SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-QSB
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended September
30, 2006
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from __________ to __________
Commission
file number: 000-51038
MedaSorb
Technologies Corporation
(Exact
Name of Small Business Issuer as Specified in Its Charter)
Nevada
|
98-0373793
|
(State
or Other Jurisdiction of
Incorporation
Or Organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
7
Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852
(Address
of Principal Executive Offices)
|
(732)
329-8885
(Issuer’s
Telephone Number, Including Area Code)
_______________________________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. þ
Yes
¨
No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes
þ
No
As
of
November 9, 2006 there were 24,485,696 shares of the issuer’s common stock
outstanding.
Transitional
Small Business Disclosure Format: ¨
Yes
þ
No
MedaSorb
Technologies Corporation
(a
development stage company)
FORM
10-QSB
TABLE
OF CONTENTS
|
Page
|
PART I. FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
|
Consolidated
Balance Sheets
|
3
|
|
Consolidated
Statements of Operations
|
4
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)
|
5
|
|
Consolidated
Statements of Cash Flows
|
6
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
|
Item
2. Management’s Discussion and Analysis or Plan of
Operation
|
16
|
|
|
|
|
Item
3. Controls and Procedures
|
18
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal Proceedings
|
18
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
18
|
|
Item
6. Exhibits
|
19
|
PART
I -- FINANCIAL INFORMATION
Item
1. Financial Statements.
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,576,869
|
|
$
|
707,256
|
|
Prepaid
expenses and other current assets
|
|
|
41,803
|
|
|
19,261
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,618,672
|
|
|
726,517
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
366,085
|
|
|
553,657
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
187,765
|
|
|
181,307
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
553,850
|
|
|
734,964
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,172,522
|
|
$
|
1,461,481
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,258,520
|
|
$
|
1,802,788
|
|
Accrued
expenses and other current liabilities
|
|
|
73,933
|
|
|
412,646
|
|
Accrued
interest
|
|
|
65,000
|
|
|
1,056,960
|
|
Stock
subscribed
|
|
|
--
|
|
|
399,395
|
|
Convertible
notes payable
|
|
|
1,000,000
|
|
|
3,429,899
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,397,453
|
|
|
7,101,688
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Convertible
notes payable
|
|
|
--
|
|
|
4,120,000
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
--
|
|
|
4,120,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,397,453
|
|
|
11,221,688
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity/(Deficiency):
|
|
|
|
|
|
|
|
Common
Stock, Par Value $0.001, 100,000,000 and 300,000,000
|
|
|
|
|
|
|
|
authorized
at September 30, 2006 and December 31, 2005,
|
|
|
|
|
|
|
|
shares
respectively, 24,465,696 and 4,829,120 shares
|
|
|
|
|
|
|
|
issued
and outstanding, respectively
|
|
|
24,466
|
|
|
4,829
|
|
10%
Series A Preferred Stock, Par Value $0.001, 100,000,000 and
-0-
|
|
|
|
|
|
|
|
shares
authorized at September 30, 2006 and December 31,
|
|
|
|
|
|
|
|
2005,
respectively, 6,231,135 and -0- shares issued
|
|
|
|
|
|
|
|
and
outstanding, respectively
|
|
|
6,231
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
67,972,899
|
|
|
49,214,431
|
|
Deficit
accumulated during the development stage
|
|
|
(66,228,527
|
)
|
|
(58,979,467
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficiency)
|
|
|
1,775,069
|
|
|
(9,760,207
|
)
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity (Deficiency)
|
|
$
|
4,172,522
|
|
$
|
1,461,481
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
MEDASORB
TECHNOLOGIES CORPORATION
|
|
|
|
|
|
|
|
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
|
|
January
22,1997
|
|
|
|
|
|
|
|
|
|
|
(date
of inception) to
|
|
Nine
months ended September 30,
|
|
Three
months ended September 30,
|
|
|
|
June
30, 2006
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
40,531,710
|
|
|
750,411
|
|
|
1,021,039
|
|
|
262,217
|
|
|
253,650
|
|
Legal,
financial and other consulting
|
|
|
5,969,057
|
|
|
621,923
|
|
|
766,960
|
|
|
18,920
|
|
|
391,118
|
|
General
and administrative
|
|
|
19,898,682
|
|
|
688,951
|
|
|
470,511
|
|
|
387,408
|
|
|
118,542
|
|
Change
in fair value of management and incentive units
|
|
|
(6,055,483
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
60,343,966
|
|
|
2,061,285
|
|
|
2,258,510
|
|
|
668,545
|
|
|
763,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
--
|
|
|
(1,000
|
)
|
|
--
|
|
|
--
|
|
Gain
on extinguishment of debt
|
|
|
(175,000
|
)
|
|
--
|
|
|
(175,000
|
)
|
|
--
|
|
|
--
|
|
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
Interest
expense, net
|
|
|
5,683,778
|
|
|
4,790,329
|
|
|
551,945
|
|
|
(22,842
|
)
|
|
199,502
|
|
Net
loss
|
|
|
(65,831,081
|
)
|
|
(6,851,614
|
)
|
|
(2,634,455
|
)
|
|
(645,703
|
)
|
|
(962,812
|
)
|
Series
A Preferred Stock Dividend
|
|
|
397,446
|
|
|
397,446
|
|
|
--
|
|
|
397,446
|
|
|
--
|
|
Net
Loss available to common shareholders
|
|
$
|
(66,228,527
|
)
|
$
|
(7,249,060
|
)
|
$
|
(2,634,455
|
)
|
$
|
(1,043,149
|
)
|
$
|
(962,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
|
|
$
|
(0.62
|
)
|
$
|
(0.55
|
)
|
$
|
(0.04
|
)
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock outstanding
|
|
|
|
|
|
11,599,016
|
|
|
4,770,455
|
|
|
24,095,093
|
|
|
4,814,308
|
|
See
accompanying notes to consolidated financial statements.
