Filed
pursuant to Rule 424(b)(3)
Registration
No. 333-138247
PROSPECTUS
MAY 7,
2007
MEDASORB
TECHNOLOGIES CORPORATION
9,312,273
Shares of Common Stock
This
prospectus relates to the sale of up to 9,312,273 shares of our Common Stock
by
some of our stockholders. The shares offered by this prospectus include:
·
5,109,531
shares
issuable to the selling stockholders upon the conversion of currently
outstanding shares of our Series A Preferred Stock;
·
1,762,788 shares issuable to the selling stockholders upon the conversion
of
shares of Series A Preferred Stock that may be issued to the selling
stockholders as dividends; and
· 2,439,954
shares issuable to the selling stockholders upon the exercise of
warrants.
For
a
list of the selling stockholders, please see “Selling Stockholders.” We are not
selling any shares of Common Stock in this offering and therefore will not
receive any proceeds from this offering. We may, however, receive proceeds
upon
the exercise of the warrants registered for sale hereunder in the event that
such warrants are exercised. All costs associated with this registration will
be
borne by us.
These
shares may be sold by the selling stockholders from time to time in the
over-the-counter market or other national securities exchange or automated
interdealer quotation system on which our Common Stock is then listed or quoted,
through negotiated transactions or otherwise at market prices prevailing at
the
time of sale or at negotiated prices.
Our
Common Stock currently trades in the over-the-counter market and is quoted
on
the OTC Bulletin Board under the symbol “MSBT.” On May 7, 2007, the last
reported sale price of our Common Stock was $1.10 per share.
Investing
in our Common Stock involves a high degree of risks. Please refer to the “Risk
Factors” beginning on page 5.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities, or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is May 7, 2007.
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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1
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THE
OFFERING
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3
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RISK
FACTORS
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4
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
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12
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USE
OF PROCEEDS
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12
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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12
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EQUITY
COMPENSATION PLAN INFORMATION
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13
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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13
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BUSINESS
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16
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MANAGEMENT
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33
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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39
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PRINCIPAL
STOCKHOLDERS
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41
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SELLING
STOCKHOLDERS
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43
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PLAN
OF DISTRIBUTION
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47
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DESCRIPTION
OF SECURITIES
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48
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TRANSFER
AGENT
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50
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COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
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50
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LEGAL
MATTERS
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51
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EXPERTS
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51
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WHERE
YOU CAN FIND MORE INFORMATION
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51
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INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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|
F-1
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PROSPECTUS
SUMMARY
This
summary highlights selected information from this prospectus and may not contain
all of the information that is important to an investor. We encourage you to
read this entire prospectus, including our consolidated financial statements
and
the notes to our consolidated financial statements completely and carefully
before deciding whether to invest in our Common Stock. You should also review
the other available information referred to in the section entitled “Where You
Can Find More Information” on page 51.
Summary
of our Business
We
are a
medical device company that is currently in the development stage, headquartered
in Monmouth Junction, New Jersey (near Princeton). We have developed and will
seek to commercialize a blood purification technology that we believe will
be
able to efficiently remove middle molecular weight toxins from circulating
blood. We will be required to obtain required approvals from the United States
Food and Drug Administration before we can sell our products. In December 2006,
we submitted a proposed pilot study for approval to the FDA with respect to
CytoSorb™ , the first device we intend to bring to market. If we obtain FDA
approval, we anticipate commencing clinical studies for CytoSorb™ by the third
quarter of 2007. If these studies are successful and we obtain FDA approval
to
proceed with our follow-up pivotal study, we anticipate that we will be able
to
begin sales of CytoSorb™ by mid-to-late 2009, at the earliest, assuming a
successful pivotal study. However, there can be no assurance we will ever obtain
FDA approval for CytoSorb™ or any other device.
We
have
developed two products, CytoSorb™ and BetaSorb™ utilizing our adsorbent polymer
technology. These products are known medically as hemoperfusion devices. During
hemoperfusion, blood is removed from the body via a catheter or other blood
access device, perfused through a filter medium where toxic compounds are
removed, and returned to the body.
We
intend
to initially focus our efforts on the commercialization of our CytoSorb™
product, which we believe will provide a relatively faster regulatory pathway
to
market. The first indication for CytoSorb™ will be in the treatment of sepsis
(bacterial infection of the blood), which causes systematic inflammatory
response syndrome. CytoSorb™ has been designed to prevent or reduce the
accumulation of high concentrates of cytokines in the bloodstream associated
with sepsis. It is intended for short term use as an adjunctive device to the
standard treatment of sepsis.
The
CytoSorb™ device consists of a cylinder containing the adsorbent polymer beads.
The cylinder incorporates industry standard connectors at either end of the
device which connect directly to an extra-corporeal circuit (bloodlines) on
a
stand alone basis. The extra-corporeal circuit consists of plastic tubing
through which the blood flows, our CytoSorb™ cartridge containing adsorbent
polymer beads, pressure monitoring gauges, and a blood pump to maintain blood
flow. The patient’s blood is accessed through a catheter inserted into his or
her veins. The catheter is connected to the extra-corporeal circuit and the
blood pump draws blood from the patient, pumps it through the cartridge and
returns it back to the patient in a closed loop system. As blood passes over
the
polymer beads in the cylinder, toxins (cytokines) are adsorbed from the
blood.
To
date,
we have manufactured the CytoSorb™ device on a limited basis for testing
purposes, including for use in clinical studies. We believe that current state
of the art blood purification technology (such as dialysis) is incapable of
effectively clearing the toxins intended to be adsorbed by our CytoSorb™
device.
Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorb™ has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines in the bloodstream. These
conditions include the prevention of post-operative complications of cardiac
surgery (cardiopulmonary bypass surgery) and damage to organs donated for
transplant prior to organ harvest. We are also exploring the potential benefits
the CytoSorb™ device may have in removing drugs from blood in situations such as
patient overdoses.
Previous
studies using our BetaSorb™ device in patients with chronic kidney failure have
provided valuable data which we will use in conducting clinical studies using
our CytoSorb™ device. However, limited studies have been conducted using our
CytoSorb™ device to date and no assurance can be given that our proposed
CytoSorb™ product will work as intended or that we will be able to obtain FDA
approval to sell CytoSorb™. Even if we ultimately obtain FDA approval, because
we can not control the timing of FDA responses to our submissions, there can
be
no assurance as to when such approval will be obtained.
Our
BetaSorb™ device is intended to remove beta2-microglobulin
from the blood of patients suffering from chronic kidney failure who rely on
long term dialysis therapy to sustain their life. BetaSorb™ utilizes an
absorbent polymer packed into an identically shaped and constructed cylinder
as
utilized for our CytoSorb™ product, although the polymers used in the two
devices are physically different. The BetaSorb™ device also incorporates
industry standard connectors at either end of the device which connect directly
into the extra-corporeal circuit (bloodlines) in series with a dialyser. To
date, we have manufactured the BetaSorb™ device on a limited basis for testing
purposes, including for use in clinical studies.
We
had
initially identified end stage renal disease (ESRD) as the target market for
our
polymer-based adsorbent technology. However, during the development of
BetaSorb™, we identified several applications for our adsorbent technology in
the treatment of critical care patients. As a result, we shifted our priorities
to pursue critical care applications (such as for the treatment of sepsis)
for
our technology given that BetaSorb’s™ potential for usage in chronic conditions
such as end stage renal disease is anticipated to have a longer and more complex
regulatory pathway. We currently intend to pursue our BetaSorb™ product after
the commercialization of the CytoSorb™ product. At such time as we determine to
proceed with our proposed BetaSorb™ product, if ever, we will need to conduct
additional clinical studies using the BetaSorb™ device and obtain FDA approval.
To
date,
we have conducted clinical studies using our BetaSorb™ device in patients with
chronic kidney failure, which have provided valuable data which underpin the
development of the critical care applications for our technology. The BetaSorb™
device has been used in a total of three human pilot studies, involving 20
patients, in the U.S. and Europe. The studies included approximately 345
treatments, with some patients using the device for up to 24 weeks (in multiple
treatment sessions lasting up to four hours, three times per week) in connection
with the application of our products to patients suffering from chronic kidney
failure. The BetaSorb™ device design was also tested on a single patient with
bacterial sepsis, producing results that our management has found encouraging
and consistent with our belief that our device design is appropriate for a
more
extensive sepsis study. In addition, CytoSorb’s™ ability to interact safely with
blood (hemocompatibility) has been demonstrated through ISO 10993 testing.
The
studies we have done to date were not done in conjunction with obtaining FDA
approval for the use of our CytoSorb™ device, the first device we intend to
bring to market.
We
have
not generated any revenue to date. We have incurred losses in each of our fiscal
years and expect these losses to continue for the foreseeable future. We will
need to raise significant additional funds to conduct clinical studies and
obtain regulatory approvals to commercialize our products. No assurance can
be
given that we will ever successfully commercialize any products.
The
Company
We
were
incorporated in Nevada on April 25, 2002 as Gilder Enterprises, Inc. and were
originally engaged in the business of installing and operating computer networks
that provided high-speed access to the Internet. On June 30, 2006, we disposed
of our original business, and pursuant to an Agreement and Plan of Merger,
acquired all of the stock of MedaSorb Technologies, Inc. in a merger, and its
business became our business. Following the merger, in August 2006, we changed
our name to MedaSorb Technologies Corporation.
Our
executive offices are located at 7 Deer Park Drive, Suite K, Monmouth Junction,
New Jersey 08852. Our telephone number is (732) 329-8885.
THE
OFFERING
Securities
Offered by Selling Stockholders
|
|
9,312,273
shares of Common Stock, including 5,109,531 shares issuable upon
conversion of currently outstanding shares of Series A Preferred
Stock;
1,762,788 shares issuable upon conversion of shares of Series A Preferred
Stock that may be issued as dividends; and 2,439,954 shares issuable
to
the selling stockholders upon the exercise of warrants.
|
Offering
Price
|
|
Determined
at the time of sale by the selling stockholders.
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any proceeds from the sale of the shares of Common
Stock
by the selling stockholders. We intend to use the proceeds from the
exercise of outstanding warrants, if any, for general corporate
purposes.
|
|
|
|
Shares
of Common Stock outstanding before the offering
|
|
24,628,274
shares.
|
|
|
|
Risk
Factors
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|
An
investment in MedaSorb involves significant risks and uncertainties.
See
“Risk Factors,” beginning on page
4.
|
RISK
FACTORS
An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occur, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part
of
your investment.
RISKS
RELATED TO OUR INDUSTRY AND OUR BUSINESS
We
currently have no commercial operations and there can be no assurance that
we
will be successful in developing commercial operations.
We
are a
development stage company and have been engaged primarily in research and
development activities and have not generated any revenues to date. There can
be
no assurance that we will be able to successfully manage the transition to
a
commercial enterprise. Potential investors should be aware of the problems,
delays, expenses and difficulties frequently encountered by an enterprise in
the
early stage of development, which include unanticipated problems relating to
development of proposed products, testing, regulatory compliance, manufacturing,
competition, marketing problems and additional costs and expenses that may
exceed current estimates. Our proposed products will require significant
additional research and testing, and we will need to overcome significant
regulatory burdens prior to commercialization. We will also need to raise
significant additional funds to complete clinical studies and obtain regulatory
approvals before we can begin selling our products. There can be no assurance
that after the expenditure of substantial funds and efforts, we will
successfully develop and commercialize any products, generate any revenues
or
ever achieve and maintain a substantial level of sales of our products.
We
have a history of losses and expect to incur substantial future losses, and
the
report of our auditor on our consolidated financial statements expresses
substantial doubt about our ability to continue as a going
concern.
We
have
experienced substantial operating losses since inception. As of December 31,
2006, we had an accumulated deficit of $67,426,583 which included losses from
operations of $7,671,580 for the year ended December 31, 2006 and $3,665,596
for
the year ended December 31, 2005. Due to these losses, our audited consolidated
financial statements have been prepared assuming we will continue as a going
concern, and the auditors’ report on those financial statements express
substantial doubt about our ability to continue as a going concern. Our losses
have resulted principally from costs incurred in the research and development
of
our polymer technology and general and administrative expenses. Because our
predecessor was a limited liability company until December 2005, substantially
all of these losses were allocated to that company’s members and will not be
available for tax purposes to us in future periods. We intend to conduct
significant additional research, development, and clinical study activities
which, together with expenses incurred for the establishment of manufacturing
arrangements and a marketing and distribution presence and other general and
administrative expenses, are expected to result in continuing operating losses
for the foreseeable future. The amount of future losses and when, if ever,
we
will achieve profitability are uncertain. Our ability to achieve profitability
will depend, among other things, on successfully completing the development
of
our technology and commercial products, obtaining the requisite regulatory
approvals, establishing manufacturing and sales and marketing arrangements
with
third parties, and raising sufficient funds to finance our activities. No
assurance can be given that our product development efforts will be successful,
that required regulatory approvals will be obtained, that any of our products
will be manufactured at a competitive cost and will be of acceptable quality,
or
that the we will be able to achieve profitability or that profitability, if
achieved, can be sustained.
We
may have difficulty raising needed capital in the future because of our limited
operating history and business risks associated with
us.
We
generate no revenues from our proposed products or otherwise, and have expended
and will continue to expend substantial funds in the research, development
and
clinical and pre-clinical studies of our polymer products. Following the June
30, 2006 merger, we completed a private placement of securities raising gross
proceeds of $5.3 million. We anticipate that the net proceeds of the private
placement will only be sufficient to fund our operations through the fourth
quarter of 2007, following which we will need additional financing before we
can
complete the clinical studies and commercialization of our proposed products.
However, there can be no assurance that financing will be available on
acceptable terms or at all. Our future capital requirements will depend upon
many factors, including, but not limited to, continued progress in our research
and development activities, costs and timing of conducting clinical studies
and
seeking regulatory approvals and patent prosecutions, competing technological
and market developments, and our ability to establish collaborative
relationships with third parties. If adequate funds are unavailable, we may
have
to delay, reduce the scope of or eliminate one or more of our research or
development programs or product launches or marketing efforts or cease
operations.
Our
long-term capital requirements are expected to depend on many factors,
including:
· |
continued
progress and cost of our research and development
programs;
|
· |
progress
with pre-clinical studies and clinical
studies;
|
· |
the
time and costs involved in obtaining regulatory
clearance;
|
· |
costs
involved in preparing, filing, prosecuting, maintaining, defending
and
enforcing patent claims;
|
· |
costs
of developing sales, marketing and distribution
channels;
|
· |
market
acceptance of our products; and
|
· |
costs
for training physicians and other health care
personnel.
|
In
addition, in the event that additional funds are obtained through arrangements
with collaborative partners or other sources, we may have to relinquish economic
and/or proprietary rights to some of our technologies or products under
development that we would otherwise seek to develop or commercialize by ourself.
We
depend upon key personnel who may terminate their employment with us at any
time.
We
currently have only eight employees. Our success will depend to a significant
degree upon the continued services of our key management and advisors,
including, Al Kraus, our Chief Executive Officer; Dr. James Winchester, our
Chief Medical Officer, who is employed by us on a part time basis; David
Lamadrid, our Chief Financial Officer; and Vincent Capponi, our Chief Operating
Officer. These individuals, other than Mr. Kraus, whose employment agreement
terminates in July 2008, do not have long-term employment agreements, and there
can be no assurance that they will continue to provide services to us. In
addition, our success will depend on our ability to attract and retain other
highly skilled personnel. We may be unable to recruit such personnel on a timely
basis, if at all. Management and other employees may voluntarily terminate
their
employment with us at any time. The loss of services of key personnel, or the
inability to attract and retain additional qualified personnel, could result
in
delays in development or approval of our products, loss of sales and diversion
of management resources.
Our
Chief Medical Officer’s primary employment is with another employer
Dr.
James
Winchester, our Chief Medical Officer, serves as the Chief of Beth Israel
Medical Center’s Nephrology division. Although the time Dr. Winchester provides
to us varies from time to time, it is generally in the range of one-half day
to
one full day per week. Because Dr. Winchester’s primary employment is with Beth
Israel Medical Center, Dr. Winchester may not always be available to provide
us
with his services when needed by us in a timely manner.
Acceptance
of our medical devices in the marketplace is uncertain, and failure to achieve
market acceptance will prevent or delay our ability to generate
revenues.
Our
future financial performance will depend, at least in part, upon the
introduction and customer acceptance of our polymer products. Even if approved
for marketing by the necessary regulatory authorities, our products may not
achieve market acceptance. The degree of market acceptance will depend upon
a
number of factors, including:
· |
the
receipt of regulatory clearance of marketing claims for the uses
that we
are developing;
|
· |
the
establishment and demonstration of the advantages, safety and efficacy
of
the our polymer technology;
|
· |
pricing
and reimbursement policies of government and third-party payers such
as
insurance companies, health maintenance organizations and other health
plan administrators;
|
· |
our
ability to attract corporate partners, including medical device companies,
to assist in commercializing our products;
and
|
· |
our
ability to market our products.
|
Physicians,
patients, payers or the medical community in general may be unwilling to accept,
utilize or recommend any of our products. If we are unable to obtain regulatory
approval or commercialize and market our products when planned, we may not
achieve any market acceptance or generate revenue.
We
may face litigation from third parties claiming that our products infringe
on
their intellectual property rights, or seek to challenge the validity of our
patents.
Our
future success is also dependent on the strength of our intellectual property,
trade secrets and know-how, which have been developed from years of research
and
development. In addition to the “Purolite” litigation discussed below which
we’ve recently settled, we may be exposed to additional future litigation by
third parties seeking to challenge the validity of our rights based on claims
that our technologies, products or activities infringe the intellectual property
rights of others or are invalid, or that we have misappropriated the trade
secrets of others.
Since
our
inception, we have sought to contract with large, established manufacturers
to
supply commercial quantities of our adsorbent polymers. As a result, we have
disclosed, under confidentiality agreements, various aspects of our technology
with potential manufacturers. We believe that these disclosures, while necessary
for our business, have resulted in the attempt by potential suppliers to assert
ownership claims to our technology in an attempt to gain an advantage in
negotiating manufacturing rights.
We
have
previously engaged in discussions with the Brotech Corporation and its
affiliate, Purolite International, Inc. (collectively “Purolite”), which had
demonstrated a strong interest in being our polymer manufacturer. For a period
of time beginning in December 1998, Purolite engaged in efforts to develop
and
optimize the manufacturing process needed to produce our polymer products on
a
commercial scale. However, the parties eventually decided not to proceed. In
2003, Purolite filed a lawsuit against us asserting, among other things,
co-ownership and co-inventorship of certain of our patents. On September 1,
2006, the United States District Court for the Eastern District of Pennsylvania
approved a Stipulated Order and Settlement Agreement under which we and Purolite
agreed to the settlement of the action. The Settlement Agreement provides us
with the exclusive right to use our patented technology and proprietary know
how
relating to adsorbent polymers for a period of 18 years. Under the terms of
the
Settlement Agreement, we have agreed to pay Purolite royalties of 2.5% to 5%
on
the sale of certain of our products if and when those products are sold
commercially.
Several
years ago we engaged in discussions with the Dow Chemical Company, which had
indicated a strong interest in being our polymer manufacturer. After a Dow
representative on our Advisory Board resigned, Dow filed and received several
patents naming our former Advisory Board member as an inventor. In management’s
view the Dow patents improperly incorporate our technology and should not have
been granted to Dow. The existence of these Dow patents could result in a
potential dispute with Dow in the future and additional expenses for
us.
We
have not yet commenced the process of seeking FDA approval of our products.
The
approval process, if permitted to proceed by the FDA, will involve pilot and
pivotal clinical studies and is lengthy and costly. The failure to obtain
government approvals, including required FDA approvals, for our polymer
products, or to comply with ongoing governmental regulations could prevent,
delay or limit introduction or sale of our products and result in the failure
to
achieve revenues or maintain our operations.
The
manufacturing and marketing of our products will be subject to extensive and
rigorous government regulation in the United States, in various states and
in
foreign countries. In the United States and other countries, the process of
obtaining and maintaining required regulatory approvals is lengthy, expensive,
and uncertain. There can be no assurance that we will ever obtain the necessary
approvals to sell our products. Even if we do ultimately receive FDA approval
for any of our products, we will be subject to extensive ongoing regulation.
Our
products will be subject to regulation as medical devices under the Federal
Food, Drug, and Cosmetic Act. In the United States, the FDA enforces, where
applicable, development, clinical studies, labeling, manufacturing,
registration, notification, clearance or approval, marketing, distribution,
record keeping, and reporting requirements for medical devices. Different
regulatory requirements may apply to our products depending on how they are
categorized by the FDA under these laws. Current FDA regulations classify our
CytoSorb™ device (the first product we intend to seek FDA approval for) as a
Class III device (CFR 876.5870—Sorbent Hemoperfusion System). We intend to
submit a 510(k) pre-market notification to the FDA for approval to market this
product. There can be no assurance, however, that the FDA will grant clearance
to market CytoSorb™ in a timely manner, if at all, or that the FDA will not
require the submission of additional clinical data or a pre-market approval
application ("PMA"), which is a lengthier process. There can be no assurance
that the clinical studies we conduct will demonstrate sufficient safety and
efficacy to obtain the required regulatory approvals for marketing, or that
we
will be able to comply with any additional FDA, state or foreign regulatory
requirements. In addition, there can be no assurance that government regulations
applicable to our products or the interpretation of those regulations will
not
change. FDA approvals are also required to commence the pilot and pivotal
clinical studies we need to conduct to further study our devices. There can
be
no assurance that the FDA will allow the clinical studies to commence. We also
are and will be subject to other Federal, state, and local laws, regulations
and
recommendations relating to laboratory and manufacturing practices as well
as
Medicare, Medicaid and anti-kickback laws. Non-compliance with applicable
requirements can result in civil penalties, the recall, injunction or seizure
of
products, an inability to import products into the United States, the refusal
by
the government to approve or clear product approval applications, the withdrawal
of previously approved product applications and criminal prosecution. The extent
of potentially adverse government regulation that might arise from future
legislation or administrative action cannot be predicted.
We
have conducted limited clinical studies of our
BetaSorb™
device
and no clinical studies of our CytoSorb™
device. Clinical and pre-clinical data is susceptible to varying
interpretations, which could delay, limit or prevent regulatory
clearances.
To
date,
we have conducted limited clinical studies on our products. There can be no
assurance that we will successfully complete the clinical studies necessary
to
receive regulatory approvals. While studies conducted by us and others have
produced results we believe to be encouraging and indicative of the potential
efficacy of our products and technology, data already obtained, or in the future
obtained, from pre-clinical studies and clinical studies do not necessarily
predict the results that will be obtained from later pre-clinical studies and
clinical studies. Moreover, pre-clinical and clinical data are susceptible
to
varying interpretations, which could delay, limit or prevent regulatory
approval. A number of companies in the medical device and pharmaceutical
industries have suffered significant setbacks in advanced clinical studies,
even
after promising results in earlier studies. The failure to adequately
demonstrate the safety and effectiveness of an intended product under
development could delay or prevent regulatory clearance of the device, resulting
in delays to commercialization, and could materially harm our business.
We
rely extensively on research and testing facilities at various universities
and
institutions, which could be adversely affect us should we lose access to those
facilities.
Although
we have our own research laboratories and clinical facilities, we collaborate
with numerous institutions, universities and commercial entities to conduct
research and studies of our products. We currently maintain a good working
relationship with these parties. However, should the situation change, the
cost
and time to establish or locate alternative research and development could
be
substantial and delay gaining FDA approval and commercializing our
products.
We
are and will be exposed to product liability risks, and clinical and preclinical
liability risks, which could place a substantial financial burden upon us should
we be sued.
Our
business exposes us to potential product liability and other liability risks
that are inherent in the testing, manufacturing and marketing of medical
devices. We cannot be sure that claims will not be asserted against us. A
successful liability claim or series of claims brought against us could have
a
material adverse effect on our business, financial condition and results of
operations.
We
do not
currently have any product liability insurance or other liability insurance
relating to clinical studies or any products. We cannot give assurances that
we
will be able to obtain or maintain adequate product liability insurance on
acceptable terms, if at all, or that such insurance will provide adequate
coverage against potential liabilities. Claims or losses in excess of any
product liability insurance coverage that we may obtain could have a material
adverse effect on our business, financial condition and results of
operations.
Certain
university and other relationships are important to our business and may
potentially result in conflicts of interests.
Dr.
John
Kellum and Dr. David Powner, among others, are critical care advisors and
consultants of ours and are associated with University of Pittsburgh Medical
Center and University of Texas, respectively. Their association with these
institutions may currently or in the future involve conflicting interests in
the
event they or these institutions enter into consulting or other arrangements
with competitors of ours.
We
have limited manufacturing experience, and once our products are approved,
we
may not be able to manufacture sufficient quantities at an acceptable cost,
or
without shut-downs or delays.
We
remain
in the research and development and clinical and pre-clinical study phase of
product commercialization. Accordingly, once our products are approved for
commercial sale, we will need to establish the capability to commercially
manufacture our products in accordance with FDA and other regulatory
requirements. We have limited experience in establishing, supervising and
conducting commercial manufacturing. If we or the third-party manufacturers
of
our products fail to adequately establish, supervise and conduct all aspects
of
the manufacturing processes, we may not be able to commercialize our products.
Due
to our limited marketing, sales and distribution experience, we may be
unsuccessful in our efforts to sell our products.
We
expect
to enter into agreements with third parties for the commercial manufacture
and
distribution of our products. There can be no assurance that parties we may
engage to market and distribute our products will:
· |
satisfy
their financial or contractual obligations to
us;
|
· |
adequately
market our products; or
|
· |
not
offer, design, manufacture or promote competing
products.
|
If
for
any reason any party we engage is unable or chooses not to perform its
obligations under our marketing and distribution agreement, we would experience
delays in product sales and incur increased costs, which would harm our business
and financial results.
If
we are unable to convince physicians and other health care providers as to
the
benefits of our products, we may incur delays or additional expense in our
attempt to establish market acceptance.
Broad
use
of our products may require physicians and other health care providers to be
informed about our products and their intended benefits. The time and cost
of
such an educational process may be substantial. Inability to successfully carry
out this education process may adversely affect market acceptance of our
products. We may be unable to educate physicians regarding our products in
sufficient numbers or in a timely manner to achieve our marketing plans or
to
achieve product acceptance. Any delay in physician education may materially
delay or reduce demand for our products. In addition, we may expend significant
funds towards physician education before any acceptance or demand for our
products is created, if at all.
