation of shares from
common to preferred
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,100
    
    
    
    
    
    
    
    
    
    
    
    2,100Conversion of preferred
stock into common stock
    
    
    (6,630
    )
    
    
    (16,386
    )
    
    
    (37
    )
    
    
    (86
    )
    
    
    11,542
    
    
    
    1
    
    
    
    30,566
    
    
    
    
    
    
    
    
    
    
    
    14,095Exchange of bridge loan
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,349
    )
    
    
    
    
    
    
    
    
    
    
    (1,349
    )Conversion of Series A
Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,141
    
    
    
    
    
    
    
    3,794
    
    
    
    
    
    
    
    
    
    
    
    3,794Conversion of Series C
Preferred dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Conversion of 2004 bridge
loans into common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,834
    
    
    
    1
    
    
    
    6,724
    
    
    
    
    
    
    
    
    
    
    
    6,725Bliss Essential, Corp.
shares issued in connection
with the merger transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,136
    
    
    
    1
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    17Issuance of common stock in
conjunction with Private
Placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,910
    
    
    
    
    
    
    
    8,413
    
    
    
    
    
    
    
    
    
    
    
    8,413Conversion of Publico
Bridge Loans into common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    783
    
    
    
    
    
    
    
    2,373
    
    
    
    
    
    
    
    
    
    
    
    2,373Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Issuance of common stock to
consultants for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    278Compensation expenses
incurred in connection with
issuance of options and
warrants to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    458Secondary placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,774
    
    
    
    
    
    
    
    11,036
    
    
    
    
    
    
    
    
    
    
    
    11,036Comprehensive loss:Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,590
    )
    
    
    
    
    
    
    (11,590
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Cumulative translation loss
attributable to the
dissolution of foreign
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    59Total Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,590
    )
    
    
    46
    
    
    
    (11,544
    )Preferred stock dividend
and financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,161
    )
    
    
    
    
    
    
    (2,161
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    39,759
    
    
    $
    4
    
    
    $
    82,179
    
    
    $
    (72,571
    )
    
    $
    
    
    
    $
    9,612
 See accompanying notes to financial statements.
 F-9




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##### Table of Contents



CLEARANT, INC.
 
 STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Operating activitiesNet loss
    
    $
    (11,590
    )
    
    $
    (14,829
    )
    
    $
    (12,703
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    470
    
    
    
    694
    
    
    
    325Stock-based compensation
    
    
    626
    
    
    
    345
    
    
    
    92Non-cash interest expense associated with convertible
debt financings (Note 12)
    
    
    1,795
    
    
    
    862
    
    
    
    309Gain on extinguishment of debt and other
    
    
    (1,331
    )
    
    
    
    
    
    
    Warrants exchanged for common stock
    
    
    158
    
    
    
    
    
    
    
    Cumulative translation loss attributable to the
dissolution of foreign subsidiaries
    
    
    59
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Receivables and prepaids
    
    
    142
    
    
    
    (32
    )
    
    
    (131
    )Payable to related parties, net
    
    
    
    
    
    
    
    
    
    
    (23
    )Accounts payable
    
    
    (555
    )
    
    
    1,201
    
    
    
    77Accrued liabilities
    
    
    (1,360
    )
    
    
    1,361
    
    
    
    492Deferred revenue
    
    
    (161
    )
    
    
    144
    
    
    
    125Other assets and liabilities
    
    
    (82
    )
    
    
    17
    
    
    
    53Net cash used in operating activities
    
    
    (11,829
    )
    
    
    (10,237
    )
    
    
    (11,384
    )Investing activitiesCost of identified intangibles
    
    
    (129
    )
    
    
    (599
    )
    
    
    (486
    )Capital expenditures
    
    
    (132
    )
    
    
    (56
    )
    
    
    (252
    )Proceeds from sales of fixed assets, net
    
    
    25
    
    
    
    
    
    
    
    Purchases of marketable securities
    
    
    
    
    
    
    
    
    
    
    (6,500
    )Proceeds from disposals of marketable securities
    
    
    
    
    
    
    3,500
    
    
    
    3,000Net cash provided by (used in) investing activities
    
    
    (236
    )
    
    
    2,845
    
    
    
    (4,238
    )Financing activitiesIssuance of common stock, net of costs
    
    
    19,554
    
    
    
