UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
20549
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
COMMISSION
FILE NUMBER 000-51038
MEDASORB
TECHNOLOGIES CORPORATION
(Name
of
Small Business Issuer in Its Charter)
Nevada
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98-0373793
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer identification number)
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7
Deer Park Drive, Suite K
Monmouth
Junction, New Jersey 08852
(732)
329-8885
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock
$0.001
par value
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15
(d) of the Exchange
Act. ¨
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
þ
Yes ¨
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) ¨
Yes þ
No
The
issuer had no revenues
for its fiscal year ended December 31, 2007.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of April 7, 2008 was approximately
$1,907,000. The number of shares outstanding of the registrant’s Common Stock as
of April 15, 2008 was 25,044,932.
Transitional
Small Business Disclosure Format: ¨
Yes þ
No
MEDASORB
TECHNOLOGIES CORP.
2007
FORM 10-KSB ANNUAL REPORT
TABLE
OF CONTENTS
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Page
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PART
I
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3
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Item
1. Description of Business
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3
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Item
2. Description of Property
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28
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Item
3. Legal Proceedings
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29
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Item
4. Submission of Matters to a Vote of Security Holders
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29
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PART
II
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29
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Item
5. Market for Common Equity and Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
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29
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Item
6. Management’s Discussion and Analysis of Plan of
Operation
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30
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Item
7. Financial Statements
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32
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Item
8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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32
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Item
8A. Controls and Procedures
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32
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Item
8B. Other Information
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33
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PART
III
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33
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Item
9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
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33
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Item
10. Executive Compensation
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35
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Item
11. Security Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
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40
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Item
12. Certain Relationships and Related Transactions and Director
Independence
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42
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Item
13. Exhibits
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43
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Item
14. Principal Accountant Fees and Services
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44
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CAUTIONARY
NOTE REGARDING 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”. However, 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.
PART
I
Item
1. Description
of 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
and physiologic fluids. We will be required to obtain required regulatory
approvals from a Notified Body for the European Community (CE Mark) and the
United States Food and Drug Administration before we can sell our products
in
Europe and the United States, respectively. 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. In the first quarter of 2007, we
received approval from the FDA to conduct a limited study of five patients
in
the adjunctive treatment of sepsis. Based on management’s belief that proceeding
with the approved limited study would add at least one year to the approval
process for the United States, we made a determination to focus our efforts
on
obtaining regulatory approval in Europe before proceeding with the
FDA.
We
estimate that the market potential in Europe for our products is substantially
equivalent to that in the U.S. Given the opportunity to conduct a much larger
clinical study in Europe, and management’s belief that the path to a CE Mark
should be faster than FDA approval, we have targeted Europe for the initial
market introduction of our CytoSorb™ product. To accomplish the European
introduction, in
July
2007 we prepared and filed a request for a clinical trial with a German Central
Ethics Committee. We received approval of the final study design in October
of
2007. The clinical study allows for enrollment of up to 80 patients with acute
respiratory distress syndrome or acute lung injury in the setting of sepsis.
We
have recently made arrangements with several hospitals in Berlin to conduct
the
clinical study, and those hospitals are now open for patient enrollment.
The
clinical protocol for our European clinical study has been designed to allow
us
to gather information to support future U.S. studies. In the event we receive
the CE Mark and are able to successfully commercialize our products in the
European market, we will review our plans for the United States to determine
whether to conduct clinical trials in support of 510K or PMA registration.
No
assurance can be given that our proposed CytoSorb™ product will work as intended
or that we will be able to obtain CE Mark (or FDA) approval to sell CytoSorb™.
Even if we ultimately obtain CE Mark approval, because we cannot control the
timing of responses from regulators to our submissions, there can be no
assurance as to when such approval will be obtained.
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 various toxic compounds 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 and other toxic compounds in
the
bloodstream. These conditions include, but are not limited to, the prevention
of
post-operative complications of cardiac surgery (cardiopulmonary bypass
surgery), damage to organs donated for transplant prior to organ harvest, and
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 the
necessary regulatory body approvals to sell CytoSorb™. Even if we ultimately
obtain regulatory approval, because we can not control the timing of responses
to our regulatory 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
adsorbent 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 separate
regulatory approval in Europe and/or the United States.
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
MedaSorb
Technologies Corporation was incorporated in Nevada on April 25, 2002 as Gilder
Enterprises, Inc. and was 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., a Delaware corporation in a merger, and its business became
our business. Following the merger, in July 2006 we changed our name to MedaSorb
Technologies Corporation. Unless otherwise indicated, all references in this
Annual Report to “MedaSorb,” “us” or “we” with respect to events prior to June
30, 2006 are references to MedaSorb Technologies, Inc. and its predecessors.
Our
executive offices are located at 7 Deer Park Drive, Suite K, Monmouth Junction,
New Jersey 08852. Our telephone number is (732) 329-8885.
MedaSorb
was originally organized as a Delaware limited liability company in August
1997
as Advanced Renal Technologies, LLC. MedaSorb changed its name to RenalTech
International, LLC in November 1998, and to MedaSorb Technologies, LLC in
October 2003. In
December 2005, MedaSorb converted from a limited liability company to a
corporation.
MedaSorb
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 had 292 stockholders that held an aggregate of
20,340,929 shares of common stock . 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 the sole director
and
officer of Gilder 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 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. 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.
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 stockholders of MedaSorb prior to the merger
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 prior
to
the merger 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 options and warrants that
were cancelled. Certain providers of legal services to MedaSorb who previously
had the right to be issued approximately 997,000 shares
of
MedaSorb 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, the sole director and officer
of
MedaSorb
Technologies Corporation (then
Gilder
Enterprises) 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, Vincent Capponi was appointed our Chief Operating
Officer, David Lamadrid was appointed our Chief Financial Officer and James
Winchester, MD was appointed our Chief Medical Officer.
For
accounting purposes, the merger has been accounted for as a reverse merger,
since MedaSorb Technologies Corporation (then Gilder
Enterprises) was
a
shell company prior to the merger, the stockholders of MedaSorb prior to the
merger own a majority of the issued and outstanding shares of our Common Stock
after the merger, and the directors and executive officers of MedaSorb prior
to
the merger became our directors and executive officers. Accordingly, pre-merger
MedaSorb is treated as the acquiror in the merger, which is treated as a
recapitalization of pre-merger MedaSorb, and the pre-merger financial statements
of MedaSorb 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
agreed
to file a registration statement 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 we agreed to file 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 until May 7, 2007, the date the registration statement was declared
effective. During this time period, we were obligated to pay those purchasers
cash dividends and an aggregate of $105,000 per 30-day period from February
26,
2007 through the date such registration statement was declared effective (May
7,2007) in cash. Pursuant to a settlement agreement with the June 30, 2006
purchasers of Series A Preferred Stock, all cash dividends and damages were
paid
for in full with additional shares of Series A Preferred Stock.
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 consisted 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.
The
terms
of the pledge provided that in the event those investors 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 would be entitled to 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. 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
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525,000
shares of Series A Preferred Stock (representing 10% of the Series
A
Preferred Stock purchased by those investors), and
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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),
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for
an
aggregate exercise price of $525,000.
Research
and Development
We
have
been engaged in research and development since inception. Our research and
development costs were approximately $1,416,000 and $1,113,000 for the years
ended December 31, 2007 and 2006, respectively.
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
and toxic compounds largely untouched by dialysis technology.
Our
initial 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 and toxic compounds, such as cytokines, from blood and physiologic
fluids. We believe that our technology may have many applications in the
treatment of common, chronic and acute healthcare complications including the
adjunctive 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. The Company estimates that the market
potential in Europe for its products is substantially equivalent to that in
the
U.S.
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 95,000 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, will 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 340,000 patients in the United States currently receiving chronic
dialysis and more than 1.5 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, from
blood and physiologic fluids. All of the potential applications described below
(i.e.,
the
adjunctive 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 have only recently received approval from the German
Ethics Committee to proceed with a clinical study of up to 80 patients with
acute respiratory distress syndrome or acute lung injury in the setting of
sepsis. If we are able to commence these studies in the second quarter of 2008
as planned, these studies are successful and we obtain European regulatory
approval, we anticipate that we will be able to begin sales of CytoSorb™ by late
2009, at the earliest. However, there can be no assurance we will ever obtain
regulatory approval for CytoSorb™ or any other device.
The
CytoSorb™ Device (Critical Care)
APPLICATION:
Adjunctive Therapy in the Treatment 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:
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.
We
received approval from the German Ethics Committee in October of 2007 to conduct
a clinical study of up to 80 patients with acute respiratory distress syndrome
or acute lung injury in the setting of sepsis, and are currently seeking
additional financing to be able to conduct that study. We recently made
arrangements with several hospitals in Berlin to conduct the clinical study,
which we expect to commence in the second quarter of 2008. We expect to complete
the study in approximately 9 months following enrollment of the first patient.