The
market for our products is rapidly changing and competitive, and new devices
and
drugs which may be developed by others could impair our ability to maintain
and
grow our business and remain competitive.
The
medical device and pharmaceutical industries are subject to rapid and
substantial technological change. Developments by others may render our
technologies and products noncompetitive or obsolete. We also may be unable
to
keep pace with technological developments and other market factors.
Technological competition from medical device, pharmaceutical and biotechnology
companies, universities, governmental entities and others diversifying into
the
field is intense and is expected to increase. Many of these entities have
significantly greater research and development capabilities and budgets than
we
do, as well as substantially more marketing, manufacturing, financial and
managerial resources. These entities represent significant competition for
us.
If
users of our products are unable to obtain adequate reimbursement from
third-party payers, or if new restrictive legislation is adopted, market
acceptance of our products may be limited and we may not achieve anticipated
revenues.
The
continuing efforts of government and insurance companies, health maintenance
organizations and other payers of healthcare costs to contain or reduce costs
of
health care may affect our future revenues and profitability, and the future
revenues and profitability of our potential customers, suppliers and
collaborative partners and the availability of capital. For example, in certain
foreign markets, pricing or profitability of medical devices is subject to
government control. In the United States, given recent federal and state
government initiatives directed at lowering the total cost of health care,
the
U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of medical devices and on the reform of the Medicare
and
Medicaid systems. While we cannot predict whether any such legislative or
regulatory proposals will be adopted, the announcement or adoption of these
proposals could materially harm our business, financial condition and results
of
operations.
Our
ability to commercialize our products will depend in part on the extent to
which
appropriate reimbursement levels for the cost of our products and related
treatment are obtained by governmental authorities, private health insurers
and
other organizations, such as health maintenance organizations (“HMOs”).
Third-party payers are increasingly challenging the prices charged for medical
care. Also, the trend toward managed health care in the United States and the
concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and medical
devices, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for our products.
The cost containment measures that health care payers and providers are
instituting and the effect of any health care reform could materially harm
our
ability to operate profitably.
INVESTMENT
RISKS
Directors,
executive officers and principal stockholders own a significant percentage
of
the shares of Common Stock, which will limit your ability to influence corporate
matters.
Our
directors, executive officers and principal stockholders together beneficially
own approximately 75% of our outstanding shares of Common Stock. Accordingly,
these stockholders could have a significant influence over the outcome of any
corporate transaction or other matter submitted to stockholders for approval,
including mergers, consolidations and the sale of all or substantially all
of
our assets and also could prevent or cause a change in control. The interests
of
these stockholders may differ from the interests of our other stockholders.
Third parties may be discouraged from making a tender offer or bid to acquire
us
because of this concentration of ownership.
Our
Series A Preferred Stock provides for the payment of penalties, which we are
currently obligated to pay.
Immediately
following our June 30, 2006 merger, we issued 5,250,000 shares of Series A
10%
Cumulative Convertible Preferred Stock with an aggregate stated value of
$5,250,000. We subsequently issued an additional 2,153,585 shares of Series
A
Preferred Stock through December 31, 2006 to additional investors as well as
in
respect of dividends issued on the shares of Series A Preferred Stock we
initially issued, and we may issue additional shares of this series of preferred
stock in the future as dividends. The Certificate of Designation designating
the
Series A Preferred Stock provides that upon the following events, among others,
the dividend rate with respect to the Series A Preferred Stock increases to
20%
per annum, which dividends would then be required to be paid in
cash:
· |
the
occurrence of “Non-Registration Events” including, the failure to cause a
registration statement registering the shares of Common Stock underlying
the Series A Preferred Stock and Warrants issued in connection therewith
to be effective by February 25, 2007 (240 days following the closing
of
the private placement);
|
· |
an
uncured breach by us of any material covenant, term or condition
in the
Certificate of Designation or any of the related transaction documents;
and
|
· |
any
money judgment or similar final process being filed against us for
more
than $100,000.
|
Because
the registration statement in which this prospectus is included was not
effective until May 7, 2007, the dividends on the shares of Series A Preferred
Stock issued to the June 30, 2006 purchasers accrued at the rate of 20% per
annum from February 26, 2007 through May 7, 2007, and are payable in cash for
such period.
In
addition, the registration rights provided for in the subscription agreement
we
entered into with the purchasers in this offering:
· |
require
that we file a registration statement with the SEC on or before 120
days
from the closing to register the shares of Common Stock issuable
upon
conversion of the Series A Preferred Stock and exercise of the Warrants,
and cause such registration statement to be effective by February
25, 2007
(240 days following the closing);
and
|
· |
entitles
each of these investors to liquidated damages in an amount equal
to two
percent (2%) of the purchase price of the Series A Preferred Stock
if we
fail to timely file that registration statement with, or have it
declared
effective by, the SEC.
|
Because
the registration statement in which this prospectus is included was not
effective until May 7, 2007, we are obligated to pay the June 30, 2006
purchasers of our Series A Preferred Stock an aggregate of $105,000 per 30-day
period from February 26, 2007 through May 7, 2007.
The
Certificate of Designation, Subscription Agreement and related transaction
documents also provide for various penalties and fees for breaches or failures
to comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates, and obtaining and maintaining an
effective registration statement with respect to the shares of Common Stock
underlying the Series A Preferred Stock and Warrants sold in the
offering.
Anti-Dilution
Provisions Of The Series A Preferred Stock And Warrants, As Well As The Terms
Of
The Employment Agreement With Our Chief Executive Officer, Could Result In
Dilution Of Stockholders
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 our 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, further
diluting holders of our Common Stock.
In
addition, under our Employment Agreement with Al Kraus, our Chief Executive
Officer, Mr. Kraus is entitled to be issued options to purchase Common Stock
at
a price of $6.64 per share so that the combined total of Common Stock owned
by
Mr. Kraus, including upon exercise of options, equals 5% of our outstanding
Common Stock on a fully diluted basis. Mr. Kraus has such right until such
time
as an aggregate of $20 million of financing has been received by us following
the commencement of his employment. Pursuant to his Employment Agreement, based
on the number of currently outstanding shares of Common Stock, Series A
Preferred Stock, warrants and options, Mr. Kraus is entitled to purchase
approximately 413, 920 shares of Common Stock at a price $6.64 per share.
Penny
Stock Regulations May Affect Your Ability To Sell Our Common
Stock.
To
the
extent the price of our Common Stock remains below $5.00 per share, our Common
Stock will be subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker dealers which sell these
securities to persons other than established customers and accredited investors.
Under these rules, broker-dealers who recommend penny stocks to persons other
than established customers and "accredited investors" must make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from
effecting transactions in our Common Stock and may make it more difficult for
holders of our Common Stock to sell shares to third parties or to otherwise
dispose of them.
Future
Sales of Common Stock Could Result in a Decline in Market
Price.
Following
the completion of the merger, the holders of 3,750,000 shares of Common Stock
are able to sell such shares without registering them under the Securities
Act.
In addition, this registration statement covers the resale of 9,312,273 shares
of Common Stock underlying the Series A Preferred Stock and Warrants sold in
the
offering or issuable in connection therewith. Sales of a significant number
of
shares of Common Stock in the public market could result in a decline in the
market price of our Common Stock.
Our
Board of Directors may, without stockholder approval, issue and fix the terms
of
shares of preferred stock and issue additional shares of common stock adversely
affecting the rights of holders of our common stock.
Our
certificate of incorporation authorizes the issuance of up to 100,000,000 shares
of “blank check” preferred stock, with such designation rights and preferences
as may be determined from time to time by the Board of Directors. We have
designated 12,000,000 shares of Series A Preferred Stock as described above.
Subject to the rights of the holders of the Series A Preferred Stock, our
Board of Directors is empowered, without stockholder approval, to issue up
to
88,000,000 additional shares of preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the rights
of
the holders of our common stock. In addition, our certificate of incorporation
authorizes the issuance of up to 100,000,000 shares of common stock, of which
approximately 75,000,000 shares remain available for issuance and may be issued
by us without stockholder approval. Issuances of additional shares of common
stock and/or preferred stock may be utilized as a method of discouraging,
delaying or preventing a change in control of our company.
Our
Charter Documents and Nevada Law May Inhibit A Takeover That Stockholders May
Consider Favorable.
Provisions
in our articles of incorporation and bylaws, and Nevada law, could delay or
prevent a change of control or change in management that would provide
stockholders with a premium to the market price of their Common Stock. The
authorization of undesignated preferred stock, for example, gives our board
the
ability to issue preferred stock with voting or other rights or preferences
that
could impede the success of any attempt to effect a change in control of us,
or
otherwise adversely affect holders of Common Stock in relation to holders of
preferred stock.
Compliance
with changing corporate governance and public disclosure regulations may result
in additional expense.
Keeping
abreast of, and in compliance with, changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations will require an increased amount
of management attention and external resources. In addition, prior to the
merger, our current management team was not subject to these laws and
regulations, as MedaSorb was a private corporation. We intend to continue to
invest all reasonably necessary resources to comply with evolving standards,
which may result in increased general and administrative expense and a diversion
of management time and attention from revenue-generating activities to
compliance activities.
Our
Common Stock is thinly traded on the OTC Bulletin Board, and we may be unable
to
obtain listing of our common stock on a more liquid market.
Our
Common Stock is quoted on the OTC Bulletin Board, which provides significantly
less liquidity than a securities exchange (such as the American or New York
Stock Exchange) or an automated quotation system (such as the Nasdaq Stock
Market). There is uncertainty that we will ever be accepted for a listing on
an
automated quotation system or securities exchange.
CAUTIONARY
STATEMENT CONCERNING
FORWARD-LOOKING
STATEMENTS
This
document contains “forward-looking statements”. These statements are subject to
risks and uncertainties and are based on the beliefs and assumptions of
management and information currently available to management. The use of words
such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,”
“should,” “likely” or similar expressions, indicates a forward-looking
statement. Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Future results may differ
materially from those expressed in the forward-looking statements. Many of
the
factors that will determine these results are beyond the ability of MedaSorb
to
control or predict. Stockholders are cautioned not to put undue reliance on
any
forward-looking statements, which speak only to the date made. For a discussion
of some of the factors that may cause actual results to differ materially from
those suggested by the forward-looking statements, please read carefully the
information under “Risk Factors” beginning on page 4.
The
identification in this document of factors that may affect future performance
and the accuracy of forward-looking statements is meant to be illustrative
and
by no means exhaustive. All forward-looking statements should be evaluated
with
the understanding of their inherent uncertainty. You may rely only on the
information contained in this prospectus. We have not authorized anyone to
provide information different from that contained in this prospectus. Neither
the delivery of this prospectus nor the sale of Common Stock means that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or solicitation of an offer
to buy these securities in any circumstances under which the offer or
solicitation is unlawful.
USE
OF PROCEEDS
There
will be no proceeds to us from the sale of shares of Common Stock in this
offering. However, we may receive up to approximately $4,879,908 upon exercise
of the outstanding warrants covered by this prospectus (assuming that no warrant
holder acquires shares by a “cashless” exercise). We intend to use any proceeds
from the exercise of warrants for working capital purposes.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
Common Stock trades in the over-the-counter-market on the OTC Bulletin Board
under the symbol “MSBT.” Our Common Stock began trading on such market on August
9, 2006. The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
|
|
Price
|
|
|
|
High
|
|
Low
|
|
2006
|
|
|
|
|
|
|
|
First
quarter
|
|
|
n/a
|
|
|
n/a
|
|
Second
quarter
|
|
|
n/a
|
|
|
n/a
|
|
Third
quarter (from August 9)
|
|
$
|
3.95
|
|
$
|
1.25
|
|
Fourth
quarter
|
|
$
|
1.73
|
|
$
|
0.57
|
|
The
number of holders of record for our Common Stock as of March 30, 2007 was
approximately 385. This number excludes individual stockholders holding stock
under nominee security position listings.
Dividends
We
have
not paid any cash dividends on our Common Stock and do not anticipate declaring
or paying any cash dividends in the foreseeable future. In addition, the terms
of our Series A Preferred Stock prohibit the payment of dividends on our Common
Stock. Nonetheless, the holders of our Common Stock are entitled to dividends
when and if declared by our board of directors from legally available
funds.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table summarizes outstanding options as of December 31, 2006, after
giving effect to the merger. The Registrant had no options outstanding
prior to the merger, and all of the options below were issued in connection
with
the merger to former option holders of MedaSorb.
|
|
Number
of securities to be issued upon exercise of outstanding
options
|
|
Weighted-average
exercise price of outstanding options
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in first
column)
|
|
Equity
compensation plans approved by stockholders
|
|
|
0
|
|
|
n/a
|
|
|
400,000(1
|
)
|
Equity
compensation plans not approved by stockholders
|
|
|
1,185,001
|
|
$
|
15.66
|
|
|
2,205,599
(2
|
)
|
Total
|
|
|
1,185,001(3
|
)
|
$
|
15.66(3
|
)
|
|
2,605,599
|
|
(1) |
Represents
options that may be issued under our 2003 Stock Option
Plan.
|
(2) |
Represents
options that may be issued under our 2006 Long-Term Incentive Plan.
|
(3) |
Represents
options to purchase (i) 133,858 shares of Common Stock at a price
of
$41.47 per share, (ii) 247,121 shares of Common Stock at a price
of $31.52
per share, (iii) 56,279 shares of Common Stock at a price of
$21.57 per
share, (iv) 34,028 shares of Common Stock at a price of $19.91 per
share,
(v) 443,507 shares of Common Stock at a price of $6.64 per share,
(vi) 452
shares of Common Stock at a price of $3.32 per share, (vii) 103,000
shares
of Common Stock at a price of $1.65 per share, and (viii) 166,756
shares
of Common Stock at a price of $1.25 per
share.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Reverse
Merger
On
June
30, 2006, pursuant to an Agreement and Plan of Merger, by and among us (formerly
known as Gilder Enterprises, Inc.), MedaSorb Technologies, Inc., a Delaware
corporation (“MedaSorb Delaware”) and MedaSorb Acquisition Inc., a newly formed
wholly-owned Delaware subsidiary of ours, MedaSorb
Delaware
merged with MedaSorb Acquisition Inc. (now known as MedaSorb Technologies,
Inc.), and the stockholders of MedaSorb Delaware became our stockholders.
MedaSorb Technologies, Inc. is now a wholly owned subsidiary of ours, and its
business (the business conducted by MedaSorb Delaware prior to the merger)
is
now our only business.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. We believe
the following critical accounting policies have significant effect in the
preparation of our consolidated financial statements.
Development
Stage Corporation
The
Company’s 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."
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.
Convertible
Notes Payable
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, the Company evaluates its convertible notes
payable to determine if an imbedded beneficial conversion feature (BCF) exists.
If a BCF is determined to exist, the Company allocates a portion of the proceeds
equal to the intrinsic value of that feature to additional paid-in capital.
The
debt discount attributed to the beneficial conversion feature is amortized
over
the convertible debenture's maturity period as interest expense using the
effective yield method.
In
accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
No.
98-5 to Certain Convertible Instruments, the Company recognizes the value
attributable to warrants to additional paid-in capital and a discount against
the convertible debentures. The Company values the warrants in accordance with
EITF 00-27 using the Black-Scholes pricing model. The debt discount attributed
to the value of the warrants issued is amortized over the convertible
debenture’s maturity period as interest expense using the effective yield
method.
Research
and Development
All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 123R, “Share-Based Payment”. This statement
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. This statement establishes fair value
as
the measurement objective in accounting for share-based payment arrangements
and
requires all entities to apply a fair-value based measurement method in
accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans.
Prior
to
the January 1, 2006 adoption of SFAS 123R, the Company accounted for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” and related interpretations. Accordingly, no compensation expense had
been recognized for stock options since all options granted had an exercise
price equal to the market price on the date of grant. As permitted by SFAS
123,
“Accounting for Stock-Based Compensation,” stock-based compensation was included
as a pro forma disclosure in the notes to the consolidated financial statements.
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 will seek to commercialize a blood purification technology that
efficiently
removes middle molecular weight toxins from circulating blood.
We
intend
to initially focus our efforts on the commercialization of our CytoSorb™
product, which we believe will provide a relatively faster regulatory pathway
to
market. The first indication for CytoSorb™ will be in the treatment of sepsis
(bacterial infection of the blood), which causes systematic inflammatory
response syndrome. CytoSorb™ has been designed to prevent or reduce the
accumulation of high concentrates of cytokines in the bloodstream associated
with sepsis. It is intended for short term use as an adjunctive device to the
standard treatment of sepsis. To date, we have manufactured the CytoSorb™ device
on a limited basis for testing purposes, including for use in clinical studies.
We believe that current state of the art blood purification technology (such
as
dialysis) is incapable of effectively clearing the toxins intended to be
adsorbed by our CytoSorb™ device.
Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorb™ has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines in the bloodstream. These
conditions include the prevention of post-operative complications of cardiac
surgery (cardiopulmonary bypass surgery) and damage to organs donated for
transplant prior to organ harvest. We are also exploring the potential benefits
the CytoSorb™ device may have in removing drugs from blood in situations such as
patient overdoses.
In
December 2006, we submitted to the FDA a proposed pilot study utilizing the
CytoSorb™ device in humans for the treatment of sepsis. If the proposed pilot
study is approved by the FDA, we anticipate commencing clinical studies by
the
third quarter of 2007. If these studies are successful and we obtain FDA
approval to proceed with our follow-up pivotal study, we anticipate that we
will
be able to begin sales of CytoSorb™ by mid-to-late 2009. There can be no
assurance that the FDA will allow us to conduct the pivotal study following
receipt of data from the pilot study. Previous studies using our BetaSorb™
device in patients with chronic kidney failure have provided valuable data
which
we will use in conducting clinical studies using our CytoSorb™ device. No
assurance can be given that our proposed CytoSorb™ product will work as intended
or that we will be able to obtain FDA approval to sell CytoSorb™. Even if we
ultimately obtain FDA approval, because we can not control the timing of FDA
responses to our submissions, there can be no assurance as to when such approval
will be obtained.
Our
research and development costs were $1,112,804 and $1,526,743 for the year
ended
December 31, 2006 and 2005, respectively. We have experienced substantial
operating losses since inception. As of December 31, 2006, we had an accumulated
deficit of $67,426,583 which included losses from operations of $7,671,580
and
$3,665,596 for the years ended December 31, 2006 and December 31, 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 $2,051,932 and $2,162,703
respectively, for the years ended December 31, 2006 and December 31, 2005
respectively. Legal, financial, and other professional consulting costs were
$912,379 and $948,209 for the years ended December 31, 2006 and 2005,
respectively.
In
addition, our loss for the year ended December 31, 2006 includes interest
expense of $4,738,877 primarily consisting of the following, net of interest
and
dividend income of $106,392:
· |
debt
discount charges of $3,351,961 as a result of the issuance of 3,058,141
shares of common stock to the holders of MedaSorb Delaware convertible
notes in the aggregate principal amount of $6,549,900 to induce those
holders to convert those notes into common stock prior to the
merger,
|
· |
$423,309
of interest expense with respect to those convertible
notes,
|
· |
$1,000,000
of debt discount charges as a result of the issuance to Margie Chassman
of
10,000,000 shares of common stock in connection with the funding
of a
$1,000,000 bridge loan to MedaSorb Delaware prior to the merger,
and
|
· |
$50,000
of interest expense with respect to the $1,000,000 bridge loan from
Ms.
Chassman.
|
Liquidity
and Capital Resources
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 reverse 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 (which are now our
financial statements) 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
December 31, 2006 we had cash on hand of $2,873,138, and current liabilities
of
$1,082,044.
We
believe that we have sufficient cash to fund our operations through the fourth
quarter of 2007, following
which we will need additional financing before we can complete clinical studies
and the commercialization of our proposed products. There
can
be no assurance that we will be successful in our capital raising
efforts.
In
October 2005, MedaSorb Delaware entered into an Investment Agreement with Margie
Chassman pursuant to which she advanced us $1,000,000. The advance bore interest
at the rate of 6% per annum. Pursuant to the terms of the Investment Agreement,
on October 28, 2006, the $1,000,000 advance was converted into
1,000,000 shares
of
Series A Preferred Stock and warrants to purchase 400,000 shares
of
Common Stock at a price of $2.00 per share.
BUSINESS
Overview
We
are a
medical device company that is currently in the development stage, headquartered
in Monmouth Junction, New Jersey (near Princeton). We have developed and will
seek to commercialize a blood purification technology that we believe will
be
able to efficiently remove middle molecular weight toxins from circulating
blood. We will be required to obtain required approvals from the United States
Food and Drug Administration before we can sell our products. In December 2006,
we submitted a proposed pilot study for approval to the FDA with respect to
CytoSorb™ , the first device we intend to bring to market. If we obtain FDA
approval, we anticipate commencing clinical studies for CytoSorb™ by the third
quarter of 2007. If these studies are successful and we obtain FDA approval
to
proceed with our follow-up pivotal study, we anticipate that we will be able
to
begin sales of CytoSorb™ by mid-to-late 2009, at the earliest, assuming a
successful pivotal study. However, there can be no assurance we will ever obtain
FDA approval for CytoSorb™ or any other device.
We
have
developed two products, CytoSorb™ and BetaSorb™ utilizing our adsorbent polymer
technology. These products are known medically as hemoperfusion devices. During
hemoperfusion, blood is removed from the body via a catheter or other blood
access device, perfused through a filter medium where toxic compounds are
removed, and returned to the body.
The
CytoSorb™ device consists of a cylinder containing the adsorbent polymer beads.
The cylinder incorporates industry standard connectors at either end of the
device which connect directly to an extra-corporeal circuit (bloodlines) on
a
stand alone basis. The extra-corporeal circuit consists of plastic tubing
through which the blood flows, our CytoSorb™ cartridge containing adsorbent
polymer beads, pressure monitoring gauges, and a blood pump to maintain blood
flow. The patient’s blood is accessed through a catheter inserted into his or
her veins. The catheter is connected to the extra-corporeal circuit and the
blood pump draws blood from the patient, pumps it through the cartridge and
returns it back to the patient in a closed loop system. As blood passes over
the
polymer beads in the cylinder, toxins (cytokines) are adsorbed from the
blood.
To
date,
we have manufactured the CytoSorb™ device on a limited basis for testing
purposes, including for use in clinical studies. We believe that current state
of the art blood purification technology (such as dialysis) is incapable of
effectively clearing the toxins intended to be adsorbed by our
devices.
Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorb™ has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines in the bloodstream. These
conditions include the prevention of post-operative complications of cardiac
surgery (cardiopulmonary bypass surgery) and damage to organs donated for
transplant prior to organ harvest. We are also exploring the potential benefits
the CytoSorb™ device may have in removing drugs from blood in situations such as
patient overdoses.
Previous
studies using our BetaSorb™ device in patients with chronic kidney failure have
provided valuable data which we will use in conducting clinical studies using
our CytoSorb™ device. However, limited studies have been conducted using our
CytoSorb™ device to date and no assurance can be given that our proposed
CytoSorb™ product will work as intended or that we will be able to obtain FDA
approval to sell CytoSorb™. Even if we ultimately obtain FDA approval, because
we can not control the timing of FDA responses to our submissions, there can
be
no assurance as to when such approval will be obtained.
Our
BetaSorb™ device is intended to remove beta2-microglobulin
from the blood of patients suffering from chronic kidney failure who rely on
long term dialysis therapy to sustain their life. BetaSorb™ utilizes an
absorbent polymer packed into an identically shaped and constructed cylinder
as
utilized for our CytoSorb™ product, although the polymers used in the two
devices are physically different. The BetaSorb™ device also incorporates
industry standard connectors at either end of the device which connect directly
into the extra-corporeal circuit (bloodlines) in series with a dialyser. To
date, we have manufactured the BetaSorb™ device on a limited basis for testing
purposes, including for use in clinical studies.
We
had
initially identified end stage renal disease (ESRD) as the target market for
our
polymer-based adsorbent technology. However, during the development of
BetaSorb™, we identified several applications for our adsorbent technology in
the treatment of critical care patients. As a result, we shifted our priorities
to pursue critical care applications (such as for the treatment of sepsis)
for
our technology given that BetaSorb’s™ potential for usage in chronic conditions
such as end stage renal disease is anticipated to have a longer and more complex
regulatory pathway. We currently intend to pursue our BetaSorb™ product after
the commercialization of the CytoSorb™ product. At such time as we determine to
proceed with our proposed BetaSorb™ product, if ever, we will need to conduct
additional clinical studies using the BetaSorb™ device and obtain FDA approval.
To
date,
we have conducted clinical studies using our BetaSorb™ device in patients with
chronic kidney failure, which have provided valuable data which underpin the
development of the critical care applications for our technology. The BetaSorb™
device has been used in a total of three human pilot studies, involving 20
patients, in the U.S. and Europe. The studies included approximately 345
treatments, with some patients using the device for up to 24 weeks (in multiple
treatment sessions lasting up to four hours, three times per week) in connection
with the application of our products to patients suffering from chronic kidney
failure. The BetaSorb™ device design was also tested on a single patient with
bacterial sepsis, producing results that our management has found encouraging
and consistent with our belief that our device design is appropriate for a
more
extensive sepsis study. In addition, CytoSorb’s™ ability to interact safely with
blood (hemocompatibility) has been demonstrated through ISO 10993 testing.
The
studies we have done to date were not done in conjunction with obtaining FDA
approval for the use of our CytoSorb™ device, the first device we intend to
bring to market.
We
have
not generated any revenue to date. We have incurred losses in each of our fiscal
years and expect these losses to continue for the foreseeable future. We will
need to raise significant additional funds to conduct clinical studies and
obtain regulatory approvals to commercialize our products. No assurance can
be
given that we will ever successfully commercialize any products.
