DATED:
JUNE 22, 2010
Filed
Pursuant to Rule 424(b)(1)
Registration
No. 333-167351
PROSPECTUS
24,653,846
SHARES OF COMMON STOCK
CYTOSORBENTS
CORPORATION
(f/k/a
Medasorb Technologies Corporation)
This
prospectus is registering an aggregate of 24,653,846 shares of common stock, par
value $0.001, of CytoSorbents Corp. (f/k/a Medasorb Technologies Corporation), a
Nevada corporation, and relates to the sale of such shares by Lincoln Park
Capital Fund, LLC. Lincoln Park Capital Fund, LLC is sometimes referred to
in this prospectus as the selling stockholder or LPC. The prices at which
LPC may sell the shares will be determined by the prevailing market price for
the shares or in negotiated transactions. See “Plan
of Distribution” on page 18 for a description of how the selling
stockholder may dispose of the shares covered by this prospectus. We do
not know when or in what amount the selling stockholder may offer the shares for
sale. We will not receive proceeds from the sale of our shares by
LPC. We have agreed to pay certain expenses related to the registration of
the shares of common stock pursuant to the registration statement of which this
prospectus forms a part.
Our
common stock currently trades on the over-the-counter market and is quoted on
the OTC Bulletin Board under the symbol “CTSO.” On May 28, 2010, the last
reported sale price of our Common Stock was $0.07 per share.
The
selling stockholder is an “underwriter” within the meaning of the Securities Act
of 1933, as amended.
INVESTING
IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE THE SECTION TITLED
“RISK FACTORS” BEGINNING ON PAGE 6 OF THIS PROSPECTUS TO READ ABOUT FACTORS
YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date
of this prospectus is June 22,
2010.
TABLE OF
CONTENTS
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1
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SUMMARY
OF OUR BUSINESS
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1
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THE
OFFERING
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5
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RISK
FACTORS
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6
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USE
OF PROCEEDS
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18
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DETERMINATION
OF OFFER PRICE
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PLAN
OF DISTRIBUTION
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18
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DESCRIPTION
OF SECURITIES
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20
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THE
TRANSACTION
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23
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THE
SELLING STOCKHOLDER
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26
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INTERESTS
OF NAMED EXPERTS AND COUNSEL
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26
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DESCRIPTION
OF BUSINESS
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27
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DESCRIPTION
OF EMPLOYEES AND PROPERTY
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48
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DESCRIPTION
OF LEGAL PROCEEDINGS
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48
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MARKET FOR COMMON
EQUITY AND
RELATED STOCKHOLDER MATTERS
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48
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INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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49
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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52
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DIRECTORS
AND EXECUTIVE OFFICERS
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52
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EXECUTIVE
COMPENSATION
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54
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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61
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WHERE
YOU CAN FIND MORE INFORMATION
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64
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PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before making an investment decision with respect to our securities. You
should read this entire prospectus, including all documents incorporated by
reference, carefully, especially the “Risk Factors” section beginning on
page 6
of this prospectus and our financial statements and related notes
contained in this prospectus before making an investment decision with respect
to our securities. Please see the section titled, “Where You Can Find More
Information,” beginning on page
64 of this prospectus. Unless the context indicates
otherwise, references to “CytoSorbents,” “the Company,” “we,” “us,” or “our,”
refers to CytoSorbents Corporation (f/k/a Medasorb Technologies
Corporation) and our wholly-owned subsidiary, CytoSorbents,
Inc.).
You
should rely only on the information contained in this prospectus or any related
prospectus supplement, including the content of all documents incorporated by
reference into the registration statement of which this prospectus forms a
part. We have not authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. The information contained in this
prospectus or incorporated by reference herein is accurate only on the date of
this prospectus. Our business, financial condition, results of operations
and prospects may have changed since such date. Other than as required
under the federal securities laws, we undertake no obligation to publicly update
or revise such information, whether as a result of new information, future
events or any other reason.
Some of
the industry data contained in this prospectus is derived from data from various
third-party sources. We have not independently verified any of this information
and cannot assure you of its accuracy or completeness. While we are not aware of
any misstatements regarding any industry data presented herein, such data is
subject to change based on various factors, including those discussed under the
“Risk Factors” section beginning on page 6
of this prospectus.
The
Company
CytoSorbents
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. In November 2008 we changed the name of our operating
subsidiary from MedaSorb Technologies, Inc. to CytoSorbents, Inc. In May
2010 we finalized the name change of MedaSorb Technologies Corporation to
CytoSorbents Corporation. Unless otherwise indicated, all references in
this Annual Report to “MedaSorb,”, “CytoSorbents”, “us” or “we” with respect to
events prior to June 30, 2006 are references to CytoSorbents, 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.
Summary
of Our Business
We are a
therapeutic medical device company that is currently in the development stage,
headquartered in Monmouth Junction, New Jersey. 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. We are currently focusing 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 as the introductory
market for our CytoSorb™ product. 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.
We are
currently approved by the German Ethics Committee to conduct a clinical study of
up to 100 patients with acute respiratory distress syndrome or acute lung injury
in the setting of sepsis. The primary endpoint of our clinical trial is
cytokine reduction and is the basis of a planned CE Mark application to approve
our device for clinical use in Europe.
After
reviewing the initial cytokine data from the first 22 patients enrolled in our
original protocol, our medical advisors recommended revisions to our protocol to
minimize non-device related artifacts that may potentially arise if the samples
are not processed or handled appropriately. The revisions to the protocol
also include a provision for testing of our targeted endpoints in plasma instead
of serum, changes in cytokine processing and analysis, additional options for
anti-coagulation that the clinical sites may use, and an increase in the number
of patients we may enroll into the study from 80 to 100.
These
changes are intended to optimize the accuracy of our cytokine data for CE Mark
submission. The proposed protocol changes and rationale for change were
submitted to the German Ethics Committee and approved. Given these
changes, cytokine data will not be statistically comparable between these first
22 patients and those enrolled subsequently in the study. While the
company will continue to review all patient data in the aggregate, including
secondary and exploratory endpoints, the primary use of the data from the first
22 patients will be used to support the planned CE Mark application from a
safety perspective. Cytokine data from all patients enrolled
subsequent to these first 22 patients, as well as safety data on all patients
enrolled in the study, will be used for submission to the CE Mark
authority.
While we
are currently observing an improvement in our enrollment rate, to date patient
enrollment has been slower than originally anticipated. The Company
has taken a number of steps to improve recruitment, the most significant of
which is the increase in the number of our clinical trial sites. With more
sites actively seeking to enroll patients, we expect the patient enrollment rate
to continue to increase going forward. Concurrent with the clinical study, we
have commenced preparation for the CE Mark submission process. Assuming
availability of adequate and timely funding, a successful outcome of the study,
and CE Mark regulatory approval, the Company intends to commercialize its
product in Europe.
By
December 31, 2009 we had initiated and opened for enrollment a total of fourteen
(14) hospital units to participate in our clinical study. To date the
Company has enrolled sixty six (66) patients in the clinical study.
We may enroll up to an additional thirty four (34) patients. In
conducting the German Clinical study we have utilized our CytoSorb™ device in
approximately 200 treatments to date with no Serious Adverse Events attributable
to the device.
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 cartridge containing adsorbent polymer beads that
are intended to remove toxins and other substances from blood and physiologic
fluids. The cartridge 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 cartridge, 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 other current
state of the art blood purification technologies (such as dialysis) are
incapable of effectively clearing the various toxic compounds intended to be
adsorbed by our devices. We have demonstrated the ability of CytoSorb to
remove cytokines in vitro with whole blood. CytoSorb’s™ ability to
interact safely with blood (hemocompatibility) and general biocompatibility has
been demonstrated through ISO 10993 testing.
Prior to
the current European Sepsis Trial, the CytoSorb™ device design was tested on a
single patient with bacterial sepsis, producing results that our management
found encouraging and consistent with our belief that our device design was
appropriate for more extensive sepsis study.
In
November 2009, we announced positive clinical data on key secondary endpoints
from 7 CytoSorb™ treated patients, compared to 6 control patients, with severe
sepsis in the setting of respiratory failure. These data included all
fully monitored, completed data sets at that time from a 22 patient sepsis
pilot.
We
are currently enrolling patients in our European Sepsis Trial using our
CytoSorb™ device. The study is a randomized, controlled clinical study in
fourteen hospital sites in Germany of up to 100 patients with acute respiratory
distress syndrome or acute lung injury in the setting of sepsis. Patients
are being treated with one new device per day for up to seven (7) consecutive
days. The study protocol was designed to support an application for the
European CE Mark (regulatory approval to sell medical devices in Europe).
This study is designed to be supportive of, but not specifically for, FDA
approval for the use of our CytoSorb™ device in the U.S.
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.
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 cannot 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 cartridge 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 dialyzer. 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.
We have
conducted clinical studies using our BetaSorb™ device in patients with chronic
kidney failure, which have provided valuable data that underpin the development
of the critical care applications for our technology. The BetaSorb™ device has
been used in a total of four 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.
We have
not generated any revenue to date. We have incurred losses in each of our fiscal
years and expect these losses to continue for the foreseeable future. We will
need to raise significant additional funds to conduct clinical studies and
obtain regulatory approvals to commercialize our products. No assurance can be
given that we will ever successfully commercialize any
products.
THE
OFFERING
On May 5,
2010, we executed a purchase agreement (the “Purchase Agreement”) and a
registration rights agreement (the “Registration Rights Agreement”), with
Lincoln Park Capital Fund, LLC. (“LPC”) Under the Purchase Agreement,
LPC is obligated to purchase from us up to $6 million of our common stock, from
time to time over a 750 day (twenty-five (25) months) period.
Pursuant
to the Registration Rights Agreement, we were required to file a registration
statement that includes this prospectus with the U.S. Securities and Exchange
Commission (“SEC”) covering the shares that have been issued or may be issued to
LPC under the Purchase Agreement. We do not have the right to commence any
sales of our shares to LPC until the SEC has declared effective the registration
statement of which this prospectus is a part. Thereafter, over
approximately 750 days, or, 25 months, generally we have the right to direct LPC
to purchase up to $6,000,000 of our common stock in amounts up to $50,000 as
often as every two business days under certain conditions. We can also
accelerate the amount of our common stock to be purchased under certain
circumstances. No sales of shares may occur at a purchase price below
$0.10 per share. The price of our stock as of May 28, 2010 was $0.07 and
accordingly no sales of shares may occur until such time as the price is again
at or above $0.10. The purchase price of the shares will be based on the
market prices of our shares at the time of sale as computed under the Purchase
Agreement without any fixed discount. We may at any time in our sole
discretion terminate the Purchase Agreement without fee, penalty or cost upon
one business days notice. We issued 1,153,846 shares of our common stock
to LPC as an initial commitment fee for entering into the agreement (which
shares are not a part of this offering), and we are obligated to issue up to an
additional 1,153,846 shares pro rata as LPC purchases up to $6,000,000 of our
common stock as directed by us.
As of May
28, 2010, there were 101,175,222 shares of our common stock outstanding of which
99,277,507 shares are held by non-affiliates. 24,653,846 shares are
offered hereby consisting of 23,500,000 shares that we may sell to LPC pursuant
to the purchase agreement, and a total of 1,153,846 shares that we are obligated
to issue to LPC as additional commitment fee shares pro rata as up to $6,000,000
of our common stock is purchased. If all of the 24,653,846 shares offered
by LPC hereby were issued and outstanding as of May 28, 2010, such shares would
represent approximately 19.6% of the total common stock outstanding or
approximately 19.9% of the non-affiliates shares outstanding, as of the date
hereof.
Securities
Offered
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Common
stock offered by selling stockholder:
Offering
Price:
Common
Stock Currently Outstanding:
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24,653,846
shares
Market
Price
101,175,222
shares as of May 28, 2010
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Use
of proceeds:
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We will not receive
any proceeds from the sale by the selling stockholder of our common stock
covered by this prospectus. However, we will receive proceeds from
sales of our common stock under the Purchase Agreement. The proceeds
from the Purchase Agreement will be used for working capital and general
corporate purposes. See “Use of Proceeds” on page
18.
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Risk
Factors:
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See
“Risk Factors” beginning on page
6 and other information included in this prospectus for a
discussion of factors you should carefully consider before deciding to
invest in the shares.