    
    
    
    
    Issuance of Series B preferred stock, net of costs
    
    
    
    
    
    
    
    
    
    
    11,319Issuance of Series C preferred stock, net of costs
    
    
    
    
    
    
    86
    
    
    
    Issuance of convertible notes payable, net of costs
    
    
    2,811
    
    
    
    6,348
    
    
    
    403Exercise of common stock options
    
    
    50
    
    
    
    1
    
    
    
    1Payments on bridge loans
    
    
    (366
    )
    
    
    
    
    
    
    Principal payments on capital lease obligations
    
    
    (7
    )
    
    
    (24
    )
    
    
    (79
    )Net cash provided by financing activities
    
    
    22,042
    
    
    
    6,411
    
    
    
    11,644Effect of translation adjustments on cash and cash equivalents
    
    
    (13
    )
    
    
    (16
    )
    
    
    (24
    )Change in cash and cash equivalents
    
    
    9,964
    
    
    
    (997
    )
    
    
    (4,002
    )Cash and cash equivalents, beginning of period
    
    
    177
    
    
    
    1,174
    
    
    
    5,176Cash and cash equivalents, end of period
    
    $
    10,141
    
    
    $
    177
    
    
    $
    1,174Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    9
    
    
    $
    
    
    
    $
    Cash paid for taxes
    
    $
    1
    
    
    $
    1
    
    
    $
    1
 F-10




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##### Table of Contents



CLEARANT, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended December 31,2005
    
    2004
    
    2003Supplemental Disclosure of Non-cash Financing Activities:Accumulated preferred stock dividend and amortization of
financing costs
    
    $
    2,161
    
    
    $
    1,628
    
    
    $
    1,526Conversion of Series A Preferred Stock into common stock
    
    
    17,883
    
    
    
    
    
    
    
    Conversion of Series B Preferred Stock into common stock
    
    
    16,386
    
    
    
    
    
    
    
    Conversion of Series C Preferred Stock into common stock
    
    
    188
    
    
    
    
    
    
    
    Conversion of Publico bridge loans into common stock
    
    
    2,373
    
    
    
    
    
    
    
    Issuance of warrants to 2005 bridge loan holders
    
    
    103
    
    
    
    
    
    
    
    Exchange of all warrants issued and outstanding in conjunction
with the 2005 and 2004 bridge loan financings into common stock
    
    
    1,350
    
    
    
    
    
    
    
    Issuance of common stock to consultants for services
    
    
    278
    
    
    
    
    
    
    
    Property and equipment financed through capital lease obligations
    
    
    42
    
    
    
    
    
    
    
    5Warrants issued to purchase common stock in conjunction with the
2004 and 2003 bridge loan financings into common stock
    
    
    
    
    
    
    1,862
    
    
    
    4Beneficial conversion feature recorded in conjunction with the
2004 bridge loan financings
    
    
    
    
    
    
    351
    
    
    
    Warrants issued to purchase common stock in conjunction with the
2004 Series C Preferred financings
    
    
    
    
    
    
    43
    
    
    
    Beneficial conversion feature recorded in conjunction with the
2004 Series C financings
    
    
    
    
    
    
    9
    
    
    
    Conversion of bridge loans and related interest into Series A
and Series B Preferred Stock
    
    
    
    
    
    
    
    
    
    
    6,328Warrants issued to purchase Series B Preferred Stock in
conjunction with the 2003 Series B Preferred financing
    
    
    
    
    
    
    
    
    
    
    1,217
 See accompanying notes to financial statements.
 F-11




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##### Table of Contents



CLEARANT, INC.
 
 NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 NOTE 1
 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ® Clearant Process ®
      
 F-12




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Revenue Recognition and Deferred Revenue
 Revenue Recognition Clearant Process® Clearant Process®
  Grants
 Clearant Process ®
 Cost of Revenues
  Use of Estimates
  Cash
Equivalents and Concentration of Credit Risk
  F-13




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##### Table of Contents





CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)




Property and Equipment




Identifiable Intangibles




Research and Development Costs




Other Comprehensive Loss




Income Taxes


Accounting for Income Taxes


Stock-Based Compensation


Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation-Transition and Disclosure