Concurrent with the clinical study, we expect to commence the CE Mark submission
process. Assuming a successful outcome of the study, management believes it
will
take an additional 6-9 months following its submission for CE Mark approval
to
receive the European regulatory approval. Assuming availability of adequate
and
timely funding, and a successful outcome to the study, management anticipates
obtaining CE Mark approval in late 2009, at the earliest.
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 the CE Mark, because
we cannot control the timing of the regulatory approval process, 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 95,000 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:
Studies
have been 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 have completed the observational and dosing phases of the
project. The results were published in Critical Care Medicine, January 2008.
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 adsorbent 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
BetaSorb™ 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, including 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 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,
for each of 2006 and 2007 we received approximately $102,000 for our efforts
in
support of the study. We have entered into a formal SubAward Agreement for
year
three of the study, and 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 currently budgeted for our participation under the study
are approximately $59,000, $132,000 and $163,000, respectively, for years three,
four and five of the study. The amounts are subject to change on an annual
basis
by the NIH, and 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 to obtain European or 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 2,100 dialysis clinics in North America, Europe, Latin America and
Asia-Pacific, Fresenius Medical Care provides dialysis treatment to more than
163,000 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, 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, 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 several of our issued patents and several of our 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 would
continue to exclusively own any confidential and proprietary know
how.
Product
Payment & Reimbursement
Critical
Care Applications
Europe
Payment
for our CytoSorb™ device for the removal of cytokines in patients with
acute
respiratory distress syndrome or acute lung injury in
the
setting of sepsis and other related acute care applications will be applied
for
on a country by country basis in Europe. We intend to initially apply for
reimbursement in Germany where we expect to conduct clinical trials. If we
are
able to successfully introduce the CytoSorb™
device into the German market we
intend
to apply for reimbursement in France, England, Italy and Spain representing
the
five economic leaders in Europe and introduce our products in those countries
accordingly. We will first need to establish the CE Mark for the CytoSorb™
device, then pursue reimbursement on a country by country basis. Each country
will determine reimbursement status of the device based on the data obtained
from the clinical trial. There can be no assurances that reimbursement will
be
granted or that additional clinical data may not be required to establish
reimbursement.
United
States
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
Europe
chronic dialysis is predominately provided by government supported clinics
accounting for approximately 75% of dialysis treatment, with the remainder
being
provided by private clinics. However, these figures vary widely among countries
within Europe. For example dialysis clinics in Denmark and Finland are 100%
publicly managed facilities while those in Portugal are 90% privately managed
facilities. Generally speaking,
dialysis services are always regulated and controlled by the healthcare
authorities and not homogeneous between the various European
countries.
There
are
three main types of reimbursement in Europe: budget transfer, fee for service
and flat rate. In some cases, the reimbursement method varies within the same
country depending on the type of provider (public or private). Europe is similar
to the U.S. in that a product such as BetaSorb™
may be part of a composite rate or separate line item reimbursement. In either
case, a country by country application for reimbursement must be
made.
It
is
expected that in the U.S., 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 may 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 Pittsburgh 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.
Pharmaceutical
research for the treatment of sepsis continues with a number of Phase I and
II
drug trials being conducted presently. Using a medical device to treat sepsis
remains a novel approach for the treatment of sepsis. There are a number of
companies that claim enabling technology for the treatment of sepsis but to
our
knowledge have not presented clinical evidence to that effect, with the
exception of Kaneka Corporation of Japan. Kaneka Corporation’s product, CTR
Adsorber, which is still being tested, uses a similar approach to our
technology. .
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.
In
August
of 2007 the German Ethics Committee approved our application to proceed with
a
clinical study enrolling up to 80 patients with acute respiratory distress
syndrome or acute lung injury in the setting of sepsis. We recently made
arrangements with several hospitals in Berlin to conduct the clinical study,
which we expect to commence in the second quarter of 2008.
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 of approximately $7 million 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, for 2006
and
2007 we received approximately $102,000 each year for our efforts in support
of
the study. We have entered into a formal SubAward Agreement for year 3, and
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
currently budgeted for our participation under the study are approximately,
$59,000, $132,000, and $163,000, respectively, for years three, four and five
of
the study. The amounts are subject to change on an annual basis by the NIH,
and
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
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.
In
the
European Union, 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.
As
discussed above, we intend to initially pursue CE Mark certification for the
CytoSorb™ device in conjunction with German clinical studies before continuing
with the approval process in the United States.
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.
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 and timely funding to
support our planned activities and that our products perform as expected in
clinical studies, that we will obtain CE Mark approval of our CytoSorb™ device
in the treatment of sepsis in late 2009, at the earliest, assuming a successful
pivotal study. We 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, France, Spain 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 25 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 includes:
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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.
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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.
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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.
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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.
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U.S.
Pat. No. 6,878,127, which expires in 2021 and U.S. Pat. No.7,312,023,
which expires in 2024. These patents concern devices, systems and
methods
for reducing levels of pro-inflammatory or anti-inflammatory stimulators
or mediators in the blood.
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U.S.
Pat. No. 6,884,829, which expires in 2022, U.S. Pat. No. 7,112,620
which
expires in 2023 and U.S. Pat. No. 7,201,962 which expires in 2025.
These
patents concern a hemocompatible polymer and a one-step method of
producing it.
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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
As
of
December 31, 2007, we had eight employees. None of our employees are represented
by a labor union or are subject to collective-bargaining agreements. We believe
that we maintain good relationships with our employees.
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
require additional capital to continue operations.
As
of
December 31, 2007 we had cash on hand of only $211,613, having depleted the
proceeds of the private placement we completed in connection with our June
30,
2006 merger. Due to the lack of available funds, we have not paid certain of
our
senior executives since February 2008. We currently require additional financing
to proceed with clinical studies and the attempted commercialization of our
proposed products. Although we continue to discuss funding alternatives with
potential institutional investors, our recent efforts to obtain additional
financing have been unsuccessful, and 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 suspend, delay, 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:
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continued
progress and cost of our research and development
programs;
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progress
with pre-clinical studies and clinical
studies;
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the
time and costs involved in obtaining regulatory
clearance;
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costs
involved in preparing, filing, prosecuting, maintaining, defending
and
enforcing patent claims;
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costs
of developing sales, marketing and distribution
channels;
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market
acceptance of our products; and
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cost
for training physicians and other health care
personnel.
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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
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,
2007, we had an accumulated deficit of $71,538,209, which included losses from
operations of $3,350,754 for the year ended December 31, 2007 and $7,671,580
for
the year ended December 31, 2006. In part 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
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; David Lamadrid, our Chief
Financial Officer; Vincent Capponi, our Chief Operating Officer and Dr. James
Winchester, our Chief Medical Officer, who is employed by us on a part time
basis. These individuals 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:
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the
receipt of regulatory clearance of marketing claims for the uses
that we
are developing;
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the
establishment and demonstration of the advantages, safety and efficacy
of
the our polymer technology;
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pricing
and reimbursement policies of government and third-party payers
such as
insurance companies, health maintenance organizations and other
health
plan administrators;
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our
ability to attract corporate partners, including medical device companies,
to assist in commercializing our products;
and
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our
ability to market our products.
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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.
Even
if
we receive the CE Mark, there can be no assurance that the data from our
clinical studies will be viewed as sufficient by the medical community to
support the purchase of our products in substantial quantities or at all.
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 regulatory approval of our
products. The approval process will involve clinical studies and is lengthy
and
costly. The failure to obtain government approvals, internationally or
domestically, 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 European market, the United States, in
various states and in other 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 CE Mark and/or FDA approval for any of our products, we
will
be subject to extensive ongoing regulation.
Our
products will be subject to international regulation as medical devices under
the Medical Device Directive. In Europe, which we expect to provide the initial
market for our products, the Notified Body and Competent Authority govern,
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 Notified Body under these laws. Current international
regulations classify our CytoSorb™ device (the first product we intend to seek
international approval for) as a Class IIb device. Concurrent with the clinical
trial in Germany, we plan to pursue CE Mark certification of the CytoSorb™
device. 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 international
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. The extent of potentially adverse government
regulation that might arise from future legislation or administrative action
cannot be predicted. There
can
be no assurances that reimbursement will be granted or that additional clinical
data may be required to establish reimbursement.
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
cannot
give assurances that we will be able to continue 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 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 international 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 79% 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.
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 issued an additional 2,769,508 shares of Series A Preferred
Stock
through December 31, 2007 to additional investors, as dividends and in
connection with the settlement of amounts owed to certain investors due to
our
failure to timely register shares of Common Stock issuable upon conversion
of
Series A Preferred Stock. We will likely 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”;
|
|
·
|
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.
|
In
addition, the registration rights provided for in the subscription agreement
we
entered into with the purchasers in this offering:
|
·
|
required
us to 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 we agreed to file 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 until May 7, 2007, the date the registration statement was declared
effective. Additionally during this time period, we were obligated to pay those
purchasers cash dividends and an aggregate of $105,000 per 30-day period from
February 26, 2007 through the date such registration statement was declared
effective. Pursuant to a settlement agreement with the June 30, 2006 purchasers
of Series A Preferred Stock, all cash dividends and damages were paid for in
full with additional shares of Series A Preferred Stock.