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OTCBB
Ticker Symbol:
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CTSO.OB
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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
March 31, 2010 we had cash on hand of $1,346,301 and current liabilities of
$1,320,771. We will need additional financing in the future in order to
complete our clinical studies and the commercialization of our proposed
products. There can be no assurance that we will be successful in our
capital raising efforts.
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
ourselves.
At such
time as the SEC has declared effective a registration statement related to
shares underlying the transaction, we may direct LPC to purchase up to
$6,000,000 of shares of our common stock under our Purchase Agreement with LPC
over a 750 day (25 month) period, generally in amounts of up to $50,000 every 2
business days. However, we cannot sell and LPC does not have the right nor the
obligation to purchase any shares of our common stock on any business day that
the purchase price of our common stock is less than $0.10 per share. The last
closing date price of a share of our common stock on May 28, 2010 was $0.07
Accordingly, as of May 28, 2010, we cannot sell any shares of our common stock
to LPC under the Purchase Agreement unless and until the price of our common
stock is again at or above $0.10. We may therefore realize no proceeds
under the Purchase Agreement. We have registered hereby 24,653,846 shares for
sale by LPC pursuant to this prospectus (not including the initial commitment
shares that have been issued to LPC); however, the selling price of our common
stock to LPC will have to average at least $0.25 per share for us to receive the
maximum proceeds of $6 million under the LPC Purchase Agreement. Assuming a purchase price
of $0.10 per share (the minimum price at which stock may be sold to LPC) and the
purchase by LPC of the full 23,500,000 shares under the Purchase Agreement,
proceeds to us would be approximately $2.35 million.
The
extent that we rely on LPC as a source of funding will depend on a number of
factors including, the prevailing market price of our common stock and the
extent to which we are able to secure working capital from other sources such as
through the sale of our products. If obtaining sufficient funding from LPC
were to prove unavailable or prohibitively dilutive and if we are unable to sell
enough of our products, we may need to secure another source of funding in order
to satisfy our working capital needs. Even if we sell all $6,000,000 worth
of common stock under the Purchase Agreement to LPC, we may still need
additional capital to fully implement our business, operating and development
plans. Should the financing we require to sustain our working capital
needs be unavailable or prohibitively expensive when we require it, the
consequences could be a material adverse effect on our business, operating
results, financial condition and prospects.
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 March 31, 2010,
we had an accumulated deficit of $80,652,936 which included losses from
operations of $969,051 for the three month period ended March 31, 2010. In
part due to these losses, our audited consolidated financial statements for the
period ended December 31, 2009 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 seven employees. Our success will depend to a significant
degree upon the continued services of our key management and advisors,
including, Dr. Phillip Chan, our Chief Executive Officer; David Lamadrid, our
Chief Financial Officer; Vincent Capponi, our Chief Operating Officer and Dr.
Robert Bartlett our Chief Medical Officer, who works with us on a consulting
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.
Effective
January 1, 2010, Dr. Phillip Chan, David Lamadrid and Vincent Capponi entered
into new Employment Agreements with us pursuant to which their employment will
terminate on December 31, 2010 without automatic renewal. There can be no
assurance that they will continue to provide services to us. Effective as of
December 31, 2008, Al Kraus stepped down from his position as president and
Chief Executive Officer. Effective January 1, 2009, Dr. Phillip Chan replaced
him as the Interim CEO and effective January 1, 2010, Dr. Chan was appointed
CEO. Mr. Kraus remains with us as a Director, serving as Chairman of the
Board.
Our
Chief Medical Officer works with us on a consulting basis.
Our Chief
Medical Officer, Dr. Robert Bartlett, works with us on a consulting basis.
Because of the part time nature of his consulting agreement, Dr. Bartlett 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 patent, trademark or other 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, 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.
“Alkermes”
Litigation
In
February 2008, Alkermes, Inc. commenced an action against us in the U.S.
District Court for the District of Massachusetts, alleging that our use of the
name MedaSorb infringes on Alkermes’ registered trademark “MEDISORB.” In the
action, Alkermes sought an injunction against our further use of the name
Medasorb. Pursuant to a Settlement Agreement dated June 18, 2008, we have
changed the name of MedaSorb Technologies Corporation to CytoSorbents
Corporation and have changed the name of our wholly-owned subsidiary, through
which we conduct all of our operational activities, from MedaSorb Technologies
Inc. to CytoSorbents, Inc. to avoid any potential confusion with Alkermes’
similarly named product.
We
have temporarily ceased the application process with the FDA and commenced the
process to obtain CE Mark approval of our products in the Europe
market.
In 2007,
the FDA approved our Investigational Device Exemption (IDE) application to
conduct a limited study of five (5) patients in the adjunctive treatment of
sepsis. Because we believed this would delay our application process in
the United States for at least one year, we decided to temporarily cease
proceedings with the FDA and instead commenced the application process of
seeking CE Mark approval of our products in the European market. The CE Mark
approval process in Europe involves clinical studies and is still lengthy and
costly, even though we believe it is faster than the FDA approval process. The
failure to obtain the CE Mark approvals for our polymer products, or to comply
with ongoing governmental regulations could prevent, delay or limit introduction
or sale of our products and result in the failure to achieve revenues or
maintain our operations.
After we
obtain the CE Mark approval for our products in Europe, we will consider
resuming the application process with the FDA. Even if the clinical protocol for
our European clinical study has been designed to allow us to gather information
to support future studies, there is no assurance that we will eventually obtain
the FDA approval. In addition, there can be no assurance that government
regulations applicable to our products or the interpretation of those
regulations will not change.
To
commercialize our products in the U.S. Market, we also will be subject to other
Federal, state, and local laws, regulations and recommendations relating to
laboratory and manufacturing practices as well as Medicare, Medicaid and
anti-kickback laws. Non-compliance with applicable requirements can result in
civil penalties, the recall, injunction or seizure of products, an inability to
import products into the United States, the refusal by the government to approve
or clear product approval applications, the withdrawal of previously approved
product applications and criminal prosecution. The extent of potentially adverse
government regulation that might arise from future legislation or administrative
action cannot be predicted.
We
have commenced the process of seeking regulatory approval of our products, but
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 have
commenced our first clinical study 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. Patient enrollment
in our current study has been slower than originally anticipated. The
Company has initiated additional hospital units, but there can be no assurance
that these sites will be able to enroll patients and meet the projected
enrollment. 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 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 CE Mark and/or 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 others, are critical care advisors and consultants of ours and are
associated with institutions such as the University of Pittsburgh Medical
Center. 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:
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satisfy their financial or
contractual obligations to
us;
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adequately market our products;
or
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not offer, design, manufacture or
promote competing products.
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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.
As of May
28, 2010 our directors, executive officers and principal stockholders together
beneficially own approximately 18.1% 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 4,895,948 shares of Series A Preferred Stock
through December 31, 2009 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:
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the occurrence of
“Non-Registration Events”;
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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
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any money judgment or similar
final process being filed against us for more than
$100,000.
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In
addition, the registration rights provided for in the subscription agreement we
entered into with the purchasers in this offering:
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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
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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.
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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.
Our
Series B Preferred Stock provides for the payment of penalties.
Immediately
following our June 2008 and August 2008 private placement, we issued a total of
52,931.47 shares of Series B 10% Cumulative Convertible Preferred Stock with an
aggregate stated value of $5,293,147. We issued an additional 22,420.96 shares
of Series B Preferred Stock through December 31, 2009 to additional investors,
and as dividends. We will likely issue additional shares of this series of
preferred stock in the future as dividends. The Certificate of Designation
designating the Series B 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:
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the occurrence of
“Non-Registration Events”;
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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
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any money judgment or similar
final process being filed against us for more than
$100,000.
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In
addition, the registration rights provided for in the subscription agreement we
entered into with the purchasers in this offering:
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required us to file a
registration statement with the SEC on or before 180 days from the Initial
Closing to register the shares of Common Stock issuable upon conversion of
the Series B Preferred Stock, and cause such registration statement to be
effective by February 21, 2009 (240 days following the Initial Closing) or
March 23, 2009 if the reasons for delay are solely due to SEC delay;
and
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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.
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We
submitted an original S-1 registration statement to the SEC on December 12,
2008. On May 7, 2010, we filed a Registration Withdrawal Request,
requesting that the December 12, 2008 Form S-1 registration statement be
withdrawn. We withdrew the original registration statement as a result of the
amount of time which had lapsed since the original issuance date of the shares
related to the December 12, 2008 registration statement. Since the shares were
issued to affiliates of the company and were held for more than six months, the
shares were no longer restricted under Rule 144(b)(1)(i) of the Securities Act.
Thus, any continuing efforts aimed at the original December 12, 2008
registration statement became futile. The Company has received a waiver from a
majority of the Series B holders for the non-registration event. Pursuant to the
waiver, the Majority series B Holders waive any liabilities, and penalties, that
result from any default arising from or in connection with the occurrence of a
Non-Registration Event as provided in Section 11.4 of the Series B Subscription
Agreement. There can be no assurance that the Company will receive such waiver
from investors for any future items and no assurance the Company will still not
incur penalties or prevent an Event of Default from occurring.
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 B Preferred Stock sold in the offering. We may in the
future default in our contractual obligations to the holders of our Series B
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 B Preferred Stock
The
conversion price of the Series B Preferred Stock issued to the June and August
2008 purchasers of our Series B Preferred Stock are subject to anti-dilution
provisions, so that upon future non-excepted issuances of our Common Stock or
equivalents thereof, subject to specified customary exceptions, at a price below
the conversion price of the Series B Preferred Stock, such conversion price will
be reduced on a weighted average basis, further diluting holders of our Common
Stock.
Future
Sales of Common Stock Could Result in a Decline in Market Price.
This
registration statement covers the sale of up to 24,653,846 shares of Common
Stock. Sales of a significant number of shares of Common Stock in the public
market could result in a decline in the market price of our Common
Stock.
Our
Board of Directors may, without stockholder approval, issue and fix the terms of
shares of preferred stock and issue additional shares of common stock adversely
affecting the rights of holders of our common stock.
Our
certificate of incorporation authorizes the issuance of up to 100,000,000 shares
of “blank check” preferred stock, with such designation rights and preferences
as may be determined from time to time by the Board of Directors. We have
designated 12,000,000 shares of Series A Preferred Stock and 200,000 shares of
Series B Preferred Stock as described above. Subject to the rights of the
holders of the Series A and Series B Preferred Stock, our Board of
Directors is empowered, without stockholder approval, to issue up to 87,800,000
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 500,000,000 shares of common stock, of which approximately
399,000,000 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.
The
sale of our common stock to LPC may cause dilution and the sale of the shares of
common stock acquired by LPC could cause the price of our common stock to
decline.
In
connection with entering into the Purchase Agreement with LPC, we authorized the
sale to LPC of up to 23,500,000 shares of our common stock and the issuance of
an additional 2,307,692 shares of our common stock as a commitment fee.
The number of shares ultimately offered for sale by LPC hereunder is dependent
upon the number of shares purchased by LPC under the Purchase Agreement. The
purchase price for the common stock to be sold to LPC pursuant to the Purchase
Agreement will fluctuate based on the price of our common stock. All 23,500,000
shares registered in this offering which may be sold by us to LPC under the
Purchase Agreement are expected to be freely tradable. It is anticipated
that shares registered in this offering will be sold over a period of up to 750
days (25 monthly periods), from the date of this prospectus. Depending
upon market liquidity at the time, a sale of shares under this offering at any
given time could cause the trading price of our common stock to decline.
We can elect to direct purchases by LPC in our sole discretion but no sales to
LPC may occur if the purchase price for our common stock under the Purchase
Agreement is below $0.10 per share and therefore, LPC may ultimately purchase
all, some or none of the 23,500,000 shares of common stock not yet issued but
registered in this offering. After LPC has acquired such shares, it may
sell all, some or none of such shares. Therefore, sales to LPC by us under the
Purchase Agreement may result in substantial dilution to the interests of other
holders of our common stock. The sale of a substantial number of shares of our
common stock under this offering, or anticipation of such sales, could make it
more difficult for us to sell equity or equity-related securities in the future
at a time and at a price that we might otherwise wish to effect
sales.
Our
stock is a penny stock. Trading of our stock may be restricted by the SEC’s
penny stock regulations and the FINRA’s sales practice requirements, which may
limit a stockholder’s ability to buy and sell our stock.