Risk-free interest rate
    
    
    3.0%-5.5
    %Expected life in years
    
    
    3-5Dividend yield
    
    
    0
    %Expected volatility
    
    
    70%-75
    %






For the year ended December 31,2005
    
    
    2004
    
    
    2003Net loss attributable to common stock, as reported
    
    $
    (13,751
    )
    
    $
    (16,457
    )
    
    $
    (14,229
    )Add: stock-based compensation expense included in reported net loss
    
    
    554
    
    
    
    345
    
    
    
    92Deduct: stock-based compensation expense determined under the fair
value method for all awards
    
    
    (1,236
    )
    
    
    (1,921
    )
    
    
    (3,110
    )Net loss attributable to common stock  pro forma
    
    $
    (14,433
    )
    
    $
    (18,033
    )
    
    $
    (17,247
    )Net loss per share:As reported, basic and diluted
    
    $
    (0.47
    )
    
    $
    (2.23
    )
    
    $
    (1.93
    )Pro forma, basic and diluted
    
    $
    (0.49
    )
    
    $
    (2.45
    )
    
    $
    (2.34
    )




Fair Value of Financial Instruments




New Accounting Pronouncements


Share-Based Payment F-14




---



##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Exchanges of Nonmonetary Assets Accounting for Nonmonetary Transactions
 Accounting for Conditional Asset Retirement Obligations conditional asset
retirement obligation Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements
 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
 NOTE 3
 NET LOSS PER SHARE
 Earnings Per Share .
 F-15




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
   For the Year Ended December 31,2005
    
    2004
    
    2003Convertible preferred stock (and related
accrued dividends) and convertible bridge loans
    
    
    
    
    
    
    19,063,000
    
    
    
    13,233,000Stock Options
    
    
    2,776,000
    
    
    
    4,999,000
    
    
    
    5,060,000Warrants
    
    
    5,179,000
    
    
    
    4,119,000
    
    
    
    1,372,000
  For the year ended December 31,2005
    
    
    2004
    
    
    2003Basic and diluted net loss per share:Numerator:Net loss attributable to common stock
    
    $
    (13,751
    )
    
    $
    (16,457
    )
    
    $
    (14,229
    )Denominator:Weighted average common stock shares outstanding
    
    
    29,498
    
    
    
    7,370
    
    
    
    7,369Net loss per share, basic and diluted
    
    $
    (0.47
    )
    
    $
    (2.23
    )
    
    $
    (1.93
    )
 NOTE 4
 PROPERTY AND EQUIPMENT
  2005
    
    
    2004Equipment
    
    $
    975
    
    
    $
    1,126Computer equipment and software
    
    
    496
    
    
    
    446Furniture and fixtures
    
    
    69
    
    
    
    70Leasehold improvements
    
    
    23
    
    
    
    131,563
    
    
    
    1,655Less accumulated depreciation
    
    
    (1,148
    )
    
    
    (1,060
    )$
    415
    
    
    $
    595
  NOTE 5
 IDENTIFIABLE INTANGIBLES
  2005
    
    
    2004Trademarks
    
    $
    37
    
    
    $
    36Patents
    
    
    1,911
    
    
    
    1,7821,948
    
    
    
    1,818Less accumulated amortization
    
    
    (545
    )
    
    
    (365
    )$
    1,403
    
    
    $
    1,453
  F-16




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
   NOTE 6 RESTRICTED CASH
  NOTE 7
 INCOME TAXES
   2005
    
    
    2004
    
    
    2003Deferred tax assets (liabilities):Net operating loss carryforwards
    
    $
    23,178
    
    
    $
    19,407
    
    
    $
    13,492Purchase in-process research and development
    
    
    548
    
    
    
    698
    
    
    
    757Research and development credits
    
    
    1,338
    
    
    
    1,325
    
    
    
    1,194Depreciation, accrued expenses and other
    
    
    462
    
    
    
    517
    
    
    
    226Net deferred tax assets
    
    
    25,527
    
    
    
    21,947
    
    
    
    15,669Less valuation allowance
    
    
    (25,527
    )
    
    
    (21,947
    )
    
    
    (15,669
    )$
    
    
    
    $
    
    
    
    $
    
    2005
    
    2004
    
    2003Federal statutory rate
    
    
    (34
    %)
    
    
    (34
    %)
    