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.
We
may in the future default in our contractual obligations to the holders of
our
Series A Preferred Stock, and in such event we may be required to pay liquidated
damages in cash or additional shares of Preferred Stock .
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 issued to the June 30, 2006 purchasers of our Series A Preferred Stock
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
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
$4
million of financing has been received by us following the commencement of
his
employment.
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.
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.
Item
2. Description
of Property.
We
currently operate a facility near Princeton, New Jersey with approximately
7,375
sq. ft, housing research laboratories, clinical manufacturing operations and
administrative offices, under a lease agreement which expires in February 2009.
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.
Item
3. Legal
Proceedings.
We
are
not party to any material pending legal proceedings.
Item
4. Submission
of Matters to a Vote of Security Holders.
No
matter
was submitted to a vote of security holders during the fiscal year ended
December 31, 2007.
PART
II
Item
5. Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities.
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.
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|
Price
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Third
quarter (from August 9)
|
|
$
|
3.95
|
|
$
|
1.25
|
|
Fourth
quarter
|
|
$
|
1.73
|
|
$
|
0.57
|
|
2007
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
2.85
|
|
$
|
1.04
|
|
Second
quarter
|
|
$
|
1.45
|
|
$
|
0.40
|
|
Third
quarter
|
|
$
|
0.63
|
|
$
|
0.16
|
|
Fourth
quarter
|
|
$
|
0.44
|
|
$
|
0.14
|
|
The
number of holders of record for our Common Stock as of December 31, 2007 was
approximately 350. This number excludes individual stockholders holding stock
under nominee security position listings.
Dividend
Policy
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, 2007, 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
|
|
|
2,098,502
|
|
$
|
9.41
|
|
|
1,772,099
|
(2)
|
Total
|
|
|
2,098,502
|
(3)
|
$
|
9.41
|
(3)
|
|
2,172,099
|
|
|
(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) 133,737 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) 306,000
shares
of Common Stock at a price of $1.65 per share, (viii) 166,756 shares
of
Common Stock at a price of $1.25 per share, (ix) 400,000 shares of
Common
Stock at a price of $1.26 per share, (x) 173,000 shares of Common
Stock at
a price of $1.90, and (xi) 137,622 shares of Common Stock at a price
of
$0.22.
|
Item
6. Management’s
Discussion and Analysis of 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 and MedaSorb Acquisition Inc., a newly formed wholly-owned
Delaware subsidiary of ours, MedaSorb
Technologies,
Inc. merged with MedaSorb Acquisition Inc. (now known as MedaSorb Technologies,
Inc.), and the stockholders of MedaSorb Technologies, Inc. became our
stockholders. MedaSorb Technologies, Inc. is now a wholly owned subsidiary
of
ours, and its business 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.
Research
and Development
All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.
Stock
Based-Compensation
The
Company accounts for its stock-based compensation under the recognition
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R).
“Accounting
for Stock-Based Compensation”,
for
employees and directors whereby each option granted is valued at fair market
value on the date of grant. Under SFAS No. 123, the fair value of each option
is
estimated on the date of grant using the Black-Scholes option pricing
model.
The
Company also follows the guidance in EITF 96-18 “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” for equity instruments issued
to consultants.
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 regulatory 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 and physiologic
fluids.
We
are
focusing 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 adjunctive 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
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. In the
first quarter of 2007, we received approval from the FDA to conduct a limited
study of five patients in the adjunctive treatment of sepsis. Based on
management’s belief that proceeding with the approved limited study would add at
least one year to the approval process for the United States, we made a
determination to focus our efforts on obtaining regulatory approval in Europe
before proceeding with the FDA.
We
estimate that the market potential in Europe for our products is substantially
equivalent to that in the U.S. Given the opportunity to conduct a much larger
clinical study in Europe, and management’s belief that the path to a CE Mark
should be faster than FDA approval, we have targeted Europe for the initial
market introduction of our CytoSorb™ product. To accomplish the European
introduction, in July 2007 we prepared and filed a request for a clinical trial
with a German Central Ethics Committee. We received approval of the final study
design in October of 2007. The clinical study allows for enrollment of up to
80
patients with acute respiratory distress syndrome or acute lung injury in the
setting of sepsis. We have recently made arrangements with several hospitals
in
Berlin to conduct the clinical studies, and those hospitals are now open for
patient enrollment.
The
clinical protocol for our European clinical study has been designed to allow
us
to gather information to support future U.S. studies. In the event we receive
the CE Mark and are able to successfully commercialize our products in the
European market, we will review our plans for the United States to determine
whether to conduct clinical trials in support of 510K or PMA registration.
No
assurance can be given that our proposed CytoSorb™ product will work as intended
or that we will be able to obtain CE Mark (or FDA) approval to sell CytoSorb™.
Even if we ultimately obtain CE Mark approval, because we cannot control the
timing of responses from regulators to our submissions, there can be no
assurance as to when such approval will be obtained.
Our
research and development costs were $1,415,509 and $1,112,804 for the years
ended December 31, 2007 and 2006, respectively. We have experienced substantial
operating losses since inception. As of December 31, 2007, we had an accumulated
deficit of $71,538,209 which included losses from operations of $3,350,754
and
$7,671,580 for the years ended December 31, 2007 and December 31, 2006
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 $2,677,475 and $2,051,932,
for
the years ended December 31, 2007 and December 31, 2006 respectively. Legal,
financial, and other consulting costs were $389,155 and $912,379 for the years
ended December 31, 2007 and 2006, respectively.
In
addition, our loss for the year ended December 31, 2007 includes net interest
and dividend income of $67,362.
Liquidity
and Capital Resources
Since
inception, our operations have been financed through the private placement
of
our debt and equity securities. At December 31, 2007, we had cash on hand of
$211,613, and current liabilities of $906,868. Due
to
the lack of available funds, we have not paid certain of our senior executives
since February 2008. We currently require additional financing to proceed with
clinical studies and the attempted commercialization of our proposed products.
Although we continue to discuss funding alternatives with potential
institutional investors, our recent efforts to obtain additional financing
have
been unsuccessful, and there can be no assurance that financing will be
available on acceptable terms or at all. If adequate funds are unavailable,
we
may have to suspend, delay or eliminate one or more of our research or
development programs or product launches or marketing efforts or cease
operations.
Due
to
our losses and lack of available cash, our audited consolidated financial
statements for the year ended December 31, 2007 included in this Annual Report
have been prepared assuming we will continue as a going concern, and the
auditors’ report on those financial statements expresses substantial doubt about
our ability to continue as a going concern.
Item
7. Financial
Statements.
The
Financial Statements and Notes thereto can be found beginning on page F-1,
"Index to Financial Statements," at the end of this Form
10-KSB.
Item
8. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not
Applicable.
Item
8A. Controls and Procedures.
An
evaluation was performed, under the supervision of, and with the participation
of, our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the
Securities and Exchange Act of 1934). Based on that evaluation, our management,
including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were adequate and effective, as
of
December 31, 2007, to ensure that information required to be disclosed by us
in
the reports that we file or submits under the Securities Exchange Act of 1934,
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There
has
not been any changes in our internal controls over financial reporting that
occurred during our quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
In
2007,
management conducted tests of our internal controls over financial reporting
in
accordance with the standards set forth by the Public Company Accounting
Oversight Board (“PCAOB”). In accordance with these standards, management
assessed and tested, on a sample basis, the Company’s internal control over
financial reporting according to a comprehensive risk analysis using the
Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). It is management’s opinion
that the testing methodology of the internal control framework is appropriate
and provides reasonable assurance as to the integrity and reliability of our
internal controls over financial reporting.
In
management’s opinion, based on the assessment completed as at December 31,
2007, our internal controls over financial reporting are operating
effectively.
Item
8B. Other Information.
Not
Applicable
PART
III
Item
9. Directors,
Executive Officers and Control Persons; Compliance with Section 16(a) of the
Exchange Act.
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
|
|
63
|
|
President
and Chief Executive Officer, Director
|
William
R. Miller
|
|
79
|
|
Chairman
of the Board
|
Joseph
Rubin, Esq.
|
|
69
|
|
Director
|
Kurt
Katz
|
|
75
|
|
Director
|
Edward
R. Jones, MD, MBA
|
|
59
|
|
Director
|
Martin
F. Whalen
|
|
67
|
|
Director
|
Vincent
Capponi
|
|
50
|
|
Chief
Operating Officer
|
David
Lamadrid
|
|
37
|
|
Chief
Financial Officer
|
James
Winchester, MD
|
|
64
|
|
Chief
Medical Officer
|
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 serves as
the
Chairman of the Board of Vion Pharmaceuticals, Inc. and was a director of
ImClone Systems Incorporated from June 1996 until August 2007. 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 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.