|
|
MEDASORB
TECHNOLOGIES CORPORATION
|
|
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
from December 31, 2005 to September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
During
the
|
|
Total
|
|
|
|
Common
Stock
|
|
Preferred
Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
Shares
|
|
Par
value
|
|
Shares
|
|
Par
Value
|
|
Capital
|
|
Stage
|
|
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
4,829,120
|
|
$
|
4,829
|
|
|
--
|
|
$
|
--
|
|
$
|
49,214,431
|
|
$
|
(58,979,467
|
)
|
$
|
(9,760,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for stock subscribed
|
|
|
240,929
|
|
|
241
|
|
|
--
|
|
|
--
|
|
|
799,644
|
|
|
--
|
|
|
799,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to investor group for price protection
settlement
|
|
|
100,000
|
|
|
100
|
|
|
--
|
|
|
--
|
|
|
(100
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to employees and directors
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
46,919
|
|
|
--
|
|
|
46,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock
|
|
|
--
|
|
|
--
|
|
|
5,250,000
|
|
|
5,250
|
|
|
5,446,597
|
|
|
(201,847
|
)
|
|
5,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of raising capital associated with issuance
of preferred stock
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(620,563
|
)
|
|
--
|
|
|
(620,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
held by original stockholders of Parent immediately prior to
merger
|
|
|
3,750,000
|
|
|
3,750
|
|
|
--
|
|
|
--
|
|
|
(3,750
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible debt, related accrued interest and
shares to induce conversion into common stock
|
|
|
5,170,880
|
|
|
5,171
|
|
|
--
|
|
|
--
|
|
|
11,376,939
|
|
|
--
|
|
|
11,382,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in consideration for funding
$1,000,000 convertible note payable per terms of merger
transaction.
|
|
|
10,000,000
|
|
|
10,000
|
|
|
--
|
|
|
--
|
|
|
990,000
|
|
|
--
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for accounts payable
|
|
|
615,696
|
|
|
616
|
|
|
--
|
|
|
--
|
|
|
420,104
|
|
|
--
|
|
|
420,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of common stock issued prior to merger for 10% Series A Preferred
Stock
|
|
|
(240,929
|
)
|
|
(241
|
)
|
|
799,885
|
|
|
800
|
|
|
30,194
|
|
|
(30,753
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock dividend on 10% Series A Preferred Stock
|
|
|
--
|
|
|
--
|
|
|
131,250
|
|
|
131
|
|
|
131,119
|
|
|
(131,250
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to employee
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
57,819
|
|
|
--
|
|
|
57,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 10% Series A Preferred Stock
|
|
|
--
|
|
|
--
|
|
|
50,000
|
|
|
50
|
|
|
83,546
|
|
|
(33,596
|
)
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(6,851,614
|
)
|
|
(6,851,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006 (Unaudited)
|
|
|
24,465,696
|
|
$
|
24,466
|
|
|
6,231,135
|
|
$
|
6,231
|
|
$
|
67,972,899
|
|
$
|
(66,228,527
|
)
|
$
|
1,775,069
|
|
See
accompanying notes to consolidated financial statements.
|
|
MEDASORB
TECHNOLOGIES CORPORATION
|
|
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
22,1997
|
|
Nine
months
|
|
Nine
months
|
|
|
|
(date
of inception) to
|
|
ended
|
|
ended
|
|
|
|
September
30, 2006
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(65,831,081
|
)
|
$
|
(6,851,614
|
)
|
$
|
(2,634,455
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued as inducement to convert
|
|
|
|
|
|
|
|
|
|
|
convertible
notes payable and accrued interest
|
|
|
3,351,961
|
|
|
3,351,961
|
|
|
--
|
|
Issuance
of stock options
|
|
|
104,738
|
|
|
104,738
|
|
|
--
|
|
Depreciation
and amortization
|
|
|
1,982,743
|
|
|
191,644
|
|
|
200,588
|
|
Amortization
of debt discount
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
--
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
--
|
|
|
(1,000
|
)
|
Gain
on extinguishment of debt
|
|
|
(175,000
|
)
|
|
--
|
|
|
(175,000
|
)
|
Abandoned
patents
|
|
|
184,903
|
|
|
1,347
|
|
|
--
|
|
Bad
debts - employee advances
|
|
|
255,882
|
|
|
--
|
|
|
--
|
|
Contributed
technology expense
|
|
|
4,550,000
|
|
|
--
|
|
|
--
|
|
Consulting
expense
|
|
|
237,836
|
|
|
--
|
|
|
--
|
|
Management
unit expense
|
|
|
1,334,285
|
|
|
--
|
|
|
--
|
|
Expense
for issuance of warrants
|
|
|
468,526
|
|
|
--
|
|
|
--
|
|
Expense
for issuance of options
|
|
|
247,625
|
|
|
--
|
|
|
--
|
|
Amortization
of deferred compensation
|
|
|
74,938
|
|
|
--
|
|
|
--
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
(313,351
|
)
|
|
(22,542
|
)
|
|
14,575
|
|
Other
assets
|
|
|
(53,893
|
)
|
|
(2,730
|
)
|
|
--
|
|
Accounts
payable and accrued expenses
|
|
|
2,757,640
|
|
|
(462,281
|
)
|
|
725,609
|
|
Accrued
interest expense
|
|
|
1,888,103
|
|
|
488,310
|
|
|
552,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(47,955,808
|
)
|
|
(2,201,167
|
)
|
|
(1,317,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
32,491
|
|
|
--
|
|
|
32,491
|
|
Purchases
of property and equipment
|
|
|
(2,199,094
|
)
|
|
--
|
|
|
--
|
|
Patent
costs
|
|
|
(337,703
|
)
|
|
(9,147
|
)
|
|
(18,183
|
)
|
Loan
receivable
|
|
|
(1,632,168
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(4,136,474
|
)
|
|
(9,147
|
)
|
|
14,308
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
400,490
|
|
|
400,490
|
|
|
--
|
|
Proceeds
from issuance of preferred stock
|
|
|
4,679,437
|
|
|
4,679,437
|
|
|
--
|
|
Equity
contributions - net of fees incurred
|
|
|
41,711,198
|
|
|
--
|
|
|
--
|
|
Proceeds
from borrowings
|
|
|
8,378,631
|
|
|
--
|
|
|
2,129,658
|
|
Proceeds
from subscription receivables
|
|
|
499,395
|
|
|
--
|
|
|
385,395
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
55,669,151
|
|
|
5,079,927
|
|
|
2,515,053
|
|
See
accompanying notes to consolidated financial statements.