    
    (34
    %)State taxes
    
    
    (5
    %)
    
    
    (5
    %)
    
    
    (5
    %)Tax credits
    
    
    (1
    %)
    
    
    (2
    %)
    
    
    (3
    %)Foreign loss with no benefit
    
    
    7
    %
    
    
    
    %
    
    
    
    %Valuation allowance
    
    
    33
    %
    
    
    41
    %
    
    
    42
    %
 
 F-17




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  NOTE 8  REVERSE MERGER TRANSACTION
   
 F-18




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Opening balance
    
    
    Adjusting
    
    

    Ending BalanceAt March 31, 2005 (in $000s):
    
    (Pre Merger)
    
    
    Entries
    
    

    (Post Merger)AssetsCash and cash equivalents
    
    $
    116
    
    
    
    8,520
    
    (a)

    $
    8,653$
    17
    
    (b)Other assets
    
    
    2,682
    
    
    
    (32
    )
    (a)

    
    2,650Total assets
    
    $
    2,798
    
    
    $
    8,505
    
    

    $
    11,303Liabilities, redeemable preferred stock
and stockholders (deficit) equityConvertible notes, net
    
    $
    8,478
    
    
    $
    (6,793
    )
    (c)

    $
    46368
    
    (c)1,024
    
    (d)(2,350
    )
    (e)(23
    )
    (e)59
    
    (d)Other liabilities
    
    
    4,545
    
    
    
    75
    
    (a)

    
    4,620Total liabilities
    
    
    13,023
    
    
    
    (7,940
    )
    

    
    5,083Series A redeemable preferred stock, net
    
    
    17,889
    
    
    
    (17,889
    )
    (f),(g)

    
    Stockholders (deficit) equity:Series B preferred stock
    
    
    16,386
    
    
    
    (16,386
    )
    (h)

    
    Series C junior preferred stock
    
    
    91
    
    
    
    (91
    )
    (i),(j)

    
    Common stock, no par value
    
    
    17,714
    
    
    
    (17,714
    )
    (k)

    
    Common stock, $0.001 par value
    
    
    
    
    
    
    12
    
    (f),(h),(i)

    
    362
    
    (g)4
    
    (c)7
    
    (k)7
    
    (b)3
    
    (a)1
    
    (e)Additional paid-in capital
    
    
    
    
    
    
    30,555
    
    (f),(h),(i)

    
    70,3233,792
    
    (g)5
    
    (j)6,721
    
    (c)17,707
    
    (k)(59
    )
    (d)10
    
    (b)8,410
    
    (a)2,372
    
    (e)(1,290
    )
    (d)(2,100
    )
    (l)Accumulated deficit
    
    
    (62,252
    )
    
    
    (1,024
    )
    (d)

    
    (64,086
    )1,290
    
    (d)(2,100
    )
    (l)Other comprehensive loss
    
    
    (53
    )
    
    
    
    
    

    
    (53
    )Total shareholders (deficit) equity
    
    
    (28,114
    )
    
    
    34,334
    
    

    
    6,220Total liabilities, redeemable preferred
stock and stockholders (deficit) equity
    
    $
    2,798
    
    
    $
    8,505
    
    

    $
    11,303
 Explanation of Adjusting Entries
 (a)
    
    Entry to record proceeds received from private placement of 2,910,000 shares of Company
common stock at $3.00 per share. Cash proceeds of $8,520 represent gross proceeds of $8,730
less approximately $210 in costs associated with the placement. Total costs of the
transaction include approximately $242 in direct legal fees, of which $167 were paid at
closing and the remaining $75 were recorded in accrued liabilities. Following the
 F-19




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 merger and private placement, the Company had 35,829,350 shares of common stock, par value
$.001, issued and outstanding.(b)
    
    Entry to record the merger. Upon completion of the transaction and effective March 31,
2005, prior stockholders continue to own 7,136,000 shares of Company common stock. The
registrant had no operations as of March 31, 2005, and approximately $17 in cash.(c)
    
    Entry to record the conversion of approximately $6,793 of Clearant convertible
promissory notes outstanding as of March 31, 2005 into approximately 3,834,000 shares of
common stock. In conjunction with the conversion, net unamortized costs remaining at March
31, 2005 of $68 were included as an adjustment to additional paid in capital.(d)
    