Our
common stock is a penny stock. The SEC has adopted Rule 15g-9 which
generally defines “penny stock” to be any equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
institutional accredited investors. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer’s account. The bid and offer quotations, and the broker- dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer’s confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
In
addition to the “penny stock” rules promulgated by the SEC, the Financial
Industry Regulatory Authority, or FINRA, has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholder. We will receive no proceeds
from the sale of shares of common stock in this offering. However, we may
receive proceeds of up to $6,000,000 under the Purchase Agreement. Any
proceeds from LPC that we receive under the Purchase Agreement will be used for
working capital and for other general corporate purposes.
PLAN
OF DISTRIBUTION
The
common stock offered by this prospectus is being offered by Lincoln Park Capital
Fund, LLC, or LPC, the selling stockholder. The common stock may be sold
or distributed from time to time by the selling stockholder directly to one or
more purchasers or through brokers, dealers, or underwriters who may act solely
as agents at market prices prevailing at the time of sale, at prices related to
the prevailing market prices, at negotiated prices, or at fixed prices, which
may be changed. The sale of the common stock offered by this prospectus
may be effected in one or more of the following methods:
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ordinary
brokers’ transactions;
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·
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transactions
involving cross or block trades;
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through
brokers, dealers, or underwriters who may act solely as
agents
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·
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“at
the market” into an existing market for the common
stock;
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in
other ways not involving market makers or established business markets,
including direct sales to purchasers or sales effected through
agents;
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in
privately negotiated transactions;
or
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any
combination of the foregoing.
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In order
to comply with the securities laws of certain states, if applicable, the shares
may be sold only through registered or licensed brokers or dealers. In
addition, in certain states, the shares may not be sold unless they have been
registered or qualified for sale in the state or an exemption from the
registration or qualification requirement is available and complied
with.
Brokers,
dealers, underwriters or agents participating in the distribution of the shares
as agents may receive compensation in the form of commissions, discounts, or
concessions from the selling stockholder and/or purchasers of the common stock
for whom the broker-dealers may act as agent. The compensation paid to a
particular broker-dealer may be less than or in excess of customary
commissions.
LPC is an
“underwriter” within the meaning of the Securities Act.
Neither
we nor LPC can presently estimate the amount of compensation that any agent will
receive. We know of no existing arrangements between LPC or any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the shares offered by this prospectus. At the time a
particular offer of shares is made, a prospectus supplement, if required, will
be distributed that will set forth the names of any agents, underwriters or
dealers and any compensation from the selling stockholder, and any other
required information.
We will
pay all of the expenses incident to the registration, offering and sale of the
shares to the public other than commissions or discounts of underwriters,
broker-dealers or agents. We have also agreed to indemnify LPC and related
persons against specified liabilities, including liabilities under the
Securities Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore,
unenforceable.
LPC and
its affiliates have agreed not to engage in any direct or indirect short selling
or hedging of our common stock during the term of the Purchase
Agreement.
We have
advised LPC that while it is engaged in a distribution of the shares included in
this prospectus it is required to comply with Regulation M promulgated under the
Exchange Act. With certain exceptions, Regulation M precludes the selling
stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security.
All of the foregoing may affect the marketability of the shares offered by this
prospectus.
DESCRIPTION
OF SECURITIES
Our total
authorized capital stock consists of 500,000,000 shares of Common Stock, par
value $.001 per share and 100,000,000 shares of preferred stock, par value
$0.001 per share. We have designated 12,000,000 shares of our preferred stock as
Series A 10% Cumulative Convertible Preferred Stock and 200,000 shares of our
preferred stock as Series B 10% Cumulative Convertible Preferred Stock. As of
May 28, 2010, there were 101,175,222 shares of our Common Stock outstanding,
60,044.6 shares of our Series B Preferred Stock and 5,903,306 shares of Series A
Preferred outstanding.
The
following description of our capital stock does not purport to be complete and
is subject to and qualified by our Articles of Incorporation and By-laws, and by
the provisions of applicable Nevada law.
Common
Stock
Holders
of our Common Stock are entitled to receive dividends out of assets legally
available therefore at such times and in such amounts as the Board of Directors
from time to time may determine. Holders of our Common Stock are entitled to one
vote for each share held on all matters submitted to a vote of the stockholders.
Cumulative voting with respect to the election of directors is not permitted by
our Articles of Incorporation. Our Common Stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
after payment of liquidation preferences, if any, on any outstanding stock
having prior rights on such distributions and payment of other claims of
creditors.
Preferred
Stock
Our
Articles of Incorporation authorize the issuance of shares of preferred stock in
one or more series. Our Board of Directors has the authority, without any vote
or action by the stockholders, to create one or more series of preferred stock
up to the limit of our authorized but unissued shares of preferred stock and to
fix the number of shares constituting such series and the designation of such
series, the voting powers (if any) of the shares of such series and the relative
participating, option or other special rights (if any), and any qualifications,
preferences, limitations or restrictions pertaining to such series which may be
fixed by the Board of Directors pursuant to a resolution or resolutions
providing for the issuance of such series adopted by the Board of Directors. Our
Board of Directors authorized the creation of both Series A and Series B
preferred stock. Each Series is further described herein.
Series
A 10% Cumulative Convertible Preferred Stock
We have
designated 12,000,000 shares of our preferred stock as Series A 10% Cumulative
Convertible Preferred Stock (the “ Series A Preferred
Stock ”), of which 5,903,306 shares were issued and outstanding as of May
12, 2010. Each share of Series A Preferred Stock has a stated value of $1.00.
For the period from January 22, 1997 (date of inception) to March 31, 2010,
4,390,135 Series A Preferred Shares were converted into 28,424,170 Common
Shares.
Dilution and
Subordination
We
entered into an Agreement and Consent as of the same date with the holders of
more than 80% of our Series A Preferred Stock, par value 0.001 per share and the
holders of more than 80% of the outstanding common stock purchase warrants
issued to the purchasers of our Series A Preferred Stock (the “ Class A Warrant ”) on
June 25, 2008. Pursuant to the Agreement and Consent, our holders of the Series
A Preferred Stock consented to the permanent waiver of the anti-dilution
protection previously provided to the holders of the Series A Preferred Stock
and the holders of the Class A Warrant.
Dividends
The
holders of outstanding shares of Series A Preferred Stock shall be entitled to
receive preferential dividends in cash out of any funds of the company together
with the holders of the Series B Preferred Stock, before any dividend or other
distribution will be paid or declared and set apart for payment on any shares of
any Common Stock, or other class of junior stock at the rate of 10% per annum on
the Series A Stated Value from the date of issue of such shares. Such dividends
shall be payable on the last day of each calendar quarter. The rate of such
preferential dividends shall be increased to 20% per annum upon the occurrence
of any “Event of Default” as defined in Section 6 of the Certificate of
Amendment to Certificate of Designation.
Voting
Rights
Holders
of Series A Preferred Stock do not have the right to vote on matters submitted
to the holders of our Common Stock. However, consent of the holders of at least
80% of the shares of Series A preferred Stock, voting as a separate class, shall
be required for amending the rights related to Series A Preferred Stock in our
certificate of incorporation.
Liquidation
Upon our
liquidation, dissolution or winding-up, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
Series A Preferred Stock after payment of liquidation to the Series B Preferred
Stock, if any.
Redemption
Commencing
on June 30, 2009, if an “Event of Default” as defined in the Certificate of
Designation of Series A Preferred Stock has not occurred and is not then
continuing, we have the option to redeem the Obligation Amount of the Series A
Preferred Stock, in whole or in part, by paying to the holders of the Series A
Preferred Stock a sum of money equal to 120% of the Obligation Amount to be
redeemed. An Event of Default has not occurred as of the date of this
prospectus.
Series
B 10% Cumulative Convertible Preferred Stock
Each
share of Series B Preferred Stock has a stated value of $100.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the Series B stated value at a conversion price of $0.0362, subject to
certain adjustments. Additionally, 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 our
assets, the conversion rate will be adjusted so that the conversion rights of
the Series B Preferred Stock stockholders will remain equivalent to those prior
to such event. For the period from January 22, 1997 (date of inception) to March
31, 2010, 9,596.95 Series B Preferred Shares were converted into 26,510,911
Common Shares.
Dividend
The
holders of Series B Preferred Stock are entitled to receive preferential
dividends payable in shares of additional Series B Preferred Stock. Any
dividends payable to both the Series A and Series B Preferred shareholders shall
be paid before any dividend or other distribution will be paid to any Common
Stock shareholder. The Series B Preferred Stock dividend is based payable at a
rate of 10% per annum on the Series B Stated Value payable on the last day of
each calendar quarter after June 30, 2008. However, upon the occurrence of any
“Event of Default” as defined in the Certificate of Designation of Series B
Preferred Stock, the dividend rate increases to 20% per annum, and revert back
to 10% after the “Event of Default” is cured. An Event of Default includes, but
is not limited to,
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the occurrence of
“Non-Registration Events”;
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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
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any money judgment or similar
final process being filed against us for more than
$100,000.
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We
received waivers from the holders of Series B Preferred Stock with regard to the
requirement to register the shares. The original Form S1 December 12, 2008
Registration Statement was withdrawn on May 7, 2010. Dividends must be
delivered to the holder of the Series B Preferred Stock no later than five (5)
business days after the end of each period for which dividends are payable.
Dividends on the Series B Preferred Stock will be made in additional shares of
Series B Preferred Stock, valued at the Series B Preferred Stock stated value.
Notwithstanding the foregoing, during the first three-years following the
initial closing, upon the approval of the holders of a majority of the Series B
Preferred Stock, including the lead investor, NJTC Venture Fund, if it then owns
25% of the shares of Series B Preferred Stock initially purchased by it, we may
pay dividends in cash instead of additional shares of Series B Preferred Stock,
and after such three-year period, the holders of a majority of the Series B
Preferred Stock, including NJTC if it then owns the 25% of the shares of the
Series B Preferred Stock initially purchased by it, may require us to make such
payments in cash.
Liquidation
In the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series B Preferred Stock will receive, in priority over the holders of
Series A Preferred Stock and Common Stock, a liquidation preference equal to the
stated value of such shares plus accrued dividends on the shares.
Voting Rights; Board
Rights
Holders
of Series B Preferred Stock have the right to vote on matters submitted to the
holders of Common Stock on an as converted basis. However, the consent of the
holders of at least a majority of the shares of the Series B Preferred Stock as
a separate class shall be required on matters related to the rights of the
Series B Preferred Stock.
Registration
Rights
We agreed
to file a registration statement under the Securities Act covering the Common
Stock issuable upon conversion of the Series B Preferred Stock within 180 days
following the initial closing and to cause it to become effective within 240
days of such closing. We also granted the investors demand and piggyback
registration rights with respect to such Common Stock. The investors in the
Series B Financing are entitled to liquidated damages in an amount equal to two
percent (2%) of the purchase price of the Series B Preferred Stock if we fail to
timely file that registration statement with, or have it declared effective by,
the SEC.
The
Company has received a waiver from a majority of the Series B holders for the
non-registration event and the timing of the Series B registration does not
create a cross-default of the Series A Preferred Series.
Redemption
Rights
Following
the fifth anniversary of the initial closing, the holders of a majority of the
Series B Preferred Stock, including NJTC if it then holds 25% of the shares of
Series B Preferred Stock initially purchased by it, may elect to require us to
redeem all, but not less than all, of their shares of Series B Preferred Stock
at the original purchase price for such shares plus all accrued and unpaid
dividends whether or not declared, if the market price of our Common Stock is
then below the conversion price of the Series B Preferred Stock.
Anti-Takeover
Provisions
Certain
anti-takeover provisions in our Certificate of Incorporation may make a change
in control of the Company more difficult, even if a change in control would be
beneficial to our stockholders. In particular, our board of directors will be
able to issue shares of preferred stock with rights and privileges that might be
senior to our Common Stock, without the consent of the holders of our Common
Stock, and has the authority to determine the price, rights, preferences,
privileges and restrictions of the preferred stock. Although the ability to
issue preferred stock may provide us with flexibility in connection with
possible acquisitions and other corporate purposes, this issuance may make it
more difficult for a third party to acquire a majority of our outstanding voting
stock.
Transfer
Agent
The
transfer agent for our Common Stock is American Stock Transfer & Trust
Company, located at 6201 15th Avenue, Brooklyn, New York 11219. American Stock
Transfer & Trust Company’s telephone number is 718-921-8143.