Net
increase in cash and cash equivalents
|
|
|
3,576,869
|
|
|
2,869,613
|
|
|
1,211,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
--
|
|
|
707,256
|
|
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
3,576,869
|
|
$
|
3,576,869
|
|
$
|
1,228,556
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
511,780
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable principal and interest conversion to equity
|
|
$
|
9,201,714
|
|
$
|
8,030,149
|
|
$
|
51,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of member units for leasehold improvements
|
|
$
|
141,635
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of management units in settlement of cost of raising
capital
|
|
$
|
437,206
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of management units for cost of raising
capital
|
|
$
|
278,087
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
of loan receivable for member units
|
|
$
|
1,632,168
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of equity in settlement of accounts payable
|
|
$
|
1,257,039
|
|
$
|
420,720
|
|
$
|
836,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for stock subscribed
|
|
$
|
399,395
|
|
$
|
399,395
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
paid from proceeds in conjunction with issuance preferred
stock
|
|
$
|
620,563
|
|
$
|
620,563
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
$
|
397,446
|
|
$
|
397,446
|
|
$
|
--
|
|
Net
effect of conversion of common stock issued
prior to merger
|
|
|
|
|
|
|
|
|
|
|
to
10% Series A Preferred Stock
|
|
$
|
559
|
|
$
|
559
|
|
$
|
--
|
|
Notes
to Consolidated Financial Statements
(UNAUDITED)
September
30, 2006
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Form 10-QSB and Item 310 of
Regulation S-B of the Securities and Exchange Commission (the Commission) and
include the results of MedaSorb Technologies Corporation (the “Parent”),
formerly known as Gilder Enterprises, Inc., and Medasorb Technologies, Inc.,
its
wholly-owned subsidiary (the “Subsidiary”), collectively referred to as “the
Company.” Accordingly, certain information and footnote disclosures required in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. Interim
statements are subject to possible adjustments in connection with the annual
audit of the Company's accounts for the year ended 2006. In the opinion of
the
Company’s management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for the fair presentation
of
the Company's consolidated financial position as of September 30, 2006 and
the
results of its operations and cash flows for the nine and three month periods
ended September 30, 2006 and 2005. Results for the nine and three months ended
are not necessarily indicative of results that may be expected for the entire
year. The unaudited condensed consolidated financial statements should be read
in conjunction with the audited financial statements of the Company and the
notes thereto as of and for the year ended December 31, 2005 as included in
the
Company’s Form 8-K filed with the Commission July 6, 2006.
On
June
30, 2006, pursuant to an Agreement and Plan of Merger, by and among the Parent,
MedaSorb Technologies, Inc., a Delaware corporation (formerly known as MedaSorb
Corporation) (“MedaSorb Delaware”) and the Subsidiary (formerly known as
MedaSorb Acquisition Inc.), MedaSorb
Delaware
merged (the “Merger”) with the Subsidiary, and the stockholders of MedaSorb
Delaware became stockholders of the Parent. The business of the Subsidiary
(the
business conducted by MedaSorb Delaware prior to the Merger) is now the
Company’s only business.
In
connection with the Merger (i) the former stockholders of MedaSorb Delaware
were
issued an aggregate of 20,340,929 shares of Common Stock of the Parent in
exchange for the same number of shares of common stock of MedaSorb Delaware
previously held by such stockholders, (ii) outstanding warrants and options
to
purchase a total of 1,697,648 shares of the common stock of MedaSorb Delaware
were cancelled in exchange for warrants and stock options to purchase the same
number of shares of the Parent’s Common Stock at the same exercise prices and
otherwise on the same general terms as the options and warrants that were
cancelled, and (iii) certain providers of legal services to MedaSorb Delaware
who previously had the right to be issued approximately 997,000 shares
of
MedaSorb Delaware common stock as payment toward accrued legal fees, became
entitled to instead be issued the same number of shares of the Parent’s Common
Stock as payment toward such services. Immediately prior to the Merger, after
giving effect to a share cancellation transaction effected by the former
principal stockholder of the Parent, the Parent had outstanding 3,750,000 shares
of Common Stock and no warrants or options to purchase Common Stock. MedaSorb
Delaware prior to the Merger had 300,000,000 authorized shares of common stock.
Following the Merger, the Parent has authorized 100,000,000 shares of common
stock and 100,000,000 shares of preferred stock.
For
accounting purposes, the Merger is being accounted for as a reverse merger,
since the Parent was a shell company prior to the Merger, the former
stockholders of MedaSorb Delaware now own a majority of the issued and
outstanding shares of the Parent’s Common Stock, and directors and executive
officers of MedaSorb Delaware became the Parent’s directors and executive
officers. Accordingly, MedaSorb Delaware is treated as the acquiror in the
Merger, which is treated as a recapitalization of MedaSorb Delaware, and the
pre-merger financial statements of MedaSorb Delaware are now deemed to be the
historical financial statements of the Parent. Historical
information described in this report refers to the operations of MedaSorb
Delaware prior to the Merger.
The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction
of
liabilities in the normal course of business. The Company has experienced
negative cash flows from operations since inception and has a deficit
accumulated during the development stage at September 30, 2006 of $66,228,527.
The Company is not currently generating revenue and is dependent on the proceeds
of present and future financings to fund its research, development and
commercialization program. The Company is continuing its fund-raising
efforts. Although the Company has historically been successful in raising
additional capital through equity and debt financings, there can be no assurance
that the Company will be successful in raising additional capital in the future
or that it will be on favorable terms. Furthermore, if the Company is
successful in raising the additional financing, there can be no assurance that
the amount will be sufficient to complete the Company's plans. These
consolidated financial statements do not include any adjustments related to
the
outcome of this uncertainty.
The
Company is a development stage company and has not yet generated any revenues.
Since inception, the Company's expenses relate primarily to research and
development, organizational activities, clinical manufacturing, regulatory
compliance and operational strategic planning. Although the Company has
made advances on these matters, there can be no assurance that the Company
will
continue to be successful regarding these issues, nor can there be any assurance
that the Company will successfully implement its long-term strategic
plans.
The
Company has developed an intellectual property portfolio, including 21 issued
and 5 pending patents, covering
materials, methods of production, systems incorporating the technology and
multiple medical uses.
2. PRINCIPAL
BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Nature
of Business
The
Company, through its subsidiary, is engaged in the research, development and
commercialization of medical devices with its platform blood purification
technology incorporating a proprietary adsorbent polymer technology. The
Company is focused on developing this technology for multiple applications
in
the medical field, specifically to provide improved blood purification for
the
treatment of acute and chronic health complications associated with blood
toxicity. As of September 30, 2006, the Company has not commenced commercial
operations and, accordingly, is in the development stage. The Company has
yet to generate any revenue and has no assurance of future revenue.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Parent, MedaSorb
Technologies Corporation, and its wholly-owned subsidiary, MedaSorb
Technologies, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
Development
Stage Corporation
The
accompanying consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standard (SFAS) No.