Corporate
History
We
were
incorporated in Nevada on April 25, 2002 as Gilder Enterprises, Inc. and were
originally engaged in the business of installing and operating computer networks
that provided high-speed access to the Internet. On June 30, 2006, we disposed
of our original business, and pursuant to an Agreement and Plan of Merger,
acquired all of the stock of MedaSorb Technologies, Inc. (“MedaSorb Delaware”)
in a merger, and its business became our business. In connection with the
merger, we also changed our principal executive offices to those of MedaSorb
Delaware, which are located at 7 Deer Park Drive, Suite K, Monmouth Junction,
New Jersey 08852. Following the merger, in July 2006 we changed our name to
MedaSorb Technologies Corporation.
MedaSorb
Delaware was originally organized as a Delaware limited liability company in
August 1997 as Advanced Renal Technologies, LLC. MedaSorb Delaware changed
its
name to RenalTech International, LLC in November 1998, and to MedaSorb
Technologies, LLC in October 2003. In
December 2005, MedaSorb Delaware converted from a limited liability company
to a
corporation.
MedaSorb
Delaware has been engaged in research and development since its inception,
and
prior to the merger, had raised approximately $53 million from
investors. These proceeds have been used to fund the development of multiple
product applications and to conduct clinical studies. These funds have also
been
used to establish in-house manufacturing capacity to meet clinical testing
needs, expand our intellectual property through additional patents and to
develop extensive proprietary know-how with regard to our products.
Immediately
prior to the merger, MedaSorb Delaware had 292 stockholders that held an
aggregate of 20,340,929 shares of common stock of MedaSorb Delaware. In
connection with the merger, certain stockholders of ours (i.e.,
persons who were stockholders of Gilder Enterprises prior to the merger),
including Joseph Bowes, a former principal stockholder and our sole director
and
officer prior to the merger, sold an aggregate of 3,617,500 shares of our Common
Stock to several purchasers, and forfeited 4,105,000 shares of Common Stock,
which we cancelled. As a result, prior to giving effect to the merger, we had
outstanding 3,750,000 shares of Common Stock and, after giving effect to the
merger, we had outstanding 24,090,929 shares of Common Stock.
The
principal stockholders of MedaSorb Delaware immediately prior to the merger
were
Margie Chassman, Guillermina Montiel, Al Kraus and Robert Shipley, who
respectively beneficially owned 10,000,000 shares (49.2%), 5,052,456 shares
(24.6%), 1,393,631 shares (6.9%) and 1,248,372 shares (6%), of the outstanding
common stock of MedaSorb Delaware. Immediately following the merger and the
closing of the Series A Preferred Stock financing described below, Ms. Chassman
beneficially owned an additional 630,000 shares of Common Stock underlying
the
warrant we issued to her in connection with her pledge of stock to the
purchasers of the Series A Preferred Stock, as described below. On July 5,
2006,
Ms. Chassman transferred 2,005,000 shares of Common Stock owned by her to her
designees as provided for under the Investment Agreement described elsewhere
in
this prospectus. In addition, following the closing of the Series A Preferred
Stock financing, without giving effect to applicable restrictions that prohibit
conversion of the Series A Preferred Stock or exercise of warrants if as a
result the holder would hold in excess of 4.99% of our Common Stock, Longview
Fund, LP beneficially owned 3,600,000 shares (13%) of our Common
Stock.
Principal
Terms of the Reverse Merger
In
connection with the merger, the former stockholders of MedaSorb Delaware were
issued an aggregate of 20,340,929 shares of Common Stock in exchange for the
shares of MedaSorb common stock previously held by them. In addition, pursuant
to the terms of the merger, 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 options to purchase the same number of shares of
our
Common Stock at the same exercise prices and otherwise on the same general
terms
as the MedaSorb Delaware options and warrants that were cancelled. 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 our Common Stock
as
payment toward such services.
Concurrently
with the closing of the merger, Joseph G. Bowes, our sole director and officer
prior to the merger, appointed Al Kraus, Joseph Rubin, Esq., and Kurt Katz
to
the Board of Directors, and then resigned from the Board and from his positions
as an officer. In addition, at such time, Al Kraus was appointed our President
and Chief Executive Officer, James Winchester, MD was appointed our Chief
Medical Officer, Vincent Capponi was appointed our Chief Operating Officer
and
David Lamadrid was appointed our Chief Financial Officer.
For
accounting purposes, the merger is being accounted for as a reverse merger,
since we were a shell company prior to the merger, the former stockholders
of
MedaSorb Delaware own a majority of the issued and outstanding shares of our
Common Stock after the merger, and the directors and executive officers of
MedaSorb Delaware became our 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 our historical financial statements.
Principal
Terms of the Series A Financing Consummated upon the Closing of the
Merger
On
June
30, 2006, immediately following the merger, we sold to four institutional
investors, in a private offering generating gross proceeds of $5.25 million,
an
aggregate of 5,250,000 shares of our Series A 10% Cumulative Convertible
Preferred Stock initially convertible into 4,200,000 shares of Common Stock,
and
five-year warrants to purchase an aggregate of 2,100,000 shares of our Common
Stock.
The
Series A Preferred Stock has a stated value of $1.00 per share. The Series
A
Preferred Stock is not redeemable at the holder’s option but may be redeemed by
us at our option following the third anniversary of the issuance of the Series
A
Preferred Stock for 120% of the stated value thereof plus any accrued but unpaid
dividends upon 30 days' prior written notice (during which time the Series
A
Preferred Stock may be converted), provided a registration statement is
effective under the Securities Act with respect to the shares of our Common
Stock into which such Series A Preferred Stock is then convertible, and an
event
of default, as defined in the Certificate of Designations relating to the Series
A Preferred Stock is not then continuing.
The
Series A Preferred Stock has a dividend rate of 10% per annum, payable
quarterly. The dividend rate increases to 20% per annum upon the occurrence
of
the events of default specified in the Certificate of Designations. Dividends
may be paid in cash or, provided no event of default is then continuing, with
additional shares of Series A Preferred Stock valued at the stated value
thereof. The Series A Preferred Stock is convertible into Common Stock at the
conversion rate of one share of Common Stock for each $1.25 of stated value
or
accrued but unpaid dividends converted.
The
warrants issued in the private placement have an initial exercise price of
$2.00
per share. The aggregate number of shares of Common Stock covered by the
Warrants equaled, at the date of issuance, one-half the number of shares of
Common Stock issuable upon the full conversion of the Series A Preferred Stock
issued to the investors on that date.
We
have
agreed to file a registration statement (of which this prospectus is a part)
under the Securities Act covering the Common Stock issuable upon conversion
of
the Series A Preferred Stock and exercise of the warrants within 120 days
following closing of the private placement and to cause it to become effective
within 240 days of that closing. We also granted the investors demand and
piggyback registration rights with respect to such Common Stock.
Because
the registration statement in which this prospectus is included was not declared
effective within the time required under our agreements with the June 30, 2006
purchasers of the Series A Preferred Stock, dividends on the shares of Series
A
Preferred Stock issued to those purchasers accrued at the rate of 20% per annum
from February 26, 2007 through May 7, 2007 and are payable in cash for such
period, and we are obligated t o pay those purchasers an aggregate of $105,000
per 30-day period from February 26, 2007 through May 7, 2007.
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 our 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, the conversion
price and/or exercise price will be reduced to the lower price.
In
connection with the sale of the Series A Preferred Stock and warrants to the
four institutional investors, to induce those investors to make the investment,
Margie Chassman pledged to those investors securities of other publicly traded
companies. The pledged securities consist of a $400,000 promissory note of
Xechem International, Inc. convertible into Xechem common stock at $.005 per
share, and 250,000 shares of the common stock of Novelos Therapeutics, Inc.
Based on the market value of the Xechem common stock ($.07 per share) and the
Novelos common stock ($1.03) per share, on June 30, 2006, the aggregate fair
market value of the pledged securities at the date of pledge was approximately
$5,857,500.
In
the
event those investors have suffered a loss on their investment in our securities
as of June 30, 2007 (as determined by actual sales by those investors or the
market price of our Common Stock on such date), the investors may sell all
or a
portion of the pledged securities so that the investors receive proceeds from
such sale in an amount equal to their loss on their investment in our
securities. No assurance can be given that the sale of the pledged securities
will provide these investors with sufficient proceeds to cover the full extent
of their loss, if any, on their investment. In consideration of her pledge
to
these investors, we paid Ms. Chassman (i) $525,000 in cash (representing 10%
of
the cash amount raised from the institutional investors), and (ii) five-year
warrants to purchase
· |
525,000
shares of Series A Preferred Stock (representing 10% of the Series
A
Preferred Stock purchased by those investors), and
|
· |
warrants
to purchase 210,000 shares of Common Stock at an exercise price of
$2.00
per share (representing 10% of the Series A Preferred Stock purchased
by
those investors),
|
for
an
aggregate exercise price of $525,000.
Technology,
Products and Applications
For
approximately the past half-century, the field of blood purification has been
focused on hemodialysis, a mature, well accepted medical technique primarily
used to sustain the lives of patients with permanent or temporary loss of kidney
function. It is widely understood by the medical community that dialysis has
inherent limitations in that its ability to remove toxic substances from blood
drops precipitously as the size of toxins increases. Our hemocompatible
adsorbent technology is expected to address this shortcoming by removing toxins
largely untouched by dialysis.
Our
products, CytoSorb™ and BetaSorb™ , are known in the medical field as
hemoperfusion devices. During hemoperfusion, blood is removed from the body
via
a catheter or other blood access device, perfused through a filter medium where
toxic compounds are removed, and returned to the body.
We
believe that our polymer adsorbent technology may remove middle molecular weight
toxins, such as cytokines, circulating in the blood. We believe that our
technology may have many applications in the treatment of common, chronic and
acute healthcare complications including the treatment and/or prevention of
sepsis; the treatment of chronic kidney failure; the treatment of liver failure;
the prevention of post-operative complications of cardiopulmonary bypass
surgery; and the prevention of damage to organs donated by brain-dead donors
prior to organ harvest. These applications vary by cause and complexity as
well
as by severity but share a common characteristic i.e. high concentrations of
toxins in the circulating blood.
Both
the
CytoSorb™ and BetaSorb™ devices consist of a cylinder containing adsorbent
polymer beads, although the polymers used in the two devices are physically
different. The cylinders in both devices incorporate industry standard
connectors at either end of the device which connect directly to the
extra-corporeal circuit (bloodlines) in series with a dialyser, in the case
of
the BetaSorb™ device, or as a stand alone device in the case of the CytoSorb™
device. Both devices will require no additional expensive equipment, and will
require minimal training.
The
extra-corporeal circuit consists of plastic blood tubing, our CytoSorb™ or
BetaSorb™ cartridge, as applicable, containing adsorbent polymer beads, pressure
monitoring gauges, and a blood pump to maintain blood flow. The patient’s blood
is accessed through a catheter inserted into his or her veins. The catheter
is
connected to the extra-corporeal circuit and the blood pump draws blood from
the
patient, pumps it through the cartridge and returns it back to the patient
in a
closed loop system.
Markets
Sepsis
In
the
United States alone, there are more than one million new cases of sepsis
annually; extrapolated to a global population, the worldwide incidence is
several million cases per year. Severe trauma and community acquired pneumonia
are often associated with sepsis.
Sepsis
patients are critically ill and suffer a very high mortality rate of between
28%
and 60%. Because they are so expensive to treat, we believe that efficacy rather
than cost will be the determining factor in the adoption of CytoSorb™ in the
treatment of sepsis. Based on current pricing of charcoal hemoperfusion devices
in the market today, we estimate that our CytoSorb™ device will sell for $500
per unit. Our current pricing model represents a fraction of what is currently
spent on the treatment of a sepsis patient.
Brain-Dead
Organ Donors
There
are
in excess of 6,000 brain dead organ donors each year in the United States;
worldwide, the number of these organ donors is estimated to be at least double
the U.S. brain dead organ donor population. There is a severe shortage of donor
organs. Currently, there are more than 85,000 individuals on transplant waiting
lists in the United States. We expect that the use of our CytoSorb™ device in
brain dead organ donors will increase the number of viable organs harvested
from
the donor pool and improve the survival of transplanted organs.
Cardiopulmonary
Bypass Procedures
There
are
approximately 400,000 cardiopulmonary bypass (CPB) and cardiac surgery
procedures performed annually in the U.S. and more than 800,000 worldwide.
Some
patients, nearly one-third, suffer from post-operative complications of
cardiopulmonary bypass surgery, including complications from infection,
pneumonia, pulmonary, and neurological dysfunction. A common characteristic
of
these post operative complications is the presence of cytokines in the blood.
Extended surgery time leads to longer ICU recovery time and hospital stays,
both
leading to higher costs - approximately $32,000 per coronary artery bypass
graft
procedure. We believe that the use of CytoSorb™ during and after the surgical
procedure may prevent or mitigate post-operative complications for many CPB
patients.
We
anticipate that the CytoSorb™ device, incorporated into the extra-corporeal
circuit used with the by-pass equipment during surgery, and/or employed
post-operatively for a period of time, may mitigate inflammation and speed
recovery.
Chronic
Kidney Failure
The
National Kidney Foundation estimates that more than 20 million Americans have
chronic kidney disease. Left untreated, chronic kidney disease can ultimately
lead to chronic kidney failure, which requires a kidney transplant or chronic
dialysis (generally three times per week) to sustain life. There are
approximately 300,000 patients in the United States currently receiving chronic
dialysis and more than 1.4 million worldwide. Approximately 89% of patients
with
chronic kidney disease are treated with hemodialysis.
Our
BetaSorb™ device has been designed for use in conjunction with standard
dialysis. Standard dialysis care typically involves three sessions per week,
averaging approximately 150 sessions per year. Assuming BetaSorb™ use in each
session, every 100,000 patients would require approximately 15 million devices
annually.
Products
We
believe that the polymer adsorbent technology used in our products has the
potential to remove middle molecular weight toxins, such as cytokines,
circulating in the blood. All of the potential applications described below
(i.e.,
the
treatment and/or prevention of sepsis; the treatment of chronic kidney failure;
the treatment of liver failure; the prevention of post-operative complications
of cardiopulmonary bypass surgery; and the prevention of damage to organs
donated by brain-dead donors prior to organ harvest) share in common high
concentrations of toxins in the circulating blood. However, because of the
limited studies we have conducted to date, we are subject to substantial risk
that our technology will have little or no effect on the treatment of any of
these indications. We only recently submitted a proposed pilot study for
approval to the FDA with respect to CytoSorb™ , the first device we intend to
bring to market. If we obtain FDA approval, we anticipate commencing clinical
studies for CytoSorb™ by the third quarter of 2007. If these studies are
successful and we obtain FDA approval to proceed with our follow-up pivotal
study, we anticipate that we will be able to begin sales of CytoSorb™ by
mid-to-late 2009, at the earliest, assuming a successful pivotal study. However,
there can be no assurance we will ever obtain FDA approval for CytoSorb™ or any
other device.
The
CytoSorb™ Device (Critical Care)
APPLICATION:
Treatment and Prevention of Sepsis
Sepsis
is
defined by high levels of toxic compounds (“cytokines”) which are released into
the blood stream as part of the body’s auto-immune response to severe infection
or injury. These toxins cause severe inflammation and damage healthy tissues,
which can lead to organ dysfunction and failure. Sepsis is very expensive to
treat and has a high mortality rate.
Potential
Benefits:
To the
extent our adsorbent blood purification technology is able to prevent or reduce
the accumulation of cytokines in the circulating blood, we believe our products
may be able to prevent or mitigate severe inflammation, organ dysfunction and
failure in sepsis patients. Therapeutic goals as an adjunctive therapy include
reduced ICU and total hospitalization time.
Background
and Rationale:
We
believe that the effective treatment of sepsis is the most valuable potential
application for our technology. Sepsis carries mortality rates of between 28%
and 60%. Death can occur within hours or days, depending on many variables,
including cause, severity, patient age and co-morbidities. Researchers estimate
that there are approximately one million new cases of sepsis in the U.S. each
year; extrapolated to a global population, this equates to several million
new
cases annually. In the U.S. alone, treatment of sepsis costs nearly $18 billion
annually. According to the Centers for Disease Control, sepsis is the tenth
leading cause of death in the U.S., as reported by (CDC). More than 1,000 people
die each day from sepsis.
An
effective treatment for sepsis has been elusive. Pharmaceutical companies have
been trying to develop drug therapies to treat the condition. With the exception
of a single drug, Xigris® from Eli Lilly, which demonstrated a small improvement
in survival in a small segment of the patient population, to our knowledge,
all
other efforts to date have failed to significantly improve patient
survival.
We
believe that our technology presents a new therapeutic approach in the treatment
of sepsis. The potential benefits of blood purification in the treatment of
sepsis patients are widely acknowledged by medical professionals and have been
studied using dialysis and hemofiltration technology. These studies, while
encouraging, demonstrated that dialysis alone produced only limited benefit
to
sepsis patients. The reason for this appears to be rooted in a primary
limitation of dialysis technology itself: the inability of standard dialysis
to
effectively and efficiently remove larger toxins from circulating blood. Limited
studies of our CytoSorb™ device have provided us with data consistent with our
belief that CytoSorb™ has the ability to remove these larger toxins. CytoSorb’s™
ability to interact safely with blood (hemocompatibility) has been demonstrated
through ISO 10993 testing. Data collected during the “emergency and
compassionate use” treatment of a single sepsis patient has been encouraging to
us.
CytoSorb™
has been designed to achieve broad-spectrum removal of both pro- and
anti-inflammatory cytokines, preventing or reducing the accumulation of high
concentrations in the bloodstream. This approach is intended to modulate the
immune response without blocking or suppressing the function of any of its
mediators. For this reason, researchers have referred to the approach reflected
in our technology as ‘immunomodulatory’ therapy.
Projected
Timeline and Budget Requirements:
Previous
clinical studies using our BetaSorb™ device in patients with chronic kidney
failure have provided valuable data which underpin the development of the
critical care applications for our technology. The BetaSorb™ device has been
used in a total of three human pilot studies, involving 20 patients, in the
U.S.
and Europe. The studies included approximately 345 treatments, with some
patients using the device for up to 24 weeks (in multiple treatment sessions
lasting up to four hours, three times per week) in connection with the
application of our products to patients suffering from chronic kidney failure.
The BetaSorb™ device design was also tested on a single patient with bacterial
sepsis, producing results that our management has found encouraging and
consistent with our belief that our device design is appropriate for a more
extensive sepsis study. Our plans for the development of CytoSorb™ to treat
sepsis patients are summarized in the table below.
Task
|
|
Status/Estimated
Time Required
|
|
Estimated
Budget
Requirements
|
1.
Design pilot study
|
|
Completed;
Submitted for FDA approval in December 2006
|
|
(nominal)
|
|
|
|
|
|
2.
Conduct pilot study
|
|
six
to nine months following design of pilot study and approval from
FDA to
commence the study
|
|
$1.2
million
|
|
|
|
|
|
3.
Design pivotal study
|
|
Concurrent
with item 2
|
|
(nominal)
|
|
|
|
|
|
4.
Conduct pivotal study
|
|
nine
to 12 months following completion of a successful pilot study, submission
of final report of pilot study to FDA and FDA approval of pivotal
study
design
|
|
$1.8
million
|
|
|
|
|
|
5.
Approval time following submission
|
|
six
to nine months
|
|
|
|
|
|
|
|
Total
|
|
Mid
to late 2009
|
|
$3.0
million
|
Because
our technology pertains to a medical device, the regulatory pathway and approval
process are faster and more straightforward than the process related to the
approval of a drug. However, even if we ultimately obtain FDA approval, because
we can not control the timing of FDA responses to our submissions, there can
be
no assurance as to when such approval will be obtained.
APPLICATION:
Prevention
and treatment of organ dysfunction in brain-dead organ donors to increase the
number and quality of viable organs harvested from donors
Potential
Benefits:
If
CytoSorb™ is able to prevent or reduce high-levels of cytokines from
accumulating in the bloodstream of brain-dead organ donors, we believe CytoSorb™
will be able to mitigate organ dysfunction and failure which results from severe
inflammation following brain-death. The primary goals for this application
are:
· |
improving
the viability of organs which can be harvested from brain-dead organ
donors, and
|
· |
increasing
the likelihood of organ survival following
transplant.
|
Background
and Rationale:
When
brain death occurs, the body responds by generating large quantities of
inflammatory cytokines. This process is similar to sepsis. A high percentage
of
donated organs are never transplanted due to this response, which damages
healthy organs and prevents transplant. In addition, inflammation in the donor
may damage organs that are harvested and reduce the probability of graft
survival following transplant.
There
is
a shortage of donated organs worldwide, with approximately 85,000 people
currently on the waiting list for organ transplants in the United States alone.
Because there are an insufficient number of organs donated to satisfy demand,
it
is vital to maximize the number of viable organs donated, and optimize the
probability of organ survival following transplant.
Projected
Timeline and Budget Requirements:
Studies
are currently being conducted under a $1 million grant from the Health Resources
and Services Administration (HRSA), an
agency
of the U.S. Department of Health and Human Services. Researchers at the
University of Pittsburgh Medical Center and the University of Texas, Houston
Medical Center completed the observational and dosing phases of the project
in
the third quarter of 2006. The observational and dosing phases of the study
involved 30 viable donors and eight non-viable donors, respectively. The next
phase of this study, the treatment phase, will involve viable donors treated
with the CytoSorb™
device.
In this phase of the project, viable donors will be treated and the survival
and
function of organs in transplant recipients will be tracked and measured. The
treatment phase will be contingent upon further discussion with the FDA and
HRSA
regarding study design, as well as obtaining additional funding.
APPLICATION:
Prevention and treatment of post-operative complications of cardiopulmonary
bypass surgery
Potential
Benefits:
If
CytoSorb™ is able to prevent or reduce high-levels of cytokines from
accumulating in the blood system during and following cardiac surgery, we
anticipate that post-operative complications of cardiopulmonary bypass surgery
may be able to be prevented or mitigated. The primary goals for this application
are to:
· |
reduce
ventilator and oxygen therapy requirements;
|
· |
reduce
length of stay in hospital intensive care units; and
|
· |
reduce
the total cost of patient care.
|
Background
and Rationale:
Due to
the highly invasive nature of cardiopulmonary bypass surgery, high levels of
cytokines are produced by the body, triggering severe inflammation. If our
products are able to prevent or reduce the accumulation of cytokines in a
patient’s blood stream, we expect to prevent or mitigate post-operative
complications caused by an excessive or protracted inflammatory response to
the
surgery. While not all patients undergoing cardiac surgery suffer these
complications, it is impossible to predict before surgery which patients will
be
affected.
Projected
Timeline:
We
commissioned the University of Pittsburgh to conduct a study to characterize
the
production of cytokines as a function of the surgical timeline for
cardiopulmonary bypass surgery. An observational study of 32 patients was
completed, and information was obtained with respect to the onset and duration
of cytokine release. We expect that this information will aid us in defining
the
appropriate time to apply the CytoSorb™ device to maximize therapeutic impact.
We are not currently focusing our efforts on the commercialization of CytoSorb™
for application to cardiac surgery. Upon successful commercialization of the
sepsis application, we will pursue the use of our polymer absorbent technology
for other critical care uses, such as cardiopulmonary bypass surgery.
The
BetaSorb™ Device (Chronic Care)
APPLICATION:
Prevention
and treatment of health complications caused by the accumulation of metabolic
toxins in patients with chronic renal failure
Potential
Benefits:
If
CytoSorb™ is able to prevent or reduce high levels of metabolic waste products
from accumulating in the blood and tissues of long-term dialysis patients,
we
anticipate that the health complications characteristic to these patients can
be
prevented or mitigated. The primary goals for this application are to
· |
improve
and maintain the general health of dialysis patients;
|
· |
improve
the quality of life of these
patients
|
· |
reduce
the total cost of patient care; and
|
· |
increase
life expectancy.
|
Background
and Rationale:
Our
BetaSorb™ device is intended for use on patients suffering from chronic kidney
failure who rely on long-term dialysis therapy to sustain life. Due to the
widely recognized inability of dialysis to remove larger proteins from blood,
metabolic waste products, such as Beta-2 microglobulin, accumulate to toxic
levels and are deposited in the joints and tissues of patients. Specific toxins
known to accumulate in these patients have been linked to their severe health
complications, increased healthcare costs, and reduced quality of life.
Researchers
also believe that the accumulation of toxins may play an important role in
the
significantly reduced life expectancy experienced by dialysis patients. In
the
U.S., the average life expectancy of a dialysis patient is five years. Industry
research has identified links between many of these toxins and poor patient
outcomes. If our BetaSorb™ device is able to routinely remove these toxins
during dialysis and prevent or reduce their accumulation, we expect our
BetaSorb™ device to maintain or improve patient health in the long-term. We
believe that by reducing the incidence of health complications, the annual
cost
of patient care will be reduced and life expectancy increased.
The
poor
health experienced by chronic dialysis patients is illustrated by the fact
that
in the U.S. alone, more than $20 billion is spent annually caring for this
patient population. While the cost of providing dialysis therapy alone is
approximately $23,000 per patient per year, the total cost of caring for a
patient ranges from $60,000 to more than $120,000 annually due to various health
complications associated with dialysis.
Projected
Timeline:
We have
collected a significant amount of empirical data for the development of this
application. As the developer of this technology, we had to undertake extensive
research, as no comparable technology was available for reference purposes.
We
have completed several pilot studies, and most recently a clinical pilot of
six
patients in California for up to 24 weeks in which our BetaSorb™ device removed
the targeted toxin, beta2-microglobulin,
as expected. In total, we have sponsored clinical studies utilizing our
BetaSorb™ device on 20 patients involving approximately 345 total treatments.
Each study was conducted by a clinic or hospital personnel with MedaSorb
providing technical assistance as requested.
As
discussed above, due to practical and economic considerations, we are now
focusing our efforts and resources on commercializing our CytoSorb™ device for
critical care application. Following commercial introduction of the CytoSorb™
device, we expect to conduct additional clinical studies using the BetaSorb™
device in the treatment of end stage renal disease patients.
Commercial
and Research Partners
University
of Pittsburgh Medical Center
Pursuant
to a “SubAward Agreement” we entered into with the University of Pittsburgh in
September 2005, we are working with researchers at the University of Pittsburgh
- Critical Care Medicine Department in the development of the sepsis application
for our technology. Consisting of more than twenty physicians, as well as
numerous full-time scientists, educators and administrative assistants, the
Critical Care Medicine Department at the University of Pittsburgh is one of
the
largest organizations of its type in the world and has established an
international reputation for excellence in clinical care, education, and
research.