THE
TRANSACTION
General
On May 5,
2010, we executed a purchase agreement, or the Purchase Agreement, and a
registration rights agreement, or the Registration Rights Agreement, with
LPC. Under the Purchase Agreement, LPC is obligated, under certain
conditions, to purchase from us up to $6 million of our common stock, from time
to time over a 750 day (twenty-five (25) monthly) period.
Pursuant
to the Registration Rights Agreement, we have filed a registration statement
that includes this prospectus with the U.S. Securities and Exchange Commission
or SEC covering the shares that have been issued or may be issued to LPC under
the Purchase Agreement. Except for the initial 1,153,846 shares issued as
a commitment fee (which shares are not included in this offering), we do not
have the right to commence any sales of our shares to LPC until the SEC has
declared effective the registration statement of which this prospectus is a
part. Thereafter, over 750 days (25 months), generally we have the right
to direct LPC to purchase up to $6,000,000 of our common stock in amounts up to
$50,000 as often as every two business days under certain conditions. We can
also accelerate the amount of our common stock to be purchased under certain
circumstances. No sales of shares may occur at a purchase price below
$0.10 per share. The price of our stock as of May 28, 2010 was $0.07 and
accordingly no sales of shares may occur until such time as the price is again
at or above $0.10. The purchase price of the shares will be based on the
market prices of our shares at the time of sale as computed under the Purchase
Agreement without any fixed discount. We may at any time in our sole
discretion terminate the Purchase Agreement without fee, penalty or cost upon
one business days notice. We issued 1,153,846 shares of our common stock
to LPC as a commitment fee for entering into the agreement (which shares are not
a part of this offering), and we are obligated to issue up to an additional
1,153,846 shares pro rata as LPC purchases up to $6,000,000 of our common stock
as directed by us. LPC may not assign any of its rights or obligations
under the Purchase Agreement.
Purchase
Of Shares Under The Purchase Agreement
Under the
Purchase Agreement, on any business day selected by us and as often as every two
business days, we may direct LPC to purchase up to $50,000 of our common
stock. The purchase price per share is equal to the lesser
of:
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the
lowest sale price of our common stock on the purchase date;
or
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the
average of the two (2) lowest closing sale prices of our common stock
during the seven (7) consecutive business days prior to the date of a
purchase by LPC.
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The
purchase price will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock split or other
similar transaction occurring during the business days used to compute the
purchase price.
In
addition to purchases of up to $50,000, we may direct LPC as often as every two
business days to purchase up to $75,000 of our common stock provided that our
closing share price on the purchase date is not below $.15 per share. We
may increase this amount: up to $150,000 of our common stock provided
that our closing share price on the purchase date is not below $.20 per share;
up to $225,000 of our common stock provided that our closing share price on the
purchase date is not below $.30 per share; up to $300,000 of our common stock
provided that our closing share price on the purchase date is not below $.40 per
share; and up to $750,000 of our common stock provided that our closing share
price on the purchase date is not below $.60. The price at which LPC would
purchase these accelerated amounts of our common stock will be the lesser of
(i) the lowest sale price of our common stock on the purchase date or
(ii) the lowest purchase price (as described in the first paragraph of this
section above) during the three (3) consecutive business days prior to the
purchase date.
Minimum
Purchase Price
Under the
Purchase Agreement, we have set a floor price of $0.10 per share. However,
LPC shall not have the right nor the obligation to purchase any shares of our
common stock in the event that the purchase price per share would be less than
the floor price.
Events
of Default
Generally,
LPC may terminate the Purchase Agreement without any liability or payment to the
Company upon the occurrence of any of the following events of
default:
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while
any registration statement is required to be maintained effective pursuant
to the terms of the Registration Rights Agreement, the effectiveness of
the registration statement of which this prospectus is a part of lapses
for any reason (including, without limitation, the issuance of a stop
order) or is unavailable to LPC for sale of our common stock offered
hereby and such lapse or unavailability continues for a period of ten (10)
consecutive business days or for more than an aggregate of thirty (30)
business days in any 365-day
period;
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suspension
by our principal market of our common stock from trading for a period of
three (3) consecutive business
days;
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the
de-listing of our common stock from our principal market provided our
common stock is not immediately thereafter trading on the Nasdaq Global
Market, the Nasdaq Global Select Market, the Nasdaq Capital market, the
New York Stock Exchange or the NYSE
AMEX;
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the
transfer agent’s failure for five (5) business days to issue to LPC shares
of our common stock which LPC is entitled to under the Purchase
Agreement;
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any
material breach of the representations or warranties or covenants
contained in the Purchase Agreement or any related agreements which has or
which could have a material adverse effect on us subject to a cure period
of five (5) business days;
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any
participation or threatened participation in insolvency or bankruptcy
proceedings by or against us; or
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a
material adverse change in the business, properties, operations, financial
condition or results of operations of the Company and its Subsidiaries
taken as a whole.
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Our
Termination Rights
We have
the unconditional right at any time for any reason to give notice to LPC
terminating the Purchase Agreement without any cost to us.
No
Short-Selling or Hedging by LPC
LPC has
agreed that neither it nor any of its affiliates shall engage in any direct or
indirect short-selling or hedging of our common stock during any time prior to
the termination of the Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our Stockholders
All
23,500,000 shares registered in this offering which may be sold by us to LPC
under the Purchase Agreement are expected to be freely tradable. It is
anticipated that shares registered in this offering will be sold over a period
of up to 750 days (25 months) from the date of this prospectus. The sale
by LPC of a significant amount of shares registered in this offering at any
given time could cause the market price of our common stock to decline and to be
highly volatile. LPC may ultimately purchase all, some or none of the
24,653,846 shares of common stock not yet issued but registered in this
offering. After it has acquired such shares, it may sell all, some or none
of such shares.
Therefore,
sales to LPC by us under the agreement may result in substantial dilution to the
interests of other holders of our common stock. However, we have the right to
control the timing and amount of any sales of our shares to LPC and the
agreement may be terminated by us at any time at our discretion without any cost
to us.
In
connection with entering into the Purchase Agreement, we authorized the issuance
to LPC of up to 25,807,692 shares of our common stock inclusive of both the
initial commitment shares already issued and the additional commitment shares to
be issued. We have the right to terminate the agreement without any payment or
liability to LPC at any time, including in the event that all $6,000,000 is sold
to LPC under the Purchase Agreement. Subject to approval by our board of
directors, we have the right but not the obligation to sell more than 23,500,000
shares to LPC. In the event we elect to issue more than the 23,500,000
shares (not including the commitment shares) offered hereby, we will be required
to file a new registration statement and have it declared effective by the
SEC. The number of shares ultimately offered for sale by LPC under this
prospectus is dependent upon the number of shares purchased by LPC under the
Purchase Agreement. The following table sets forth the amount of proceeds
we would receive from LPC from the sale of shares at varying purchase
prices:
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Assumed
Average
Purchase
Price
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Number of
Shares to be
Issued if Full
Purchase(1)
|
|
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Percentage of
Outstanding Shares
After Giving Effect to
the Issuance to LPC(2)
|
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Proceeds from the Sale of
Shares to LPC Under the
Purchase
Agreement (in millions)
|
|
| |
|
|
|
|
|
|
|
|
|
|
| $ |
0.10
|
(3) |
|
23,951,923 |
|
|
|
19.14 |
% |
|
$ |
2.35 |
|
| $ |
0.15
|
|
|
24,177,885 |
|
|
|
19.29 |
% |
|
$ |
3.525 |
|
| $ |
0.20
|
|
|
24,403,846 |
|
|
|
19.43 |
% |
|
$ |
4.70 |
|
| $ |
0.30
|
|
|
21,153,846 |
|
|
|
17.29 |
% |
|
$ |
6.00 |
|
| $ |
0.40
|
|
|
16,153,846 |
|
|
|
13.77 |
% |
|
$ |
6.00 |
|
| $ |
0.60
|
|
|
11,153,846 |
|
|
|
9.93 |
% |
|
$ |
6.00 |
|
|
(1)
|
The
number of shares to be issued includes the additional commitment shares
issuable to LPC (but not the initial commitment shares), and no proceeds
will be attributable to such commitment
shares.
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|
(2)
|
The
denominator is based on 101,175,222 shares outstanding as of May 28, 2010,
which includes the 1,153,846 shares previously issued to LPC plus the
number of shares set forth in the adjacent column which includes the
commitment fee issued pro rata as up to $6,000,000 of our stock is
purchased by LPC. The numerator is based on the number of shares issuable
under the Purchase Agreement at the corresponding assumed purchase price
set forth in the adjacent column, including the additional commitment
shares, but excluding the 1,153,846 shares previously issued to
LPC.
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|
(3)
|
Under
the Purchase Agreement, we may not sell and LPC cannot purchase any shares
in the event the purchase price thereof is below $0.10 per
share.
|
THE
SELLING STOCKHOLDER
The
following table presents information regarding the selling stockholder.
Neither the selling stockholder nor any of its affiliates has held a
position or office, or had any other material relationship, with
us.
|
Selling
Stockholder
|
|
Shares
Beneficially
Owned Before
Offering
|
|
|
Percentage of
Outstanding Shares
Beneficially Owned
Before Offering
|
|
|
Shares to be Issued in the
Offering Assuming The
Company Issues The Maximum
Number of Shares Under the
Purchase Agreement
|
|
|
Percentage of
Outstanding Shares
Beneficially Owned
After Offering
|
|
|
Lincoln
Park Capital Fund, LLC (1)
|
|
|
1,153,846
|
(2) |
|
|
1.14
|
%(2) |
|
|
24,653,846
|
(3) |
|
|
0.91
|
% |
|
(1)
|
Josh
Scheinfeld and Jonathan Cope, the principals of LPC, are deemed to be
beneficial owners of all of the shares of common stock owned by LPC.
Messrs. Scheinfeld and Cope have shared voting and disposition power over
the shares being offered under this
Prospectus.
|
|
(2)
|
1,153,846
shares of our common stock have been previously issued to LPC as a
commitment fee under the Purchase Agreement. We may at our
discretion elect to issue to LPC up to an additional 24,653,846 shares of
our common stock under the Purchase Agreement but LPC does not
beneficially own any such shares that may be issued by us at our sole
discretion and such shares are not included in determining the percentage
of shares beneficially owned before the
offering.
|
|
(3)
|
This
number includes 23,500,000 shares of common stock, the maximum number of
shares to be sold in the offering, plus 1,153,846, the additional
commitment shares to be issued assuming the Company offers the maximum
number of shares under the Purchase Agreement. The 1,153,846 shares
previously issued to LPC are not a part of this
offering.
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INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis, or had, or
is to receive, in connection with the offering, a substantial interest, direct
or indirect, in the registrant or any of its parents or subsidiaries. Nor was
any such person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
The
December 31, 2009 financial statements included in this prospectus and the
registration statement have been audited by WithumSmith+Brown, PC, independent
registered public accounting firm, to the extent and for the periods set forth
in their report appearing elsewhere herein and in the registration statement,
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
DESCRIPTION
OF BUSINESS
Corporate
History
CytoSorbents
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. In November 2008 we changed the name of our operating
subsidiary from MedaSorb Technologies, Inc. to CytoSorbents, Inc. In May
2010 we finalized the name change of MedaSorb Technologies Corporation to
CytoSorbents Corporation. Unless otherwise indicated, all references in
this Annual Report to “MedaSorb,”, “CytoSorbents”, “us” or “we” with respect to
events prior to June 30, 2006 are references to CytoSorbents, 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.
CytoSorbents
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, CytoSorbents converted from a limited liability company to a
corporation.
CytoSorbents
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, CytoSorbents 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 CytoSorbents 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 CytoSorbents. 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 CytoSorbents prior to the merger
were issued an aggregate of 20,340,929 shares of Common Stock in exchange for
the shares of CytoSorbents 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 CytoSorbents 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 CytoSorbents options and warrants
that were cancelled. Certain providers of legal services to CytoSorbents who
previously had the right to be issued approximately 997,000 shares of CytoSorbents
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 CytoSorbents 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 CytoSorbents Corporation (then Gilder Enterprises) was a shell company
prior to the merger, the stockholders of CytoSorbents 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 CytoSorbents prior to the
merger became our directors and executive officers. Accordingly, pre-merger
CytoSorbents is treated as the acquiror in the merger, which is treated as a
recapitalization of pre-merger CytoSorbents, and the pre-merger financial
statements of CytoSorbents 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 for the June 30, 2006 purchasers of the Series A Preferred
Stock and the exercise price of the warrants were 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. As of the “Qualified Closing” of our Series B Preferred Stock
private placement in August of 2008, these investors’ agreed to a modification
of their rights and pricing and gave up their anti-dilution protection – see
Qualified Closing description in Series B Preferred Stock section)
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 ($0.07 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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·
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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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·
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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.