7,
"Accounting and Reporting by Development Stage Enterprises."
Cash
and Cash Equivalents
The
Company considers all
highly liquid investments purchased with an original maturity of three months
or
less to be cash equivalents.
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
of property and equipment is provided for by the straight-line method over
the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the lesser of their economic useful lives or the term of the
related leases. Gains and losses on depreciable assets retired or sold are
recognized in the statements of operations in the year of disposal. Repairs
and
maintenance expenditures are expensed as incurred.
Patents
Legal
costs incurred to establish patents are capitalized. When patents are issued,
capitalized costs are amortized on the straight-line method over the related
patent term. In the event a patent is abandoned, the net book value of the
patent is written off.
Impairment
or Disposal of Long-Lived Assets
The
Company assesses the impairment of patents and other long-lived assets under
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment loss based
on
the difference between the carrying amount and fair value.
Research
and Development
All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method prescribed by
SFAS
No. 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and the
tax
basis of assets and liabilities. Deferred tax assets and liabilities reflect
the
tax rates expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely
than
not that some or all of the deferred tax asset will not be realized. Under
Section 382 of the Internal Revenue Code the net operating losses generated
prior to the Merger may be limited due to the change in ownership.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.
Concentration
of Credit Risk
The
Company maintains cash balances, at times, with financial institutions in excess
of amounts insured by the Federal Deposit Insurance Corporation. Management
monitors the soundness of these institutions and considers the Company’s risk
negligible.
Financial
Instruments
The
carrying values of prepaid expenses and other current assets, accounts payable
and accrued expenses approximated their fair values due to their short-term
nature. Convertible notes payable approximate their fair value based upon the
borrowing rates available for the nature of the underlying debt.
Stock-Based
Compensation
Through
December 31, 2005, the Company has accounted for its stock compensation plans
under the recognition and measurement principles of Accounting Principles
Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related
interpretations. Under APB No. 25, no compensation cost was generally recognized
for fixed stock options in which the exercise price is greater than or equal
to
the market price on the grant date. Through December 31, 2005, the Company
had
not adopted the recognition requirements of Statement of Financial Accounting
Standards (“SFAS”) No. 123, “Accounting
for Stock-Based Compensation”,
for
employees and directors and, accordingly, has made all pro forma disclosures
required. The Company adopted the requirements of SFAS No. 123 and EITF Issue
No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods and Services” with
regard to non-employees. Each option granted is valued at fair market value
on
the date of grant. Had compensation cost for options granted to employees and
directors been determined consistent with SFAS No. 123, the Company's pro forma
net loss would have been as follows:
|
|
Nine
Months
|
|
Three
Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
Net
Loss
|
|
|
|
|
|
As
reported
|
|
$
|
2,634,455
|
|
$
|
962,812
|
|
Pro
forma
|
|
$
|
2,634,455
|
|
$
|
962,812
|
|
|
|
|
|
|
|
|
|
Net
Loss per Share:
|
|
|
|
|
|
|
|
Basic
and diluted, as reported
|
|
$
|
0.55
|
|
$
|
0.20 |
|
Basic
and diluted, proforma
|
|
$
|
0.55
|
|
$
|
0.20 |
|
Under
SFAS No. 123, the fair value of each option was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions: (1) expected lives of five-ten years, (2) dividend yield of 0%,
(3)
risk-free interest rates ranging from 3.25% - 5.63%, and (4) volatility
percentage of 0.01%.
Effective
January 1, 2006, the Company has adopted the recognition requirements of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Accounting
for Stock-Based Compensation”,
for
employees and directors. The adoption of SFAS No. 123(R) has not had a
significant effect on these financial statements.
Effects
of Recent Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29." The
statement addresses the measurement of exchanges of non-monetary assets and
eliminates the exception from fair value measurement for non-monetary exchanges
of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS No. 153 is effective for
non-monetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Effective January 1, 2006, the Company has adopted SFAS No.
153. The adoption of SFAS No. 153 did not have an effect on the Company’s
financial statements.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement replaces APB No. 20 and SFAS No. 3 and changes the requirements
for the accounting and reporting of a change in accounting principle. APB No.
20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the accounting principle. SFAS No. 154 requires
retrospective application to prior periods’ financial statements of voluntary
changes in accounting principle. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of SFAS No. 154 did not have an effect on the Company’s
financial statements.
In
February 2006, the FASB issued SFAS No. 155,”Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to
simplify and make more consistent the accounting for certain financial
instruments. Specifically, SFAS No. 155 amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, to permit fair value
re-measurement for any hybrid financial instrument with an embedded derivative
that otherwise would require bifurcation, provided that the whole instrument
is
accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140,
Accounting for the Impairment or Disposal of Long-Lived Assets, to allow a
qualifying special-purpose entity (SPE) to hold a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS No. 155 applies to all financial instruments acquired
or issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006, with earlier application allowed. The Company is currently
evaluating this pronouncement for its potential impact on the results of
operations or financial position of the Company.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets”, to simplify accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
Additionally, SFAS No. 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for
measuring each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 applies to all separately recognized servicing assets
and servicing liabilities acquired or issued after the beginning of an entity’s
fiscal year that begins after September 15, 2006, although early adoption is
permitted. The Company does not expect that the adoption of SFAS No. 156 will
have a significant impact on the consolidated results of operations or financial
position of the Company.
In
July
2006, FASB has published FASB Interpretation No. 48 (FIN No. 48), Accounting
for
Uncertainty in Income Taxes, to address the non-comparability in reporting
tax
assets and liabilities resulting from a lack of specific guidance in SFAS No.
109, Accounting for Income Taxes, on the uncertainty in income taxes recognized
in an enterprise’s financial statements. FIN No. 48 will apply to fiscal
years beginning after December 15, 2006, with earlier adoption permitted.
The adoption of FIN No. 48 is not expected to have a material effect on the
Company’s financial condition or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
to
eliminate the diversity in practice that exists due to the different definitions
of fair value and the limited guidance for applying those definitions in GAAP
that are dispersed among the many accounting pronouncements that require fair
value measurements. SFAS No. 157 retains the exchange price notion in earlier
definitions of fair value, but clarifies that the exchange price is the price
in
an orderly transaction between market participants to sell an asset or liability
in the principal or most advantageous market for the asset or liability.