The
SubAward Agreement was entered into under a grant from NIH entitled “Systems
Engineering of a Pheresis Intervention for Sepsis (SEPsIS)”
to study
the use of adsorbent polymer technology in the treatment of severe sepsis.
The
study commenced in September 2005 and is expected to continue for a total of
five years. Currently, we believe that the only polymers being used in this
study are polymers we have developed specifically for use in the study, which
are similar to the polymers used in our devices. Under the SubAward Agreement,
during the first year of the study, which concluded in August 2006, we received
$104,921 for our efforts in support of the grant. Although we have not yet
formally entered into an additional SubAward Agreement, we continue to supply
UPMC with new samples based on our adsorbent polymer technology under the same
terms as the initial SubAward Agreement, and expect to do so for the duration
of
the study. UPMC has indicated to us that the amounts budgeted for our
participation under the study are approximately $142,000, $110,000, $133,000
and
$163,000, respectively, for years two, three, four and five of the study, but
that our continued participation in the study is subject to our performance
and
an annual review by UPMC.
Researchers
at UPMC have participated in nearly every major clinical study of potential
sepsis intervention during the past twenty years. Drs. Derek Angus and John
Kellum were investigators for Eli Lilly’s sepsis drug, Xigris®. Dr. Kellum, a
member of the UPMC faculty since 1994, is our principal investigator for
CytoSorb™. Dr. Kellum, together with several other researchers at UPMC, serve on
our Critical Care Advisory Board. Dr. Kellum’s research interests span various
aspects of Critical Care Medicine, but center on critical care nephrology
(including acid-base, and renal replacement therapy), sepsis and multi-organ
failure, and clinical epidemiology. He is Chairman of the Fellow Research
Committee at the University of Pittsburgh Medical Center and has
authored more than 70 publications and has received numerous research grants
from foundations and industry.
Fresenius
Medical Care
AG
In
1999,
we entered into an exclusive, long-term agreement with Fresenius Medical Care
for the global marketing and distribution of our BetaSorb™ device and any
similar product we may develop for the treatment of renal disease. We currently
intend to pursue our BetaSorb™ product after the commercialization of the
CytoSorb™ product. At such time as we determine to proceed with our proposed
BetaSorb™ product, if ever, we will need to conduct additional clinical studies
using the BetaSorb™ device and obtain FDA approval.
Fresenius
Medical Care is the world's largest, integrated provider of products and
services for individuals with chronic kidney failure. Through its network of
more than 1,600 dialysis clinics in North America, Europe, Latin America and
Asia-Pacific, Fresenius Medical Care provides dialysis treatment to more than
130,000 patients around the globe. Fresenius Medical Care is also the world's
largest provider of dialysis products, such as hemodialysis machines, dialyzers
and related disposable products.
Advisory
Boards
From
time
to time our management meets with scientific advisors who sit on our Scientific
Advisory Board, our Medical Advisory Board - Critical Care Medicine, and our
Medical Advisory Board - Chronic Kidney Failure / Dialysis.
Our
Scientific Advisory Board consists of four scientists with expertise in the
fields of fundamental chemical research, polymer research and development,
and
dialysis engineering technology.
Our
Medical Advisory Board - Critical Care Medicine consists of seven medical
doctors, four of whom are affiliated with UPMC, with expertise in critical
care
medicine, sepsis, multi-organ failure and related clinical study
design.
Our
Medical Advisory Board - Chronic Kidney Failure / Dialysis consists of four
medical doctors with expertise in kidney function, kidney diseases and their
treatment, and dialysis technology.
We
compensate members of our Advisory Boards at the rate of $2,000 for each
full-day meeting they attend in person; $1,200 if attendance is by telephone.
When we consult with members of our Advisory Board (whether in person or by
telephone) for a period of less than one day, we compensate them at the rate
of
$150 per hour, except with respect to one of our advisors, who we compensate
at
the rate of $200 per hour. We also reimburse members of our Advisory Boards
for
their travel expenses for attending our meetings.
Royalty
Agreements
With
Principal Stockholder
In
August
2003, in order to induce Guillermina Vega Montiel, a principal stockholder
of
ours, to make a $4 million investment in MedaSorb Delaware, we granted Ms.
Montiel a perpetual royalty equal to three percent of all gross revenues
received by us from sales of CytoSorbTM
in
the
applications of sepsis, cardiopulmonary bypass surgery, organ donor,
chemotherapy and inflammation control. In addition, for her investment, Ms.
Montiel received 1,230,770 membership units of MedaSorb Delaware, which at
the
time was a limited liability company. Those membership units ultimately became
185,477 shares of our Common Stock following our June 30, 2006
merger.
With
Purolite
In
2003,
Purolite filed a lawsuit against us asserting, among other things, co-ownership
and co-inventorship of certain of our patents. On September 1, 2006, the United
States District Court for the Eastern District of Pennsylvania approved a
Stipulated Order and Settlement Agreement under which we and Purolite agreed
to
the settlement of the action. The Settlement Agreement provides us with the
exclusive right to use our patented technology and proprietary know how relating
to adsorbent polymers for a period of 18 years. In particular, the Settlement
Agreement relates to twelve of our issued patents and five pending patent
applications covering our biocompatible polymeric resins, our methods of
producing these polymers, and the methods of using the polymers to remove
impurities from physiological fluids, such as blood.
Under
the
terms of the Settlement Agreement, we have agreed to pay Purolite royalties
of
2.5% to 5% on the sale of those of our products, if and when those products
are
sold commercially, that are used in direct contact with blood. However, if
the
first product we offer for commercial sale is a biocompatible polymer to be
used
in direct contact with a physiological fluid other than blood, royalties will
be
payable with respect to that product as well. The royalty payments provided
for
under the Settlement Agreement would apply to our currently envisioned CytoSorb™
and BetaSorb™ products.
Following
the expiration of the eighteen year term of the Settlement Agreement, the
patents and patent applications that are the subject of the Settlement Agreement
should have expired under current patent laws, and the technology claimed in
them will be available to the public. However, following such time, we continue
to exclusively own any confidential and proprietary know how.
Product
Payment & Reimbursement
Critical
Care Applications
Payment
for our CytoSorb™ device in the treatment and prevention of sepsis and other
related acute care applications is anticipated to fall under the
“diagnosis-related group” (DRG) in-patient reimbursement system, which is
currently the predominant basis of hospital medical billing in the United
States. Under this system, predetermined payment amounts are assigned to
categories of medical patients with respect to their treatments at medical
facilities based on the DRG that they fall within (which is a function of such
characteristics as medical condition, age, sex, etc.) and the length of time
spent by the patient at the facility. Reimbursement is not determined by the
actual procedures used in the treatment of these patients, and a separate
reimbursement decision would not be required to be made by Medicare, the HMO
or
other provider of medical benefits in connection with the actual method used
to
treat the patient.
Critical
care applications such as those targeted by our CytoSorb™ device involve a high
mortality rate and extended hospitalization, coupled with extremely expensive
ICU time. In view of these high costs and high mortality rates, we believe
acceptance of our proprietary technology by critical care practitioners and
hospital administrators will primarily depend on safety and efficacy factors
rather than cost.
Chronic
Renal Failure
In
the
U.S., over 80% of chronic dialysis patients are Medicare-eligible, regardless
of
age. Therefore, it is expected that Medicare will be the primary payer for
the
BetaSorb™ device, either through the current “fee for service” mechanism or
managed care programs. The large majority of costs not covered by federal
programs are covered by the private insurance sector.
While
the
fee-for-service composite rate system is currently the dominant payment
mechanism, many industry participants believe that a managed care system will
become the dominant payment mechanism. We believe that movement to a full or
shared-risk managed care system would speed market acceptance of BetaSorb™
because, under such a system, providers will have a strong incentive to adopt
technologies that lower overall treatment costs. Fresenius is a leading
participant in the move to managed care and will play a leading role in the
demonstration and introduction of our product to Medicare.
Competition
General
We
believe that our products represent a unique approach to disease states and
health complications associated with the presence of larger toxins (often
referred to as middle molecular weight toxins) in the bloodstream, including
sepsis, post-operative complications of cardiac surgery (cardiopulmonary bypass
surgery), damage to organs donated for transplant prior to organ harvest, and
renal disease. Researchers have explored the potential of using existing
membrane-based dialysis technology to treat patients suffering from sepsis.
These techniques are unable to effectively remove the middle molecular weight
toxins. We believe that our devices may be able to remove middle molecular
weight toxins from circulating blood. This concept has been tested at the
University of Pittsburg using a septic rat model based on lipopolysaccharide
(a
particular kind of toxin, known as a bacterial endotoxin) and the CytoSorb™
polymer.
Both
the
CytoSorb™ and BetaSorb™ devices consist of a cylinder containing adsorbent
polymer beads. The cylinder incorporates industry standard connectors at either
end of the device which connect directly to an extra-corporeal circuit
(bloodlines) on a stand alone basis. The extra-corporeal circuit consists of
plastic tubing through which the blood flows, our cartridge (CytoSorb™ or
BetaSorb™ depending on the condition being treated) containing our adsorbent
polymer beads, pressure monitoring gauges, and a blood pump to maintain blood
flow. The patient’s blood is accessed through a catheter inserted into his or
her veins. The catheter is connected to the extra-corporeal circuit and the
blood pump draws blood from the patient, pumps it through the cartridge and
returns it back to the patient in a closed loop system. As blood passes over
the
polymer beads in the cylinder, toxins are adsorbed from the blood, without
filtering any fluids from the blood or the need for replacement fluid or
dialysate.
Although
standard dialysis also uses extra-corporeal circuits and blood pumps, the
technology used in dialysis to remove toxins (osmosis and convection) drains
fluids out of the bloodstream in a process called ultrafiltration, and uses
semi-permeable membranes as a filter, allowing the passage of certain sized
molecules across the membrane, but preventing the passage of other, larger
molecules.
MedaSorb’s
technology uses the same extra-corporeal circuits as dialysis, however, our
devices do not rely on membrane technology but instead use an adsorbent of
specified pore size, which controls the size of the molecules which can pass
into the adsorbent. As blood flows over our polymer adsorbent, middle molecules
such as cytokines flow into the polymer adsorbent and are adsorbed. Our devices
do not use semipermeable membranes or dialysate. In addition, our devices do
not
remove fluids from the blood like a dialyser. Accordingly, we believe that
our
technology has significant advantages as compared to traditional dialysis
techniques.
Sepsis
Researchers
have explored the potential of using existing membrane-based dialysis technology
to treat patients suffering from sepsis. These techniques are unable to
effectively remove middle molecular weight toxins, which leading researchers
have shown to cause and complicate sepsis. The same experts believe that a
blood
purification technique that efficiently removes, or significantly reduces,
the
circulating concentrations of such toxins might represent a successful
therapeutic option. We believe that the CytoSorb™ device may have the ability to
remove middle molecular weight toxins from circulating blood.
Medical
research during the past two decades has focused on drug interventions aimed
at
chemically blocking or suppressing the function of one or two inflammatory
agents. In hindsight, some researchers now believe this approach has little
chance of significantly improving patient outcomes because of the complex
pathways and multiple chemical factors at play. Clinical studies of these drug
therapies have been largely unsuccessful. An Eli Lilly drug, Xigris®, cleared by
the FDA in November 2001, is the first and only drug to be approved for the
treatment of severe sepsis. Clinical studies demonstrated that use of Xigris®
resulted in a 6% reduction in the absolute risk of death, and a 13% risk
reduction in the most severe sepsis patients. The drug remains controversial
and
is considered extremely expensive when compared to the percentage of patients
who benefit.
While
studies of other potential sepsis drug therapies are in progress, we are not
aware of any other broad-spectrum blood detoxification therapy under development
for this application that could be considered directly competitive with our
approach.
Cardiopulmonary
Bypass Surgery
We
are
not aware of any practical competitive approaches for removing cytokines in
CPB
patients. Alternative therapies such as “off-pump” surgeries are available but
“post-bypass” syndrome has not been shown to be reduced in this less invasive
procedure. If successful, CytoSorb™ is expected to be useful in both on-pump and
off-pump procedures.
Chronic
Dialysis
Although
standard dialysis treatment effectively removes urea and creatinine from the
blood stream (which are normally filtered by functioning kidneys), standard
dialysis has not been effective in removing beta2-microglobulin
toxins from the blood of patients suffering from chronic kidney failure. We
know
of no other device, medication or therapy considered directly competitive with
our technology. Research and development in the field has focused primarily
on
improving existing dialysis technologies. The introduction of the high-flux
dialyzer in the mid-1980s and the approval of Amgen’s Epogen™, a recombinant
protein used to treat anemia, are the two most significant developments in
the
field over the last two decades.
Efforts
to improve removal of middle molecular weight toxins with enhanced dialyzer
designs have achieved only marginal success. Many experts believe that dialyzer
technology has reached its limit in this respect. A variation of high-flux
hemodialysis, known as hemodiafiltration, has existed for many years. However,
due to the complexity, cost and increased risks, this dialysis technique has
not
gained significant acceptance worldwide. In addition, many larger toxins are
not
effectively filtered by hemodiafiltration, despite its more open pore structure.
As a result, hemodiafiltration does not approach the quantity of toxins removed
by the BetaSorb™ device.
Treatment
of Organ Dysfunction in Brain-Dead Organ Donors
We
are
not aware of any directly competitive products to address the application of
our
technology for the mitigation of organ dysfunction and failure resulting from
severe inflammation following brain-death.
Clinical
Studies
Our
first
clinical studies were conducted in patients with chronic renal failure. The
health of these patients is challenged by high levels of toxins circulating
in
their blood but, unlike sepsis patients, they are not at imminent risk of death.
The toxins involved in chronic renal failure are completely different from
those
involved in sepsis, eroding health gradually over time. The treatment of
patients with chronic renal failure is a significant target market for us,
although not the current focus of our efforts and resources. Our clinical
studies and product development work in this application functioned as a low
risk method of evaluating the safety of the technology in a clinical setting,
with direct benefit to development of the critical care applications on which
we
are now focusing our efforts.
We
have
not conducted any clinical studies of our products with respect to the treatment
of any other indications, although data collected during the “emergency and
compassionate use” treatment of a single sepsis patient has been encouraging to
us. Because of the limited studies we have conducted, we are subject to
substantial risk that our technology will have little or no effect on the
treatment of any indications that we have targeted.
We
only
recently submitted a proposed pilot study for approval to the FDA with respect
to CytoSorb™ , the first device we intend to bring to market. If we obtain FDA
approval, we anticipate commencing clinical studies for CytoSorb™ by the third
quarter of 2007. If these studies are successful and we obtain FDA approval
to
proceed with our follow-up pivotal study, we anticipate that we will be able
to
begin sales of CytoSorb™ by mid-to-late 2009, at the earliest, assuming a
successful pivotal study. However, there can be no assurance we will ever obtain
FDA approval for CytoSorb™ or any other device.
Government
Research Grants
Two
government research grants by the National Institutes of Health (NIH) and Health
and Human Services (HHS) have been awarded to investigators at the University
of
Pittsburgh to explore the use of adsorbent polymers in the treatment of sepsis
and organ transplant preservation. Under “SubAward Agreements” with the
University of Pittsburgh, we have been developing
polymers for use in these studies.
A
grant
of $1 million
was awarded to the University of Pittsburgh Medical Center in 2003. The project
seeks to improve the quantity and viability of organs donated for transplant
by
using CytoSorb™ to detoxify the donor’s blood. The observational and dosing
phases of the study, involving 30 viable donors and eight non-viable donors,
respectively, have been completed. The next phase of this study, the treatment
phase, will involve viable donors. The treatment phase will be contingent upon
further discussion with the FDA and HRSA regarding study design, as well as
obtaining additional funding.
In
addition, in September 2005, the University of Pittsburgh Medical Center was
awarded a grant from NIH entitled “Systems Engineering of a Pheresis
Intervention for Sepsis (SEPsIS)”
to study
the use of adsorbent polymer technology in the treatment of severe sepsis.
The
study, expected to last for a total of five years, commenced in September,
2005
and remains in progress. Under a SubAward Agreement, we are working with
researchers at the University of Pittsburgh - Critical Care Medicine Department.
Currently, we believe that the only polymers being used in this study are
polymers we have developed specifically for use in the study, which are similar
to the polymers used in our devices. Under the SubAward Agreement, during the
first year of the study, which concluded in August 2006, we received $104,921
for our efforts in support of the grant. Although we have not yet formally
entered into an additional SubAward Agreement, we continue to supply UPMC with
new samples based on our adsorbent polymer technology under the same terms
as
the initial SubAward Agreement, and expect to do so for the duration of the
study. UPMC has indicated to us that the amounts budgeted for our participation
under the study are approximately $142,000, $110,000, $133,000 and $163,000,
respectively, for years two, three, four and five of the study, but that our
continued participation in the study is subject to our performance and an annual
review by UPMC.
These
grants represent a substantial research cost savings to us and demonstrate
the
strong interest of the medical and scientific communities in our
technology.
Regulation
The
medical devices that we manufacture are subject to regulation by numerous
regulatory bodies, including the FDA and comparable international regulatory
agencies. These agencies require manufacturers of medical devices to comply
with
applicable laws and regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical devices. Devices
are generally subject to varying levels of regulatory control, the most
comprehensive of which requires that a clinical evaluation program be conducted
before a device receives approval for commercial distribution.
In
the
U.S., permission to distribute a new device generally can be met in one of
two
ways. The first process requires that a pre-market notification (510(k)
Submission) be made to the FDA to demonstrate that the device is as safe and
effective as, or substantially equivalent to, a legally marketed device that
is
not subject to pre-market approval (PMA). A legally marketed device is a device
that (i) was legally marketed prior to May 28, 1976, (ii) has
been reclassified from Class III to Class II or I, or (iii) has been
found to be substantially equivalent to another legally marketed device
following a 510(k) Submission. The legally marketed device to which equivalence
is drawn is known as the “predicate” device. Applicants must submit descriptive
data and, when necessary, performance data to establish that the device is
substantially equivalent to a predicate device. In some instances, data from
human clinical studies must also be submitted in support of a 510(k) Submission.
If so, these data must be collected in a manner that conforms with specific
requirements in accordance with federal regulations. The FDA must issue an
order
finding substantial equivalence before commercial distribution can occur.
Changes to existing devices covered by a 510(k) Submission which do not
significantly affect safety or effectiveness can generally be made by us without
additional 510(k) Submissions.
The
second process requires that an application for PMA be made to the FDA to
demonstrate that the device is safe and effective for its intended use as
manufactured. This approval process applies to certain Class III devices.
In this case, two steps of FDA approval are generally required before marketing
in the U.S. can begin. First, investigational device exemption (IDE) regulations
must be complied with in connection with any human clinical investigation of
the
device in the U.S. Second, the FDA must review the PMA application which
contains, among other things, clinical information acquired under the IDE.
The
FDA will approve the PMA application if it finds that there is a reasonable
assurance that the device is safe and effective for its intended purpose.
In
the
European Union, distributors of medical devices are required to comply with
the
Medical Devices Directive and obtain CE Mark certification in order to market
medical devices. The CE Mark certification, granted following approval from
an
independent Notified Body, is an international symbol of adherence to quality
assurance standards and compliance with applicable European Medical Devices
Directives. Distributors of medical devices may also be required to comply
with
other foreign regulations such as Ministry of Health Labor and Welfare approval
in Japan. The time required to obtain these foreign approvals to market our
products may be longer or shorter than that required in the U.S., and
requirements for those approvals may differ from those required by the FDA.
In
the
United States, our CytoSorb™ and BetaSorb™ devices are classified as Class III
(CFR 876.5870—Sorbent Hemoperfusion System) and will require 501(k) Submissions
to the FDA. However, because the BetaSorb™ device is intended for chronic use,
the FDA may require pre-market approval (PMA), which we will submit if required.
In the case of CytoSorb™, because the application is for acute care (short term,
less than 30 days), management believes that FDA approval for this product
may
be obtained based solely on the 510(k) Submission accompanied with clinical
data. In Europe, our devices are expected to be classified as class IIb, and
will conform to the ISO 13485 Quality Standard in support of our planned
applications to obtain CE Mark certification in Europe, and applicable approvals
in Canada and Japan.
The
process of obtaining clearance to market products is costly and time-consuming
in virtually all of the major markets in which we expect to sell products and
may delay the marketing and sale of our products. Countries around the world
have recently adopted more stringent regulatory requirements which are expected
to add to the delays and uncertainties associated with new product releases,
as
well as the clinical and regulatory costs of supporting those releases. No
assurance can be given that any of our medical devices will be approved on
a
timely basis, if at all. In addition, regulations regarding the development,
manufacture and sale of medical devices are subject to future change. We cannot
predict what impact, if any, those changes might have on our business. Failure
to comply with regulatory requirements could have a material adverse effect
on
our business, financial condition and results of operations.
Provided
we have sufficient additional funding and FDA approval to proceed, we expect
to
begin the treatment phase of a pilot clinical study on the safety and efficacy
of our products in the treatment of sepsis in the third or fourth quarter of
2007. The pilot phase is expected to span six to nine months. If we successfully
complete the pilot study and obtain approval from the FDA to proceed to the
pivotal phase, we estimate that an additional one year period would be required
for the pivotal study, to the extent we have sufficient funding, for the purpose
of compiling sufficient data to support both the U.S. 510(k) Submission and
the
application to obtain CE Mark certification in Europe. In the U.S., another
six
to nine months is anticipated for FDA review and approval of the 510(k)
submission. Concurrent with these activities, we plan to pursue CE Mark
certification of our products. Upon successful completion of a “quality systems
audit” in combination with clinical data and the assembly of a technical file,
we anticipate that CytoSorb™ device will receive CE Mark certification,
allowing
it
to be sold in Europe.
The
FDA
can ban certain medical devices, detain or seize adulterated or misbranded
medical devices, order repair, replacement or refund of these devices and
require notification of health professionals and others with regard to medical
devices that present unreasonable risks of substantial harm to the public
health. The FDA may also enjoin and restrain certain violations of the Food,
Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical
devices, or initiate action for criminal prosecution of such violations.
International sales of medical devices manufactured in the U.S. that are not
approved by the FDA for use in the U.S., or are banned or deviate from lawful
performance standards, are subject to FDA export requirements. Exported devices
are subject to the regulatory requirements of each country to which the device
is exported. Some countries do not have medical device regulations, but in
most
foreign countries medical devices are regulated. Frequently, regulatory approval
may first be obtained in a foreign country prior to application in the U.S.
to
take advantage of differing regulatory requirements.
Sales
and Marketing
We
currently estimate, provided that we receive adequate funding to support our
planned activities and that our products perform as expected in clinical
studies, that we will obtain FDA approval of our CytoSorb™ device in the
treatment of sepsis in mid to late 2009, assuming a successful pivotal study.
As
we approach regulatory approval, we plan to initially build a sales organization
of approximately 15 representatives in the U.S. In addition, we plan on pursuing
localized distribution agreements in rural areas.
We
also
plan to initiate sales in several European countries which are known as early
adopters of new medical device technology. These countries primarily include
Italy, Germany and the United Kingdom. We plan to initially operate through
local distributors in each European country where we launch sales operations.
Only after establishment of a limited network of local distributors and actual
generation of sales, will we formulate a broader distribution strategy on a
global basis.
Intellectual
Property and Patent Litigation
The
medical device market in which we primarily participate is in large part
technology driven. As a result, intellectual property rights, particularly
patents and trade secrets, play a significant role in product development and
differentiation. However, intellectual property litigation to defend or create
market advantage is inherently complex, unpredictable and is expensive to
pursue. Litigation often is not ultimately resolved until an appeal process
is
completed and appellate courts frequently overturn lower court patent decisions.
Moreover,
competing parties frequently file multiple suits to leverage patent portfolios
across product lines, technologies and geographies and to balance risk and
exposure between the parties. In some cases, several competitors are parties
in
the same proceeding, or in a series of related proceedings, or litigate multiple
features of a single class of devices. These forces frequently drive settlement
not only of individual cases, but also of a series of pending and potentially
related and unrelated cases. In addition, although monetary and injunctive
relief is typically sought, remedies are generally not determined until the
conclusion of the proceedings, and are frequently modified on appeal.
Accordingly, the outcomes of individual cases are difficult to time, predict
or
quantify and are often dependent upon the outcomes of other cases in other
forums, both domestic and international.
We
rely
on a combination of patents, trademarks, trade secrets and non-disclosure
agreements to protect our intellectual property. We hold 21 U.S.
patents, some of which have foreign counterparts, and additional patent
applications pending worldwide that cover various aspects of our technology.
There can be no assurance that pending patent applications will result in issued
patents, that patents issued to us will not be challenged or circumvented by
competitors, or that such patents will be found to be valid or sufficiently
broad to protect our technology or to provide us with a competitive advantage.
Our portfolio of patents and patent applications include:
· |
U.S.
Pat. No. 5,545,131, which expires on November 30, 2014. This patent
concerns an artificial kidney containing a polymeric resin to filter
impurities from blood.
|
· |
U.S.
Pat. Nos. 5,773,384, 5,904,663, 6,127,311, 6,136,424, 6,159,377 and
6,582,811, which expire on or before February 6, 2018. These patents
concern the use of macronet polymeric resins that are subsequently
treated
to make them biocompatible for the removal of impurities from
physiological fluids.
|
· |
U.S.
Pat. Nos. 6,087,300, 6,114,466, 6,133,393, 6,153,707, 6,156,851 and
6,303,702, which expire on or before February 6, 2018. These patents
concern the use of mesoporous polydivinylbenzene polymeric resins
that are
subsequently treated to make them biocompatible for the removal of
impurities from physiological
fluids.
|
· |
U.S.
Pat. No. 6,416,487, which expires on July 30, 2017. This patent concerns
a
method of removing Beta-2 microglobulin using polymers with
surface-exposed vinyl groups modified for
biocompatibility.
|
· |
U.S.
Pat. No. 6,878,127, which expires on April 20, 2021. This patent
concerns
devices, systems and methods for reducing levels of pro-inflammatory
or
anti-inflammatory stimulators or mediators in the
blood.
|
· |
U.S.
Pat. No. 6,884,829, which expires on January 4, 2023. This patent
concerns
a hemocompatible polymer and a one-step method of producing
it.
|
· |
U.S.