As of the
“Qualified Closing” of our Series B Preferred Stock private placement in August
of 2008, Ms. Chassman agreed to a modification of her rights and pricing and
gave up her anti-dilution protection – see Qualified Closing description in
Series B Preferred Stock section)
Principal Terms of the
Series B Financing Consummated in 2008
Each
share of Series B Preferred Stock has a stated value of $100.00, and is
convertible at the holder’s option into that number of shares of Common Stock
equal to the Series B stated value at a conversion price of $0.0362, subject to
certain adjustments. Additionally, 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 our
assets, the conversion rate will be adjusted so that the conversion rights of
the Series B Preferred Stock stockholders will remain equivalent to those prior
to such event.
Dividend
The
holders of Series B Preferred Stock are entitled to receive preferential
dividends payable in shares of additional Series B Preferred Stock . Any
dividends payable to both the Series A and Series B Preferred shareholders shall
be paid before any dividend or other distribution will be paid to any Common
Stock shareholder. The Series B Preferred Stock dividend is based payable at a
rate of 10% per annum on the Series B Stated Value payable on the last day of
each calendar quarter after June 30, 2008. However, upon the occurrence of any
“Event of Default” as defined in the Certificate of Designation of Series B
Preferred Stock, the dividend rate increases to 20% per annum, and revert back
to 10% after the “Event of Default” is cured. An Event of Default includes, but
is not limited to,
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the occurrence of
“Non-Registration Events”;
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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
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¨
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any money judgment or similar
final process being filed against us for more than
$100,000.
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Dividends
must be delivered to the holder of the Series B Preferred Stock no later than
five (5) business days after the end of each period for which dividends are
payable. Dividends on the Series B Preferred Stock will be made in additional
shares of Series B Preferred Stock, valued at the Series B Preferred Stock
stated value. Notwithstanding the foregoing, during the first three-years
following the initial closing, upon the approval of the holders of a majority of
the Series B Preferred Stock, including the lead investor, NJTC Venture Fund, if
it then owns 25% of the shares of Series B Preferred Stock initially purchased
by it, we may pay dividends in cash instead of additional shares of Series B
Preferred Stock, and after such three-year period, the holders of a majority of
the Series B Preferred Stock, including NJTC if it then owns the 25% of the
shares of the Series B Preferred Stock initially purchased by it, may require us
to make such payments in cash.
Liquidation
In the
event of the Company’s dissolution, liquidation or winding up, the holders of
the Series B Preferred Stock will receive, in priority over the holders of
Series A Preferred Stock and Common Stock, a liquidation preference equal to the
stated value of such shares plus accrued dividends on the shares.
Voting Rights; Board
Rights
Holders
of Series B Preferred Stock have the right to vote on matters submitted to the
holders of Common Stock on an as converted basis. However, the consent of the
holders of at least a majority of the shares of the Series B Preferred Stock as
a separate class, including NJTC if it is then a holders of at least 25% of the
shares of Series B Preferred Stock purchased by it on the Initial Closing Date,
shall be required on matters related to the rights of the Series B Preferred
Stock.
In
addition, so long as NJTC holds 25% of the Series B Preferred Stock it purchased
before the initial closing, NJTC is entitled to elect (i) two directors to our
Board of Directors, which shall consist of six members, and (ii) two members to
our compensation committee, which shall consist of no less than three
members. Within the first twelve (12) months following the Initial
Closing, the Company must reduce the Board of Directors to five (5)
members.
Moreover,
so long as Cahn Medical Technologies, LLC is the holder of at least 25% of the
shares of the Series B Preferred Stock purchased by it on the initial closing
date, it has the right to have its designee receive notices of, and attend as an
observer, all meetings of our Board of Directors.
Registration
Rights
We filed
a registration statement under the Securities Act covering the Common Stock
issuable upon conversion of the Series B Preferred Stock on December 12,
2008. On May 7, 2010, we filed a Registration Withdrawal Request,
requesting that the December 12, 2008 Form S-1 registration statement be
withdrawn. We withdrew the original registration statement as a result of the
amount of time which had lapsed since the original issuance date of the shares
related to the December 12, 2008 registration statement. Since the shares were
issued to affiliates of the company and were held for more than six months, the
shares were no longer restricted under Rule 144(b)(1)(i) of the Securities Act.
Thus, any continuing efforts aimed at the original December 12, 2008
registration statement became futile. Pursuant to the terms of the Registration
Rights Agreement, we were required to cause the Registration Statement to become
effective within 240 days of such closing. Since it was determined that ceasing
efforts aimed at registering the Series B common stock shares was in the best
interests of the Company, we received a waiver from a majority of the Series B
holders for the non-registration event . Pursuant to the waiver, the
Majority series B Holders waive any liabilities, and penalties, that result from
any default arising from or in connection with the occurrence of a
Non-Registration Event as provided in Section 11.4 of the Series B Subscription
Agreement.
Redemption
Rights
Following
the fifth anniversary of the initial closing, the holders of a majority of the
Series B Preferred Stock, including NJTC, if it then holds 25% of the shares of
Series B Preferred Stock initially purchased by it, may elect to require us to
redeem all, but not less than all, of their shares of Series B Preferred Stock
at the original purchase price for such shares plus all accrued and unpaid
dividends whether or not declared, if the market price of our Common Stock is
then below the conversion price of the Series B Preferred Stock.
Dilution and
Subordination
As one of
the conditions to the closing of the Series B financing with an initial closing
on June 25, 2008, we entered into an Agreement and Consent as of the same date
with the holders of more than 80% of our Series A Preferred Stock, par value
0.001 per share and the holders of more than 80% of the outstanding common stock
purchase warrants issued to the purchasers of our Series A Preferred Stock (the
“Class A
Warrant”). Pursuant to the Agreement and Consent, our holders of the
Series A Preferred Stock consented to the permanent waiver of the anti-dilution
protection previously provided to the holders of the Series A Preferred Stock
and the holders of the Class A Warrant.
In
connection with such Agreement and Consent, the conversion price with respect to
the June 30, 2006 purchasers of Series A Preferred Stock held by the Holders was
reduced effective June 25, 2008, the initial closing of the Series B Financing
according to the Schedule A to the Agreement and Consent as set forth below. In
the event that within the 60-day period following the Initial Closing, at
additional closings, the Company issued additional shares of Series B Preferred
Stock so that the aggregate gross proceeds that were raised on the Initial
Closing and such additional closings (excluding the principal amount of our
outstanding debt converted into the Series B Preferred Stock) from the holders
of the Series A Preferred Stock or their affiliates, is $1,500,000 or more, the
conversion price with respect to the Series A Preferred Stock held by these
holders was agreed to be further reduced in accordance with Schedule A to the
Agreement and Consent as set forth below. Based on the total amount raised and
in accordance with our investor agreements, MedaSorb’s Series B Preferred Stock
private placement was considered a “Qualified” closing.
In
addition, June 30, 2006 purchasers of the Series A Preferred Stock also agreed
the conversion price with respect to the Class A Warrant shall be reduced
effectively on the initial closing. Pursuant to our agreement for a Qualified
closing, Conversion pricing and warrant exercise pricing was further reduced as
disclosed in the following chart.
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06/30/06 Purchasers of
Series A Preferred Stock
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Initial Closing (06/25/08)
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Qualified Closing (08/25/08)
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Preferred Stock
Conversion Price
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Warrant
Exercise Price
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Preferred Stock
Conversion Price
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Warrant
Exercise Price
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Alpha
Capital Aktiengesellschaft
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$
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0.26
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|
$
|
0.52
|
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$
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0.20
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$
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0.40
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Longview
Fund, LP
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$
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1.25
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$
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2.00
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$
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0.45
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$
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0.90
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Platinum
Partners Long Term Growth III LLC
|
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$
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1.25
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$
|
2.00
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$
|
0.10
|
|
|
$
|
0.40
|
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|
Ellis
International Ltd.
|
|
$
|
0.26
|
|
|
$
|
0.52
|
|
|
$
|
0.20
|
|
|
$
|
0.40
|
|
|
Margie
Chassman
|
|
$
|
1.25
|
|
|
$
|
2.00
|
|
|
$
|
0.10
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|
|
$
|
0.40
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We are a
therapeutic 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. The Company is currently
focusing our efforts on obtaining regulatory approval in Europe before
proceeding with the FDA.
Research
and Development
We have
been engaged in research and development since inception. Our research and
development costs were approximately $1,962,000 and $1,983,000 for the years
ended December 31, 2009 and 2008, 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 cartridge containing adsorbent
polymer beads, although the polymers used in the two devices are physically
different. The cartridges 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 dialyzer, 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
Sepsis is
characterized by a systemic inflammatory response in response to severe
infection or trauma. There are generally three categories of sepsis,
including mild to moderate sepsis, severe sepsis and septic shock. Mild to
moderate sepsis typically occurs with an infection that is responsive to
antibiotics or antiviral medication. An example is a patient with
self-limiting influenza or a treatable community acquired pneumonia.
Mortality is generally very low. Severe sepsis is sepsis with evidence of
organ dysfunction. An example is a patient who develops respiratory
failure due to a severe pneumonia and requires mechanical ventilation in the
intensive care unit. Severe sepsis has a mortality rate of approximately
30-35%. Septic shock, or severe sepsis with low blood pressure that is not
responsive to fluid resuscitation, is the most serious form of sepsis with an
expected mortality in excess of 50%.
In
sepsis, the body produces large amounts of inflammatory mediators called
cytokines in response to infection. In severe infection, many people
suffer from a massive, unregulated overproduction of cytokines, often termed
“cytokine storm” that can kill cells and damage organs, leading to multi-organ
failure and in many cases death. CytoSorb™ is an investigational device
designed to act as a broad spectrum cytokine filter. It is intended to
play a critical role in treating patients with severe sepsis or septic shock by
reducing cytokine storm, while antibiotics work to control the actual
infection. CytoSorb is currently being evaluated in patients with acute
respiratory distress syndrome or acute lung injury in the setting of sepsis in a
100 patient randomized, controlled clinical trial in Europe.
In the
United States alone, there are more than one million new cases of severe sepsis
and septic shock annually. Based on the reported incidence in a number of
developed countries, the worldwide incidence is estimated to be 18 million cases
per year. . The Company estimates that the market potential in Europe for
its products is substantially equivalent to that in the U.S.
Severe
sepsis and septic shock patients are amongst the most expensive patients to
treat in a hospital. Because of this, we believe that efficacy rather than
cost will be the determining factor in the adoption of CytoSorb™ in the
treatment of sepsis. Based on the limited number of available treatments for
this disease, and based on current pricing of charcoal hemoperfusion devices in
the market today, we estimate that our CytoSorb™ device will sell for at least
$500 per unit. Our current pricing model represents a fraction of what is
currently spent on the treatment of a sepsis patient.
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 high amounts 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 more than
340,000 patients in the United States currently receiving chronic dialysis and
more than 1.5 million worldwide. Approximately 66% of patients with chronic
kidney disease are treated with hemodialysis.
One of
the problems with standard high-flux dialysis is the limited ability to remove
certain mid-molecular weight toxins such as B2-microglobulin.
Over time, B2-microglobulin
can accumulate and cause amyloidosis in joints and elsewhere in the
musculoskeletal system, leading to pain and disability.
Our
BetaSorb™ device has been designed to remove these mid-molecular weight toxins
when used 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.
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 100,000 individuals on transplant waiting
lists in the United States. Cytokine storm is common in these organ
donors, resulting in reduced viability of potential donor organs. The
potential use of CytoSorb™ hemoperfusion to control cytokine storm in brain dead
organ donors could increase the number of viable organs harvested from the donor
pool and improve the survival of transplanted organs. A
proof-of-concept pilot study using the Company’s technology in human brain dead
donors has been published.