Moreover, the SFAS states that the transaction is hypothetical at the
measurement date, considered from the perspective of the market participant
who
holds the asset or liability. Consequently, fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants at the measurement date (an
exit
price), as opposed to the price that would be paid to acquire the asset or
received to assume the liability at the measurement date (an entry
price).
SFAS
No.
157 also stipulates that, as a market-based measurement, fair value measurement
should be determined based on the assumptions that market participants would
use
in pricing the asset or liability, and establishes a fair value hierarchy that
distinguishes between (a) market participant assumptions developed based on
market data obtained from sources independent of the reporting entity
(observable inputs) and (b) the reporting entity's own assumptions about market
participant assumptions developed based on the best information available in
the
circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
about the use of fair value to measure assets and liabilities in interim and
annual periods subsequent to initial recognition. Entities are encouraged to
combine the fair value information disclosed under SFAS No. 157 with the fair
value information disclosed under other accounting pronouncements, including
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
practicable. The guidance in this Statement applies for derivatives and other
financial instruments measured at fair value under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” at initial recognition and in
all subsequent periods.
SFAS
No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years, although
earlier application is encouraged. Additionally, prospective application of
the
provisions of SFAS No. 157 is required as of the beginning of the fiscal year
in
which it is initially applied, except when certain circumstances require
retrospective application. The Company is currently evaluating the impact of
this statement on its results of operations or financial position of the
Company.
In
September 2006, the FASB issued “Statement of Financial Accounting Standards No.
158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R)”, which will
require employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. Under past accounting
standards, the funded status of an employer’s postretirement benefit plan (i.e.,
the difference between the plan assets and obligations) was not always
completely reported in the balance sheet. Past standards only required an
employer to disclose the complete funded status of its plans in the notes to
the
financial statements. SFAS No. 158 applies to plan sponsors that are public
and
private companies and nongovernmental not-for-profit organizations. The
requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year ending after
December 15, 2006, for entities with publicly traded equity securities, and
at
the end of the fiscal year ending after June 15, 2007, for all other entities.
The requirement to measure plan assets and benefit obligations as of the date
of
the employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The Company does not expect that
the adoption of SFAS No. 158 will have a significant impact on the consolidated
results of operations or financial position of the Company.
3.
CONVERTIBLE NOTES PAYABLE
From
time
to time beginning in 2003 through June 30, 2006,, the Company issued convertible
notes to various investors in the aggregate principal amount of $6,549,900.
The
notes bore interest at a rate of 12 percent per annum and were convertible
into
common stock at prices ranging from $3.32 per share to $6.64 per share (as
adjusted for the Merger and conversion of MedaSorb Delaware from a limited
liability company to a corporation). Some of the convertible notes were issued
together with warrants. All of these convertible notes, in the aggregate
principal amount of $6,549,900, together with $1,480,249 in accrued interest,
were converted into equity on June 30, 2006 upon the closing of the Merger
(see
Note 1). In connection with this conversion, the Parent issued 5,170,880 shares
of Common Stock and five-year warrants to purchase a total of 816,691 shares
of
Common Stock at a price of $4.98 per share. The 5,170,880 shares of Common
Stock
issued upon conversion includes 3,058,141 shares (“inducement shares”) issued to
the note holders as an inducement for them to convert the convertible notes.
The
inducement shares were valued at $3,351,961, and such amount is included as
a charge to interest expense in the consolidated statements of operations for
the nine months ended September 30, 2006.
Separately,
in 2005 the Company received a $1 million bridge loan in anticipation of the
reverse merger transaction (see Note 1) which closed in June 2006. The loan
bears interest at 6% per annum, repayable in cash or, at the option of the
noteholder, converted into the Series A Preferred Stock and Warrants which
were
sold in connection with the Merger (see Note 4). The loan and accrued interest
is due and payable on December 31, 2006, subject
to earlier repayment in the event the Company completes an offering of
securities generating gross proceeds of $5.5 million or more. In addition,
in
the event that less than $6.5 million of gross proceeds are raised in such
an offering within 120 days from the date subscription materials were first
circulated to potential investors, the balance of the bridge loan then
outstanding, at the Company’s option, is convertible into the securities
sold in that offering. In
consideration for funding the loan, and assisting in arranging the Merger
transaction and concurrent offering, the noteholder was also issued 10 million
shares of common stock. The issuance of common stock associated with the
convertible note resulted in the Company recording a debt discount charge in
the
amount of $1,000,000. The terms of the agreement provided the note to be due
currently, therefore, the Company has amortized the debt discount entirely,
resulting in a charge to the consolidated statements of operations for the
nine
months ended September 30, 2006 in the amount of $1,000,000.
4. STOCKHOLDERS'
EQUITY
During
the nine months ended September 30, 2006 the Company received approximately
$400,000 from an existing investor. For this investment as well as approximately
$399,000 received in stock subscriptions during 2005, the Company issued 240,929
shares of common stock and five year warrants to purchase 240,929 shares of
common stock at an exercise price of $4.98. The investors who participated
in
this offering had the option to exchange their shares and warrants for the
equivalent dollar amount of preferred stock sold in the private placement
described below. All of these investors exercised this option and the Company
cancelled their 240,929 shares of common stock and warrants and issued 799,885
shares of 10% Series A Preferred Stock and five-year warrants to purchase
319,954 shares of common stock at an initial exercise price of $2.00 per share.
These investors have registration rights with respect to the Common Stock
underlying the Series A Preferred Stock and warrants. The shares of Series
A Preferred Stock are initially convertible into common stock at a rate of
$1.25
per share subject to certain adjustments. In accordance with Emerging Issues
Task Force (EITF) 00-27, the Company allocated the $799,885 of proceeds based
on
the relative fair value to the preferred stock as follows: $769,132 was
allocated to the preferred stock and $30,753 to the warrants. Additionally,
the
Company evaluated if the embedded conversion option resulted in a beneficial
conversion feature, however, the proceeds allocated to the preferred stock
exceeded the market value of the common stock subject to conversion, resulting
in no beneficial conversion feature. In accordance with EITF 98-5, the value
assigned to the warrants resulting from the relative fair value calculation
as
well as the value of the beneficial conversion feature totaling $30,753, has
been recorded as a preferred stock dividend and is presented in the consolidated
statements of operations for the nine months ended September 30,
2006.
During
the nine months ended September 30, 2006, the Company issued 100,000 shares
of
common stock to resolve a price protection provision with an existing investor
group.