Pat. App. Nos. 10/980,510, 10/981,055, 11/105,140 and 11/255,132.
These
applications concern biocompatible devices, systems, and methods
for
reducing levels of pro-inflammatory or anti-inflammatory stimulators
or
mediators in the blood.
|
· |
U.S.
Pat. App. No. 11/601,931. This application concerns size-selective
polymeric adsorbents for use in
hemoperfusion.
|
We
also
rely on non-disclosure and non-competition agreements with employees,
consultants and other parties to protect, in part, trade secrets and other
proprietary technology. There can be no assurance that these agreements will
not
be breached, that we will have adequate remedies for any breach, that others
will not independently develop equivalent proprietary information or that third
parties will not otherwise gain access to our trade secrets and proprietary
knowledge.
Several
years ago we engaged in discussions with the Dow Chemical Company, which had
indicated a strong interest in being our polymer manufacturer. After a Dow
representative on our Advisory Board resigned, Dow filed and received five
patents naming our former Advisory Board member as an inventor. These patents,
two of which subsequently lapsed for failure to pay maintenance fees, concern
the area of coating high divinylbenzene-content polymers to render them
hemocompatible, and using such coated polymers to treat blood or plasma. In
management’s view the Dow patents improperly incorporate our technology, are
based on our proprietary technology, and should not have been granted to Dow.
While we believe that our own patents would prevent Dow from producing our
products as they are currently envisioned, Dow could attempt to assert its
patents against us. To date, to our knowledge, Dow has not utilized their
patents for the commercial manufacture of products that would be competitive
with us, and we currently have no plans to challenge Dow’s patents. However, the
existence of these Dow patents could result in a potential dispute with Dow
in
the future and additional expenses for us.
We
may
find it necessary to initiate litigation to enforce our patent rights, to
protect our trade secrets or know-how and to determine the scope and validity
of
the proprietary rights of others. Patent litigation can be costly and
time-consuming, and there can be no assurance that our litigation expenses
will
not be significant in the future or that the outcome of litigation will be
favorable to us. Accordingly, we may seek to settle some or all of our pending
litigation described below. Settlement may include cross-licensing of the
patents which are the subject of the litigation as well as our other
intellectual property and may involve monetary payments to or from third
parties.
Employees
and Properties
We
currently have eight employees
and operate a 6,575 sq. ft. facility near Princeton, New Jersey, housing
research laboratories, clinical manufacturing operations and administrative
offices, under a lease agreement which expired in February 2007. We expect
to
enter into a two-year renewal agreement for that lease shortly. In the opinion
of management, the leased properties are adequately insured, are in good
condition and suitable for the conduct of our business. We also collaborate
with
numerous institutions, universities and commercial entities who conduct research
and testing of our products at their facilities.
Legal
Proceedings
We
are
not currently a party to any pending legal proceedings.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth our directors and executive officers, their ages
and
the positions they hold:
Name
|
|
Age
|
|
Position
|
Al
Kraus
|
|
62
|
|
President
and Chief Executive Officer, Director
|
William
R. Miller
|
|
78
|
|
Chairman
of the Board
|
James
Winchester, MD
|
|
62
|
|
Chief
Medical Officer
|
Vincent
Capponi
|
|
48
|
|
Chief
Operating Officer
|
David
Lamadrid
|
|
36
|
|
Chief
Financial Officer
|
Edward
R. Jones, MD, MBA
|
|
58
|
|
Director |
Joseph
Rubin, Esq.
|
|
68
|
|
Director
|
Kurt
Katz
|
|
74
|
|
Director
|
Al
Kraus. Mr.
Kraus
has more than twenty-five years’ experience managing companies in the dialysis,
medical device products, personal computer and custom software industries.
He
has been the President and Chief Executive Officer of MedaSorb since 2003.
Prior
to joining us, from 2001 to 2003, Mr. Kraus was President and CEO of
NovoVascular Inc., an early stage company developing coated stent technology.
From 1996 to 1998, Mr. Kraus was President and CEO of Althin Healthcare and
from
1998 to 2000, of Althin Medical Inc., a manufacturer of products for the
treatment of end stage renal disease. While CEO of Althin, he provided strategic
direction and management for operations throughout the Americas. From 1979
to
1985, Mr. Kraus was U.S. Subsidiary Manager and Chief Operating Officer of
Gambro Inc., a leading medical technology and healthcare company. Mr.
Kraus
was the Chief Operating Officer of Gambro when it went public in the United
States in an offering led by Morgan Stanley.
William
R. Miller.
Mr.
Miller has been the Chairman of the Board since January 1, 2007. Mr. Miller
served as Vice Chairman of the Board of Directors of the Bristol-Myers Squibb
Company from 1985 until 1991, at which time he retired. Mr. Miller has served
as
a director of ImClone Systems Incorporated since June 1996 and also serves
as
the Chairman of the Board of Vion Pharmaceuticals, Inc. Mr. Miller previously
served as Chairman of Cold Spring Harbor Laboratory, a non-profit institution,
and the Pharmaceutical Manufacturers Association. Mr. Miller is also a Trustee
of the Manhattan School of Music, a director of the Opera Orchestra of New
York
and a Managing Director of the Metropolitan Opera Association. Mr. Miller earned
his M.A. in Philosophy, Politics and Economics from St. Edmund Hall, Oxford
University, Oxford, England.
James
Winchester, M.D.
Prior to
joining MedaSorb in 2000, Dr. Winchester was Professor of Medicine and Director
of Dialysis Programs at Georgetown University School of Medicine for more than
25 years. Dr. Winchester is also currently the Chief of the Nephrology Division
at Beth Israel Medical Center, a position he has held since July 2004. He has
published more than 200 articles in scientific and medical journals, and has
co-authored eight books in the fields of renal replacement therapy and clinical
poisoning management. Dr. Winchester is editor-in chief of Replacement
of Renal Function,
the
most widely used textbook for nephrology fellows. Dr. Winchester has published
more articles on hemoperfusion than any other nephrologist in the world. He
is
widely recognized as one of the world’s leading experts in hemoperfusion and
toxicology, and is a former member of the Scientific Advisory Board for Total
Renal Care (Davita). Dr. Winchester received his medical degree from the
University of Glasgow and is a Fellow of the Royal College of Physicians and
Surgeons of Glasgow,
and a
Fellow of the American College of Physicians.
Vincent
Capponi.
Mr.
Capponi joined MedaSorb as Vice President of Operations in 2002 and became
its
Chief Operating Officer in July 2005. He has more than 20 years of management
experience in medical device, pharmaceutical and imaging equipment at companies
including Upjohn, Sims Deltec and Sabratek. Prior to joining MedaSorb in 2002,
Mr. Capponi held several senior management positions at Sabratek and its
diagnostics division GDS, and was interim president of GDS diagnostics in 2001.
From 1998 to 2000, Mr. Capponi was Senior Vice President and Chief Operating
Officer for Sabratek and Vice President Operations from 1996 to 1998. He
received his MS in Chemistry and his BS in Chemistry and Microbiology from
Bowling Green State University.
David
Lamadrid.
Mr.
Lamadrid has been with MedaSorb since 2000 and has served as its Chief Financial
Officer since October 2002. He
has 15
years of business experience in finance and operations. Prior to joining
MedaSorb
in
2000,
Mr. Lamadrid was a financial analyst at Chase Manhattan Bank working in the
Middle Market Banking Group. Mr. Lamadrid received his MBA from New York
University, a BS in Finance from St. John’s University, and an AAS in Accounting
from S.U.N.Y. Rockland.
Edward
R. Jones, MD, MBA. Dr.
Jones
has been a director of ours since April 2007. Dr. Jones is an attending
physician at the Albert Einstein Medical Center and Chestnut Hill Hospital
as
well as Clinical Professor of Medicine at Temple University Hospital. Dr.
Jones
has published or contributed to the publishing of 30 chapters, articles,
and
abstracts on the subject of treating kidney-related illnesses. He is a
sixteen-year member of the Renal Physicians Association, the Philadelphia
County
Medical Society and a past board member of the National Kidney Foundation
of the
Delaware Valley. Dr. Jones has been elected to serve as the next President
of
the Renal Physicians Association starting in 2009.
Joseph
Rubin, Esq. Mr.
Rubin
became a director of MedaSorb in 1997. Mr. Rubin is a founder and Senior Partner
of Rubin, Bailin, and Ortoli, LLP an international and domestic corporate and
commercial law firm in New York City, where he has practiced law since 1986.
Mr.
Rubin also teaches at the Columbia University School of International and Public
Affairs, where he is also Executive Director of the International Technical
Assistance Program for Public Affairs (ITAP). Mr. Rubin was Adjunct Professor
at
the Columbia University Graduate School of Business from 1973 to 1994, and
taught at Columbia Law School in 1996. Mr. Rubin received his law degree from
Harvard Law School, and his B.A., MIA, and M.Phil degrees in political science
and international relations from Columbia University.
Kurt
Katz, M.Ch.E. Mr.
Katz
became a director of MedaSorb in 1997. Since retiring from Peabody International
Corporation in 1986, Mr. Katz has pursued various business interests. He is
currently the Chairman of Polymeric Resources Corporation, a polymer company
engaged in the manufacture of nylon and compounding. Mr. Katz served as
President and Chief Operating Officer of Peabody, which specializes in energy
and environmental products. Mr. Katz served as Executive Vice President and
Chief Operating Officer of Peabody from 1981 to 1983, and was a Director from
1977 to 1985. Prior to joining Peabody in 1973, Mr. Katz held a variety of
management positions with Westinghouse Electric Corporation, where he served
for
18 years and was directly involved in the launching of new products, divisions
and subsidiaries. .Mr.
Katz
has a B.S. and M.S. in chemical engineering, and an MBA.
Audit
Committee Financial Expert
The
Board
of Directors does not have an Audit Committee, and therefor does not have an
“audit committee financial expert,” as such term is defined in Item 401(e) of
Regulation S-B.
Executive
Compensation
Summary
Compensation Table
The
following table shows for the fiscal year ended December 31, 2006, compensation
awarded to or paid to, or earned by, our Chief Executive Officer, our Chief
Operating Officer, our Chief Financial Officer, and our Chief Medical Officer
(the “Named Executive Officers”).
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards (1)
($)
|
|
Total
($)
|
|
Al
Kraus
Chief
Executive Officer
|
|
|
2006
|
|
|
201,257
|
|
|
-0-
|
|
|
69,555
(2
|
)
|
|
270,812
|
|
Vincent
Capponi,
Chief
Operating Officer
|
|
|
2006
|
|
|
178,441
|
|
|
200
|
|
|
40,297(3
|
)
|
|
218,939
|
|
David
Lamadrid,
Chief
Financial Officer
|
|
|
2006
|
|
|
135,629
|
|
|
200
|
|
|
-0-
|
|
|
135,829
|
|
Dr.
James Winchester
Chief
Medical Officer
|
|
|
2006
|
|
|
120,000
|
|
|
-0-
|
|
|
40,297(4
|
)
|
|
160,297
|
|
(1) |
The
value of option awards granted to the Named Executive Officers has
been
estimated pursuant to SFAS No. 123(R) for the options described in
the
footnotes below, except that for purposes of this table, we have
assumed
that none of the options will be forfeited. The Named Executive Officers
will not realize the estimated value of these awards in cash until
these
awards are vested and exercised or sold. For information regarding
our
valuation of option awards, see “Stock-Based Compensation” in Note 2 of
our financial statements for the period ended December 31, 2006.
|
(2) |
Reflects
options to purchase 413,920 shares of Common Stock, all of which
are
currently exercisable at an exercise price of $6.64
per share. Options to purchase 332,094 of these shares were granted
on
September 30, 2006 and expire on September 30, 2016, and options
to
purchase 81,826 of these shares were granted on December 31, 2006
and
expire on December 31, 2016.
|
(3) |
Reflects
options to purchase 50,000 shares of Common Stock at an exercise
price of
$1.65
per share, which options were granted on December 31, 2006 and expire
on
December 31, 2016. This option vested and became exercisable as to
16,667
shares on the date of grant, and will vest and become exercisable
as to
16,667 shares on December 31, 2007; and as to 16,666 shares on December
31, 2008.
|
(4) |
Reflects
options to purchase 50,000 shares of Common Stock at an exercise
price of
$1.65
per share, which were granted on December 31, 2006 and expire on
December
31, 2016. This option vested and became exercisable as to 16,667
shares on
the date of grant, and will vest and become exercisable as to 16,667
shares on December 31, 2007; and as to 16,666 shares on December
31,
2008.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table shows for the fiscal year ended December 31, 2006, certain
information regarding outstanding equity awards at fiscal year end for the
Named
Executive Officers.
Outstanding
Equity Awards At December 31, 2006
|
|
Option
Awards
|
|
Name
|
|
Number
of
Securities
Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Al
Kraus
|
|
|
332,094
81,826
|
|
|
—
—
|
|
|
6.64
(1
6.64
(1
|
)
)
|
|
9/30/16
12/31/16
|
|
Vincent
Capponi
|
|
|
16,667
|
|
|
33,333
|
|
|
1.65
(2
|
)
|
|
12/31/16
|
|
David
Lamadrid
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dr.
James Winchester
|
|
|
16,667
|
|
|
33,333
|
|
|
1.65
(3
|
)
|
|
12/31/16
|
|
(2) |
Vests
and becomes exercisable as to (i) 16,667 shares on December 31, 2006;
(ii)
16,667 shares on December 31, 2007; and (iii) 16,666 shares on December
31, 2008.
|
(3) |
Vests
and becomes exercisable as to (i) 16,667 shares on December 31, 2006;
(ii)
16,667 shares on December 31, 2007; and (iii) 16,666 shares on December
31, 2008.
|
Director
Compensation
The
following table shows for the fiscal year ended
December 31, 2006 certain information with respect to the compensation of all
non-employee directors of the Company.
Director
Compensation for Fiscal 2006
Name
|
|
Fees
Earned or
Paid
in
Cash
($)
|
|
Option
Awards
($)
(1)
|
|
Total
($)
|
|
Joseph
Rubin (2)
|
|
|
-0-
|
|
|
9,732
|
|
|
9,732
|
|
Kurt
Katz (3)
|
|
|
-0-
|
|
|
9,732
|
|
|
9,732
|
|
|
(1) |
The
value of option awards granted to directors has been estimated
pursuant to
SFAS No. 123(R) for the options described in the footnotes below,
except
that for purposes of this table, we have assumed that none of the
options
will be forfeited. The directors will not realize the estimated
value of
these awards in cash until these awards are vested and exercised
or sold.
For information regarding our valuation of option awards, see “Stock-Based
Compensation” in Note 2 of our financial statements for the period ended
December 31, 2006.
|
|
(2) |
At
December 31, 2006, Mr. Rubin held options to purchase 61,715 shares
of our
Common Stock.
|
|
(3) |
At
December 31, 2006, we had issued on behalf of Mr. Katz options
to purchase
56,817 shares of our Common Stock in connection with his service
as a
director. All of these options have been issued to a trust established
by
Mr. Katz for the benefit of his
children.
|
Our
directors did
not
receive
any cash compensation for their service on the Board of Directors
during
2006. On June 15, 2006, in anticipation of our June 30, 2006 merger and
private
placement,
each
non-employee director
of MedaSorb Delaware was granted an option to purchase that
number of shares of MedaSorb Delaware common stock equal to the number
of shares
of common stock then subject to director options held by such person that
had
exercise prices ranging from $6.64 to $21.57. The options issued on June
15,
2006 have an exercise price of $1.25 per share, which is the conversion
price of the Series A Preferred Stock issued in the June 30, 2006 private
placement. The non-employee directors of MedaSorb Delaware at the time
of that
grant included our current non-employee directors Joseph Rubin and Kurt
Katz,
who were each issued options to purchase 15,069 shares
of
common stock; Brian Murray and Jean Futrell, who were each issued options
to
purchase 15,069 shares
of
common stock, and Bruce Davis, who was issued an option to purchase 2,260
shares
of common stock. All of
these
options became options to purchase the same number of shares of our Common
Stock
at the same exercise price following the merger.
In
addition, on August 1, 2006, we granted options to purchase 5,000 shares
of
Common Stock at an exercise price of $1.25 per share to each of our
non-employee directors,
Joseph Rubin and Kurt Katz, following the determination of our Board that
such
grant fairly reflected the services provided by our non-employee directors
during 2006.
In
2007,
we approved arrangements under which each non-employee director receives
a fee
of $2,000 for each Board meeting attended in person and a fee of $1,000
for each
Board meeting participated in by telephone. In addition, our Board approved
a
policy under which each non-employee director will be eligible to be issued
options to purchase up to 10,000 shares of our Common Stock on December
31, 2007
based on attendance at Board meetings held during 2007, so that, for example,
a
non-employee director attending all of our meetings would be entitled to
receive
an option to purchase 10,000 shares of our Common Stock, and a non-employee
director attending 80% of our meetings would be entitled to receive an
option to
purchase 8,000 shares of our Common Stock. Such options will be exercisable
at
the closing price of our Common Stock on the date of grant. Our directors
are
also
reimbursed for actual out-of-pocket expenses incurred by them in connection
with
their attendance at meetings of the Board of Directors.
In
connection with his appointment as Chairman of the Board, we agreed to
compensate Mr. Miller at the rate of $20,000 per annum, and on January 1,
2007 issued Mr. Miller a ten year option to purchase 200,000 shares of our
Common Stock at a price of $1.65 per share (the last reported sales price
on the
OTC Bulletin Board on December 29, 2006). We have also agreed to issue to
Mr.
Miller in 2008, to the extent he continues to serve as our Chairman, an
additional option to purchase 100,000 shares of Common Stock. Such
options would be exercisable at the closing price of our Common Stock on
the
date of grant.
Employment
Agreements with Named Executive Officers
Agreement
with Chief Executive Officer
MedaSorb
Delaware entered into an Employment Agreement, dated as of July 18, 2003, with
Al Kraus, our Chief Executive Officer. The Employment Agreement provides for
an
initial five-year term of employment as our Chief Executive Officer. Under
the
terms of the Employment Agreement, Mr. Kraus received an annual base salary
of
$200,000 through December 31, 2006. Effective January 1, 2007, Mr. Kraus’s
annual base salary was increased to $216,351. Under the Employment Agreement,
Mr. Kraus was also granted an option to purchase 5% of the outstanding equity
interests of MedaSorb Delaware (which was then a limited liability company)
on a
fully-diluted basis, and will be issued additional options so that the combined
total of Common Stock owned by Mr. Kraus, including upon exercise of options,
equals 5% of our outstanding Common Stock on a fully diluted basis. Mr. Kraus
has such right until such time as an aggregate of $20 million of financing
has
been received by MedaSorb Delaware (including us following the merger) following
the commencement of his employment. These options are exercisable at a price
of
$6.64 per share of Common Stock, and based on the number of currently
outstanding shares of Common Stock, Series A Preferred Stock, warrants and
options, entitle Mr. Kraus to purchase 413,920 shares of Common Stock. In 2005,
MedaSorb Delaware’s board approved the issuance to Mr. Kraus of “Management
Units” of the limited liability company in lieu of the options he was then
entitled to under the Employment Agreement. As a result of the conversion of
MedaSorb Delaware to a corporation and the merger, the Management Units issued
under the Employment Agreement were exchanged for 1,393,631 shares of Common
Stock.
In
the
event that Mr. Kraus’s employment is terminated as a result of his death, his
heirs will be entitled to 120-days of salary. In the event Mr. Kraus is
terminated for “justifiable cause” we will pay him his accrued and unpaid base
salary through the date of termination. If Mr. Kraus’s employment is terminated
without cause or in the event of a Change of Control, he will be entitled to
one-year’s base salary payable monthly over a period of one year.
Mr.
Kraus
is prohibited under the Employment Agreement from disclosing any of our
confidential information (as defined in the agreement) during the term of his
employment and any time thereafter and, following the termination of the
agreement with us, from competing with us and directly or indirectly soliciting
any of our customers or suppliers for a period of one year, and from soliciting
our employees for a period of three years.
On
February 8, 2007, Mr. Kraus was granted an immediately exercisable option to
purchase 400,000 shares of our Common Stock at an exercise price of $1.26 (the
closing price of our Common Stock on the date of grant).
Agreement
with Chief Operating Officer
MedaSorb
Delaware entered into an Employment Agreement, dated as of July 1, 2005, with
Vincent Capponi, our Chief Operating Officer. The Employment Agreement provides
for an initial term of one-year, with automatic annual renewal unless either
party provides notice to the other within 120 days prior to the end of the
year
of its intention not to renew. Under the terms of the Employment Agreement,
Mr.
Capponi received an annual base salary of $181,886 through December 31, 2006.
Effective January 1, 2007, Mr. Capponi’s annual base salary was increased to
$195,527. Under the Employment Agreement, Mr. Capponi was also granted
Management Units equal to 1.5% of the outstanding equity interests of MedaSorb
Delaware (which was then a limited liability company) on a fully-diluted basis,
and was entitled to receive additional Management Units so that Mr. Capponi
continued to hold Management Units equal to 1.5% of the outstanding equity
of
MedaSorb Delaware on a fully diluted basis until December 31, 2005. This right
has expired. As a result of the conversion of MedaSorb Delaware to a corporation
and the merger, these Management Units were exchanged for 418,086 shares of
our
Common Stock.
In
the
event that Mr. Capponi’s employment is terminated as a result of his death, his
heirs will be entitled to 120-days of salary. In the event Mr. Capponi is
terminated for “justifiable cause” we will pay him his accrued and unpaid base
salary through the date of termination. If Mr. Capponi’s employment is
terminated without cause or in the event of Change of Control, he will be
entitled to one-year’s base salary payable monthly for a period of one year.
Mr.
Capponi is prohibited under the Employment Agreement from disclosing any of
our
confidential information (as defined in the agreement) during the term of his
employment and any time thereafter, and following the termination of the
agreement with us, from competing with us and directly or indirectly soliciting
any of our customers or suppliers for a period of one year, and from soliciting
our employees for a period of three years.
Agreement
with Chief Financial Officer
MedaSorb
Delaware entered into an Employment Agreement, dated as of July 1, 2005, with
David Lamadrid, our Chief Financial Officer. The Employment Agreement provides
for an initial term of one-year, with automatic annual renewal unless either
party provides notice to the other within 120 days prior to the end of the
year
of its intention not to renew. Under the terms of the Employment Agreement,
Mr.
Lamadrid received an annual base salary of $135,629 through December 31, 2006.
Effective January 1, 2007, Mr. Lamadrid’s annual base salary was increased to
$145,801. Under the Employment Agreement, Mr. Lamadrid was also granted
Management Units equal to 1.8% of the outstanding equity interests of MedaSorb
Delaware (which was then a limited liability company) on a fully-diluted basis,
and was entitled to receive additional Management Units so that Mr. Lamadrid
continued to hold Management Units equal to 1.8% of the outstanding equity
of
MedaSorb Delaware on a fully diluted basis until December 31, 2005. This right
has expired. As a result of the conversion of MedaSorb Delaware to a corporation
and the merger, these Management Units were exchanged for 501,704 shares of
our
Common Stock.
In
the
event that Mr. Lamadrid’s employment is terminated as a result of his death, his
heirs will be entitled to 120-days of salary. In the event Mr. Lamadrid is
terminated for “justifiable cause” we will pay him his accrued and unpaid base
salary through the date of termination. If Mr. Lamadrid’s employment is
terminated without cause or in the event of Change of Control, he will be
entitled to one-year’s base salary payable monthly for a period of one year.
Mr.
Lamadrid is prohibited under the Employment Agreement from disclosing any of
our
confidential information (as defined in the agreement) during the term of his
employment and any time thereafter, and following the termination of the
agreement with us, from competing with us and directly or indirectly soliciting
any of our customers or suppliers for a period of one year, and from soliciting
our employees for a period of three years.
On
January 16, 2007, Mr. Lamadrid was granted an option to purchase 150,000
shares of our Common Stock at an exercise price of $1.90 (the closing price
of
our Common Stock on the date of grant). The option is currently exercisable
as
to 50,000 shares, and becomes exercisable as to an additional 50,000 shares
on
January 16, 2008 and the remaining 50,000 shares on January 16,
2009.
Agreement
with Chief Medical Officer
MedaSorb
Delaware entered into an Employment Agreement, dated as of July 1, 2004, with
Dr. James Winchester, our Chief Medical Officer. The Employment Agreement
provides for an initial term of one-year, with automatic annual renewal unless
either party provides notice to the other within 90 days prior to the end of
the
year of its intention not to renew. Under the terms of the Employment Agreement,
Dr. Winchester receives an annual base salary of $120,000. Dr. Winchester’s
primary employment is with Beth Israel Medical Center, as the Chief of its
Nephrology division. Although the time Mr. Winchester provides to us varies
from
time to time, it is generally in the range of one-half day to one full day
per
week.
Dr.
Winchester is prohibited under his Employment Agreement from disclosing any
of
our confidential information (as defined in the agreement) during the term
of
his employment and any time thereafter, and following the termination of this
agreement with us, from competing with us and directly or indirectly soliciting
any of our customers, suppliers or employees for a period of one year.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In
October 2005, MedaSorb Delaware entered into an Investment Agreement with Margie
Chassman pursuant to which she advanced us $1,000,000. At the time of the
advance, Ms. Chassman was not a stockholder of, or otherwise affiliated with,
MedaSorb Delaware. The advance bore interest at the rate of 6% per annum.
Pursuant to the terms of the Investment Agreement, on October 28, 2006, the
$1,000,000 advance was converted into 1,000,000 shares of Series A Preferred
Stock (convertible into 800,000 shares of Common Stock) and warrants to purchase
400,000 shares of Common Stock at a price of $2.00 per share. On the date of
conversion, the last reported sales price of our Common Stock was $1.44, so
that
the aggregate market value of the 800,000 shares of Common Stock underlying
the
Series A Preferred Stock issued on October 28, 2006 was $1,152,000, and the
aggregate market value of the 400,000 shares of Common Stock underlying the
Warrants issued on October 28, 2006, which had an aggregate exercise price
of
$800,000, was $576,000.