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 are currently enrolling patients in a European Sepsis
Trial to evaluate our CytoSorb™ device. The study is a randomized, open
label, controlled clinical study in fourteen (14) sites in Germany of up to one
hundred (100) patients with acute respiratory distress syndrome or acute lung
injury in the setting of sepsis. If these studies are successful, we obtain
European regulatory approval, and given sufficient and timely financial
resources, we intend to commercialize in Europe. 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
a potentially life threatening disease defined as a systemic inflammatory
response in the presence of a known or suspected infection. Sepsis is
mediated 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. Severe sepsis (sepsis with
organ dysfunction) and septic shock (severe sepsis with persistent hypotension
despite fluid resuscitation) carries mortality rates of between 28% and 80%.
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; and
based on the reported incidence in a number of developed countries, the
worldwide incidence is estimated to be 18 million cases annually. The incidence
of sepsis is also rising due to:
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Increased incidence of antibiotic
resistance
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Increase in co-morbid conditions
like cancer and diabetes
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Increased use of indwelling
medical devices that are susceptible to
infection
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In the
U.S. alone, treatment of sepsis costs nearly $18 billion annually. According to
the Centers for Disease Control, sepsis is a top ten cause of death in the
U.S. The incidence of sepsis is believed to be under-reported as the
primary infection (i.e. pneumonia, pyelonephritis, etc.) is often cited as the
cause of death.
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 biologic, 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 in the U.S.
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 many 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 significant quantities of 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 four 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 more
extensive sepsis study.
We are
currently approved by the German Ethics Committee to conduct a clinical study of
up to 100 patients with acute respiratory distress syndrome or acute lung injury
in the setting of sepsis. By December 31, 2009 we had initiated and opened for
enrollment a total of fourteen (14) hospital units to participate in our
clinical study.
In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, to include a provision for
testing of our targeted endpoints in plasma instead of serum, and to increase
the total number of patients that may be enrolled from 80 to 100 patients.
This revision has been approved by the German Ethics Committee. We believe that
the revised protocol will enable more potential sites to participate in the
study, and may help accelerate patient enrollment through greater access to
potential candidates.
Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
To date
we have enrolled sixty-six (66) patients in the clinical study. We may enroll up
to an additional thirty-four (34) patients. In conducting the
German Clinical study we have utilized our CytoSorb™ device in approximately 200
treatments to date with no Serious Adverse Events attributable to the
device.
Depending
on the pace of patient recruitment, we anticipate completion of our patient
enrollment in the second half of 2010 to the first quarter of 2011.
Concurrent with the clinical study, we have commenced our preparation for the CE
Mark submission process. If these studies are successful, we obtain CE Mark
approval, and given sufficient and timely financial resources, management
intends to commercialize in Europe.
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:
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improving the viability of organs
which can be harvested from brain-dead organ donors,
and
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increasing the likelihood of
organ survival following
transplant.
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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 100,000 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, would 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. We are
not currently focusing our efforts on the commercialization of CytoSorb™ for
application in organ donors. The treatment phase would 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:
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reduce ventilator and oxygen
therapy requirements;
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reduce incidence of multi-organ
failure in the peri- and post-operative
periods
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reduce length of stay in hospital
intensive care units; and
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reduce the total cost of patient
care.
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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
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improve and maintain the general
health of dialysis patients;
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improve the quality of life of
these patients
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reduce the total cost of patient
care; and
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increase life
expectancy.
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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
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. We are not currently focusing our
efforts on the commercialization of CytoSorb™ for application in organ donors.
The treatment phase would 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 each of 2006 and 2007, we
received approximately $102,000 for our efforts in support of the grant.
Additionally for 2008 and 2009 we received an approximate $59,000 and $80,000,
respectively for our supporting efforts. We continue to supply UPMC with new
samples based on our adsorbent polymer technology under the same terms as the
initial SubAward Agreement, and expect to do so for the duration of the study.
UPMC has indicated to us that the amount budgeted for our participation under
the study is approximately $65,000, for the final grant period ending September
2010. The amount is 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.
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 the Chairman of our Severe Sepsis and
Inflammatory Disease 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 three scientists with expertise in the
fields of fundamental chemical research, and polymer research and
development.
Our
Medical Advisory Board for Severe Sepsis / Inflammatory Disease consists of five
medical doctors, one of whom is affiliated with UPMC, with expertise in critical
care medicine, sepsis, multi-organ failure and related clinical study
design.
Our
Medical Advisory Board for 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
$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 is country dependent in Europe. Once CE
Mark approval is obtained for the CytoSorb™ device, we plan to market the device
initially in Germany where CytoSorb reimbursement is anticipated to fall under
the “diagnosis related group” (DRG) acute care reimbursement. Under this system,
hospitals would purchase CytoSorb and subtract the cost from a pre-determined
lump-sum payment made by the payor to the hospital based on the patient’s
diagnosis. No specific reimbursement code would be required for the CytoSorb
device. If we are able to successfully introduce the CytoSorb™ device into the
German market we intend to apply for reimbursement in France, Italy
and Spain representing the four economic leaders in Europe and introduce our
products in those countries accordingly. Reimbursement is specific to each
country. There can be no assurances that reimbursement will be granted or that
additional clinical data may not be required to establish
reimbursement.
United
States
As in
Germany, payment for our CytoSorb™ device in the US for the treatment and
prevention of sepsis and other related acute care applications is anticipated to
fall under the DRG in-patient reimbursement system, which is currently the
predominant basis of hospital medical billing for acute care medicine 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 treatments, 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 successfully tested
at the University of Pittsburgh using septic rat models with our CytoSorb™
polymer, which were based on lipopolysaccharide (a particular kind of toxin,
known as a bacterial endotoxin) and cecal ligation puncture.
Both the
CytoSorb™ and BetaSorb™ devices consist of a cartridge containing adsorbent
polymer beads. The cartridge 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 cartridge, 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 dialyzer. 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
treat sepsis by the removal of 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 an average absolute 6% reduction in 28-day mortality, and an
absolute 13% reduction in 28-day mortality in the most severe sepsis patients.
The drug remains controversial due to potentially dangerous adverse events and
questions of efficacy and is considered expensive when compared to the
percentage of patients who benefit.
Pharmaceutical
research for the treatment of sepsis continues with a number of clinical stage
drug trials being presently conducted including, but not limited to, drug and
biologic candidates from Eisai, AM-Pharma B.V., Agennix AG and BTG plc.
Using a medical device to treat sepsis remains a relatively novel approach for
the treatment of sepsis. There are a number of companies that claim enabling
blood purification technology for the treatment of sepsis. Toray
Industries currently markets an endotoxin removal cartridge called Toraymyxin™
for the treatment of sepsis in Europe and Japan. To date, it has been used
to treat more than 70,000 patients since 1994. However, the ability of
Toraymyxin to remove cytokines, the key mediators of sepsis, has not been well
documented. Spectral Diagnostics, Inc has obtained exclusive development
and commercial rights in the U.S. for Toraymyxin, with plans to combine the use
of its endotoxin activity assay to create a theranostic product. In March
2010, Spectral announced plans to conduct a U.S. pivotal study to diagnose
endotoxemia and treat sepsis with this theranostic product. Toraymyxin has not
yet been approved for use in the U.S. Kaneka Corporation currently markets
Lixelle™, a modified porous cellulosic bead, for the removal of beta2–microglobulin
during hemodialysis in Japan. Lixelle has been used in several small human
pilot studies including a 5 patient pilot study in 2002 and a 4 patient pilot
study in 2009. Though these studies correlate Lixelle use with cytokine
reduction, they are not randomized, controlled studies and so do not control for
natural cytokine clearance. To our knowledge, no large, randomized,
controlled trials have been conducted with Lixelle as a treatment for
sepsis. Kaneka has since developed a modified cellulosic resin called CTR
that can also remove cytokines from experimental pre-clinical systems. To
our knowledge, Kaneka has not conducted or published any study using CTR to
treat human sepsis patients. Ube Industries, LTD is currently developing
an adsorbent resin called CF-X for the removal of cytokines. To our
knowledge, Ube has not published any study using CF-X to treat human sepsis
patients. Other potential competitors include the now defunct Arbios
Systems, Inc. Hemolife Medical, Inc. and Hemocleanse Technologies, LLC. We
believe our CytoSorb™ cartridge has significant competitive, technological, and
economic advantages over systems by these other companies.
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 and cytokine production still remain a problem in this
less invasive, but more technically challenging 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.
High flux dialyzers by Gambro, Fresenius, Nephros and others are capable of
removing some beta2-microglobulin.
However, we believe our technology would significantly improve clearance of this
and other toxins. Kaneka markets Lixelle™ outside the US to remove
beta2-microglobulin
in dialysis patients. 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 modest 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 is less
widely used. In addition, many larger toxins are not effectively filtered by
hemodiafiltration, despite its more open pore structure. As a result,
hemodiafiltration is expected to be less efficient in large toxin removal
compared with the BetaSorb™ device. In terms of resin technology, Kaneka
Corporation is the only company currently marketing a resin cartridge (Lixelle)
in Japan designed to address this need.
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 generally 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 the development of the critical care applications on
which we are now focusing our efforts.
The
Company is focusing its research efforts on critical care applications of it
technology. We are currently enrolling patients in a European Sepsis
clinical 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.
In April
2009, we submitted a protocol revision to expand the options for
anti-coagulation that the clinical sites may use, and to increase the total
number of patients that may be enrolled from 80 to 100 patients. This
revision has been approved by the German Ethics Committee. We believe that the
revised protocol will enable more potential sites to participate in the study,
and may help accelerate patient enrollment through greater access to potential
candidates.
Additionally,
we have updated blood sampling and handling procedures to minimize non-device
related artifacts that may potentially arise if the samples are not processed
appropriately.
By
December 31, 2009 we had initiated and opened for enrollment a total of fourteen
(14) hospital units to participate in our clinical study. To date we have
enrolled sixty-six (66) patients in the clinical study. We may enroll up to an
additional thirty-four (34) additional patients. In conducting the German
Clinical study we have utilized our CytoSorb™ device in approximately 200
treatments to date with no Serious Adverse Events attributable to the
device.
Depending
on the rate of enrollment, we expect to complete the patient enrollment in the
second half of 2010 to the first quarter of 2011. Concurrent with the clinical
study, we have commenced our preparation for the CE Mark submission process.
Assuming availability of adequate and timely funding, a successful outcome of
the study, and CE Mark regulatory approval, the Company intends to commercialize
its product in Europe.
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.
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. We are not currently focusing our efforts on
the commercialization of CytoSorb™ for application in organ donors. The
treatment phase would 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 each of 2006 and 2007, we
received approximately $102,000 for our efforts in support of the grant.
Additionally for 2008 and 2009 we received an approximate $59,000 and $80,000,
respectively for our supporting efforts. We continue to supply UPMC with new
samples based on our adsorbent polymer technology under the same terms as the
initial SubAward Agreement, and expect to do so for the duration of the study.
UPMC has indicated to us that the amount budgeted for our participation under
the study is approximately $65,000, for the final grant period ending September
2010. The amount is 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
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.
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 that
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) 510(k) devices, but may require
pre-market approval (PMA) by the FDA. In Europe, our devices are
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.
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, that our products perform as expected in
clinical studies, and that we obtain CE Mark approval of our CytoSorb™ device in
the treatment of sepsis, that we will commercialize in Europe. We plan to
initiate sales in several European countries, which are known as early adopters
of new medical device technology. These countries primarily include German,
Italy, France, and Spain. 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 27 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.
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, 2009, we had seven 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.
DESCRIPTION
OF PROPERTY
We
operate a 6,575 sq. ft. facility near Princeton, New Jersey, housing research
laboratories, clinical manufacturing operations and administrative offices. 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. Our principal place of
business is at 7 Deer Park Drive, Suite K, Monmouth Junction, New Jersey
08852.
DESCRIPTION
OF LEGAL PROCEEDINGS
We are
currently not involved, but may at times be involved in various claims and legal
actions. Management is currently of the opinion that these claims and legal
actions would have no merit, and any ultimate outcome will not have a
material adverse impact on the consolidated financial position of the Company
and/or the results of its operations.