On
June
30, 2006, immediately following the closing of the Merger, the Company completed
an initial closing of a $5.25 million private placement. For this investment
the
Parent issued 5,250,000 shares of 10% Series A Preferred Stock and five year
warrants to purchase 2,100,000 shares of common stock at an initial price of
$2.00 per share. These investors have registration rights with respect to the
Common Stock underlying the Series A Preferred Stock and warrants. The
shares of Series A Preferred Stock are initially convertible into common stock
at a rate of $1.25 per share subject to certain adjustments. In connection
with
the private placement, the Company incurred costs associated with raising
capital in the amount of $620,563. Both the conversion price of the Series
A
Preferred Stock and the exercise price of the warrants are subject to
“full-ratchet” anti-dilution provisions, so that upon future issuances of common
stock or equivalents thereof, subject to specified customary exceptions, at
a
price below the conversion price of the Series A Preferred Stock and/or exercise
price of the warrants, such conversion price and/or exercise price will be
reduced to such lower price. In accordance with Emerging Issues Task Force
(EITF) 00-27, the Company allocated the $5,250,000 of proceeds based on the
relative fair value to the preferred stock as follows: $5,048,153 was allocated
to the preferred stock and $201,847 to the warrants. Additionally, the Company
evaluated if the embedded conversion option resulted in a beneficial conversion
feature, however, the proceeds allocated to the preferred stock exceeded the
market value of the common stock subject to conversion, resulting in no
beneficial conversion feature. In accordance with EITF 98-5, the value assigned
to the warrants resulting from the relative fair value calculation as well
as
the value of the beneficial conversion feature totaling $201,847, has been
recorded as a preferred stock dividend and is presented in the consolidated
statements of operations for the nine months ended September 30,
2006.
Subsequent
to closing the Merger the Company closed on an additional $50,000 and
issued 50,000 shares of 10% Series A Preferred Stock and five year warrants
to
purchase 20,000 shares of common stock at an initial price of $2.00 per share.
This investor has registration rights with respect to the Common Stock
underlying the Series A Preferred Stock and warrants. In accordance with
Emerging Issues Task Force (EITF) 00-27, the Company allocated the $50,000
of
proceeds based on the relative fair value to the preferred stock as follows:
$42,202 was allocated to the preferred stock and $7,798 to the warrants.
Additionally, the Company evaluated if the embedded conversion option resulted
in a beneficial conversion feature, however, the proceeds allocated to the
preferred stock exceeded the market value of the common stock subject to
conversion, resulting in a beneficial conversion feature in the amount of
$25,798. In accordance with EITF 98-5, the value assigned to the warrants
resulting from the relative fair value calculation as well as the value of
the
beneficial conversion feature totaling $33,596, has been recorded as a preferred
stock dividend and is included in the consolidated statements of operations
for
the nine months ended September 30, 2006.
On
September 30, 2006 the Company issued 131,250 shares of 10 % Series A Preferred
Stock as a quarterly dividend payment.
During
the nine months ended September 30, 2006, the Company issued 2,112,739 shares
of
common stock in exchange for the conversion of convertible notes payable and
related accrued interest amounting to $8,030,149. In addition, the note holders
also received 3,058,141 shares of common stock as an inducement to convert
said
debt. An inducement charge has been included in the consolidated statements
of
operations (see Note 3).
During
the nine months ended September 30, 2006, the Company issued 10,000,000 shares
of common stock to an existing bridge loan holder and her designees in
consideration for funding a $1,000,000 loan, and assisting in arranging the
Merger and concurrent offering.
During
the nine months ended September 30, 2006, the Company issued 615,696 shares
of
common stock to a provider of legal services as settlement of accounts payable
in the amount of $420,720 (See Note 1).
During
the nine months ended September 30, 2006, the Company granted options to
purchase 438,850 shares of common stock to employees and directors resulting
in
compensation expense of $104,738.
The
summary of the stock option activity for the nine months ended September 30,
2006 is as follows:
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
|
|
Shares
|
|
per
Share
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2006
|
|
|
512,247
|
|
$
|
27.49
|
|
|
5.5
|
|
Granted
|
|
|
438,850
|
|
$
|
5.33
|
|
|
9.9
|
|
Cancelled
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Exercised
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Outstanding,
September 30, 2006
|
|
|
951,097
|
|
$
|
17.26
|
|
|
7.5
|
|
The
summary of the status of the Company’s non-vested options for the nine months
ended September 30, 2006 is as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
Date
|
|
|
|
Shares
|
|
Fair
Value
|
|
|
|
|
|
|
|
Non-vested,
January 1, 2006
|
|
|
1,105
|
|
$
|
0.00
|
|
Granted
|
|
|
438,850
|
|
$
|
0.25
|
|
Cancelled
|
|
|
--
|
|
|
--
|
|
Vested
|
|
|
(428,851
|
) |
$
|
0.24
|
|
Exercised
|
|
|
--
|
|
|
--
|
|
Non-vested,
September 30, 2006
|
|
|
11,104
|
|
$
|
0.43
|
|
As
of
September 30, 2006, approximately $4,800 of total unrecognized compensation
cost
related to stock options is expected to be recognized over a weighted average
period of 1.11 years.
As
of
September 30, 2006, the Company has the following warrants to purchase common
stock outstanding:
Number
of Shares
|
|
Warrant
Exercise
|
|
Warrant
|
|
To
be Purchased
|
|
Price
per Share
|
|
Expiration
Date
|
|
1,206
|
|
$
|
41.47
|
|
|
January
9, 2007
|
|
25,995
|
|
$
|
19.91
|
|
|
February
8, 2007
|
|
603
|
|
$
|
41.47
|
|
|
February
24, 2007
|
|
2,652
|
|
$
|
41.47
|
|
|
May
30, 2007
|
|
15,569
|
|
$
|
6.64
|
|
|
March
31, 2010
|
|
816,691
|
|
$
|
4.98
|
|
|
June
30, 2011
|
|
2,100,000
|
|
$
|
2.00
|
|
|
June
30, 2011
|
|
339,954
|
|
$
|
2.00
|
|
|
September
30, 2011
|
|
As
of
September 30, 2006, the Company has the following warrants to purchase preferred
stock outstanding:
Number
of
|
|
Warrant
Exercise
|
|
|
Warrant
|
|
Shares
to be
|
|
Price
per
|
|
|
Expiration
|
|
Purchased
|
|
Preferred
Share
|
|
|
Date
|
|
525,000
|
|
$
|
1.00
|
|
|
June
30, 2011
|
|
If
the
holder of warrants for preferred stock exercises in full, the holder will
receive additional five-year warrants to purchase a total of 210,000 shares
of
common stock at $2.00 per share.