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.
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.
Martin
F. Whalen. Mr.
Whalen has been a director of ours since May 2007. Mr. Whalen was President
and
owner of M.W. Orthopedics, Inc., and has over forty years' experience in the
hospital and surgical fields. Mr. Whalen served on the Board of Directors for
Biomet Inc. from 1988 to 1992 and Founders Bank from 1987 to 2000. He also
served on the Board of Trustees of New England College and La Salle College
High
School and was the President of The Blue White Scholarship Foundation. Mr.
Whalen graduated from Villanova University with a B.S. in Economics and a major
in Finance.
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
over 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.
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. 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.
Section
16(a) Beneficial Ownership Reporting Compliance
The
members of our Board of Directors, our executive officers and persons who hold
more than 10% of our outstanding Common Stock are subject to the reporting
requirements of Section 16(a) of the Exchange Act, which requires them to file
reports with respect to their ownership of our Common Stock and their
transactions in such Common Stock. Based solely upon a review of Forms 3 and
4
and amendments filed with the SEC by persons subject to the reporting
requirements of Section 16(a) of the Exchange Act, except for one Form 4 filed
one day late by each of James Winchester, Vincent Capponi and William Miller,
we
believe that, all reporting requirements under Section 16(a) for the 2007 fiscal
year were met in a timely manner by our directors, executive officers and
beneficial owners of more than 10% of our Common Stock.
Code
of Conduct
We
maintain a Code of Business Conduct and Ethics that is applicable to all of
our
employees, including our Chief Executive Officer and Chief Financial Officer,
and our directors. The Code of Conduct, which satisfies the requirements of
a
“code of ethics” under applicable SEC rules, contains written standards that are
designed to deter wrongdoing and to promote honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest;
full, fair, accurate, timely and understandable public disclosures and
communications, including financial reporting; compliance with applicable laws,
rules and regulations; prompt internal reporting of violations of the code;
and
accountability for adherence to the code.
Audit
Committee Financial Expert
The
Board
of Directors does not have an Audit Committee, and therefore does not have
an
“audit committee financial expert,” as such term is defined in Item 401(e) of
Regulation S-B.
Item
10. Executive
Compensation.
Summary
Compensation Table
The
following table shows for the fiscal year ended December 31, 2007, 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
|
|
|
2007
|
|
|
216,351
|
|
|
-0-
|
|
|
251,446
|
(2)
|
|
467,797
|
|
|
|
|
2006
|
|
|
201,257
|
|
|
-0-
|
|
|
69,555
|
(3)
|
|
270,812
|
|
Vincent
Capponi,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
|
2007
|
|
|
195,527
|
|
|
-0-
|
|
|
-0-
|
|
|
195,527
|
|
|
|
|
2006
|
|
|
178,441
|
|
|
200
|
|
|
40,297
|
(4)
|
|
218,939
|
|
David
Lamadrid,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
2007
|
|
|
145,801
|
|
|
-0-
|
|
|
137,781
|
(5)
|
|
283,582
|
|
|
|
|
2006
|
|
|
135,629
|
|
|
200
|
|
|
-0-
|
|
|
135,829
|
|
Dr.
James Winchester
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Medical Officer
|
|
|
2007
|
|
|
120,000
|
|
|
-0-
|
|
|
2,431
|
(6)
|
|
122,431
|
|
|
|
|
2006
|
|
|
120,000
|
|
|
-0-
|
|
|
40,297
|
(7)
|
|
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, 2007.
|
(2) |
Options
to purchase 400,000 shares of Common Stock at an exercise price of
$1.26
per share and 80,122 shares of Common Stock at an exercise price
of $0.22
per share.
|
(3)
|
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.
|
(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, vested and become exercisable as to
16,667
shares on December 31, 2007; and will vest as to 16,666 shares on
December
31, 2008.
|
(5) |
Option
to purchase 150,000 shares of Common Stock at an exercise price of
$1.90
per share.
|
(6) |
Option
to purchase 25,000 shares of Common Stock at an exercise price of
$0.22
per share.
|
(7) |
Reflects
options to purchase 50,000 shares of Common Stock at an exercise
price of
$1.65 per share, which were granted on December 31, 2006 and expire
on
December 31, 2016. This option vested and became exercisable as to
16,667
shares on the date of grant, vested and become exercisable as to
16,667
shares on December 31, 2007; and will vest as to 16,666 shares on
December
31, 2008.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table shows for the fiscal year ended December 31, 2007, certain
information regarding outstanding equity awards at fiscal year end for the
Named
Executive Officers.
Outstanding
Equity Awards At December 31, 2007
|
|
Option
Awards
|
|
Name
|
|
Number of
Securities Underlying
Unexercised Options
(#)
Exercisable
|
|
Number of Securities
Underlying Unexercised
Options
(#)
Unexercisable
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration Date
|
|
Al
Kraus
|
|
|
332,094
|
|
|
|
|
|
6.64
|
(1)
|
|
9/30/16
|
|
|
|
|
81,826
|
|
|
|
|
|
6.64
|
(1)
|
|
12/31/16
|
|
|
|
|
400,000
|
|
|
|
|
|
1.26
|
(1)
|
|
02/08/17
|
|
|
|
|
80,122
|
|
|
|
|
|
0.22
|
(1)
|
|
12/31/17
|
|
Vincent
Capponi
|
|
|
33,334
|
|
|
16,666
|
|
|
1.65
|
(2)
|
|
12/31/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Lamadrid
|
|
|
50,000
|
|
|
100,000
|
|
|
1.90
|
(3)
|
|
01/16/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
James Winchester
|
|
|
33,334
|
|
|
16,666
|
|
|
1.65
|
(4)
|
|
12/31/16
|
|
|
|
|
8,333
|
|
|
16,667
|
|
|
0.22
|
(5)
|
|
12/31/17
|
|
|
(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) 50,000 shares on January 16, 2007;
(ii)
50,000 shares on January 16, 2008; and (iii) 50,000 shares on January
16,
2009.
|
|
(4)
|
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.
|
|
(5)
|
Vests
and becomes exercisable as to (i) 8,333 shares on December 31, 2007;
(ii)
8,333 shares on December 31, 2008; and (iii) 8,334 shares on December
31,
2009.
|
Director
Compensation
The
following table shows for the fiscal year ended December 31, 2007 certain
information with respect to the compensation of all non-employee directors
of
the Company.
Director
Compensation for Fiscal 2007
Name
|
|
Fees Earned or Paid
in Cash ($)
|
|
Option Awards ($)
(1)
|
|
Total ($)
|
|
William
R. Miller
|
|
|
20,000
|
|
|
159,536
|
(2)(3)
|
|
179,536
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Rubin
|
|
|
10,000
|
|
|
972
|
(2)(4)
|
|
10,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Kurt
Katz
|
|
|
10,000
|
|
|
972
|
(2)(5)
|
|
10,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
R. Jones
|
|
|
6,000
|
|
|
729
|
(2)(6)
|
|
6,729
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin
F. Whalen
|
|
|
4,000
|
|
|
486
|
(2)(7)
|
|
4,486
|
|
|
(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.
|
|
(3)
|
At
December 31, 2007, Mr. Miller held options to purchase 200,000 shares
of
our Common Stock.
|
|
(4)
|
At
December 31, 2007, Mr. Rubin held options to purchase 71,715 shares
of our
Common Stock.
|
|
(5)
|
At
December 31, 2007, we had issued on behalf of Mr. Katz options to
purchase
66,817 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.
|
|
(6)
|
At
December 31, 2007, Dr. Jones held options to purchase 7,500 shares
of our
Common Stock.
|
|
(7)
|
At
December 31, 2007, Mr. Whalen held options to purchase 5,000 shares
of our
Common Stock.
|
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 quarterly Board meetings held during 2007. 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
we 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). In January 2008 we issued Mr. Miller
an
additional option to purchase 100,000 shares of Common Stock at an exercise
price of $0.25 per share.
In
2008,
the Board approved the issuance to each non-employee director, with the
exception of the Chairman, options to purchase up to 30,000 shares of Common
Stock on December 31, 2008 based on attendance at quarterly Board meetings
held
during 2008.
Employment
Agreements with Named Executive Officers
Agreement
with Chief Executive Officer
Effective
December 31, 2007, we entered into a new Employment Agreement with Al Kraus,
our
President and Chief Executive Officer. The new Employment Agreement is
substantially similar to the previous Employment Agreement that we had entered
into with Mr. Kraus, which it replaces, and has the following principal
terms.
The
Employment Agreement provides for a one-year term of employment as our President
and Chief Executive Officer. Under the terms of the Employment Agreement, Mr.
Kraus will continue to receive his current base salary of $216,351 per annum.