The
Investment Agreement provided that Ms. Chassman would be issued 10 million
shares of common stock in consideration for funding the loan, and further
provided that she would assist in arranging a “Qualified Merger” and that she
would “invest or arrange for others to invest” between $3 to $11.5 million. This
assistance consisted primarily of consultations between MedaSorb Delaware and
Ms. Chassman’s husband, David Blech. Mr. Blech introduced MedaSorb Delaware to
potential placement agents, investors and merger partners including the company
(Gilder Enterprises, Inc.) that MedaSorb Delaware ultimately merged with. Mr.
Blech also introduced us to the four institutional investors that purchased
$5.25 million of our securities on June 30, 2006. Mr. Blech also assisted us
in
structuring these transactions. Of the four investors, two had co-invested
with
Ms. Chassman in other transactions, and the other two were introduced by the
investors that had previously invested with Ms. Chassman. A description of
Mr.
Blech and his background can be found in footnote 2 to the Principal
Stockholders table. We have been informed that Ms. Chassman has operated a
small
graphic design business for at least fifteen years and, for at least the last
seven years, has invested in numerous early stage biotechnology and information
technology companies. Ms. Chassman has also informed us that her portfolio
of
investments, exclusive of her investment in MedaSorb, is currently worth in
excess $25,000,000.
In
consideration for funding the $1 million advance, in addition to the securities
into which such loan was converted on October 28, 2006 as described above,
Ms.
Chassman and her designees were issued
an
aggregate of 10 million shares of Common Stock prior to the merger; such shares
are included in the 20,340,929 shares of common stock of MedaSorb Delaware
outstanding immediately prior to the June 30, 2006 merger. Upon issuance, the
shares were valued at $12,500,000 based on the conversion price of the 5,250,000
shares of Series A Preferred Stock sold on that date. These shares of Common
Stock are subject to a 12-month lock-up agreement expiring June 30, 2007 and
a
voting agreement entitling us to voting rights with respect to such shares
until
the earlier to occur of a transfer of those shares to an unrelated third party
or June 30, 2008.
Following
transfers effected by Ms. Chassman, the 10,000,000 shares of Common Stock are
currently held as follows:
Stockholder
|
|
Shares
of Common Stock
|
|
Margie
Chassman
|
|
|
4,795,000
|
|
Margery
Germain
|
|
|
2,000,000
|
|
Central
Yeshiva Beth Joseph
|
|
|
1,000,000
|
|
Wood
River Trust
|
|
|
1,050,000
|
|
Spring
Charitable Remainder Trust
|
|
|
1,150,000
|
|
Miriam
Fisher
|
|
|
5,000
|
|
The
share
held by Ms. Germain include 300,000 shares held directly by her minor children.
Wood River Trust is a trust formed for the benefit of Evan Blech, the son of
Ms.
Chassman and Mr. Blech. The trustees of Wood River Trust are Harvey Kesner
and
Michael C. Doyle. Ms. Chassman and Mr. Blech are the income beneficiaries of
Spring Charitable Remainder Trust, and its remainder beneficiary is a charitable
organization yet to be designated. Andrew Levinson is the trustee of the Spring
Charitable Remainder Trust.
In
connection with our June 30, 2006 sale of Series A Preferred Stock and warrants
to four institutional investors which generated gross proceeds of $5.25 million,
to induce those investors to make the investment, Margie Chassman pledged to
those investors securities of other publicly traded companies. The pledged
securities consist of a $400,000 promissory note of Xechem International, Inc.
convertible into Xechem common stock at $.005 per share, and 250,000 shares
of
the common stock of Novelos Therapeutics, Inc. Based on the market value of
the
Xechem common stock ($.07 per share) and the Novelos common stock ($1.03) per
share, on June 30, 2006, the aggregate fair market value of the pledged
securities at the date of pledge was approximately $5,857,500.
In
the
event those investors have suffered a loss on their investment in our securities
as of June 30, 2007 (as determined by actual sales by those investors or the
market price of our Common Stock on such date), the investors may sell all
or a
portion of the pledged securities so that the investors receive proceeds from
such sale in an amount equal to their loss on their investment in our
securities. No assurance can be given that the sale of the pledged securities
will provide these investors with sufficient proceeds to cover the full extent
of their loss, if any, on their investment. In consideration of her pledge
to
these investors, we paid Ms. Chassman (i) $525,000 in cash (representing 10%
of
the cash amount raised from the institutional investors), and (ii) five-year
warrants to purchase
· |
525,000
shares of Series A Preferred Stock (representing 10% of the Series
A
Preferred Stock purchased by those investors), and
|
· |
warrants
to purchase 210,000 shares of Common Stock at an exercise price of
$2.00
per share (representing 10% of the Series A Preferred Stock purchased
by
those investors),
|
for
an
aggregate exercise price of $525,000.
In
August
2003, in order to induce Guillermina Vega Montiel, a principal stockholder
of
ours, to make a $4 million investment in MedaSorb Delaware, we granted Ms.
Montiel a perpetual royalty equal to three percent of all gross revenues
received by us from sales of CytoSorbTM
in
the
applications of sepsis, cardiopulmonary bypass surgery, organ donor,
chemotherapy and inflammation control. In addition, for her investment, Ms.
Montiel received 1,230,770 membership units of MedaSorb Delaware, which at
the
time was a limited liability company. Those membership units ultimately became
185,477 shares of our Common Stock following our June 30, 2006
merger.
Separate
from the $1 million advance provided by Ms. Chassman, from time to time
beginning in 2003 through June 30, 2006, MedaSorb Delaware 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. On June 30, 2006, these convertible notes, in the
aggregate principal amount of $6,549,900, together with $1,480,249 in accrued
interest, were converted into 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 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
our
Consolidated Statements of Operations for the nine months ended September 30,
2006. Guillermina Vega Montiel, a principal stockholder of ours, held
approximately $4,120,000 in principal amount of the convertible notes, which
together with $679,800 of accrued interest, converted into 4,354,189 of the
shares of Common Stock issued as a result of the conversion.
Joseph
Rubin is a director of ours and performs legal services from time to time.
At
December 31, 2006, MedaSorb Delaware owed Mr. Rubin’s firm approximately $5,000
in respect of legal services provided by his firm to MedaSorb
Delaware.
Director
Independence
All
members of our Board of Directors, other than Joseph Rubin, who performs legal
services for us as disclosed above; and AL Kraus, our Chief Executive Officer,
are independent under the standards set forth in Nasdaq Marketplace Rule
4200(a)(15).
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information known to us with respect to the
beneficial ownership of Common Stock held of record as of April 23, 2007, by
(1)
all persons who are owners of 5% or more of our Common Stock, (2) each of our
named executive officers (see “Summary Compensation Table”), (3) each director,
and (4) all of our executive officers and directors as a group.
Each
of
the stockholders can be reached at our principal executive offices located
at 7
Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852.
|
|
SHARES
BENEFICIALLY OWNED1
|
|
|
|
Number
|
|
Percent
(%)
|
|
Beneficial
Owners of more than 5% of Common Stock (other than directors and
executive
officers)
|
|
|
|
|
|
|
|
Margie
Chassman(2)
|
|
|
6,638,334
|
(2)
|
|
25.1
|
%
|
Guillermina
Montiel(3)
|
|
|
5,052,456
|
|
|
20.5
|
%
|
Margery
Germain(4)
|
|
|
2,000,000
|
|
|
8.1
|
%
|
Robert
Shipley (5)
|
|
|
1,495,710
|
|
|
5.8
|
%
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
Al
Kraus(6)
|
|
|
2,207,551
|
|
|
8.7
|
%
|
William
R. Miller(7)
|
|
|
200,000
|
|
|
*
|
|
David
Lamadrid (8)
|
|
|
558,734
|
|
|
2.3
|
%
|
Vince
Capponi (9)
|
|
|
434,753
|
|
|
1.8
|
%
|
Joseph
Rubin(10)
|
|
|
388,284
|
|
|
1.6
|
%
|
James
Winchester(11)
|
|
|
69,186
|
|
|
*
|
|
Kurt
Katz(12)
|
|
|
59,077
|
|
|
*
|
|
Edward
Jones |
|
|
0 |
|
|
*
|
|
All
directors and executive officers as a group (seven
persons)(13)
|
|
|
3,917,585
|
|
|
15.0
|
%
|
*
Less
than
1%.
1
|
Gives
effect to the shares of Common Stock issuable upon the exercise of
all
options exercisable within 60 days of March 30, 2007 and other rights
beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and includes voting and investment power with
respect
to shares. Unless otherwise indicated, the persons named in the table
have
sole voting and sole investment control with respect to all shares
beneficially owned. Percentage ownership is calculated based on 24,628,274
shares of Common Stock outstanding as of March 30, 2007.
|
2
|
Based
on information reflected in a Schedule 13G filed by Ms. Chassman
with the
SEC on November 20, 2006, and includes 630,000 shares of Common Stock
ultimately issuable upon exercise and conversion of the Series A
Preferred
Stock and warrants underlying the warrant we issued Ms. Chassman
upon the
closing of our Series A Preferred Stock private placement, 800,000
shares
of Common Stock issuable upon conversion of Series A Preferred Stock
and
400,000 shares of Common Stock issuable upon exercise of warrants.
Ms.
Chassman has waived her registration rights with respect to the Series
A
Preferred Stock and warrants. Margie Chassman is married to David
Blech.
Mr. Blech disclaims beneficial ownership of these shares. Since 1980
Mr.
Blech has been a founder of companies and venture capital investor
in the
biotechnology sector. His initial venture investment, Genetic Systems
Corporation, which he helped found and served as treasurer and a
member of
the board of directors, was sold to Bristol Myers in 1986 for $294
million
of Bristol Myers stock. Other companies he helped found include DNA
Plant
Technology, Celgene Corporation, Neurogen Corporation, Icos Corporation,
Incyte Pharmaceuticals, Alexion Pharmaceuticals and Neurocrine
Biosciences. He was also instrumental in the turnaround of Liposome
Technology, Inc. and Biotech General Corporation. In 1990 Mr. Blech
founded D. Blech & Company, which, until it ceased doing business in
September 1994, was a registered broker-dealer involved in underwriting
biotechnology issues. In May 1998, David Blech pled guilty to two
counts
of criminal securities fraud, and, in September 1999, he was sentenced
by
the U.S. District Court for the Southern District of New York to
five
years’ probation, which was completed in September 2004. Mr. Blech also
settled administrative charges by the Commission in December 2000
arising
out of the collapse in 1994 of D. Blech & Co., of which Mr. Blech was
President and sole stockholder. The settlement prohibits Mr. Blech
from
engaging in future violations of the federal securities laws and
from
association with any broker-dealer. In addition, the District Business
Conduct Committee for District No.10 of NASD Regulation, Inc. reached
a
decision, dated December 3, 1996, in a matter styled District Business
Conduct Committee for District No. 10 v. David Blech, regarding the
alleged failure of Mr. Blech to respond to requests by the staff
of the
National Association of Securities Dealers, Inc. (“NASD”) for documents
and information in connection with seven customer complaints against
various registered representatives of D. Blech & Co. The decision
found that Mr. Blech failed to respond to such requests in violation
of
NASD rules and that Mr. Blech should, therefore, be censured, fined
$20,000 and barred from associating with any member firm in any capacity.
Furthermore, Mr. Blech was discharged in bankruptcy in the United
States
Bankruptcy Court for the Southern District of New York in March 2000.
|
3
|
Includes
58,472 shares issuable upon exercise of stock options.
|
4
|
Includes
1,700,000 shares of Common Stock held directly by Ms. Germain and
300,000
shares of Common Stock held by her minor
children.
|
5
|
Includes
328,402 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock and 661,293 shares of Common Stock issuable upon
exercise
of warrants and options.
|
6
|
Includes
413,920 shares of Common Stock issuable upon exercise of stock options
pursuant to Mr. Kraus’s Employment Agreement described above, and an
additional 400,000 shares of Common Stock. issuable upon other currently
exercisable stock options.
|
7
|
These
shares are issuable upon exercise of stock options.
|
8
|
Includes
50,000 shares of Common Stock issuable upon exercise of stock options
|
9
|
Includes
16,667 shares of Common Stock issuable upon exercise of stock options
|
10
|
Includes
2,050 shares of Common Stock issuable upon conversion of Series A
Preferred Stock and 303,970 shares of Common Stock issuable upon
exercise
of warrants and stock options. Does not include shares of Common
Stock
beneficially owned by Mr. Rubin’s spouse, as to which he disclaims
beneficial ownership.
|
11
|
Includes
16,667 shares of Common Stock issuable upon exercise of stock options
|
12
|
Includes
56,817 shares of Common Stock issuable upon exercise of stock options,
all of which are held by a trust established for the benefit of Mr.
Katz's
children. Mr. Katz does not exercise voting control over these shares
and
disclaims beneficial ownership over the
shares.
|
13
|
Includes
an aggregate of 1,460,091 shares of Common Stock issuable upon exercise
of
stock options and warrants and conversion of Series A Preferred Stock.
|
SELLING
STOCKHOLDERS
Below
is
a list of the selling stockholders who have the right to acquire the 9,312,273
shares of Common Stock covered by this prospectus upon the conversion of Series
A Convertible Preferred Stock and exercise of warrants to purchase shares of
our
Common Stock at a price of $2.00 per share. Other than as set forth below,
none
of these selling stockholders hold or within the past three years have held,
a
position, office or other material relationship with us or our predecessors
or
affiliates. Pursuant to the terms of the warrants and the Certificate of
Designation designating the Series A Preferred Stock, the selling stockholders
may not convert the Series A Preferred Stock or exercise the warrants if as
a
result thereof they would own in excess of 4.99% of our Common Stock. Both
the
Certificate of Designation and warrants provide each selling stockholder with
the ability to waive this restriction upon 61-days’ prior notice to us, and to
increase the 4.99% limitation to up to 9.99%.
Of
the
shares of Common Stock we are registering for the selling stockholders,
8,034,981 shares are being registered on behalf of the four institutional
investors (the first four stockholders named in the table below). These
investors purchased from us on June 30, 2006 in a private offering generating
gross proceeds of $5.25 million, an aggregate of 5,250,000 shares of our Series
A 10% Cumulative Convertible Preferred Stock initially convertible into
4,200,000 shares of Common Stock, and five-year warrants to purchase an
aggregate of 2,100,000 shares of our Common Stock. On September 30, 2006, we
issued as a dividend to these investors 131,250 additional shares of Series
A
Preferred Stock, convertible into 105,000 shares of Common Stock, and on
December 31, 2006, we issued as a dividend to these investors 134,531 additional
shares of Series A Preferred Stock, convertible into 107,625 shares of Common
Stock. In accordance with the Subscription Agreement we entered into with these
investors, we are registering for resale by these investors the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock sold to them
and
the dividends thereon, and the shares of Common Stock issuable under the
warrants we sold to them.
We
are
registering an additional 75,145 shares of Common Stock on behalf of an
accredited investor who on September 30, 2006 purchased from us, for an
aggregate purchase price of $50,000, and on substantially the same terms as
the
purchasers in our June 30, 2006 Series A Preferred Stock financing, 50,000
shares of Series A Preferred Stock convertible into 40,000 shares of Common
Stock and five-year warrants to purchase 20,000 shares of Common Stock at a
price of $2.00 per share.
The
remaining 1,202,147 shares of Common Stock we are registering are issuable
to
selling stockholders who on September 30, 2006 exchanged an aggregate of 240,929
shares of our Common Stock and warrants to purchase an additional 240,929 shares
of Common Stock held by them at a price of $4.98 per share, 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. These stockholders had invested an
aggregate of $799,885 in MedaSorb Delaware during 2005 upon terms which provided
them with anti-dilution price protection with respect to financings completed
in
the next 12 months. In March 2006, consistent with these anti-dilution terms,
and in anticipation of the merger and financing we completed on June 30, 2006,
MedaSorb Delaware notified each of these stockholders that they would be
permitted to exchange the shares of Common Stock and warrants purchased by
them
in 2005 for the securities to be sold in the private placement to be completed
in the next six months concurrent with a reverse merger, at the same price
paid
by investors in that private placement. On September 30, 2006, the last reported
sales price of the Common Stock was $1.70.
The
following table sets forth information concerning the selling stockholders,
including the number of shares currently held and the number of shares offered
by each selling shareholder. We have no knowledge of the intentions of any
selling shareholder to actually sell any of the securities listed under the
columns "Shares Offered."
|
|
Before
Offering
|
|
|
|
After
Offering(3)
|
|
Name
of Selling Stockholder
|
|
Number
of Shares
Owned(1)
|
|
Percentage
Owned(2)
|
|
Number
of Shares
Offered
|
|
Number
of Shares
Owned(1)
|
|
Percentage
Owned(2)
|
|
Alpha
Capital Aktiengesellschaft
|
|
|
1,530,473(4)
|
|
|
4.99
|
%
|
|
1,530,473(40
|
|
|
0
|
|
|
*
|
|
Longview
Fund, LP
|
|
|
4,591,418(5)
|
|
|
4.99
|
%
|
|
4,591,418(5)
|
|
|
0
|
|
|
*
|
|
Platinum
Partners Long Term Growth II, LLC
|
|
|
1,530,473(6)
|
|
|
4.99
|
%
|
|
1,530,473(6)
|
|
|
0
|
|
|
*
|
|
Ellis
International Ltd
|
|
|
382,618(7)
|
|
|
1.5
|
%
|
|
382,618(7)
|
|
|
0
|
|
|
*
|
|
Paul
and Susan Ambrose
|
|
|
14,314(8)
|
|
|
*
|
|
|
12,023(8)
|
|
|
2,291
|
|
|
*
|
|
Henry
A. Berkowitz Revocable
Trust
|
|
|
77,636(9)
|
|
|
*
|
|
|
73,642(9)
|
|
|
3,994
|
|
|
*
|
|
Bongert
and Mueller
|
|
|
8,721(10)
|
|
|
*
|
|
|
7,515(10)
|
|
|
1,206
|
|
|
*
|
|
Berkeley
Bottjer 1999 Trust
|
|
|
24,242(11)
|
|
|
*
|
|
|
18,786(11)
|
|
|
5,456
|
|
|
*
|
|
David
and Constance Clapp
|
|
|
86,159(12)
|
|
|
*
|
|
|
15,029(12)
|
|
|
71,130
|
|
|
*
|
|
Janet
W. Devereux
|
|
|
28,767(13)
|
|
|
*
|
|
|
22,544(13)
|
|
|
6,223
|
|
|
*
|
|
Karl
Eigsti 1999 Trust
|
|
|
24,241(14)
|
|
|
*
|
|
|
18,786(14)
|
|
|
5,455
|
|
|
*
|
|
Lisa
Firenze
|
|
|
7,342(15)
|
|
|
*
|
|
|
6,004(15)
|
|
|
1,338
|
|
|
*
|
|
Edward
B. Grier lll
|
|
|
87,518(16)
|
|
|
*
|
|
|
75,145(16)
|
|
|
12,373
|
|
|
*
|
|
Jo-Bar
Enterprises, LLC
|
|
|
17,440(17)
|
|
|
*
|
|
|
15,029(17)
|
|
|
2,411
|
|
|
*
|
|
Rajinder
Khullar
|
|
|
9,773(18)
|
|
|
*
|
|
|
8,266(18)
|
|
|
1,507
|
|
|
*
|
|
Harry
Klaristenfeld
|
|
|
22,554(19)
|
|
|
*
|
|
|
18,937(19)
|
|
|
3,617
|
|
|
*
|
|
Michael
Klausmeyer
|
|
|
152,519(20)
|
|
|
*
|
|
|
67,631(20)
|
|
|
84,888
|
|
|
*
|
|
Galba
Anstalt
|
|
|
101,785(21)
|
|
|
*
|
|
|
75,145(21)
|
|
|
26,640
|
|
|
*
|
|
Patrick
McNamara
|
|
|
55,958(22)
|
|
|
*
|
|
|
37,573(22)
|
|
|
18,385
|
|
|
*
|
|
Howard
and Ellen Miller
|
|
|
139,089(23)
|
|
|
*
|
|
|
60,116(23)
|
|
|
78,973
|
|
|
*
|
|
Keith
Mithoefer
|
|
|
29,734(24)
|
|
|
*
|
|
|
5,260(24)
|
|
|
24,474
|
|
|
*
|
|
Margaret
Mithoefer
|
|
|
21,239(25)
|
|
|
*
|
|
|
3,757(25)
|
|
|
17,482
|
|
|
*
|
|
Peter
Mithoefer
|
|
|
21,239(26)
|
|
|
*
|
|
|
3,757(26)
|
|
|
17,482
|
|
|
*
|
|
Newbridge
International Pension Plan & Trust FBO John A. Jones
|
|
|
9,022(27)
|
|
|
*
|
|
|
7,515(27)
|
|
|
1,507
|
|
|
*
|
|
Patrick
O'Leary
|
|
|
2,254(28)
|
|
|
*
|
|
|
2,254(28)
|
|
|
0
|
|
|
*
|
|
Vivek
M Prabhaker
|
|
|
9,773(29)
|
|
|
*
|
|
|
8,266(29)
|
|
|
1,507
|
|
|
*
|
|
Barry
D Romeril
|
|
|
38,647(30)
|
|
|
*
|
|
|
18,786(30)
|
|
|
19,861
|
|
|
*
|
|
Asher
Rubin
|
|
|
3,609(31)
|
|
|
*
|
|
|
2,705(31)
|
|
|
904
|
|
|
*
|
|
Joseph
Rubin
(37)
|
|
|
388,991(32)
|
|
|
1.6
|
%
|
|
3,757(32)
|
|
|
385,234
|
|
|
1.6
|
%
|
Michael
Seely
|
|
|
35,275(33)
|
|
|
*
|
|
|
7,515(33)
|
|
|
27,760
|
|
|
*
|
|
Robert
Shipley
(38)
|
|
|
1,609,008(34)
|
|
|
7.7
|
%
|
|
601,896(34)
|
|
|
1,007,112
|
|
|
4.1
|
%
|
James
Stoner
|
|
|
6,016(35)
|
|
|
*
|
|
|
4,509(35)
|
|
|
1,507
|
|
|
*
|
|
Arnaldo
Barros
|
|
|
90,145(36)
|
|
|
*
|
|
|
75,145(36)
|
|
|
15,000
|
|
|
*
|
|
*
Less
than 1%.
(1)
|
Includes
shares of Common Stock that the selling stockholder has the right
to
acquire beneficial ownership of within 60
days.
|
(2) |
Based
on 24,628,274 shares of Common Stock issued and outstanding on March
30,
2007.
|
(3)
|
This
table assumes that each selling stockholder will sell all shares
offered
for sale by it under this prospectus. Stockholders are not required
to
sell their shares.
|
(4)
|
Includes
400,000 shares of Common Stock issuable upon exercise of warrants,
840,500
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 289,973 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Konrad Ackermann, as Director
of
the selling stockholder, exercises voting and dispositive control
over
these shares. Absent the restriction on beneficially owning in excess
of
4.99% of our Common Stock applicable to the Series A Preferred Stock
and
warrants, and consistent with Rule 13d-3 under the Securities Exchange
Act
of 1934, as of April 23, 2007 (i) Alpha Capital
Aktiengesellschaft is
the beneficial owner of 1,240,500 shares of Common Stock, representing
4.8% of our outstanding shares of Common Stock, and (ii) the 1,530,473
shares being registered on behalf of Alpha Capital
Aktiengesellschaft represents
5.9% of our outstanding shares of Common
Stock.
|
(5)
|
Includes
1,200,000 shares of Common Stock issuable upon exercise of warrants,
2,521,500 shares of Common Stock issuable upon conversion Series
A
Preferred Stock, and 869,918 shares of Common Stock issuable upon
conversion of Series A Preferred Stock dividends paid in kind. Peter
T.