5. COMMITMENTS
AND CONTINGENCIES
Pending
Litigation
The
Company is involved in various claims and legal actions. Management is of the
opinion that these claims and legal actions have no merit, but may have a
material adverse impact on the consolidated financial position of the Company
and/or the results of its operations.
On
September 1, 2006, MedaSorb and Purolite International Ltd. and its affiliates
(“Purolite”) agreed to the settlement of the action that had been commenced by
Purolite in which Purolite claimed ownership rights in certain of MedaSorb’s
patents. The Settlement Agreement provides MedaSorb with the exclusive right
to
use its patented technology and proprietary know how relating to adsorbent
polymers for a period of 18 years. Under the terms of the Settlement Agreement,
MedaSorb has agreed to pay Purolite royalties of 2.5% to 5% on the sale of
certain of its products if and when those products are sold commercially for
a
term not greater than 18 years commencing with the first sale of such
product.
A
former
employee of the Company has initiated a legal action against the Company seeking
reimbursement of certain claimed expenses. The matter is under legal review
by
Company counsel. As of the date of the consolidated financial statements, the
outcome of the case could not be determined and the financial impact, if any,
could not be reasonably estimated. Accordingly, a loss contingency has not
been
accrued.
Employment
Agreements
The
Company has employment agreements with certain key executives through July
2008.
One of these agreements provides for an additional bonus payment based on
achieving specific milestones as defined in the agreement, however, as of the
date of this report, these milestones have not been met. Furthermore, this
agreement includes an anti-dilution provision whereby the employee is granted
options for the right to obtain 5% of the outstanding stock of the Company
on a
fully diluted basis. For the nine months ended September 30, 2006, the Company’s
financial statements reflect the issuance of options to purchase 332,094 shares
of common stock to this employee consistent with his employment agreement.
The
options were valued at $57,819 and have been included as a charge in the
consolidated statements of operations for the nine months ended September 30,
2006.
Royalty
Agreements
In
an
agreement dated August 11, 2003 an existing investor agreed to make a $4 million
equity investment in the Company. These amounts were received by the Company
in
2003. In connection with this agreement the Company granted the investor a
future royalty of 3% on all gross revenues received by the Company from the
sale
of its CytoSorb device. The Company has not generated any revenue from this
product and has not incurred any royalty costs through September 30, 2006.
The
amount of future revenue subject to the royalty agreement could not be
reasonably estimated nor has a liability been incurred, therefore, an accrual
for royalty payments has not been included in the consolidated financial
statements.
License
Agreements
In
an
agreement dated September 1, 2006, the Company entered into a license agreement
which provides the Company the exclusive right to use its patented technology
and proprietary know how relating to adsorbent polymers for a period of 18
years. Under the terms of the Settlement Agreement, MedaSorb has agreed to
pay
Purolite royalties of 2.5% to 5% on the sale of certain of its products if
and
when those products are sold commercially for a term not greater than 18 years
commencing with the first sale of such product (see Pending
Litigation).
6.
NET LOSS PER SHARE
Basic
earnings per share and diluted earnings per share for the nine and three months
ended September 30, 2006 and 2005 have been computed by dividing the net loss
for each respective period by the weighted average number of shares outstanding
during that period. All outstanding warrants and options at September 30, 2006
and 2005, respectively, have been excluded from the computation of diluted
EPS
as they are anti-dilutive.
7. SUBSEQUENT
EVENTS
In
October 2006, the Company issued 10 year warrants to purchase 240,125 shares
of
common stock at an exercise price of $1.25 per share to a provider of legal
services toward payment of accrued legal fees (See Note 1).
The
former employee of the Company who had initiated a legal action against the
Company seeking reimbursement of certain claimed expenses has withdrawn the
action without prejudice.
In
October 2006, the Company entered into an agreement with a scientific consultant
under which the Company is entitled to receive a new patent.
In
October 2006, the bridge loan (See Note 3) was converted into preferred stock
and warrants under the same terms of the June 30, 2006 private placement (See
Note 4).
15
Item
2. Management’s Discussion and Analysis or Plan of
Operation.
These
unaudited condensed consolidated financial statements and discussion should
be
read in conjunction with the audited financial statements of the Company and
the
notes thereto as of and for the year ended December 31, 2005 as included in
the
Company’s Form 8-K filed with the Commission July 6, 2006.
Forward-looking
statements
Statements
contained in this Quarterly Report on Form 10-QSB, other than the historical
financial information, constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All such
forward-looking statements involve known and unknown risks, uncertainties or
other factors which may cause actual results, performance or achievement of
the
Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Primary
risk factors include, but are not limited to: ability
to successfully develop commercial operations; the ability to obtain adequate
financing in the future when needed; dependence on key personnel; acceptance of
the Company's medical devices in the marketplace; the outcome of pending and
potential litigation; obtaining government approvals, including required FDA
approvals; compliance with governmental regulations; reliance on research and
testing facilities of various universities and institutions; product liability
risks; limited manufacturing experience; limited marketing, sales and
distribution experience; market acceptance of the Company's products;
competition; unexpected changes in technologies and technological advances;
and
other factors detailed in the Company's Current Report on Form 8-K filed with
the SEC on July 6, 2006.
Reverse
Merger
On
June
30, 2006, pursuant to an Agreement and Plan of Merger, by and among the Company
(formerly known as Gilder Enterprises, Inc.), MedaSorb Technologies, Inc.,
a
Delaware corporation (formerly known as MedaSorb Corporation) (“MedaSorb
Delaware”) and MedaSorb Acquisition Inc., a newly formed wholly-owned Delaware
subsidiary of the Company, MedaSorb Delaware merged (the “Merger”) with MedaSorb
Acquisition Inc. (now known as MedaSorb Technologies, Inc.), and the
stockholders of MedaSorb Delaware became stockholders of the Company. MedaSorb
Technologies, Inc. is now a wholly owned subsidiary of the Company, and its
business (the business conducted by MedaSorb Delaware prior to the Merger)
is
now the Company’s only business.