The Employment Agreement also provides that Mr. Kraus will be issued options
on
a quarterly basis, if necessary, so as to maintain a 5% beneficial ownership
interest in our outstanding Common Stock on a fully diluted basis. Mr. Kraus
will have this right until such time as an aggregate of $4 million of financing
has been received by us following December 31, 2007. Options granted pursuant
to
the Employment Agreement would have an exercise price equal to the market price
of our shares of Common Stock on the applicable grant date.
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.
Agreement
with Chief Operating Officer
We
are a
party to 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 renewals 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 (which was then
a
limited liability company) on a fully-diluted basis. As a result of the
conversion of MedaSorb 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
We
are a
party to 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 renewals 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
(which was then a limited liability company) on a fully-diluted basis. As a
result of the conversion of MedaSorb 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.
Agreement
with Chief Medical Officer
We
are a
party to 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 renewals 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.
Item
11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
following table sets forth information known to us with respect to the
beneficial ownership of Common Stock held of record as of April 7, 2008, 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)
|
|
|
6,758,546
|
(2)
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
Guillermina
Montiel(3)
|
|
|
5,052,456
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
Margery
Germain(4)
|
|
|
2,000,000
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
Robert
Shipley (5)
|
|
|
1,538,865
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Al
Kraus(6)
|
|
|
2,287,673
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
William
R. Miller (7)
|
|
|
300,000
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
David
Lamadrid (8)
|
|
|
1,075,400
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
Vince
Capponi (9)
|
|
|
818,086
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
Joseph
Rubin(10)
|
|
|
397,424
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
James
Winchester(11)
|
|
|
152,519
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Kurt
Katz(12)
|
|
|
69,077
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Edward
R. Jones(13)
|
|
|
7,500
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Martin
F. Whalen(14)
|
|
|
5,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (nine
persons)(15)
|
|
|
5,112,679
|
|
|
18.5
|
%
|
1
|
Gives
effect to the shares of Common Stock issuable upon the exercise of
all
options exercisable within 60 days of April 7, 2008 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 25,044,932
shares of Common Stock outstanding as of April 7, 2008.
|
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, 920,212
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
371,557 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
494,042 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
566,666 shares of Common Stock issuable upon exercise of stock options.
|
9
|
Includes
400,000 shares of Common Stock issuable upon exercise of stock options.
|
10
|
Includes
2,320 shares of Common Stock issuable upon conversion of Series A
Preferred Stock and 312,840 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
100,000 shares of Common Stock issuable upon exercise of stock options.
|
12
|
Includes
66,817 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 of the
shares.
|
13
|
These
shares are issuable upon exercise of stock
options.
|
14
|
These
shares are issuable upon exercise of stock
options.
|
15
|
Includes
an aggregate of 2,655,185 shares of Common Stock issuable upon exercise
of
stock options and warrants and conversion of Series A Preferred
Stock.
|
Item
12. Certain
Relationships and Related Transactions.
Joseph
Rubin is a director of ours and performs legal services for us from time to
time. At December 31, 2007, we owed Mr. Rubin’s firm approximately $2,500 in
respect of legal services provided by his firm to us.
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).
Item
13. Exhibits.
(a)
The
following documents are filed as part of this report:
Exhibit
No.
|
|
Description
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger, dated as of June 29, 2006, by and among Gilder
Enterprises, Inc., MedaSorb Corporation and MedaSorb Acquisition
Inc.
*
|
|
|
|
3.1
|
|
Articles
of Incorporation of Gilder Enterprises, Inc. (filed as Exhibit
3.1 to
Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004,
and incorporated herein by reference).
|
|
|
|
3.2
|
|
Amendment
to Registrant’s Articles of Incorporation effected August 1, 2006 (filed
as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on August
7, 2006, and incorporated herein by reference).
|
|
|
|
3.3
|
|
By-Laws
of Gilder Enterprises, Inc. (filed as Exhibit 3.2 to Registrant’s
Registration Statement on Form SB-2 filed on March 29, 2004, and
incorporated herein by reference).
|
|
|
|
4.1
|
|
Certificate
To Set Forth Designations, Voting Powers, Preferences, Limitations,
Restrictions, And Relative Rights Of Series A 10% Cumulative Convertible
Preferred Stock, $.001 Par Value Per Share**
|
|
|
|
4.2
|
|
Form
of Warrant issued to purchasers of Series A Preferred Stock.
**
|
|
|
|
4.3
|
|
Form
of Subscription Agreement, dated as of June 29, 2006, by and among
Gilder
Enterprises, Inc. and the purchasers party thereto. **
|
|
|
|
10.1‡
|
|
Employment
Agreement, dated as of December 31, 2007, between Al Kraus and
MedaSorb
Technologies Corporation (filed as Exhibit 10.1 to Registrant’s Current
Report on Form 8-K filed on January 7, 2008, and incorporated herein
by
reference)
|
|
|
|
10.2‡
|
|
Employment
Agreement, dated as of July 1, 2005, between Vincent Capponi and
MedaSorb
Technologies, LLC. *
|
|
|
|
10.3‡
|
|
Employment
Agreement, dated as of July 1, 2005, between David Lamadrid and
MedaSorb
Technologies, LLC. *
|
|
|
|
10.4‡
|
|
Employment
Agreement, dated as of July 1, 2004, between Dr. James Winchester
and
MedaSorb Technologies, LLC. *
|
|
|
|
10.5‡
|
|
Gilder
Enterprises, Inc. 2006 Long Term Incentive Plan. **
|
|
|
|
10.6
|
|
Stipulated
Order and Settlement Agreement by and Between Bro-Tech Corporation
and
Purolite International Ltd. and MedaSorb Corporation. *
|
|
|
|
10.7
|
|
Subaward
Agreement, dated May 2006, between MedaSorb Technologies and University
of
Pittsburgh. *
|
|
|
|
10.8
|
|
Letter
Agreement, dated August 11, 2003, between RenalTech International
and
Guillermina Vega Montiel *
|
|
|
|
10.9
|
|
Term
Sheet For An Investment In MedaSorb Technologies, LLC, dated October
26,
2005, between MedaSorb and Margie Chassman
*
|
10.10
|
|
Form
of Voting Agreement entered into by Margie Chassman and her transferees
in
connection with 10,000,000 shares of Common Stock. *
|
|
|
|
21
|
|
Subsidiaries
of the Registrant *
|
|
|
|
*
|
|
Incorporated
by reference to the similarly described exhibit previously filed
as an
exhibit to Registrant’s Registration Statement on Form SB-2, Registration
No. 333-138247.
|
|
|
|
**
|
|
Incorporated
by reference to the similarly described exhibit previously filed
as an
exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
on July 6, 2006.
|
|
|
|
‡
|
|
Indicates
a management contract or compensatory plan or
arrangement.
|
Item
14. Principal
Accountant Fees and Services.
The
following table presents fees for professional audit services rendered by
WithumSmith+Brown, A Professional Corporation, for the audit of our annual
financial statements for the years ended December 31, 2007 and 2006, and fees
billed for other services rendered by WithumSmith+Brown during those years.
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Audit
fees
(1)
|
|
$
|
80,347
|
|
$
|
127,772
|
|
Audit
related fees
|
|
|
—
|
|
|
—
|
|
Tax
fees
|
|
|
—
|
|
|
26,110
|
|
All
other fees
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Total
fees
|
|
$
|
80,347
|
|
$
|
153,882
|
|
(1)
|
Includes
fees paid for professional services rendered in connection with the
audit
of annual financial statements and the review of quarterly financial
statements, and the review of such financial statements in the Company’s
Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB,
Registration Statement on Form SB-2 and Current Reports on Form
8-K.
|
Pre-Approval
Policies And Procedures
We
do not
have an audit committee or a formal pre-approval process for the performance
for
us by our independent auditor of non-audit services. For the year ended December
31, 2007, our independent auditor performed non-attest tax services. We
anticipate that any non-audit services to be performed for us by our independent
auditor, subject to the de minimis exceptions for non-audit services described
in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended,
will
be approved prior to our auditor’s engagement for such services by our Board of
Directors, acting in the capacity of an audit committee.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, MedaSorb Technologies
Corporation has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 15th day of April,
2008.
|
MEDASORB
TECHNOLOGIES CORPORATION |
By:
|
/s/
Al Kraus
|
|
Al
Kraus
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Al Kraus
|
|
Chief
Executive Officer (Principal
|
|
April
15, 2008
|
Al
Kraus
|
|
Executive
Officer) and Director
|
|
|
|
|
|
|
|
/s/
David Lamadrid
|
|
Chief
Financial Officer (Principal
|
|
April
15, 2008
|
David
Lamadrid
|
|
Accounting
and Financial Officer)
|
|
|
|
|
|
|
|
/s/
William R. Miller
|
|
Chairman
of the Board
|
|
April
15, 2008
|
William
R. Miller
|
|
|
|
|
|
|
|
|
|
/s/
Joseph Rubin
|
|
Director
|
|
April
15, 2008
|
Joseph
Rubin, Esq.
|
|
|
|
|
|
|
|
|
|
/s/
Kurt Katz
|
|
Director
|
|
April
15, 2008
|
Kurt
Katz
|
|
|
|
|
|
|
|
|
|
/s/
Edward R. Jones
|
|
Director
|
|
April
15, 2008
|
Edward
R. Jones
|
|
|
|
|
|
|
|
|
|
/s/
Martin F. Whalen
|
|
Director
|
|
April
15, 2008
|
Martin
F. Whalen
|
|
|
|
|
FINANCIAL
STATEMENTS
|
|
Page
|
|
|
|
|
|
|
Report
of Independent Accounting Firms
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets at December 31, 2007 and December 31, 2006
|
|
F-4
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007
and 2006,
and from inception to December 31, 2007
|
|
F-5
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency) period from
inception to December 31, 2007
|
|
F-6
|
|
|
|
Consolidated
Statements of Cash Flows for the for the years ended December 31,
2007 and
2006, and from inception to December 31, 2007
|
|
F-11
|
|
|
|
Notes
to Financial Statements
|
|
F-13
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders,
MedaSorb
Technologies Corporation:
We
have
audited the accompanying consolidated balance sheets of Medasorb Technologies
Corporation (a development stage company), as of December 31, 2007
and
2006,
and the
consolidated 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, 2007.