Benz, as Chairman of the selling stockholder, exercises voting and
dispositive control over these shares. Absent the restriction on
beneficially owning in excess of 4.99% of our Common Stock applicable
to
the Series A Preferred Stock and warrants, and consistent with Rule
13d-3
under the Securities Exchange Act of 1934, as of April 23, 2007 (i)
Longview Fund is the beneficial owner of 3,721,500 shares of Common
Stock,
representing 13.2% of our outstanding shares of Common Stock, and
(ii) the
4,591,418 shares being registered on behalf of Longview Fund represents
15.8% of our outstanding shares of Common
Stock.
|
(6)
|
Includes
400,000 shares of Common Stock issuable upon exercise of warrants,
840,500
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 289,973 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Mark Nordlicht, as General
Manager
of the selling stockholder, exercises voting and dispositive control
over
these shares. Absent the restriction on beneficially owning in excess
of
4.99% of our Common Stock applicable to the Series A Preferred Stock
and
warrants, and consistent with Rule 13d-3 under the Securities Exchange
Act
of 1934, as of April 23, 2007 (i) Platinum Partners Long Term Growth
II is
the beneficial owner of 1,240,500 shares of Common Stock, representing
4.8% of our outstanding shares of Common Stock, and (ii) the 1,530,473
shares being registered on behalf of Platinum Partners Long Term
Growth II
represents 5.9% of our outstanding shares of Common
Stock.
|
(7)
|
Includes
100,000 shares of Common Stock issuable upon exercise of warrants,
210,125
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 72,493 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Wilhelm Ungar, as Director
of the
selling stockholder, exercises voting and dispositive control over
these
shares.
|
(8)
|
Includes
3,200 shares of Common Stock issuable upon exercise of warrants,
6,560
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 2,263 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind.
|
(9)
|
Includes
19,600 shares of Common Stock issuable upon exercise of warrants,
40,180
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 13,862 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Henry Berkowitz, Trustee,
exercises voting and dispositive control over these
shares.
|
(10)
|
Includes
2,000 shares of Common Stock issuable upon exercise of warrants,
4,100
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,415 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Heinz A. Bongart, Partner,
exercises voting and dispositive control over these
shares.
|
(11)
|
Includes
5,000 shares of Common Stock issuable upon exercise of warrants,
10,250
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 3,536 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Karl
Eigsti, Trustee, exercises voting and dispositive control over these
shares.
|
(12)
|
Includes
4,000 shares of Common Stock issuable upon exercise of warrants,
8,200
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 2,829 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(13)
|
Includes
6,000 shares of Common Stock issuable upon exercise of warrants,
12,300
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 4,244 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(14)
|
Includes
5,000 shares of Common Stock issuable upon exercise of warrants,
10,250
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 3,536 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Karl Eigsti, Trustee, exercises
voting and dispositive control over these
shares.
|
(15)
|
Includes
1,598 shares of Common Stock issuable upon exercise of warrants,
3,276
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,130 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind.
|
(16)
|
Includes
20,000 shares of Common Stock issuable upon exercise of warrants,
41,000
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 14,145 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(17)
|
Includes
4,000 shares of Common Stock issuable upon exercise of warrants,
8,200
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 2,829 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Joel Stone, Managing Member,
exercises voting and dispositive control over these
shares.
|
(18)
|
Includes
2,200 shares of Common Stock issuable upon exercise of warrants,
4,510
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,556 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(19)
|
Includes
5,040 shares of Common Stock issuable upon exercise of warrants,
10,332
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 3,565 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(20)
|
Includes
18,000 shares of Common Stock issuable upon exercise of warrants,
36,900
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 12,731 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(21)
|
Includes
20,000 shares of Common Stock issuable upon exercise of warrants,
41,000
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 14,145 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. Thierry de Marignac exercises
voting and dispositive control over these
shares.
|
(22)
|
Includes
10,000 shares of Common Stock issuable upon exercise of warrants,
20,500
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 7,073 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(23)
|
Includes
16,000 shares of Common Stock issuable upon exercise of warrants,
32,800
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 11,316 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(24)
|
Includes
1,400 shares of Common Stock issuable upon exercise of warrants,
2,870
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 990 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(25)
|
Includes
1,000 shares of Common Stock issuable upon exercise of warrants,
2,050
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 707 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(26)
|
Includes
1,000 shares of Common Stock issuable upon exercise of warrants,
2,050
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 707 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(27)
|
Includes
2,000 shares of Common Stock issuable upon exercise of warrants,
4,100
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,415 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind. John A. Jones, Trustee, exercises
voting and dispositive control over these
shares.
|
(28)
|
Includes
600 shares of Common Stock issuable upon exercise of warrants, 1,230
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 424 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(29)
|
Includes
2,200 shares of Common Stock issuable upon exercise of warrants,
4,510
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,556 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(30)
|
Includes
5,000 shares of Common Stock issuable upon exercise of warrants,
10,250
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 3,536 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(31)
|
Includes
720 shares of Common Stock issuable upon exercise of warrants, 1,476
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 509 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(32)
|
Includes
1,000 shares of Common Stock issuable upon exercise of warrants,
2,050
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 707 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(33)
|
Includes
2,000 shares of Common Stock issuable upon exercise of warrants,
4,100
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 1,415 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(34)
|
Includes
160,196 shares of Common Stock issuable upon exercise of warrants,
328,402
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 113,299 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(35)
|
Includes
1,200 shares of Common Stock issuable upon exercise of warrants,
2,460
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 849 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in kind.
|
(36)
|
Includes
20,000 shares of Common Stock issuable upon exercise of warrants,
41,000
shares of Common Stock issuable upon conversion Series A Preferred
Stock,
and 14,145 shares of Common Stock issuable upon conversion of Series
A
Preferred Stock dividends paid in
kind.
|
(37)
|
Joe
Rubin a director of ours and from time to time renders legal services
to
us.
|
(38)
|
Robert
Shipley was a director of MedaSorb Delaware prior to its merger with
us on
June 30, 2006.
|
PLAN
OF DISTRIBUTION
We
are
registering the shares of Common Stock on behalf of the selling stockholders.
As
used in this prospectus, “selling stockholders” includes the pledges, donees,
transferees or others who may later hold the selling stockholders’ interests. We
have agreed to pay the costs and fees of registering the shares, but the selling
stockholders will pay any brokerage commissions, discounts or other expenses
relating to the sale of the shares, including attorneys’ fees.
The
stockholders and any of their pledgees, assignees and successors-in-interest
may, from time to time, sell any or all of their shares of Common Stock on
any
stock exchange, market or trading facility on which the shares are traded or
in
private transactions. These sales may be at fixed or negotiated prices. The
stockholders may use any one or more of the following methods when selling
shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales;
|
|
·
|
broker-dealers
may agree with the stockholders to sell a specified number of such
shares
at a stipulated price per share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
stockholders may also sell shares under Rule 144 under the Securities Act,
if
available, rather than under this prospectus.
Broker-dealers
engaged by the stockholders may arrange for other brokers dealers to participate
in sales. Broker-dealers may receive commissions or discounts from the
stockholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The stockholders do
not
expect these commissions and discounts to exceed what is customary in the types
of transactions involved.
The
stockholders may from time to time pledge or grant a security interest in some
or all of the shares of Common Stock owned by them and, if they default in
the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of Common Stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list
of
stockholders to include the pledgee, transferee or other successors in interest
as stockholders under this prospectus.
The
stockholders and any broker-dealers or agents that are involved in selling
the
shares may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales. In such event, any commissions received
by
such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
and have agreed to indemnify the stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities
Act.
DESCRIPTION
OF SECURITIES
Our
total
authorized capital stock consists of 100,000,000 shares of Common Stock, par
value $.001 per share and 100,000,000 shares of preferred stock, par value
$.001
per share. We have designated 12,000,000 shares of our preferred stock as Series
A 10% Cumulative Convertible Preferred Stock. As of April 23, 2007, there were
issued and outstanding 24,628,274 shares of our Common Stock and 7,403,585
shares of our Series A Preferred Stock. The following description of our capital
stock does not purport to be complete and is subject to and qualified by our
Articles of Incorporation and By-laws, and by the provisions of applicable
Nevada law.
Common
Stock
Holders
of our Common Stock are entitled to receive dividends out of assets legally
available therefore at such times and in such amounts as the Board of Directors
from time to time may determine. Holders of our Common Stock are entitled to
one
vote for each share held on all matters submitted to a vote of the stockholders.
Cumulative voting with respect to the election of directors is not permitted
by
our Articles of Incorporation. Our Common Stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
after payment of liquidation preferences, if any, on any outstanding stock
having prior rights on such distributions and payment of other claims of
creditors.
Preferred
Stock
Our
Articles of Incorporation authorizes the issuance of shares of preferred stock
in one or more series. Our Board of Directors has the authority, without any
vote or action by the stockholders, to create one or more series of preferred
stock up to the limit of our authorized but unissued shares of preferred stock
and to fix the number of shares constituting such series and the designation
of
such series, the voting powers (if any) of the shares of such series and the
relative participating, option or other special rights (if any), and any
qualifications, preferences, limitations or restrictions pertaining to such
series which may be fixed by the Board of Directors pursuant to a resolution
or
resolutions providing for the issuance of such series adopted by the Board
of
Directors.
Series
A 10% Cumulative Convertible Preferred Stock
We
have
designated 12,000,000 shares of our preferred stock as Series A 10% Cumulative
Convertible Preferred Stock (“Series A Preferred Stock”), of which 7,403,585
shares were issued and outstanding as of March 30, 2007. Each share of Series
A
Preferred Stock has a stated value of $1.00, and is convertible at the holder’s
option into that number of shares of our Common Stock equal to the stated value
of such share of Series A Preferred Stock divided by an initial conversion
price
of $1.25. Upon the occurrence of a stock split, stock dividend, combination
of
our Common Stock into a smaller number of shares, issuance of any of our shares
or other securities by reclassification of our Common Stock, merger or sale
of
substantially all of our assets, the conversion rate will be adjusted so that
the conversion rights of the Series A Preferred Stock stockholders will be
equivalent to the conversion rights of the Series A Preferred Stock stockholders
prior to such event. In addition, in the event we sell shares of our Common
Stock (or the equivalent thereof) following the issuance of shares of Series
A
Preferred Stock at a price of less than $1.25 per share, the conversion price
of
the shares of Series A Preferred Stock will be reduced to such lower
price.
The
Series A Preferred Stock bears a dividend of 10% per annum payable quarterly,
at
our election in cash or additional shares of our Series A Preferred Stock valued
at the stated value thereof; provided, however, that we must pay the dividend
in
cash if an “Event of Default” as defined in the Certificate of Designation
designating the Series A Preferred Stock has occurred and is then continuing.
In
addition, upon an Event of Default, the dividend rate increases to 20% per
annum. An Event of Default includes, but is not limited to, the
following:
· |
the
occurrence of “Non-Registration Events” including, the failure to cause a
registration statement registering the shares of Common Stock underlying
the Series A Preferred Stock and Warrants issued in connection therewith
to be effective by February 25, 2007 (240 days following the closing
of
the private placement);
|
· |
an
uncured breach by us of any material covenant, term or condition
in the
Certificate of Designation or any of the related transaction documents;
and
|
· |
any
money judgment or similar final process being filed against us for
more
than $100,000.
|
Because
the registration statement in which this prospectus is included was not
effective until May 7, 2007, the dividends on the shares of Series A Preferred
Stock issued to the June 30, 2006 purchasers accrued at the rate of 20% per
annum from February 26, 2007 through May 7, 2007, and are payable in cash for
such period.
In
the
event of our dissolution, liquidation or winding up, the holders of the Series
A
Preferred Stock will receive, in priority over the holders of Common Stock,
a
liquidation preference equal to the stated value of such shares plus accrued
dividends thereon.
The
Series A Preferred Stock is not redeemable at the option of the holder but
may
be redeemed by us at our option following the third anniversary of the issuance
of the Series A Preferred Stock for 120% of the stated value thereof plus any
accrued but unpaid dividends upon 30 days' prior written notice, during which
time the Series A Preferred Stock may be converted, provided a registration
statement is effective under the Securities Act with respect to the Common
Stock
into which such Preferred is convertible and an Event of Default is not then
continuing.
Holders
of Series A Preferred Stock do not have the right to vote on matters submitted
to the holders of our Common Stock.
The
registration rights provided for in the subscription agreement we entered into
with the purchasers of the Series A Preferred Stock:
· |
require
that we file a registration statement with the SEC on or before 120
days
from the closing to register the shares of Common Stock issuable
upon
conversion of the Series A Preferred Stock and exercise of the Warrants,
and cause such registration statement to be effective by February
25, 2007
(240 days following the closing of the private placement);
and
|
· |
entitles
each of these investors to liquidated damages in an amount equal
to two
percent (2%) of the purchase price of the Series A Preferred Stock
if we
fail to timely file that registration statement with, or have it
declared
effective by, the SEC.
|
Because
the registration statement in which this prospectus is included was not
effective until May 7, 2007, we are obligated to pay the June 30, 2006
purchasers of our Series A Preferred Stock an aggregate of $105,000 per 30-day
period from February 26, 2007 through May 7, 2007.
The
transaction documents we entered into with the purchasers of the Series A
Preferred Stock also provide for various penalties and fees for breaches or
failures to comply with provisions of those documents, such as the timely
payment of dividends, delivery of stock certificates, and obtaining and
maintaining an effective registration statement with respect to the shares
of
Common Stock underlying the Series A Preferred Stock and warrants sold in the
offering.
In
addition, the purchasers of our securities in our June 30, 2006 private
placement have been provided with “full-ratchet” anti-dilution price protection,
so that upon future issuances of our 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,
further diluting holders of our Common Stock.
Anti-Takeover
Provisions
Certain
anti-takeover provisions in our Certificate of Incorporation may make a change
in control of the Company more difficult, even if a change in control would
be
beneficial to our stockholders. In particular, our board of directors will
be
able to issue up to 88,000,000 shares of preferred stock with rights and
privileges that might be senior to our Common Stock, without the consent of
the
holders of our Common Stock, and has the authority to determine the price,
rights, preferences, privileges and restrictions of the preferred stock.
Although the ability to issue preferred stock may provide us with flexibility
in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority
of
our outstanding voting stock.
TRANSFER
AGENT
The
transfer agent for our Common Stock is American Stock Transfer & Trust
Company, located at 6201 15th Avenue, Brooklyn, New York 11219. American Stock
Transfer & Trust Company’s telephone number is 718-921-8143.
COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified as provided by the Nevada Revised
Statutes and our bylaws. We have been advised that in the opinion of the
Securities and Exchange Commission indemnification for liabilities arising
under
the Securities Act of 1933 is against public policy as expressed in the
Securities Act of 1933, and is, therefore, unenforceable. In the event that
a
claim for indemnification against such liabilities is asserted by one of our
directors, officers, or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our legal counsel the matter
has been settled by controlling precedent, submit the question of whether such
indemnification is against public policy to a court of appropriate jurisdiction.
We will then be governed by the court's decision.
LEGAL
MATTERS
The
validity of the shares of Common Stock being offered hereby will be passed
upon
for us by Cane Clark, LLP, Las Vegas, Nevada.
EXPERTS
The
audited financial statements of MedaSorb Delaware (formerly MedaSorb
Technologies, LLC) for the fiscal years ended December 31, 2006 and 2005
included in and made a part of this document have been audited by
WithumSmith+Brown, A Professional Corporation, independent auditors, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and current reports and other information with the SEC. You
may read and copy any reports, statements or other information we file at the
SEC’s public reference rooms in Washington D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on
the
public reference rooms. Our filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
SEC
at http://www.sec.gov.
We
have
filed a registration statement on Form SB-2 under the Securities Act with the
SEC covering the Common Stock to be offered by the selling stockholders. As
permitted by the rules and regulations of the SEC, this document does not
contain all information set forth in the registration statement and exhibits
thereto, all of which are available for inspection as set forth above. For
further information, please refer to the registration statement, including
the
exhibits thereto. Statements contained in this document relating to the contents
of any contract or other document referred to herein are not necessarily
complete, and reference is made to the copy of that contract or other document
filed as an exhibit to the registration statement or other document, and each
statement of this type is qualified in all respects by that reference.
No
person
is authorized to give any information or make any representation not contained
in this document. You should not rely on any information provided to you that
is
not contained in this document. This prospectus does not constitute an offer
to
sell or a solicitation of an offer to purchase the securities described herein
in any jurisdiction in which, or to any person to whom, it is unlawful to make
the offer or solicitation. Neither the delivery of this document nor any
distribution of shares of Common Stock made hereunder shall, under any
circumstances, create any implication that there has not been any change in
our
affairs as of any time subsequent to the date hereof.
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
Reports
of Independent Accounting Firms
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets at December 31, 2006
|
|
|
and
December 31, 2005
|
|
F-4
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006 and
2005,
and from inception to December 31, 2006
|
|
F-5
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)
|
|
|
period
from inception to December 31, 2006
|
|
F-6
|
|
|
|
Consolidated
Statements of Cash Flows for the for the years ended December 31,
2006 and
2005, and from inception to December 31, 2006
|
|
F-8
|
|
|
|
Notes
to Financial Statements
|
|
F-10
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders,
MedaSorb
Technologies Corporation:
We
have
audited the accompanying balance sheets of MedaSorb Technologies Corporation
(f/k/a Gilder Enterprises, Inc.) (a development stage company), as of December
31, 2006
and
2005,
and the
related statements of operations, stockholders’ equity (deficiency) and cash
flows for the years then ended and the cumulative period from January 1, 2001
to
December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of MedaSorb Technologies Corporation
as of December 31, 2006
and
2005
and
the
results of its operations and cash flows for the years then ended and the
cumulative period from January 1, 2001 to December 31, 2006
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring net losses and negative cash
flows from operations. These matters raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
WithumSmith+Brown, A Professional Corporation
New
Brunswick, New Jersey
March
26,
2007
Report
of Independent Public Accountants
To
the
Board of Directors and Stockholders,
MedaSorb
Technologies Corporation:
We
have
audited the accompanying balance sheets of MedaSorb Technologies Corporation
(a
development stage company), as of December 31, 2000 and 1999, and the related
statements of operations, changes in members’ equity and cash flows for the
period from inception (January 22, 1997) through December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in
the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of MedaSorb Technologies Corporation
as of December 31, 2000 and 1999, and the results of its operations and its
cash
flows for the period from inception (January 22, 1997) to December 31, 2000,
in
conformity with accounting principles generally accepted in the United
States.
Arthur
Andersen, LLP
New
York,
New York
December
27, 2001
MEDASORB
TECHNOLOGIES CORPORATION
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
December
31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,873,138
|
|
$
|
707,256
|
|
Prepaid
expenses and other current assets
|
|
|
24,880
|
|
|
19,261
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,898,018
|
|
|
726,517
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
303,560
|
|
|
553,657
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
243,471
|
|
|
181,307
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
547,031
|
|
|
734,964
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
3,445,049
|
|
$
|
1,461,481
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
942,265
|
|
$
|
1,802,788
|
|
Accrued
expenses and other current liabilities
|
|
|
69,779
|
|
|
412,646
|
|
Accrued
interest
|
|
|
70,000
|
|
|
1,056,960
|
|
Stock
subscribed
|
|
|
--
|
|
|
399,395
|
|
Convertible
notes payable
|
|
|
--
|
|
|
3,429,899
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,082,044
|
|
|
7,101,688
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Convertible
notes payable
|
|
|
--
|
|
|
4,120,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,082,044
|
|
|
11,221,688
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficiency):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
Series A Preferred Stock, Par Value $0.001, 100,000,000 and
-0-
|
|
|
|
|
|
|
|
shares
authorized at December 31, 2006 and 2005, respectively,
|
|
|
|
|
|
|
|
7,403,585
and -0- shares issued and outstanding, respectively
|
|
|
7,403
|
|
|
--
|
|
Common
Stock, Par Value $0.001, 100,000,000 and 300,000,000
shares
|
|
|
|
|
|
|
|
authorized
at December 31, 2006 and 2005, respectively, 24,628,274
|
|
|
|
|
|
|
|
and
4,829,120 shares issued and outstanding, respectively
|
|
|
24,629
|
|
|
4,829
|
|
Additional
paid-in capital
|
|
|
69,757,556
|
|
|
49,214,431
|
|
Deficit
accumulated during the development stage
|
|
|
(67,426,583
|
)
|
|
(58,979,467
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficiency)
|
|
|
2,363,005
|
|
|
(9,760,207
|
)
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity (Deficiency)
|
|
$
|
3,445,049
|
|
$
|
1,461,481
|
|
The
Notes to Consolidated Financial Statements are an
integral part of these statements.
MEDASORB
TECHNOLOGIES CORPORATION
|
|
(a
development stage company)
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
22,1997
|
|
|
|
|
|
|
|
(date
of inception) to
|
|
Year
ended
|
|
Year
ended
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
40,892,771
|
|
|
1,112,804
|
|
|
1,526,743
|
|
Legal,
financial and other consulting
|
|
|
6,259,513
|
|
|
912,379
|
|
|
948,209
|
|
General
and administrative
|
|
|
20,138,109
|
|
|
939,128
|
|
|
635,960
|
|
Change
in fair value of management and incentive units
|
|
|
(6,055,483
|
)
|
|
--
|
|
|
(14,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
61,234,910
|
|
|
2,964,311
|
|
|
3,096,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
--
|
|
|
(21,663
|
)
|
Gain
on extinguishment of debt
|
|
|
(206,608
|
)
|
|
(31,608
|
)
|
|
(175,000
|
)
|
Interest
expense, net
|
|
|
5,644,408
|
|
|
4,738,877
|
|
|
765,898
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (income) expense, net
|
|
|
5,416,137
|
|
|
4,707,269
|
|
|
569,235
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(66,651,047
|
)
|
|
(7,671,580
|
)
|
|
(3,665,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock dividend
|
|
|
775,536
|
|
|
775,536
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(67,426,583
|
)
|
$
|
(8,447,116
|
)
|
$
|
(3,665,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
|
|
$
|
(0.56
|
)
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock outstanding
|
|
|
|
|
|
14,956,072
|
|
|
4,786,956
|
|
The
Notes to Consolidated Financial Statements are an
integral part of these statements.
MEDASORB
TECHNOLOGIES CORPORATION |
(a
development stage company) |
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) |
|
|
|
|
|
|
|
|
|
|
Period
from January 22, 1997 (date of inception) to December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
|
|
|
|
Equity(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 22, 1997 (date of inception)
|
|
$
|
--
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
1,143,487
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,143,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
receivable
|
|
|
440,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
contribution
|
|
|
4,550,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(5,256,012
|
)
|
|
(5,256,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1997
|
|
|
6,133,487
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(5,256,012
|
)
|
|
877,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
2,518,236
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,518,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to consultants
|
|
|
1,671
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
receivable
|
|
|
50,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,867,348
|
)
|
|
(1,867,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1998
|
|
|
8,703,394
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(7,123,360
|
)
|
|
1,580,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
1,382,872
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,382,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued to consultants
|
|
|
88,363
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
88,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of deferred compensation
|
|
|
47,001
|
|
|
(47,001
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
15,667
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
15,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
receivable
|
|
|
100,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,066,388
|
)
|
|
(3,066,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 1999
|
|
|
10,321,630
|
|
|
(31,334
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(10,189,748
|
)
|
|
100,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
14,407,916
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14,407,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued to consultants
|
|
|
1,070,740
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,070,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued to consultants
|
|
|
468,526
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
468,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of deferred compensation
|
|
|
27,937
|
|
|
(27,937
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
46,772
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
46,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(10,753,871
|
)
|
|
(10,753,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2000
|
|
|
26,296,749
|
|
|
(12,499
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(20,943,619
|
)
|
|
5,340,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
13,411,506
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
13,411,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued to consultants
|
|
|
161,073
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
161,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to employee
|
|
|
2,847
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
incurred in raising capital
|
|
|
(1,206,730
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,206,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
12,499
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
12,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(15,392,618
|
)
|
|
(15,392,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2001
|
|
|
38,665,445
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(36,336,237
|
)
|
|
2,329,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
6,739,189
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
6,739,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued to consultants
|
|
|
156,073
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
156,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to consultant
|
|
|
176,250
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
176,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to employee
|
|
|
2,847
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
incurred in raising capital
|
|
|
(556,047
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(556,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness
of loan receivable in exchange for equity
|
|
|
(1,350,828
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,350,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(11,871,668
|
)
|
|
(11,871,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
43,832,929
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(48,207,905
|
)
|
|
(4,374,976
|
)
|
The Notes to Consolidated Financial Statements are
an integral
part of these statements.
MEDASORB
TECHNOLOGIES CORPORATION |
(a
development stage company) |
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) |
|
|
|
|
|
|
|
|
|
|
Period
from January 22, 1997 (date of inception) to December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
|
|
|
|
Equity(Deficit)
|
|
Equity
contributions
|
|
|
4,067,250
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,067,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued to consultants
|
|
|
16,624
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
16,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of management units
|
|
|
2,952,474
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,952,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
issued to consultant
|
|
|
65,681
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
65,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
incurred in raising capital
|
|
|
(343,737
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(343,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness
of loan receivable in exchange for equity
|
|
|
(281,340
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(281,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(6,009,283
|
)
|
|
(6,009,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
50,309,881
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(54,217,188
|
)
|
|
(3,907,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
512,555
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
512,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of management units
|
|
|
(2,396,291
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(2,396,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
incurred in raising capital
|
|
|
(80,218
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(80,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,096,683
|
)
|
|
(1,096,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
48,345,927
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(55,313,871
|
)
|
|
(6,967,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
contributions
|
|
|
92,287
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
92,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of accounts payable in exchange for equity
|
|
|
836,319
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
836,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible notes payable and accrued interest for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
|
|
|
51,565
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
51,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of management units
|
|
|
(14,551
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(14,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
incurred in raising capital
|
|
|
(92,287
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(92,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
from an LLC to "C" corporation
|
|
|
(49,219,260
|
)
|
|
--
|
|
|
4,829,120
|
|
|
4,829
|
|
|
--
|
|
|
--
|
|
|
49,214,431
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,665,596
|
)
|
|
(3,665,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
--
|
|
|
--
|
|
|
100,000
|
|
|
100
|
|
|
--
|
|
|
--
|
|
|
(100
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to employees, consultants and directors
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
143,352
|
|
|
--
|
|
|
143,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 10% Series A Preferred Stock for cash
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,300,000
|
|
|
5,300
|
|
|
5,530,143
|
|
|
(235,443
|
)
|
|
5,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
rendered
|
|
|
--
|
|
|
--
|
|
|
778,274
|
|
|
779
|
|
|
--
|
|
|
--
|
|
|
587,035
|
|
|
--
|
|
|
587,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of common stock issued prior to reverse merger for 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
--
|
|
|
--
|
|
|
(240,929
|
)
|
|
(241
|
)
|
|
799,885
|
|
|
800
|
|
|
30,194
|
|
|
(30,753
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
stock dividends on 10% Series A Preferred Stock
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
303,700
|
|
|
303
|
|
|
303,397
|
|
|
(303,700
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock for redemption of convertible note
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,000,000
|
|
|
1,000
|
|
|
1,204,640
|
|
|
(205,640
|
)
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants to consultants for services
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
9,883
|
|
|
--
|
|
|
9,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in exchange for accounts payable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
192,311
|
|
|
--
|
|
|
192,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(7,671,580
|
)
|
|
(7,671,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
--
|
|
$
|
--
|
|
|
24,628,274
|
|
$
|
24,629
|
|
|
7,403,585
|
|
$
|
7,403
|
|
$
|
69,757,556
|
|
$
|
(67,426,583
|
)
|
$
|
2,363,005
|
|
The
Notes to Consolidated Financial Statements are an
integral part of these statements.