In
February 2008, Alkermes, Inc. commenced an action against us in the United
States District Court for the District of Massachusetts, alleging that our use
of the name MedaSorb infringes on Alkermes’ registered trademark “MEDISORB.” In
the action, Alkermes sought an injunction against our further use of the name
MedaSorb. Pursuant to a Settlement Agreement dated June 18, 2008, to avoid
any potential confusion with Alkermes’ similarly named product, the Company has
ceased using the “MedaSorb” name in its wholly-owned subsidiary, through which
the Company conducts all of its operational activities, and renamed our
operating subsidiary CytoSorbents, Inc. as of November 2008. In May 2010
the Company has finalized the change of the parent company name from MedaSorb
Technologies Corporation to CytoSorbents Corporation.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock began trading on the OTCBB on August 9, 2006 under the symbol
“MSBT”. It currently trades under the symbol “CTSO.” 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
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High
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Low
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2008
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First
quarter
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$
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0.32
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$
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0.15
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Second
quarter
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$
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0.23
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$
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0.10
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Third
quarter
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$
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0.20
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$
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0.07
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Fourth
quarter
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$
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0.17
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$
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0.03
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2009
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First
quarter
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$
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0.21
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$
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0.08
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Second
quarter
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$
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0.16
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$
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0.05
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Third
quarter
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$
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0.20
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$
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0.04
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Fourth
quarter
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$
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0.44
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$
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0.13
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2010
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First
quarter
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$
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0.30
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0.14
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The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require: (i)
that a broker or dealer approve a person’s account for transactions in penny
stocks and (ii) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person’s account for
transactions in penny stocks, the broker or dealer must (i) obtain financial
information and investment experience and objectives of the person;
and (ii) make a reasonable determination that the transactions in penny stocks
are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which, in highlight form, (i)
sets forth the basis on which the broker or dealer made the suitability
determination and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stocks in both public offerings and
in secondary trading, and about commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
The
number of holders of record for our Common Stock as of May 28, 2010 was
approximately 330. This number excludes individual stockholders holding stock
under nominee security position listings.
Dividends
We have
not paid any cash dividends on our Common Stock and do not anticipate declaring
or paying any cash dividends in the foreseeable future.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
These
unaudited condensed consolidated financial statements and management’s
discussion should be read in conjunction with the audited financial statements
of the Company and the notes thereto as of and for the year ended December 31,
2009 as included in the Company’s Form 10-K filed with the Securities and
Exchange Commission (the “Commission”) on April 9, 2010.
Plan
of Operations
We are a
development stage company and expect to remain so for at least the next several
quarters. 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.
The first indication for CytoSorb™ will be in the adjunctive treatment of sepsis
(bacterial infection of the blood), which causes systemic inflammatory response
syndrome. CytoSorb™ has been designed to prevent or reduce the accumulation of
high concentrations 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, 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
December 2006, we submitted a proposed pilot study for approval to the FDA with
respect to our CytoSorb™ device. In the first quarter of 2007, we received FDA
approval of our IDE application 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 as the introductory
market for our CytoSorb™ product. 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.
We are
currently approved by the German Ethics Committee to conduct a clinical study of
up to 100 patients with acute respiratory distress syndrome or acute lung injury
in the setting of sepsis. The primary endpoint of our clinical trial is
cytokine reduction and is the basis of a planned CE Mark application to approve
our device for clinical use in Europe.
After
reviewing the initial cytokine data from the first 22 patients enrolled in our
original protocol, our medical advisors recommended revisions to our protocol to
minimize non-device related artifacts that may potentially arise if the samples
are not processed or handled appropriately. The revisions to the protocol
also include a provision for testing of our targeted endpoints in plasma instead
of serum, changes in cytokine processing and analysis, additional options for
anti-coagulation that the clinical sites may use, and an increase in the number
of patients we may enroll into the study from 80 to 100.
These
changes are intended to optimize the accuracy of our cytokine data for CE Mark
submission. The proposed protocol changes and rationale for change were
submitted to the German Ethics Committee and approved. Given these
changes, cytokine data will not be statistically comparable between these first
22 patients and those enrolled subsequently in the study. While the
company will continue to review all patient data in the aggregate, including
secondary and exploratory endpoints, the primary use of the data from the first
22 patients will be used to support the planned CE Mark application from a
safety perspective. Cytokine data from all patients enrolled
subsequent to these first 22 patients, as well as safety data on all patients
enrolled in the study, will be used for submission to the CE Mark
authority.
While we
are currently observing an improvement in our enrollment rate, to date patient
enrollment has been slower than originally anticipated. The Company
has taken a number of steps to improve recruitment, the most significant of
which is the increase in the number of our clinical trial sites. With more
sites actively seeking to enroll patients, we expect the patient enrollment rate
to continue to increase going forward.
By
December 31, 2009 we had initiated and opened for enrollment a total of fourteen
(14) hospital units to participate in our clinical study. To date the
Company has enrolled sixty six (66) patients in the clinical study.
We may enroll up to an additional thirty four (34) patients. In
conducting the German Clinical study we have utilized our CytoSorb™ device in
approximately 200 treatments to date with no Serious Adverse Events attributable
to the device.
Depending
on the rate of enrollment, we expect to complete the patient enrollment between
the second half of 2010 to the first quarter of 2011. Concurrent with the
clinical study, we have commenced our preparation for the CE Mark submission
process. Assuming availability of adequate and timely funding, a successful
outcome of the study, and CE Mark regulatory approval, the Company intends to
commercialize its product in Europe.
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 510(k) 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.
Results of
Operations
For the
three months ended March 31, 2010 and 2009
Our
research and development costs were, $681,215 and $488,555, for the three months
ended March 31, 2010 and 2009 respectively. We have experienced substantial
operating losses since inception. As of March 31, 2010, we had an accumulated
deficit of $80,652,936, which included losses of $969,051 for the three month
period ended March 31, 2010. In comparison, we had losses of $760,151 for the
three month period ended March 31, 2009. 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
$894,845 and $716,889 for the three month periods ended March 31, 2010 and 2009,
respectively.
For the
years ended December 31, 2009 and 2008
Our
research and development costs were $1,961,960 and $1,983,483 for the years
ended December 31, 2009 and 2008, respectively. We have experienced substantial
operating losses since inception. As of December 31, 2009, we had an accumulated
deficit of $78,902,521, which included net losses of $2,736,715 and $3,017,890
for the years ended December 31, 2009 and December 31, 2008 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 $2,719,410 and $2,892,855 for the
years ended December 31, 2009 and December 31, 2008 respectively. Legal,
financial, and other consulting costs were $307,952 and $351,357 for the years
ended December 31, 2009 and 2008, respectively.
Interest
(income) expense, net, in the amounts of $8,142 and $22,207 include interest and
dividend income in the amounts of $10,484 and $25,162 for the years ended
December 31, 2009 and 2008, respectively.
Liquidity and Capital
Resources
Since
inception, our operations have been financed through the private placement of
our debt and equity securities. At December 31, 2009 we had cash of $1,595,628.
As of March 31, 2010 we had cash on hand of $1,346,301, and current liabilities
of $1,320,771.
We
believe that we have sufficient cash to fund our operations into the third
quarter of 2010, following which we will need additional funding before we can
complete our clinical studies and commercialize our products. Assuming we
are successful in receiving SEC approval for this registration statement, we
believe that we will be able to receive ongoing funding per the terms of this
purchase agreement. The agreement with LPC has the potential to significantly
extend the time that we may be able to fund our operations. However, we
cannot sell any shares of our common stock to LPC in the event that the
price is below $0.10. As of May 28, 2010, the market price of our stock
was $0.07. Accordingly we cannot sell any shares of our common stock to
LPC until the price is again at or above $0.10. We will continue to seek
funding for the long term needs of the Company. 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 and development programs or product launches or marketing efforts or
cease operations.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no changes in or disagreements with our accountants on accounting or
financial disclosure matters.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth our directors and executive officers, their ages and
the positions they hold:
|
Name
|
|
Age
|
|
Position
|
|
Phillip
Chan, MD, Ph.D
|
|
40
|
|
President
and Chief Executive Officer, Director
|
|
Al
Kraus
|
|
65
|
|
Chairman
of the Board
|
|
Joseph
Rubin, Esq.
|
|
71
|
|
Director
|
|
Edward
R. Jones, MD, MBA
|
|
61
|
|
Director
|
|
James
Gunton
|
|
43
|
|
Director
|
|
David
Lamadrid
|
|
39
|
|
Chief
Financial Officer
|
|
Vincent
Capponi
|
|
52
|
|
Chief
Operating Officer
|
|
Robert
Bartlett
|
|
70
|
|
Chief
Medical
Officer
|
Phillip Chan, MD,
PhD. Dr. Chan
became a director of CytoSorbents in 2008 and since January 2009 is also Chief
Executive Officer. Prior to CytoSorbents, Dr. Chan led healthcare and life
science investments as Partner for the NJTC Venture Fund. Dr. Chan
co-founded Andrew Technologies, a medical device company developing novel
surgical instruments for plastic surgery and continues as a Board Director. He
is a Board-certified Internal Medicine physician with a strong background in
clinical medicine and research. Dr. Chan received his MD and PhD from the Yale
University School of Medicine and completed his Internal Medicine residency at
Beth Israel Deaconess Medical Center at Harvard. He also holds a BS in cell and
molecular biology from Cornell University.
Al Kraus.
Mr. Kraus has been a director of CytoSorbents since 2003 and up until the
end of 2008 was the Company’s President and CEO. Mr. Kraus currently
serves as Chairman of the Board of Directors. Mr. Kraus has more than
twenty-five years’ experience managing companies in the dialysis, medical device
products, personal computer and custom software industries. 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.
Joseph Rubin,
Esq. Mr.
Rubin became a director of CytoSorbents in 1997. Mr. Rubin is a founder and
Senior Partner of, Rubin & Bailin, LLP an international and domestic
corporate and commercial law firm in New York City, where he has practiced law
since 1986. Mr. Rubin also taught at the Columbia University School of
International and Public Affairs, where he was 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.
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 is also the President of the Renal Physicians
Association.
James Gunton. Mr. Gunton
became a director of CytoSorbents in 2008. He is a cofounder of the NJTC Venture
Fund. Mr. Gunton has been investing in privately-held growth technology
companies for fifteen years. Before co-founding in 2001 the $80 million NJTC
Venture Fund, Jim was a manager at Oracle Corporation in the Silicon Valley. He
represents NJTC Venture Fund at nine portfolio companies and is a former
Governor of the National Association of Small Business Investment Companies. Jim
earned a BS from Stanford University and an MBA with distinction from Duke
University.
David
Lamadrid. Mr. Lamadrid joined CytoSorbents as Vice President of
Finance in 2000 and has served as its Chief Financial Officer since October
2002. He has over 17 years of business experience in finance and operations.
Prior to joining CytoSorbents 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.
Vincent
Capponi. Mr. Capponi joined CytoSorbents 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.
Robert Bartlett,
MD. Dr. Bartlett became our Chief Medical Officer in January
2009. He is Professor Emeritus of Surgery at the University of Michigan
Health System. Prior to becoming Professor Emeritus in 2005, Dr. Bartlett
was Director of the Surgical Intensive Care Unit, Chief of the Trauma/Clinical
Care Division and Director of the Extracorporeal Life Support Program at the
University of Michigan Medical Center. Dr. Bartlett was the pioneer in the
development of the extracorporeal membrane oxygenation machine (ECMO), used to
oxygenate blood in critically ill patients worldwide. He received his MD
from the University of Michigan Medical School, cum laude. He completed
his general surgery residency at Peter Bent Brigham Hospital in Boston, and was
Chief resident in thoracic surgery. Dr. Bartlett was also a NIH Trainee in
Academic Surgery at Harvard Medical School, and was previously faculty at the
University of California, Irvine. Dr. Bartlett is the recipient of 26
separate research grants, 14 from the National Institute of Health, including an
RO1 grant for the development of a totally artificial lung. He has also
received numerous national and international awards for his contributions to
critical care medicine.
Audit
Committee Financial Expert
We do not
have an Audit Committee, and therefore do not have an “audit committee financial
expert.”