    Entry to record unamortized portion of Clearant convertible note warrants and
beneficial conversion features to interest expense upon conversion of the notes into common
stock. At the date of the conversion and immediately prior to the merger, Clearant
exchanged all warrants outstanding and issued in conjunction with 2004 and 2005 bridge loan
financings two-year warrants to purchase approximately 2,477,000 shares of common stock at
$4.00 per share. The fair value of the warrants exchanged was re-measured and resulted in
the recording of a one-time gain of $1,290 and a $59 adjustment to additional paid-in
capital. Remaining warrants outstanding immediately prior to the merger were cancelled
except as set forth herein.(e)
    
    Entry to record the conversion of approximately $2,350 of Company convertible notes
into approximately 783,000 shares of common stock at $3.00 per share. Related accrued
interest of $23 was forgiven and recorded as an adjustment to additional paid-in capital.
The Company issued note holders two-year warrants to purchase approximately 839,000 shares
of common stock at $4.00 per share. The fair value of the warrants of $849 (calculated
using a Black-Scholes model) had no impact on the financial statements at March 31, 2005
(net adjustment of $0 to additional paid-in capital).(f)
    
    Entry to record the conversion of Clearant Series A preferred stock into 5,677,000
shares of the common stock. Immediately prior to the conversion, Series A preferred stock
was comprised of original investment of $14,521, accrued Series A preferred dividends of
$3,794 and net unamortized costs of $426. The net unamortized costs of $426 were
reclassified against additional paid-in capital.(g)
    
    Entry to record the conversion of $3,794 of accrued Series A preferred dividends into
2,141,000 shares of common stock.(h)
    
    Entry to record the conversion of Clearant Series B preferred stock into 5,832,000
shares of common stock. Immediately prior to the conversion, Series B preferred stock
was comprised of original investment of $18,233 and costs of $1,847. The cost of $1,847
was reclassified against original paid-in capital.(i)
    
    Entry to record the conversion of Clearant Series C preferred stock into 33,000 shares
of common stock. Immediately prior to the conversion, Series C preferred stock was
comprised of original investment of $102, accrued Series C preferred dividends of $5, and
net unamortized costs of $16. The net unamortized costs of $16 were reclassified against
additional paid-in capital.(j)
    
    Entry to record the conversion of $5 of accrued Series C preferred dividends into 3,000
shares of common stock.(k)
    
    Entry to record the conversion of approximately 7,371,000 shares of Clearants common
stock, no par value, into approximately 7,371,000 shares of the Companys common stock,
$0.001 par value.(l)
    
    Entry to record share exchange of 1.5 million shares from common stockholders to
preferred stockholders to consummate the merger. The share exchange was valued at $2,100
and is treated as a beneficial impact of the transaction to the preferred stockholders and
included in net loss attributable to common stock in the quarter ended March 31, 2005.
 F-20




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 NOTE 9
 CAPITALIZATION
 Common Stock Transactions and Non-cash Financing Activities
      Lock-up Period
  Preferred Stock
   Series A PreferredShares
    
    
    AmountBalance at December 31, 2002
    
    
    6,454,000
    
    
    $
    14,723Accrued dividends, amortization of financing costs and other
    
    
    
    
    
    
    1,461Balance at December 31, 2003
    
    
    6,454,000
    
    
    $
    16,184Accrued dividends, amortization of financing costs and other
    
    
    
    
    
    
    1,645Balance at December 31, 2004
    
    
    6,454,000
    
    
    
    17,829Conversion of preferred stock into common stock
    
    
    (6,454,000
    )
    
    
    (17,829
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
 F-21




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Series B PreferredShares
    
    
    AmountBalance at December 31, 2002
    
    
    
    
    
    $
    Conversion of Series B bridge loans and related interest
    
    
    2,301,000
    
    
    
    6,328Issuance of Series B Preferred, net of costs
    
    
    4,329,000
    
    
    
    10,058Balance at December 31, 2003
    
    
    6,630,000
    
    
    $
    16,386No activity
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    6,630,000
    
    
    $
    16,386Conversion of preferred stock into common stock
    
    
    (6,630,000
    )
    
    
    (16,386
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
 Application of Issue No. 98-5 to Certain Convertible Instrument
  Series C PreferredShares
    