Plan
Of Operations
We
are a
development stage company and expect to remain so for at least the next twelve
months. We have not generated revenues to date and do not expect to do so until
we commercialize and receive the necessary approvals to sell our proposed
products. We are preparing to commercialize a blood purification technology
that
efficiently removes toxic compounds from circulating blood using our proprietary
polymer-based adsorbent technology. We believe that our technology will support
novel therapeutic approaches to critical health conditions, including sepsis,
organ transplant, post-operative complications of cardiopulmonary bypass surgery
and drug detoxification.
Our
near
term goal is focused on conducting clinical trials of our CytoSorb™ product in
the treatment of sepsis. Over the next twelve months, provided that we have
sufficient funds for our operations, we expect to design and conduct a pilot
study of the use of our product on at least 10 sepsis patients. We believe
that
submission of data from this pilot study to the FDA will allow us to then
conduct the subsequent pivotal study required for FDA approval of our CytoSorb™
product for sepsis treatment.
Our
research and development costs were $750,411 and $1,021,039 for the nine months
ended September 30, 2006 and 2005, respectively, and $262,217 and $253,650,
for
the three months ended September 30, 2006 and 2005 respectively. We have
experienced substantial operating losses since inception. As of September 30,
2006, we had an accumulated deficit of $66,228,527 which included losses from
operations of $3,665,596 for the year ended December 31, 2005, $645,703 for
the
three-month period ended September 30, 2006 and $6,851,614 for the nine-month
period ended September 30, 2006. In comparison, we had losses from operations
of
$962,812 and $2,634,455 for the three and nine month periods ended September
30,
2005 respectively. Historically, our losses have resulted principally from
costs
incurred in the research and development of our polymer technology, and general
and administrative expenses, which together were $2,162,703, $649,625, and
$1,439,362 respectively, for the year ended December 31, 2005, the three-months
ended September 30, 2006, and the nine months ended September 30, 2006
respectively. In addition, our loss for the nine months ended September 30,
2006
includes net interest expense of $4,790,329, primarily resulting from inducement
and debt discount charges of $3,351,961 and $1,000,000 in connection with the
conversion to equity of principal and interest under outstanding debt
instruments during the nine-month period.
Since
inception, the operations of MedaSorb Delaware have been financed through the
private placement of its debt and equity securities. At December 31, 2005 (prior
to the Merger), MedaSorb Delaware had cash of $707,256, an amount sufficient
to
fund its operations for approximately four months. Due to its losses and
available cash at that time, MedaSorb Delaware ’s audited consolidated financial
statements for its year ended December 31, 2005 have been prepared assuming
MedaSorb Delaware will continue as a going concern, and the auditors’ report on
those financial statements expresses substantial doubt about the ability of
MedaSorb Delaware to continue as a going concern.
As
of
September 30, 2006 we had cash on hand of $3,576,869, and current liabilities
of
$2,397,453.
We
believe that we have sufficient cash to fund our operations for the next
12 months,
following which time we will be required to raise additional capital. There
can
be no assurance that we will be successful in our capital raising
efforts.
An
evaluation was performed, under the supervision of, and with the participation
of, our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e)
to
the Securities and Exchange Act of 1934). Based on that evaluation, the
Company’s management, including our Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
adequate and effective, as of September 30, 2006, to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934, is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer , as appropriate, to
allow timely decisions regarding required disclosure.
There
has
not been any changes in our internal controls over financial reporting that
occurred during our quarter ended September 30, 2006 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
On
September 1, 2006, the United States District Court for The Eastern District
Of
Pennsylvania approved a Stipulated Order and Settlement Agreement under which
the Company and Purolite International Ltd. and its affiliates (“Purolite”)
agreed to the settlement of the action that had been commenced by Purolite
in
which Purolite claimed ownership rights in certain of the Company’s patents. The
Settlement Agreement provides MedaSorb with the exclusive right to use its
patented technology and proprietary know how relating to adsorbent polymers
for
a period of 18 years. Under the terms of the Settlement Agreement, MedaSorb
has
agreed to pay Purolite royalties of 2.5% to 5% on the sale of certain of its
products if and when those products are sold commercially.
In
addition, during the quarter ended September 30, 2006, the action commenced
against the Company by a former employee seeking reimbursement of certain
claimed expenses was withdrawn without prejudice.
On
August
1, 2006, the Company issued ten-year options to purchase an aggregate of 25,000
shares of Common Stock to five persons consisting of the Company’s directors and
two former directors of MedaSorb Delaware, exercisable at $1.25 per share.
This
issuance was exempt from registration pursuant to Section 4(2) and Regulation
D
under the Securities Act.
On
September 30, 2006, the Company issued to an additional “accredited investor”
under the Securities Act, for aggregate gross consideration of $50,000, 50,000
shares of Series A Preferred Stock and warrants to purchase 20,000 shares of
Common Stock at a price of $2.00 per share in a transaction exempt from
registration pursuant to Section 4(2) and Regulation D under the Securities
Act.
On
September 30, 2006, pursuant to agreements previously entered into with existing
stockholders of the Company, those stockholders exchanged an aggregate of
240,929 shares of our Common Stock and warrants to purchase an additional
240,929 shares of Common Stock, for 799,885 shares of Series A Preferred Stock
and warrants to purchase 319,954 shares of Common Stock at a price of $2.00
per
share in a transaction exempt from registration pursuant to Sections 4(2) and
3(a)(9) and Regulation D under the Securities Act.
On
September 30, 2006, the Company issued 615,696 shares of our Common Stock to
one
of its attorneys as payment for accrued legal fees in a transaction exempt
from
registration pursuant to Section 4(2) and Regulation D under the Securities
Act.
Item
6. Exhibits.
Number
|
Description
|
|
|
31.1
|
Certification
of Al Kraus, Chief Executive Officer of the Registrant, pursuant
to Rules
13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
31.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant
to
Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
32.1
|
Certification
of Al Kraus, Chief Executive Officer of the Registrant, pursuant
to Rules
13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|
|
|
32.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant
to
Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MEDASORB
TECHNOLOGIES CORPORATION
|
Date:
November 14, 2006
|
By:
/s/ David Lamadrid
|
|
|
Name:
David Lamadrid
Title:
Chief Financial Officer
|
|
(On
behalf of the registrant and as
principal
accounting officer)
|
EXHIBIT
INDEX
Number
|
Description
|
|
|
31.1
|
Certification
of Al Kraus, Chief Executive Officer of the Registrant, pursuant
to Rules
13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
31.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant
to
Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
32.1
|
Certification
of Al Kraus, Chief Executive Officer of the Registrant, pursuant
to Rules
13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|
|
|
32.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant
to
Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|