These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial position of Medasorb Technologies
Corporation as of December 31, 2007
and
2006
and the
consolidated results of its operations and cash flows for the years then ended
and the cumulative period from January 1, 2001 to December 31, 2007
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 consolidated
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 consolidated
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
April
10,
2008
Report
of Independent Public Accountants
To
the
Board of Directors and Stockholders,
Medasorb
Corporation:
We
have
audited the accompanying balance sheets of Medasorb 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 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,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
211,613
|
|
$
|
2,873,138
|
|
Prepaid
expenses and other current assets
|
|
|
200,682
|
|
|
24,880
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
412,295
|
|
|
2,898,018
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
144,457
|
|
|
303,560
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
245,820
|
|
|
243,471
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
390,277
|
|
|
547,031
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
802,572
|
|
$
|
3,445,049
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
775,342
|
|
$
|
942,265
|
|
Accrued
expenses and other current liabilities
|
|
|
131,526
|
|
|
69,779
|
|
Accrued
interest
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
906,868
|
|
|
1,082,044
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity (Deficiency):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
Series A Preferred Stock, Par Value $0.001, 100,000,000 shares
authorized
at December 31, 2007 and 2006 8,019,508 and 7,403,585 shares issued
and
outstanding, respectively
|
|
|
8,019
|
|
|
7,403
|
|
Common
Stock, Par Value $0.001, 100,000,000 shares authorized at December
31,
2007 and 2006 25,044,932 and 24,628,274 shares issued and outstanding,
respectively
|
|
|
25,045
|
|
|
24,629
|
|
Additional
paid-in capital
|
|
|
71,400,849
|
|
|
69,757,556
|
|
Deficit
accumulated during the development stage
|
|
|
(71,538,209
|
)
|
|
(67,426,583
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficiency)
|
|
|
(104,296
|
)
|
|
2,363,005
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity (Deficiency)
|
|
$
|
802,572
|
|
$
|
3,445,049
|
|
The
Notes
to Consolidated Financial Statements are an integral part of these
statements.
(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,
|
|
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
42,308,280
|
|
|
1,415,509
|
|
|
1,112,804
|
|
Legal,
financial and other consulting
|
|
|
6,648,668
|
|
|
389,155
|
|
|
912,379
|
|
General
and administrative
|
|
|
21,400,075
|
|
|
1,261,966
|
|
|
939,128
|
|
Change
in fair value of management and incentive units
|
|
|
(6,055,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
64,301,540
|
|
|
3,066,630
|
|
|
2,964,311
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
(216,617
|
)
|
|
(10,009
|
)
|
|
(31,608
|
)
|
Interest
(income) expense, net
|
|
|
5,577,046
|
|
|
(67,362
|
)
|
|
4,738,877
|
|
Penalties
associated with non-registration of Series A Preferred
Stock
|
|
|
361,495
|
|
|
361,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (income) expense, net
|
|
|
5,700,261
|
|
|
284,124
|
|
|
4,707,269
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(70,001,801
|
)
|
|
(3,350,754
|
)
|
|
(7,671,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock dividend
|
|
|
1,536,408
|
|
|
760,872
|
|
|
775,536
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(71,538,209
|
)
|
$
|
(4,111,626
|
)
|
$
|
(8,447,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
|
|
$
|
(0.17
|
)
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock outstanding
|
|
|
|
|
|
24,848,562
|
|
|
14,956,072
|
|
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,
2007
|
|
Members'
|
|
|
|
|
|
|
|
Additional
|
|
Deficit
Accumulated
During
the
|
|
Total
|
|
|
|
Equity
|
|
Deferred
|
|
Common Stock
|
|
Preferred Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
(Deficiency)
|
|
Compensation
|
|
Shares
|
|
Par value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Stage
|
|
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
|
|
The
Notes
to Consolidated Financial Statements are an integral part of these financial
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,
2007
|
|
Members'
|
|
|
|
|
|
|
|
Additional
|
|
Deficit
Accumulated
During
the
|
|
Total
|
|
|
|
Equity
|
|
Deferred
|
|
Common Stock
|
|
Preferred Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
(Deficiency)
|
|
Compensation
|
|
Shares
|
|
Par value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Stage
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 financial
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,
2007
|
|
Members'
|
|
|
|
|
|
|
|
Additional
|
|
Deficit
Accumulated
During
the
|
|
Total
|
|
|
|
Equity
|
|
Deferred
|
|
Common Stock
|
|
Preferred Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
(Deficiency)
|
|
Compensation
|
|
Shares
|
|
Par value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Stage
|
|
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
|
|
|
|
|
|
—
|
|
The
Notes
to Consolidated Financial Statements are an integral part of these financial
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,
2007
|
|
Members'
|
|
|
|
|
|
|
|
Additional
|
|
Deficit
Accumulated
During
the
|
|
Total
|
|
|
|
Equity
|
|
Deferred
|
|
Common Stock
|
|
Preferred Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
(Deficiency)
|
|
Compensation
|
|
Shares
|
|
Par value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Stage
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
Notes
to Consolidated Financial Statements are an integral part of these financial
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,
2007
|
|
Members'
|
|
|
|
|
|
|
|
Additional
|
|
Deficit
Accumulated
During
the
|
|
Total
|
|
|
|
Equity
|
|
Deferred
|
|
Common Stock
|
|
Preferred Stock
|
|
Paid-In
|
|
Development
|
|
Stockholders'
|
|
|
|
(Deficiency)
|
|
Compensation
|
|
Shares
|
|
Par value
|
|
Shares
|
|
Par Value
|
|
Capital
|
|
Stage
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to employees, consultants and directors
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
498,955
|
|
|
—
|
|
|
498,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in settlement of accounts payable
|
|
|
—
|
|
|
—
|
|
|
11,501
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
22,991
|
|
|
—
|
|
|
23,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
|
—
|
|
|
—
|
|
|
405,157
|
|
|
405
|
|
|
(506,446
|
)
|
|
(506
|
)
|
|
101
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series A Preferred Stock as dividends and settlement of
dividends/penalties payable in connection with non-registration
event
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,122,369
|
|
|
1,122
|
|
|
1,121,246
|
|
|
(760,872
|
)
|
|
361,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,350,754
|
)
|
|
(3,350,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
—
|
|
$
|
—
|
|
|
25,044,932
|
|
$
|
25,045
|
|
|
8,019,508
|
|
$
|
8,019
|
|
$
|
71,400,849
|
|
$
|
(71,538,209
|
)
|
$
|
(104,296
|
)
|
The
Notes
to Consolidated Financial Statements are an integral part of these financial
statements.