    
    AmountBalance at December 31, 2003
    
    
    
    
    
    $
    Issuance of Series C Preferred, net of costs
    
    
    37,000
    
    
    
    86Balance at December 31, 2004
    
    
    37,000
    
    
    $
    86Conversion of preferred stock into common stock
    
    
    (37,000
    )
    
    
    (86
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
 Preferred Stock Preferences and Rights
     F-22




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
       
 F-23




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  NOTE
10 STOCK OPTIONS
    Employees
    
    
    Non-Employees
    
    
    TotalExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
December 31, 2002
    
    
    4,495,000
    
    
    $
    0.60-$7.94
    
    
    
    100,000
    
    
    $
    2.30-$7.22
    
    
    
    4,595,000
    
    
    $
    0.60-$7.94Granted
    
    
    800,000
    
    
    $
    2.75
    
    
    
    10,000
    
    
    $
    2.80
    
    
    
    810,000
    
    
    $
    2.75-$2.80Exercised
    
    
    (2,000
    )
    
    $
    0.60
    
    
    
    
    
    
    $
    
    
    
    
    (2,000
    )
    
    $
    0.60Canceled
    
    
    (232,000
    )
    
    $
    0.60-$7.22
    
    
    
    
    
    
    $
    
    
    
    
    (232,000
    )
    
    $
    0.60-$7.22Outstanding at
December 31, 2003
    
    
    5,061,000
    
    
    $
    0.60-$7.94
    
    
    
    110,000
    
    
    $
    2.30-$7.22
    
    
    
    5,171,000
    
    
    $
    0.60-$7.94Granted
    
    
    474,000
    
    
    $
    2.80
    
    
    
    40,000
    
    
    $
    7.22
    
    
    
    514,000
    
    
    $
    2.80-$7.22Exercised
    
    
    (2,000
    )
    
    $
    0.60-$2.30
    
    
    
    
    
    
    $
    
    
    
    
    (2,000
    )
    
    $
    0.60-$2.30Change in status
    
    
    (199,000
    )
    
    $
    0.60-$7.22
    
    
    
    199,000
    
    
    $
    0.60-$7.22
    
    
    
    
    
    
    
    Canceled
    
    
    (81,000
    )
    
    $
    0.60-$7.22
    
    
    
    (30,000
    )
    
    $
    7.22
    
    
    
    (111,000
    )
    
    $
    0.60-$7.22Outstanding 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
    
    
    (226,000
    )
    
    $
    0.60-$2.30
    
    
    
    226,000
    
    
    $
    0.60-$2.30
    
    
    
    
    
    
    
    Canceled
    
    
    (3,799,000
    )
    
    $
    0.60-$7.94
    
    
    
    (285,000
    )
    
    $
    0.60-$7.22
    
    
    
    (4,084,000
    )
    
    $
    0.60-$7.94Outstanding at
December 31, 2005
    
    
    2,396,000
    
    
    $
    0.60-$7.94
    
    
    
    380,000
    
    
    $
    0.60-$7.22
    
    
    
    2,776,000
    
    
    $
    0.60-$7.94
  F-24




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Options Outstanding
    
    
    Options ExercisableWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Remaining
    
    
    Number
    
    
    Averageof
    
    
    Exercise
    
    
    Contractual
    
    
    of
    
    
    ExerciseRange of Exercise Price:
    
    Shares
    
    
    Price
    
    
    Life (Years)
    
    
    Shares
    
    
    PriceEmployees:$0.60 to $0.66
    
    
    467,000
    
    
    $
    0.64
    
    
    
    6.56
    
    
    
    467,000
    
    
    $
    0.64$2.25 to $2.30
    
    
    371,000
    
    
    $
    2.27
    
    
    
    4.85
    
    
    
    335,000
    
    
    $
    2.27$2.80 to $3.17
    
    
    614,000
    
    
    $
    2.92
    
    
    
    6.98
    
    
    
    566,000
    
    
    $
    2.93$3.86 to $4.51
    
    
    944,000
    
    
    $
    4.08
    
    
    
    9.54
    
    
    
    195,000
    
    
    $
    4.12Total Employees ($0.60 to $4.51)
    
    
    2,396,000
    
    
    $
    2.83
    
    
    
    7.69
    
    
    