MEDASORB
TECHNOLOGIES CORPORATION |
|
(a
development stage company) |
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
|
|
For
the Period from
|
|
|
|
|
|
|
|
January
22, 1997
|
|
|
|
|
|
|
|
(date
of inception) to
|
|
Year
ended
|
|
Year
ended
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(66,651,047
|
)
|
$
|
(7,671,580
|
)
|
$
|
(3,665,596
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
used
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued as inducement to convert
|
|
|
|
|
|
|
|
|
|
|
convertible
notes payable and accrued interest
|
|
|
3,351,961
|
|
|
3,351,961
|
|
|
--
|
|
Issuance
of common stock to consultants for services
|
|
|
30,000
|
|
|
30,000
|
|
|
--
|
|
Depreciation
and amortization
|
|
|
2,046,625
|
|
|
255,526
|
|
|
265,264
|
|
Amortization
of debt discount
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
--
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
--
|
|
|
(21,663
|
)
|
Gain
on extinguishment of debt
|
|
|
(206,608
|
)
|
|
(31,608
|
)
|
|
(175,000
|
)
|
Abandoned
patents
|
|
|
183,556
|
|
|
--
|
|
|
183,556
|
|
Bad
debts - employee advances
|
|
|
255,882
|
|
|
--
|
|
|
--
|
|
Contributed
technology expense
|
|
|
4,550,000
|
|
|
--
|
|
|
--
|
|
Consulting
expense
|
|
|
237,836
|
|
|
--
|
|
|
--
|
|
Management
unit expense
|
|
|
1,334,285
|
|
|
--
|
|
|
(14,551
|
)
|
Expense
for issuance of warrants
|
|
|
478,409
|
|
|
9,883
|
|
|
--
|
|
Expense
for issuance of options
|
|
|
390,977
|
|
|
143,352
|
|
|
--
|
|
Amortization
of deferred compensation
|
|
|
74,938
|
|
|
--
|
|
|
--
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
(296,428
|
)
|
|
(5,619
|
)
|
|
41,898
|
|
Other
assets
|
|
|
(53,893
|
)
|
|
(2,730
|
)
|
|
--
|
|
Accounts
payable and accrued expenses
|
|
|
2,798,244
|
|
|
(421,677
|
)
|
|
775,665
|
|
Accrued
interest
|
|
|
1,893,103
|
|
|
493,310
|
|
|
760,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by operating activities
|
|
|
(48,603,823
|
)
|
|
(2,849,182
|
)
|
|
(1,849,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
32,491
|
|
|
--
|
|
|
32,491
|
|
Purchases
of property and equipment
|
|
|
(2,199,094
|
)
|
|
--
|
|
|
(4,000
|
)
|
Patent
costs
|
|
|
(393,419
|
)
|
|
(64,863
|
)
|
|
(20,393
|
)
|
Loan
receivable
|
|
|
(1,632,168
|
)
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
|
(4,192,190
|
)
|
|
(64,863
|
)
|
|
8,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
400,490
|
|
|
400,490
|
|
|
--
|
|
Proceeds
from issuance of preferred stock, net of related
|
|
|
|
|
|
|
|
|
|
|
issuance
costs
|
|
|
4,679,437
|
|
|
4,679,437
|
|
|
--
|
|
Equity
contributions - net of fees incurred
|
|
|
41,711,198
|
|
|
--
|
|
|
--
|
|
Proceeds
from borrowing
|
|
|
8,378,631
|
|
|
--
|
|
|
2,132,581
|
|
Proceeds
from subscription receivables
|
|
|
499,395
|
|
|
--
|
|
|
399,395
|
|
The Notes to Consolidated Financial Statements are
an integral
part of these statements.
MEDASORB
TECHNOLOGIES CORPORATION |
|
(a
development stage company) |
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
Net
cash provided by financing activities
|
|
|
55,669,151
|
|
|
5,079,927
|
|
|
2,531,976
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,873,138
|
|
|
2,165,882
|
|
|
690,507
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
--
|
|
|
707,256
|
|
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,873,138
|
|
$
|
2,873,138
|
|
$
|
707,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
511,780
|
|
$
|
--
|
|
$
|
7,871
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable principal and interest conversion to equity
|
|
$
|
10,201,714
|
|
$
|
9,030,149
|
|
$
|
51,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of member units for leasehold improvements
|
|
$
|
141,635
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of management units in settlement of cost of
|
|
|
|
|
|
|
|
|
|
|
raising
capital
|
|
$
|
437,206
|
|
$
|
--
|
|
$
|
92,287
|
|
|
|
|
|
|
|
|
|
|
|
|
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 common stock in exchange for stock
|
|
|
|
|
|
|
|
|
|
|
subscribed
|
|
$
|
399,395
|
|
$
|
399,395
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of equity in settlement of accounts payable
|
|
$
|
1,586,444
|
|
$
|
750,125
|
|
$
|
836,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
paid from proceeds in conjunction with issuance of
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
$
|
620,563
|
|
$
|
620,563
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
$
|
775,536
|
|
$
|
775,536
|
|
$
|
--
|
|
The Notes to
Consolidated Financial Statements are an integral part of these
statements.
1. BASIS
OF PRESENTATION
The
accompanying consolidated financial statements 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.”
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 Parent’s subsidiary (formerly known
as MedaSorb Acquisition Inc.), MedaSorb Delaware merged (the “Merger”) with the
Parent’s 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
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
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 December 31, 2006 of $67,426,583.
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 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 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 December 31, 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 debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
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.
Convertible
Notes Payable
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company evaluates its
convertible notes payable to determine if an imbedded beneficial conversion
feature (BCF) exists. If a BCF is determined to exist, the Company allocates
a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The debt discount attributed to the beneficial
conversion feature is amortized over the convertible debenture's maturity period
as interest expense using the effective yield method.
In
accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
No.
98-5 to Certain Convertible Instruments ("EITF 00-27"), the Company recognizes
the value attributable to warrants to additional paid-in capital and a discount
against the convertible debentures. The Company values the warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model. The debt
discount attributed to the value of the warrants issued is amortized over the
convertible debenture’s maturity period as interest expense using the effective
yield method.
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 reverse 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 approximate 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.
Net
Loss per Common Share
Basic
EPS
is computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during
the
period. The computation of Diluted EPS does not assume conversion, exercise
or
contingent exercise of securities that would have an anti-dilutive effect on
earnings. Refer to Note 10 for methodology for determining net loss per
share.
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 was 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(R), “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(R) 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 fair valued on the date of
grant. Had compensation cost for options granted to employees and directors
been
determined consistent with SFAS No. 123(R), the Company's pro forma net loss
would have been as follows:
Net
Loss
|
|
Period
from January 22, 1997 (date of inception)
to December 31, 2005
|
|
|
|
As
reported
|
|
$
|
58,979,467
|
|
$
|
3,665,596
|
|
Pro
forma
|
|
$
|
59,053,461
|
|
$
|
3,692,026
|
|
Under
SFAS No. 123(R), 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 Statement of Financial Accounting Standards
No.
123(R), "Share-Based Payment" ("SFAS 123(R)"), which requires all companies
to
measure compensation cost for all share-based payments (including employee
stock
options) at fair value and to recognize cost over the vesting period. In March
2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 provides the SEC staff position regarding the
application of SFAS 123(R), including interpretive guidance related to the
interaction between SFAS 123(R) and certain SEC rules and regulations, and
provides the staff's views regarding the valuation of share-based payment
arrangements for public companies. SAB 107 highlights the importance of
disclosures made related to the accounting for share-based payment transactions.
In April 2005, the SEC announced that companies may implement SFAS 123(R) at
the
beginning of their next fiscal year beginning after June 15, 2005, or December
15, 2005 for small business issuers. The Company implemented the provisions
of
SFAS 123(R) and SAB 107 in the first quarter of calendar 2006 using the
modified-prospective method, and it did not have a material impact on the
Company’s consolidated financial position or cash flows. See Note 9 for further
information and the required disclosures under SFAS 123(R) and SAB 107,
including the impact of the implementation on our results of
operations.
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 Company does not expect that the adoption of SFAS No. 154 will
have a significant impact on the consolidated results of operations or financial
position of the Company.
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
remeasurement 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 does not expect that the adoption of SFAS No. 155 will have a
significant impact on the consolidated 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 of 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 noncomparability 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
Company does not expect that the adoption of FIN No. 48 will have a significant
impact on the consolidated results of operations or financial position of the
Company.
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 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. Since the Company does not have
a
defined benefit plan or post-retirement plan, 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.
PROPERTY AND EQUIPMENT, NET:
Property
and equipment - net, consists of the following:
December
31,
|
|
2006
|
|
2005
|
|
Depreciation/Amortization
Period
|
|
Furniture
and fixtures
|
|
$
|
130,015
|
|
$
|
130,015
|
|
|
7
years
|
|
Equipment
and computers
|
|
|
1,709,815
|
|
|
1,709,815
|
|
|
3
to 7 years
|
|
Leasehold
improvements
|
|
|
462,980
|
|
|
462,980
|
|
|
Term
of lease
|
|
|
|
|
2,302,810
|
|
|
2,302,810
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
1,999,250
|
|
|
1,749,153
|
|
|
|
|
Property
and Equipment, Net
|
|
$
|
303,560
|
|
$
|
553,657
|
|
|
|
|
Depreciation
expense for the years ended December 31, 2006 and 2005 amounted to $250,096
and
$259,836, respectively. Depreciation expense from inception to December 31,
2006
amounted to $2,026,338.
4.
OTHER ASSETS:
Other
assets consist of the following:
December
31,
|
|
2006
|
|
2005
|
|
Intangible
assets, net
|
|
$
|
189,577
|
|
$
|
130,143
|
|
Security
deposits
|
|
|
53,894
|
|
|
51,164
|
|
Total
|
|
$
|
243,471
|
|
$
|
181,307
|
|
Intangible assets consist of the
following:
December
31,
|
|
2006
|
|
2005
|
|
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Patents
|
|
$
|
209,863
|
|
$
|
20,286
|
|
$
|
145,000
|
|
$
|
14,857
|
|
The
issued patents that are capitalized are being amortized over the patents
remaining legal life. Pending patents are not being amortized. Amortization
expense amounted to $5,428 and $5,428 for the years ended December 31, 2006
and
2005, respectively. Amortization expense from inception to December 31, 2006
amounted to $20,286.
Amortization
expense is anticipated to be approximately $8,800 for each of the next five
years ended December 31, 2011. During the years ended December 31, 2006 and
2005, the Company abandoned its pursuit of certain patents and recorded a loss
on abandonment in the amount of $0 and $183,556, respectively.
5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts
Payable and accrued expenses consist of the following:
December
31,
|
|
2006
|
|
2005
|
|
Other
payables
|
|
$
|
148,390
|
|
$
|
239,786
|
|
Legal,
financial and consulting
|
|
|
290,168
|
|
|
883,092
|
|
Research
and development
|
|
|
451,414
|
|
|
683,009
|
|
Filing
fees
|
|
|
119,221
|
|
|
162,071
|
|
Employee
compensation
|
|
|
2,851
|
|
|
247,476
|
|
|
|
$
|
1,012,044
|
|
$
|
2,215,434
|
|
6.
INCOME TAXES:
From
inception through December 31, 2005, the Company incurred losses which, as
a
limited liability company, were passed through to its members. The Company
was a
corporation in 2006, and its tax loss of approximately $3,400,000 for the year
ended December 31, 2006 also represents the Company’s net operating loss
carryforward, which expires in 2026. These loss carryforwards are subject to
limitation in future years should certain ownership changes occur. A deferred
tax asset has not been recorded due to the uncertainty that the Company will
have the ability to utilize such asset.
For
the
years ended December 31, 2006, respectively, the Company’s effective tax rate
differs from the federal statutory rate principally due to net operating losses
and certain non-deductible expenses for which no benefit has been recorded.
A
reconciliation of the Federal statutory rate to the Company’s effective tax rate
for the year ended December 31, 2006 is as follows:
Federal
statutory rate
|
|
|
(34.0
|
)%
|
Decrease
resulting from:
|
|
|
|
|
Non-deductible
expenses
|
|
|
18.6
|
|
Operating
losses
|
|
|
15.4
|
|
Effective
tax rate
|
|
|
—
|
%
|
7.
COMMITMENTS AND CONTINGENCIES:
The
Company is obligated under non-cancelable operating leases for office space
and
equipment expiring at various dates through September 2009. The aggregate
minimum future payments under these leases are approximately as
follows:
Year
ending December 31, |
|
|
|
|
2007
|
|
$ |
42,000 |
|
2008
|
|
|
5,000 |
|
2009
|
|
|
4,000 |
|
Total |
|
$ |
51,000 |
|
The
preceding data reflects existing leases and does not include replacements upon
their expiration. In the normal course of business, operating leases are
normally renewed or replaced by other leases.
Rent
expense for the years ended December 31, 2006 and 2005 amounted to approximately
$226,000 and $259,000, respectively.
Employment
Agreements
The
Company has employment agreements with certain key executives through July
2008.
The
agreements provide for annual base salaries of varying amounts. Future minimum
annual salaries are approximately as follows:
Year
ending December 31, |
|
|
|
|
2007
|
|
$
|
200,000
|
|
2008
|
|
|
108,000
|
|
Total
|
|
$
|
308,000
|
|
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 year ended December 31, 2006, the Company’s financial statements reflect
the issuance of options to purchase 413,920 shares of common stock to this
employee consistent with his employment agreement. The options were valued
at
approximately $69,600 and have been included as a charge to the consolidated
statements of operations for the year ended December 31, 2006.
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 the Company’s
patents. The settlement agreement provides the Company 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,
the Company 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 License Agreements). The Company has not generated any revenue from its
products and has not incurred any royalty costs through December 31, 2006.
The
amount of future revenue subject to the settlement 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.
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 December 31, 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 Litigation). The Company
has
not generated any revenue from its products and has not incurred any royalty
costs through December 31, 2006. The amount of future revenue subject to the
Settlement 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.
8.
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
year ended December 31, 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
bore
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 1). The loan and accrued interest were
due
and payable on December 31, 2006, subject to earlier repayment in the event
the
Company were to complete 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 were 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, would be
convertible into the securities sold in that offering. In consideration for
both
funding the loan and assisting in arranging the Merger transaction and
concurrent offering, the noteholder was also issued 10 million shares of common
stock in 2006. Due to the contingent nature of completing the reverse merger,
the Company could not be reasonably assured that the reverse merger would take
place until its consummation in 2006. Accordingly, the issuance of common stock
associated with these contingencies resulted in the Company recording a debt
discount charge in the amount of $1,000,000 at the date of the reverse merger
closing in 2006. The terms of the agreement provided the note to be due
currently. Therefore, the Company immediately amortized the debt discount
entirely at the date of the reverse merger closing, resulting in a charge to
the
consolidated statements of operations for the year ended December 31, 2006
in
the amount of $1,000,000.
In
October 2006, pursuant to the terms of the Investment Agreement with the bridge
loan holder, the $1,000,000 bridge loan was converted into 1,000,000 shares
of
10% Series A Preferred Stock and warrants to purchase 400,000 shares of Common
Stock at a price of $2.00 per share. In accordance with Emerging Issues Task
Force (EITF) 00-27, the Company allocated the $1,000,000 of proceeds based
on
the relative fair value to the preferred stock as follows: $917,180 was
allocated to the preferred stock and $82,820 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 $122,820. 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 $205,640 has been recorded as a preferred stock dividend and is
included in the consolidated statements of operations for year ended December
31, 2006. As noted above, the Company has concluded that the conversion feature
is not considered a derivative under EITF 00-19 and SFAS 133.
9. STOCKHOLDERS'
EQUITY
Each
share of Series A Preferred Stock has a stated value of $1.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the stated value of such share of Series A Preferred Stock divided
by
an initial conversion price of $1.25. Upon the occurrence of a stock split,
stock dividend, combination of the Common Stock into a smaller number of shares,
issuance of any of shares of Common Stock or other securities by
reclassification of the Common Stock, merger or sale of substantially all of
the
Company’s assets, the conversion rate will be adjusted so that the conversion
rights of the Series A Preferred Stock stockholders will be equivalent to the
conversion rights of the Series A Preferred Stock stockholders prior to such
event. In addition, in the event the Company sells shares of Common Stock (or
the equivalent thereof) at a price of less than $1.25 per share, the conversion
price of the shares of Series A Preferred Stock will be reduced to such lower
price. In addition, in the event the Company sells shares of Common Stock (or
the equivalent thereof) at a price of less than $2.00 per share, the exercise
price of the warrants will be reduced to such lower price.
The
Series A Preferred Stock bears a dividend of 10% per annum payable quarterly,
at
the Company’s election in cash or additional shares of Series A Preferred Stock
valued at the stated value thereof; provided, however, that the Company must
pay
the dividend in cash if an “Event of Default” as defined in the Certificate of
Designation designating the Series A Preferred Stock has occurred and is then
continuing. In addition, upon an Event of Default, the dividend rate increases
to 20% per annum. An Event of Default includes, but is not limited to, the
following:
· |
the
occurrence of “Non-Registration Events” including, the failure to cause a
registration statement registering the shares of Common Stock underlying
the Series A Preferred Stock and Warrants issued in connection therewith
to be effective within 240 days following the closing of the private
placement;
|
· |
an
uncured breach by the Company of any material covenant, term or condition
in the Certificate of Designation or any of the related transaction
documents; and
|
· |
any
money judgment or similar final process being filed against the Company
for more than $100,000.
|
In
the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series A Preferred Stock will receive, in priority over the holders of
Common Stock, a liquidation preference equal to the stated value of such shares
plus accrued dividends thereon.
The
Series A Preferred Stock is not redeemable at the option of the holder but
may
be redeemed by the Company at its option following the third anniversary of
the
issuance of the Series A Preferred Stock for 120% of the stated value thereof
plus any accrued but unpaid dividends upon 30 days' prior written notice, during
which time the Series A Preferred Stock may be converted, provided a
registration statement is effective under the Securities Act with respect to
the
Common Stock into which such Preferred is convertible and an Event of Default
is
not then continuing.
Holders
of Series A Preferred Stock do not have the right to vote on matters submitted
to the holders of Common Stock.
The
registration rights provided for in the subscription agreements entered into
with the purchasers of the Series A Preferred Stock: 1)
requires that the Company file a registration statement with the SEC on or
before 120 days from the closing to register the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock and exercise of the warrants,
and cause such registration statement to be effective within 240 days following
the closing; and 2)
entitles each of these investors to liquidated damages in an amount equal to
two
percent (2%) of the purchase price of the Series A Preferred Stock if the
Company fails to timely file that registration statement with, or have it
declared effective by, the SEC (see Note 11).
The
transaction documents entered into with the purchasers of the Series A Preferred
Stock also provide for various penalties and fees for breaches or failures
to
comply with provisions of those documents, such as the timely payment of
dividends, delivery of stock certificates upon conversion of the Series A
Preferred Stock or exercise of the warrants, and obtaining and maintaining
an
effective registration statement with respect to the shares of Common Stock
underlying the Series A Preferred Stock and warrants sold in the
offering.
In
accordance with Emerging Issues Task Force (EITF) 00-27, the Company allocates
the proceeds associated with the issuance of preferred stock based on the
relative fair value of the preferred stock and warrants. Additionally, the
Company evaluates if the embedded conversion option results in a beneficial
conversion feature by comparing the relative fair value allocated to the
preferred stock to the market value of the underlying common stock subject
to
conversion. In connection with the preferred stock issuances during the year
ended December 31, 2006, the Company received total proceeds of $7,099,885.
The
Company allocated the total proceeds in accordance with EITF 00-27 based on
the
related fair value to the preferred stock as follows: $6,776,667 was allocated
to the preferred stock and $323,218 to the warrants. Additionally, the embedded
conversion option resulted in a beneficial conversion feature in the amount
of
$148,618. 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 is recorded as a preferred stock dividend and
is
presented in the consolidated statements of operations. In addition, the Company
considers the guidance of EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Common
Stock,” and SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities (as amended),” and concluded that the conversion feature embedded in
the preferred stock only provides for physical settlement and there are no
net
settlement features. Accordingly, the Company has concluded that the conversion
feature is not considered a derivative under EITF 00-19 and SFAS
133.
Stock
Option Plans
As
of
December 31, 2006, the Company had a Long Term Incentive Plan (“2006 Plan”) to
attract, retain, and provide incentives to employees, officers, directors,
and
consultants. The Plan generally provides for the granting of stock, stock
options, stock appreciation rights, restricted shares, or any combination of
the
foregoing to eligible participants.
A
total
of 2,500,000 shares of common stock are reserved for issuance under the 2006
Plan. As of December 31, 2006 there were outstanding options to purchase 294,401
shares of common stock under the 2006 Plan. Additionally, as of December 31,
2006 there were options to purchase 890,600 shares of Common Stock that were
issued outside of the 2006 Plan.
The
2006
Plan as well as grants issued outside of the Plan are administered by the
Compensation Committee of the Board (the Committee). The Committee is
authorized to select from among eligible employees, directors, advisors and
consultants those individuals to whom incentives are to be granted and to
determine the number of shares to be subject to, and the terms and conditions
of
the options. The Committee is also authorized to prescribe, amend and
rescind terms relating to options granted under the 2006 Plan. Generally,
the interpretation and construction of any provision of the 2006 Plan or any
options granted hereunder is within the discretion of the
Committee.
The
2006
Plan provides that options may or may not be Incentive Stock Options (ISOs)
within the meaning of Section 422 of the Internal Revenue Code. Only
employees of the Company are eligible to receive ISOs, while employees and
non-employee directors, advisors and consultants are eligible to receive options
which are not ISOs, i.e. “Non-Qualified Options.” Because the Company has
not yet obtained shareholder approval of the 2006 Plan, all options granted
thereunder to date are “Non-Qualified Options” and until such shareholder
approval is obtained, all future options issued under the 2006 Plan will also
be
“Non-Qualified Options.”
Stock-based
Compensation
Effective
January 1, 2006, the Company implemented the fair value recognition provisions
of SFAS 123(R) and SAB 107 for all share-based compensation. Share-based
employee compensation for the year ended December 31, 2006 in the amounts of
approximately $31,300 and $112,000 (net of related tax), is included in the
net
loss of $7,671,580 under the captions research and development and general
and
administrative, respectively.
The
summary of the stock option activity for the year ended December 31, 2006 is
as
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
Shares
|
|
per
Share
|
|
Life
(Years)
|
|
Outstanding,
January 1, 2006
|
|
|
512,247
|
|
$
|
27.49
|
|
|
5.2
|
|
Granted
|
|
|
673,105
|
|
|
6.65
|
|
|
9.2
|
|
Cancelled
|
|
|
(351
|
)
|
|
6.64
|
|
|
8.0
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2006
|
|
|
1,185,001
|
|
$
|
15.66
|
|
|
7.5
|
|
The
weighted-average grant date fair value for options granted during the years
ended December 31, 2006 and 2005 amounted to approximately $0.30 and $0.44
per
share, respectively.
At
December 31, 2006, the aggregate intrinsic value of options outstanding and
options currently exercisable amounted to approximately $63,000.
The
summary of the status of the Company’s non-vested options for the year ended
December 31, 2006 is as follows:
|
|
Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
Non-vested,
January 1, 2006
|
|
|
1,105
|
|
$
|
0.00
|
|
Granted
|
|
|
673,105
|
|
$
|
0.30
|
|
Cancelled
|
|
|
(351
|
)
|
$
|
0.00
|
|
Vested
|
|
|
(594,194
|
)
|
$
|
0.24
|
|
Exercised
|
|
|
—
|
|
|
|
|
Non-vested,
December 31, 2006
|
|
|
79,665
|
|
$
|
0.77
|
|
As
of
December 31, 2006, approximately $61,000 of total unrecognized compensation
cost
related to stock options is expected to be recognized over a weighted average
period of 6.7 years.
As
of
December 31, 2006, the Company has the following warrants to purchase common
stock outstanding:
Number
Of Shares
To
be Purchased
|
|
Warrant
Exercise
Price
per Share
|
|
|
|
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
|
|
52,080
|
|
$
|
2.00
|
|
|
July
31, 2011
|
|
400,000
|
|
$
|
2.00
|
|
|
October
31, 2011
|
|
240,125
|
|
$
|
2.00
|
|
|
October
24, 2016
|
|
As
of
December 31, 2006, the Company has the following warrant to purchase preferred
stock outstanding:
Number
of
Shares
to be
Purchased
|
|
Warrant
Exercise
Price
per
Preferred
Share
|
|
|
|
525,000
|
|
$
|
1.00
|
|
|
June
30, 2011
|
|
If
the
holder of warrants for preferred stock exercises in full, the holder will
receive additional 5 year warrants to purchase a total of 210,000 shares of
common stock at $2.00 per share.
Equity
Instruments Issued for Services Rendered
During
the years ended December 31, 2006 and 2005, the Company issued stock options,
warrants and shares of common stock in exchange for services rendered to the
Company. The fair value of each stock option and warrant was valued using the
Black Scholes pricing model which takes into account as of the grant date the
exercise price and expected life of the stock option or warrant, the current
price of the underlying stock and its expected volatility, expected dividends
on
the stock and the risk free interest rate for the term of the stock option
or
warrant. Shares of common stock are valued at the quoted market price on the
date of grant. The fair value of each grant was charged to the related expense
in the statement of operations for the services received.
10.
NET LOSS PER SHARE
Basic
earnings per share and diluted earnings per share for the years ended December
31, 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 representing
approximately 1,185,001 and 3,994,875 incremental shares,
respectively, as well as shares issuable upon conversion of Series A Convertible
Preferred Stock and Preferred Stock Warrant representing approximately 6,342,868
incremental shares have been excluded from the computation of diluted EPS as
they are anti-dilutive.
11. SUBSEQUENT
EVENTS
Effective
January 1, 2007, the Company appointed a new Chairman of the Board, agreed
to
compensate him at the rate of $20,000 per annum, and issued him an option to
purchase 200,000 shares of Common Stock exercisable at $1.65 per
share.
In
January 2007, the Company issued options to purchase 176,000 shares of Common
Stock to employees and a consultant exercisable at $1.90 per share.
In
February 2007, the Company issued an option to purchase 400,000 shares of Common
Stock to an employee exercisable at $1.26 per share.
The
Company is required to file a registration statement under the terms of the
subscription agreements for 5,250,000 shares of Series A Preferred Stock with
an
aggregate stated value of $5,250,000, sold to four institutional investors
(See
Note 9). The
registration rights provided for in the subscription agreements entered into
with these investors requires the Company to file a registration statement
with
the SEC and cause it to be declared effective by the SEC by February 25,
2007. The failure to have the registration statement timely declared
effective by the SEC constitutes an event of default under the Certificate
of
Designation and entitles those
investors to liquidated damages of two percent (2%) of the purchase price of
the
Series A Preferred Stock per 30-day period. The
Company filed the registration statement, but it has not yet been declared
effective by the SEC. Accordingly, the Company is obligated to pay those
investors an aggregate of $105,000 per 30-day period from February 26, 2007
through the date that the registration statement is declared effective by the
SEC, and cash dividends on the shares of Series A Preferred Stock issued to
those investors began to accrue at the rate of 20% per annum on February 26,
2007 and will continue to accrue at that rate until the registration statement
is declared effective.