(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,
|
|
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(70,001,801
|
)
|
$
|
(3,350,754
|
)
|
$
|
(7,671,580
|
)
|
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
|
|
|
2,237,065
|
|
|
190,440
|
|
|
255,526
|
|
Amortization
of debt discount
|
|
|
1,000,000
|
|
|
|
|
|
1,000,000
|
|
Gain
on disposal of property and equipment
|
|
|
(21,663
|
)
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
(216,617
|
)
|
|
(10,009
|
)
|
|
(31,608
|
)
|
Abandoned
patents
|
|
|
183,556
|
|
|
|
|
|
|
|
Bad
debts - employee advances
|
|
|
255,882
|
|
|
|
|
|
|
|
Contributed
technology expense
|
|
|
4,550,000
|
|
|
|
|
|
|
|
Consulting
expense
|
|
|
237,836
|
|
|
|
|
|
|
|
Management
unit expense
|
|
|
1,334,285
|
|
|
|
|
|
|
|
Expense
for issuance of warrants
|
|
|
478,409
|
|
|
|
|
|
9,883
|
|
Expense
for issuance of options
|
|
|
889,932
|
|
|
498,955
|
|
|
143,352
|
|
Amortization
of deferred compensation
|
|
|
74,938
|
|
|
|
|
|
|
|
Penalties
in connection with non-registration event
|
|
|
361,496
|
|
|
361,496
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
(472,230
|
)
|
|
(175,802
|
)
|
|
(5,619
|
)
|
Other
assets
|
|
|
(53,893
|
)
|
|
|
|
|
(2,730
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,726,079
|
|
|
(72,165
|
)
|
|
(421,677
|
)
|
Accrued
interest
|
|
|
1,823,103
|
|
|
(70,000
|
)
|
|
493,310
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by operating activities
|
|
|
(51,231,662
|
)
|
|
(2,627,839
|
)
|
|
(2,849,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
32,491
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,220,521
|
)
|
|
(21,427
|
)
|
|
|
|
Patent
costs
|
|
|
(405,678
|
)
|
|
(12,259
|
)
|
|
(64,863
|
)
|
Loan
receivable
|
|
|
(1,632,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used by financing activities
|
|
|
(4,225,876
|
)
|
|
(33,686
|
)
|
|
(64,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Proceeds
from subscription receivables
|
|
|
499,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
55,669,151
|
|
|
|
|
|
5,079,927
|
|
The
Notes
to Consolidated Financial Statements are an integral part of these
statements.
(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,
|
|
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
211,613
|
|
|
(2,661,525
|
)
|
|
2,165,882
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
2,873,138
|
|
|
707,256
|
|
Cash
and cash equivalents at end of period
|
|
$
|
211,613
|
|
$
|
211,613
|
|
$
|
2,873,138
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
590,189
|
|
$
|
78,409
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash financing activities:
|
|
|
|
|
|
|
Note
payable principal and interest conversion to equity
|
|
$
|
10,201,714
|
|
$
|
|
|
$
|
9,030,149
|
|
Issuance
of member units for leasehold improvements
|
|
$
|
141,635
|
|
$
|
|
|
$
|
|
|
Issuance
of management units in settlement of cost of raising
capital
|
|
$
|
437,206
|
|
$
|
|
|
$
|
|
|
Change
in fair value of management units for cost of raising
capital
|
|
$
|
278,087
|
|
$
|
|
|
$
|
|
|
Exchange
of loan receivable for member units
|
|
$
|
1,632,168
|
|
$
|
|
|
$
|
|
|
Issuance
of equity in settlement of accounts payable
|
|
$
|
1,609,446
|
|
$
|
23,002
|
|
$
|
750,125
|
|
Issuance
of common stock in exchange for stock subscribed
|
|
$
|
399,395
|
|
$
|
|
|
$
|
399,395
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
paid from proceeds in conjunction with issuance of preferred
stock
|
|
$
|
620,563
|
|
$
|
|
|
$
|
620,563
|
|
Series
A Preferred stock dividends
|
|
$
|
1,536,408
|
|
$
|
760,872
|
|
$
|
775,536
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of conversion of common stock to preferred stock prior
to
merger
|
|
$
|
559
|
|
$
|
—
|
|
$
|
559
|
|
During
the years ended December 31, 2007 and 2006, 506,446 and -0- Series A Preferred
Shares were converted into 405,157 and -0- Common Shares, respectively.
For the
period from January 22, 1997 (date of inception) to December 31, 2007,
506,446
Series A Preferred Shares were converted into 405,157 Common
Shares.
During
the years ended December 31, 2007 and 2006, 553,629 and -0- Series A Preferred
Shares were issued in connection with the non-registration event as settlement
of dividends/penalties payable, respectively, For the period from January
22,
1997 (date of inception) to December 31, 2007, 553,629 Series A Preferred
Shares
were issued in connection with the non-registration event as settlement
of
dividends/penalties payable.
The
Notes
to Consolidated Financial Statements are an integral part of these
statements.
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 has been accounted for as a reverse merger,
since the Parent was a shell company prior to the Merger, the former
stockholders of MedaSorb Delaware owned a majority of the issued and outstanding
shares of the Parent’s Common Stock immediately following the Merger, 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, 2007 of $71,538,209.
The Company is not currently generating revenue and is dependent on the proceeds
of present and future financings to fund its research, development and
commercialization program. The Company is continuing its fund-raising efforts.
Although the Company has historically been successful in raising additional
capital through equity and debt financings, there can be no assurance that
the
Company will be successful in raising additional capital in the future or that
it will be on favorable terms. Furthermore, if the Company is successful in
raising the additional financing, there can be no assurance that the amount
will
be sufficient to complete the Company's plans. These matters raise substantial
doubt about the Company’s ability
to
continue as a going concern. 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 25 issued
and multiple 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 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, 2007,
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.
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.
Additionally, net operating losses generated subsequent to the reverse merger
may be limited in the event of changes 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 accounts payable and other debt obligations approximate
their
fair values due to their short-term nature.
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 9 for methodology for determining net loss per
share.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation under the recognition
requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R).
“Accounting
for Stock-Based Compensation”,
for
employees and directors whereby each option granted is valued at fair market
value on the date of grant. Under SFAS No. 123, the fair value of each option
is
estimated on the date of grant using the Black-Scholes option pricing
model.
The
Company also follows the guidance in EITF 96-18 “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” for equity instruments issued
to consultants.
Effects
of Recent Accounting Pronouncements
In
September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States, and expands disclosures about fair value measurements. SFAS No. 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, with earlier application encouraged. Any amounts recognized
upon adoption as a cumulative effect adjustment will be recorded to the opening
balance of retained earnings in the year of adoption. The Company has not yet
determined the impact of this statement on its results of operations or
financial condition.
The
Company has adopted the provisions of FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement 109 “Accounting for Income Taxes”, and prescribes a
recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition classification,
interest and penalties accounting in interim periods disclosure and
transition.
Based
on
our evaluation, we have concluded that there are no significant uncertain tax
positions requiring recognition in our financial statements or adjustments
to
our deferred tax assets and related valuation allowance. Our evaluation was
performed for the tax years ended December 31, 2004, 2005, 2006 and 2007, the
tax years which remain subject to examination by major tax jurisdictions as
of
December 31, 2007.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions, although such assessments historically have been minimal and
immaterial to our financial results. In the event we have received an assessment
for interest and/or penalties, it has been classified in the financial
statements as general and administrative expense.
In
February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option
for Financial Assets and Liabilities” to permit all entities to choose to elect
to measure eligible financial instruments and certain other items at fair value.
The decision whether to elect the fair value option may occur for each eligible
items either on a specified election date or according to a preexisting policy
for specified types of eligible items. However, that decision must also take
place on a date on which criteria under SFAS 159 occurs. Finally, the decision
to elect the fair value option shall be made on an instrument-by-instrument
basis, except in certain circumstances. An entity shall report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. SFAS No. 159 applies to fiscal years
beginning after November 15, 2007, with early adoption permitted for an entity
that has also elected to apply the provisions of SFAS No. 157. The Company
is
currently evaluating this pronouncement in connection with SFAS No.
157.
3. |
PROPERTY
AND EQUIPMENT, NET:
|
Property
and equipment - net, consists of the following:
December
31,
|
|
2007
|
|
2006
|
|
Depreciation/
Amortization
Period
|
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
130,015
|
|
$
|
130,015
|
|
|
7
years
|
|
Equipment
and computers
|
|
|
1,731,242
|
|
|
1,709,815
|
|
|
3
to 7 years
|
|
Leasehold
improvements
|
|
|
462,980
|
|
|
462,980
|
|
|
Term
of lease
|
|
|
|
|
2,324,237
|
|
|
2,302,810
|
|
|
|
|
Less
accumulated depreciation and
amortization
|
|
|
2,179,780
|
|
|
1,999,250
|
|
|
|
|
Property
and Equipment, Net
|
|
$
|
144,457
|
|
$
|
303,560
|
|
|
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 amounted to $180,530
and
$250,096, respectively. Depreciation expense from inception to December 31,
2007
amounted to $2,206,868.
Other
assets consist of the following:
December
31,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
191,926
|
|
$
|
189,577
|
|
Security
deposits
|
|
|
53,894
|
|
|
53,894
|
|
Total
|
|
$
|
245,820
|
|
$
|
243,471
|
|
Intangible
assets consist of the following:
December
31,
|
|
2007
|
|
2006
|
|
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
222,121
|
|
$
|
30,195
|
|
$
|
209,863
|
|
$
|
20,286
|
|
The
issued patents that are capitalized are being amortized over the patents
remaining legal life. Pending patents are not amortized. Amortization expense
amounted to $9,910 and $5,428 for the years ended December 31, 2007 and 2006,
respectively. Amortization expense from inception to December 31, 2007 amounted
to $30,196.
Amortization
expense is anticipated to be approximately $11,300 for the next five years
ended
December 31, 2012.