    1,563,000
    
    
    $
    2.25Non-employees
    
    
    380,000
    
    
    $
    2.04
    
    
    
    4.06
    
    
    
    380,000
    
    
    $
    2.04
     F-25




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 NOTE
11 WARRANTS
   Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
 Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants
 
 F-26




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
  Warrants OutstandingNumber
    
    Exercise
    
    Weighted Average of Remainingof Shares
    
    Price
    
    Contractual Life (Years)3,316,645
    
    $
    4.00
    
    
    1.251,862,698
    
    $
    4.96
    
    
    4.85
  Risk-free interest rate
    
    
    3.0%-5.5
    %Expected life in years
    
    
    3-5Dividend yield
    
    
    0
    %Expected volatility
    
    70% to 75%
  NOTE
12  BRIDGE LOANS
   Application of
Issue No. 98-5 to Certain Convertible Instrument
  F-27




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
   NOTE
13  COMMITMENTS AND CONTINGENCIES
 Leases and Commitments
  2006
    
    $
    6392007
    
    
    442008
    
    
    202009 and thereafter
    
    
    2Net minimum lease payments
    
    $
    705
   Litigation
  NOTE
14  401K PLAN
  NOTE
15  FACILITY CLOSING CHARGES
 Accounting and Reporting by
Development Stage Companies,
 F-28




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##### Table of Contents



CLEARANT, INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
 NOTE
16  SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
  Quarter endedMar. 31,
    
    Jun. 30,
    
    Sept. 30,
    
    Dec. 31,2005Total revenues
    
    $
    107
    
    
    $
    191
    
    
    $
    154
    
    
    $
    89Gross margin
    
    
    103
    
    
    
    186
    
    
    
    150
    
    
    
    85Total operating expenses
    
    
    2,746
    
    
    
    2,513
    
    
    
    2,810
    
    
    
    3,574Loss from operations
    
    
    (2,643
    )
    
    
    (2,327
    )
    
    
    (2,660
    )
    
    
    (3,489
    )Other expense, net
    
    
    (457
    )
    
    
    
    
    
    
    
    
    
    
    (14
    )Net loss
    
    
    (3,100
    )
    
    
    (2,327
    )
    
    
    (2,660
    )
    
    
    (3,503
    )Preferred stock dividend and financing costs
    
    
    (2,161
    )
    
    
    
    
    
    
    
    
    
    
    Net loss attributable to common stock
    
    $
    (5,261
    )
    
    $
    (2,327
    )
    
    $
    (2,660
    )
    
    $
    (3,503
    )Net loss per share  Basic and diluted
    
    $
    (0.71
    )
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    (0.09
    )Number of shares  Basic and diluted
    
    
    7,370
    
    
    
    35,860
    
    
    
    35,923
    
    
    
    38,1022004Total revenues
    
    $
    310
    
    
    $
    110
    
    
    $
    269
    
    
    $
    317Gross margin
    
    
    302
    
    
    
    102
    
    
    
    260
    
    
    
    309Total operating expenses
    
    
    3,249
    
    
    
    3,926
    
    
    
    3,599
    
    
    
    4,161Loss from operations
    
    
    (2,947
    )
    
    
    (3,824
    )
    
    
    (3,339
    )
    
    
    (3,852
    )Other income (expense), net
    
    
    4
    
    
    
    (80
    )
    
    
    (98
    )
    
    
    (693
    )Net loss
    
    $
    (2,943
    )
    
    $
    (3,904
    )
    
    $
    (3,437
    )
    
    $
    (4,545
    )Preferred stock dividend and financing costs
    
    
    (401
    )
    
    
    (401
    )
    
    
    (413
    )
    
    
    (413
    )Net loss attributable to common stock
    
    $
    (3,344
    )
    
    $
    (4,305
    )
    
    $
    (3,850
    )
    
    $
    (4,958
    )Net loss per share  Basic and diluted
    
    $
    (0.45
    )
    
    $
    (0.58
    )
    
    $
    (0.52
    )
    
    $
    (0.67
    )Number of shares  Basic and diluted
    
    
    7,369
    
    
    
    7,369
    
    
    
    7,369
    
    
    
    7,370
 NOTE
17  SUBSEQUENT EVENTS
 Clearant
Process ® Clearant Process ®
 Clearant
Process ®
  F-29