5. |
ACCOUNTS
PAYABLE AND ACCRUED
EXPENSES:
|
Accounts
Payable and accrued expenses consist of the following:
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Other
payable
|
|
$
|
255,418
|
|
$
|
151,241
|
|
Legal,
financial and consulting
|
|
|
242,891
|
|
|
290,168
|
|
Research
and development
|
|
|
329,177
|
|
|
451,414
|
|
Filing
fees
|
|
|
79,382
|
|
|
119,221
|
|
|
|
|
|
|
|
|
|
|
|
$
|
906,868
|
|
$
|
1,012,044
|
|
From
inception through December 31, 2005, the Company incurred losses which, as
a
limited liability company, were passed through to its members. Tax losses
amounted to approximately $2,900,000 and $3,400,000 for the years ended December
31, 2007 and December 31, 2006, respectively, the sum of which also represents
the Company’s net operating loss carryforward which expires through 2027. These
loss carryforwards are subject to limitation in future years should certain
ownership changes occur. A full valuation allowance equal to the deferred tax
asset has been recorded due to the uncertainty that the Company will have the
ability to utilize such asset.
For
the
years ended December 31, 2007 and December 31, 2006, respectively, the Company’s
effective tax rate differs from the federal statutory rate principally due
to
net operating losses offset by 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 years ended December 31, 2007 and December 31, 2006 is as
follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
Decrease
resulting from:
|
|
|
|
|
|
|
|
Non-deductible
expenses
|
|
|
4.9
|
|
|
18.6
|
|
Operating
losses
|
|
|
29.1
|
|
|
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,
|
|
|
2008
|
|
$
|
163,000
|
|
|
|
|
2009
|
|
|
30,000
|
|
Total
|
|
|
|
|
$
|
193,000
|
|
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, 2007 and 2006 amounted to approximately
$253,000 and $226,000, respectively.
Employment
Agreements
The
Company has employment agreements with certain key executives through December
2008. The
agreements provide for annual base salaries of varying amounts.
One
of
these agreements 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 years ended December 31, 2007 and
2006, the Company’s financial statements reflect the issuance of options to
purchase 480,122 and 413,920 shares of common stock to this employee consistent
with his employment agreement and includes a bonus grant. These options were
valued at approximately $251,000 and $69,600 and have been included as a charge
to the consolidated statements of operations for the years ended December 31,
2007 and 2006, respectively.
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.
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, 2007. 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 agreement, MedaSorb has agreed to pay 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. The Company has not generated any revenue from its
products and has not incurred any royalty costs through December 31, 2007.
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.
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 issued to the holders of the 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
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”;
|
|
·
|
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)
required 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.
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.
The
Company has recorded non-cash stock dividends in connection with the issuance
of
Series A Preferred Stock as a stock dividend to its preferred shareholders
as of
December 31, 2007. Prior to February 26, 2007 and after May 7, 2007, the
dividend rate was 10% per annum. Effective February 26, 2007 due to the
Company’s failure to have the registration statement it filed declared effective
by the Commission within the time required under agreements with the June 30,
2006 purchasers of the Series A Preferred Stock (i) dividends on the shares
of
Series A Preferred Stock issued to those purchasers were required to be paid
in
cash, (ii) the dividend rate increased from 10% per annum to 20% per annum,
and
(iii) such purchasers were entitled to liquidated damages of 2% of their
principal investment payable in cash per 30 day period until the registration
statement was declared effective. In connection with such cash dividend and
penalty obligations, as modified by the Settlement Agreement described below,
the Company’s financial statements for the year ending December 31, 2007 also
reflect an aggregate charge of $361,496. On
May 7,
2007 the Company’s registration statement filed in connection with the Company’s
obligations to the June 30, 2006 purchasers of its Series A Preferred Stock
was
declared effective by the Commission.
Pursuant
to a settlement agreement entered into in August 2007 with the June 30, 2006
purchasers of the Series A Preferred Stock, cash dividends stopped accruing
on
the Series A Preferred Stock effective on the date the Company’s registration
statement was declared effective (May 7, 2007) and all cash dividends and
penalties due through that date were paid with additional shares of Series
A
Preferred Stock at its stated value of $1.00 per share in lieu of cash. The
settlement, did not result in a gain or loss on extinguishment of debt
for the year ended December 31, 2007. Additionally, as part of the settlement,
the dividend rate on the Series A Preferred Stock issued to these purchasers
was
reset to 10% effective as of May 7, 2007.
During
the years ended December 31, 2007 and 2006, the Company issued 760,873 and
303,700 shares of Series A Preferred Stock respectively as payment of stock
dividends at the stated value of $1.00 per share. During the year ended December
31, 2007, the Company issued 361,496 shares of Series A Preferred Stock as
settlement of the cash dividends and penalties payable to the purchasers under
the agreement. The shares were valued at $361,495 and included as a charge
to operations under other (income) expenses for the year ended December 31,
2007.
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 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, 2007, 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, 2007 there were outstanding options to purchase
1,208,023 shares of common stock reserved under the plan. Additionally, as
of
December 31, 2007 there were options to purchase 890,479 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 Board
of Directors. The Board 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 Board is also
authorized to prescribe, amend and rescind terms relating to options granted
under the Plans. Generally, the interpretation and construction of any
provision of the Plans or any options granted hereunder is within the discretion
of the Board.
The
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 guidance of SAB 107 for all share-based compensation.
Share-based employee compensation for the years ended December 31, 2007 and
December 31, 2006 in the amounts of approximately $37,000 and $462,000 (net
of
related tax) and $31,300 and $112,000 (net of related tax), are included in
the
net loss of $3,350,754 and $7,671,580, respectively under the captions research
and development and general and administrative.
The
summary of the stock option activity for the year ended December 31, 2007 is
as
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
Shares
|
|
per Share
|
|
Life (Years)
|
|
Outstanding,
January 1, 2007
|
|
|
1,185,001
|
|
$
|
15.66
|
|
|
7.5
|
|
Granted
|
|
|
913,622
|
|
|
1.31
|
|
|
9.2
|
|
Cancelled
|
|
|
(121
|
)
|
|
41.47
|
|
|
0.0
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding,
December 31, 2007
|
|
|
2,098,502
|
|
$
|
9.41
|
|
|
7.7
|
|
The
weighted-average grant date fair value for options granted during the years
ended December 31, 2007 and 2006 amounted to approximately $0.63 and $0.30
per
share, respectively.
At
December 31, 2007, the aggregate intrinsic value of options outstanding and
options currently exercisable amounted to $0.
The
summary of the status of the Company’s non-vested options for the year ended
December 31, 2007 is as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
Fair Value
|
|
Non-vested,
January 1, 2007
|
|
|
79,665
|
|
$
|
0.77
|
|
Granted
|
|
|
913,622
|
|
$
|
0.63
|
|
Cancelled
|
|
|
—
|
|
$
|
—
|
|
Vested
|
|
|
(819,957
|
)
|
$
|
0.57
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Non-vested,
December 31, 2006
|
|
|
173,330
|
|
$
|
0.80
|
|
As
of
December 31, 2007, approximately $139,004 of total unrecognized compensation
cost related to stock options is expected to be recognized over a weighted
average period of 0.74 years.
As
of
December 31, 2007, the Company has the following warrants to purchase common
stock outstanding:
Number of Shares
|
|
Warrant Exercise
|
|
Warrant
|
|
To be Purchased
|
|
Price per Share
|
|
Expiration Date
|
|
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, 2007, the Company has the following warrant to purchase preferred
stock outstanding:
|
|
Warrant Exercise
|
|
Warrant
|
|
Shares to be
|
|
Price per
|
|
Expiration
|
|
Purchased
|
|
Preferred Share
|
|
Date
|
|
525,000
|
|
$
|
1.00
|
|
|
June 30, 2011
|
|
If
the
holder of warrants for preferred stock exercises in full, the holder will
receive additional 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, 2007 and 2006 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 (ranging from $0.22 to $1.90 per share) and expected life of
the
stock option or warrant (5-10 years), the current price of the underlying stock
and its expected volatility (approximately 26 percent), expected dividends
(-0-
percent) on the stock and the risk free interest rate (ranging from 4 to 4.5
percent) 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.
Basic
earnings per share and diluted earnings per share for the years ended December
31, 2007 and 2006 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 3,964,419 and 2,098,502 incremental shares,
respectively, as well as shares issuable upon conversion of Series A Convertible
Preferred Stock and Preferred Stock Warrant representing approximately 7,045,606
incremental shares have been excluded from the computation of diluted EPS as
they are anti-dilutive.
In
January 2008, the Board approved an increase in the number of shares of common
stock issuable under the Company’s 2006 Long Term Incentive Plan from 2,500,000
to 20,000,000.
In
January 2008, the Company issued options to purchase 3,014,000 shares of Common
Stock to eligible employees and a consultant exercisable at $.25 per share.