EXECUTIVE
COMPENSATION
The
following table shows for the fiscal year ended December 31, 2009, 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 ($)
|
|
|
Phillip
Chan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer
|
|
2009
|
|
|
216,351
|
|
|
|
-0-
|
|
|
|
12,971
|
(2)
|
|
|
229,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vincent
Capponi,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
2009
|
|
|
205,303
|
|
|
|
200
|
|
|
|
510
|
(3)
|
|
|
206,013
|
|
|
|
|
2008
|
|
|
195,527
|
|
|
|
150
|
|
|
|
155,795
|
(4)
|
|
|
351,472
|
|
|
|
|
2007
|
|
|
195,527
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
195,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Lamadrid,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
2009
|
|
|
189,992
|
(9)
|
|
|
200
|
|
|
|
510
|
(5)
|
|
|
190,702
|
|
|
|
|
2008
|
|
|
157,630
|
|
|
|
150
|
|
|
|
196,555
|
(6)
|
|
|
354,335
|
|
|
|
|
2007
|
|
|
145,801
|
|
|
|
-0-
|
|
|
|
137,781
|
(7)
|
|
|
283,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Robert Bartlett
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Medical Officer
|
|
2009
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
73
|
(8)
|
|
|
50,073
|
|
|
|
(1)
|
The value of option awards
granted to the Named Executive Officers has been estimated pursuant to
recognition requirements of accounting standards for accounting for
stock-based compensation 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,
2009.
|
|
|
(2)
|
Reflects options to purchase
2,503,858 shares of Common Stock at an exercise price of $0.084 per share,
which were granted on January 8, 2009 and expire on January 8, 2019. This
option vested and became exercisable as to 1,251,929 shares on the date of
grant, and vested and became exercisable as to 1,251,929 shares on January
8, 2010.
|
|
|
(3)
|
Reflects options to purchase
400,000 shares of Common Stock at an exercise price of $0.168 per share,
which were granted on January 28, 2009 and expire on January 28, 2019.
This option vested and became exercisable as to 100,000 shares on the date
of grant, vested and became exercisable as to 100,000 shares on January
28, 2010, vests and becomes exercisable as to 100,000 shares on January
28, 2011, and vests and becomes exercisable as to 100,000 shares on
January 28, 2012.
|
|
|
(4)
|
Reflects options to purchase
1,100,000 shares of Common Stock at an exercise price of $0.25 per share,
which were granted on January 16, 2008 and expire on January 16, 2018.
This option vested and became exercisable as to 366,666 shares on the date
of grant, vested and became exercisable as to 366,667 shares on January
16, 2009; and vested and became exercisable as to 366,667 shares on
January 16, 2010. Reflects options to purchase 2,250,000 shares of
Common Stock at an exercise price of $0.035 per share, which were granted
on June 25, 2008 and expire on June 25, 2018. This option vested and
became exercisable as to 562,500 shares on the date of grant, vested and
became exercisable as to 562,500 shares on June 25, 2009, vests and
becomes exercisable as to 562,500 shares on June 25, 2010, and vests and
becomes exercisable as to 562,500 shares on June 25,
2011.
|
|
|
(5)
|
Reflects options to purchase
400,000 shares of Common Stock at an exercise price of $0.168 per share,
which were granted on January 28, 2009 and expire on January 28, 2019.
This option vested and became exercisable as to 100,000 shares on the date
of grant, vested and became exercisable as to 100,000 shares on January
28, 2010, vests and becomes exercisable as to 100,000 shares on January
28, 2011, and vests and becomes exercisable as to 100,000 shares on
January 28, 2012.
|
|
|
(6)
|
Reflects options to purchase
1,400,000 shares of Common Stock at an exercise price of $0.25 per share,
which were granted on January 16, 2008 and expire on January 16, 2018.
This option vested and became exercisable as to 466,667 shares on the date
of grant, vested and became exercisable as to 466,667 shares on January
16, 2009; and vested and became exercisable as to 466,666 shares on
January 16, 2010. Reflects options to purchase 2,750,000 shares of
Common Stock at an exercise price of $0.035 per share, which were granted
on June 25, 2008 and expire on June 25, 2018. This option vested and
became exercisable as to 687,500 shares on the date of grant, vested and
became exercisable as to 687,500 shares on June 25, 2009, vests and
becomes exercisable as to 687,500 shares on June 25, 2010, and vests and
becomes exercisable as to 687,500 shares on June 25,
2011.
|
|
|
(7)
|
Reflects options to purchase
150,000 shares of Common Stock at an exercise price of $1.90 per share,
which were granted on January 16, 2007 and expire on January 16, 2017.
This option vested and became exercisable as to 50,000 shares on the date
of grant, vested and became exercisable as to 50,000 shares on January 16,
2008; and vested and became exercisable as to 50,000 shares on January 16,
2009.
|
|
|
(8)
|
Reflects options to purchase
50,000 shares of Common Stock at an exercise price of $0.084 per share,
which were granted on January 8, 2009 and expire on January 8, 2014. This
option vested and became exercisable as to 12,500 shares on January 8,
2010, vests and becomes exercisable as to 12,500 shares on January 8,
2011; vests and becomes exercisable as to 12,500 shares on January 8,
2012, and vests and becomes exercisable as to 12,500 shares on January 8,
2013.
|
|
|
(9)
|
Amount includes payments in the
approximate amount of $14,992 for certain other expenses pursuant to an
employment agreement.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table shows for the fiscal year ended December 31, 2009, certain
information regarding outstanding equity awards at fiscal year end for the Named
Executive Officers.
Outstanding
Equity Awards At December 31, 2009
|
|
|
Option Awards
|
|
|
Name
|
|
Number of
Securities Underlying
Unexercised Options
(#)
Exercisable
|
|
|
Number of Securities
Underlying Unexercised
Options
(#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration Date
|
|
|
Phillip
Chan
|
|
|
15,000
|
|
|
|
|
|
|
0.08
|
(1)
|
12/31/18
|
|
|
|
|
|
1,251,929
|
|
|
|
1,251,929
|
|
|
|
0.084
|
(2)
|
1/8/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vincent
Capponi
|
|
|
50,000
|
|
|
|
|
|
|
|
1.65
|
(1)
|
12/31/16
|
|
|
|
|
|
733,333
|
|
|
|
366,667
|
|
|
|
0.25
|
(3)
|
01/16/18
|
|
|
|
|
|
1,125,000
|
|
|
|
1,125,000
|
|
|
|
0.035
|
(4)
|
06/25/18
|
|
|
|
|
|
100,000
|
|
|
|
300,000
|
|
|
|
0.168
|
(5)
|
01/28/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Lamadrid
|
|
|
150,000
|
|
|
|
|
|
|
|
1.90
|
(1)
|
01/16/17
|
|
|
|
|
|
933,333
|
|
|
|
466,667
|
|
|
|
0.25
|
(6)
|
01/16/18
|
|
|
|
|
|
1,375,000
|
|
|
|
1,375,000
|
|
|
|
0.035
|
(7)
|
06/25/18
|
|
|
|
|
|
100,000
|
|
|
|
300,000
|
|
|
|
0.168
|
(8)
|
01/28/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Bartlett
|
|
|
|
|
|
|
50,000
|
|
|
|
0.084
|
(9)
|
01/08/14
|
|
|
|
(2)
|
Vests and becomes exercisable as
to (i) 1,251,929 shares on January 8, 2009; and (ii) 1,251,929 shares on
January 8, 2010.
|
|
|
(3)
|
Vests and becomes exercisable as
to (i) 366,666 shares on January 16, 2008; (ii) 366,667 shares on January
16, 2009; and (iii) 366,667 shares on January 16,
2010.
|
|
|
(4)
|
Vests and becomes exercisable as
to (i) 562,500 shares on June 25, 2008; (ii) 562,500 shares on June 25,
2009; (iii) 562,500 shares on June 25, 2010; and (iv) 562,500 shares on
June 25, 2011.
|
|
|
(5)
|
Vests and becomes exercisable as
to (i) 100,000 shares on January 28, 2009; (ii) 100,000 shares on January
28, 2010; (iii) 100,000 shares on January 28, 2011; and (iv) 100,000
shares on January 28, 2012.
|
|
|
(6)
|
Vests and becomes exercisable as
to (i) 466,666 shares on January 16, 2008; (ii) 466,667 shares on January
16, 2009; and (iii) 466,667 shares on January 16,
2010.
|
|
|
(7)
|
Vests and becomes exercisable as
to (i) 687,500 shares on June 25, 2008; (ii) 687,500 shares on June 25,
2009; (iii) 687,500 shares on June 25, 2010; and (iv) 687,500 shares on
June 25, 2011.
|
|
|
(8)
|
Vests and becomes exercisable as
to (i) 100,000 shares on January 28, 2009; (ii) 100,000 shares on January
28, 2010; (iii) 100,000 shares on January 28, 2011; and (iv) 100,000
shares on January 28, 2012.
|
|
|
(9)
|
Vests and becomes exercisable as
to (i) 12,500 shares on January 8, 2010; (ii) 12,500 shares on January 8,
2011; (iii)12,500 shares on January 8, 2012 and (iv) 12,500 shares on
January 8, 2013.
|
Director
Compensation
The
following table shows for the fiscal year ended December 31, 2009 certain
information with respect to the compensation of all non-employee directors of
the Company.
Director
Compensation for Fiscal 2009
|
Name
|
|
|
Fees Earned or
Paid in
Cash
($)
|
|
|
Option
Awards
($) (1)
|
|
|
Total
($)
|
|
|
Joseph
Rubin
|
|
|
|
8,000
|
|
|
|
230
|
(2)(3)
|
|
|
8,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
R. Jones
|
|
|
|
8,000
|
|
|
|
230
|
(2)(4)
|
|
|
8,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Gunton
|
|
|
|
—
|
|
|
|
—
|
(5)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Al
Kraus
|
|
|
|
20,000
|
|
|
|
1,840
|
(6)
|
|
|
21,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
Chan (7)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(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,
2009.
|
|
|
(3)
|
At December 31, 2009, in
connection with his service as a director we had issued Mr. Rubin the
following: options to purchase 21,098 shares of our Common Stock at an
exercise price of $31.52 per share, which were granted on June 30, 2006
and expire on December 13, 2010; options to purchase 5,274 shares of our
Common Stock at an exercise price of $21.57 per share, which were granted
on June 30, 2006 and expire on January 26, 2012; options to purchase 3,014
shares of our Common Stock at an exercise price of $21.57 per share, which
were granted on June 30, 2006 and expire on December 11, 2012; options to
purchase 753 shares of our Common Stock at an exercise price of $21.57 per
share, which were granted on June 30, 2006 and expire on December 28,
2013; options to purchase 1,507 shares of our Common Stock at an exercise
price of $6.64 per share, which were granted on June 30, 2006 and expire
on December 29, 2014; options to purchase 10,000 shares of our Common
Stock at an exercise price of $1.25 per share, which were granted on June
30, 2006 and expire on January 30, 2016; options to purchase 15,069 shares
of our Common Stock at an exercise price of $1.25 per share, which were
granted on June 30, 2006 and expire on June 12, 2016; options to purchase
5,000 shares of our Common Stock at an exercise price of $1.25 per share,
which were granted on August 1, 2006 and expire on August 1, 2016; options
to purchase 10,000 shares of our Common Stock at an exercise price of
$0.22 per share, which were granted on December 31, 2007 and expire on
December 31, 2017; options to purchase 45,000 shares of our Common Stock
at an exercise price of $0.035 per share, which were granted on June 25,
2008 and expire on June 25, 2018; options to purchase 30,000 shares of our
Common Stock at an exercise price of $0.08 per share, which were granted
on December 31, 2008 and expire on December 31, 2018; and options to
purchase 100,000 shares of our Common Stock at an exercise price of $0.166
per share, which were granted on December 31, 2009 and expire on December
31, 2019.
|
|
|
(4)
|
At December 31, 2009, in
connection with his service as a director we had issued Dr. Jones the
following: options to purchase 7,500 shares of our Common Stock at an
exercise price of $0.22 per share, which were granted on December 31, 2007
and expire on December 31, 2017; options to purchase 45,000 shares of our
Common Stock at an exercise price of $0.035 per share, which were granted
on June 25, 2008 and expire on June 25, 2018; and options to purchase
30,000 shares of our Common Stock at an exercise price of $0.08 per share,
which were granted on December 31, 2008 and expire on December 31, 2018;
and options to purchase 100,000 shares of our Common Stock at an exercise
price of $0.166 per share, which were granted on December 31, 2009 and
expire on December 31, 2019.
|
|
|
(5)
|
As of December 31, 2009, in
connection with his service as a director we had issued Mr. Gunton the
following: options to purchase 15,000 shares of our Common Stock at an
exercise price of $0.08 per share, which were granted on December 31, 2008
and expire on December 31, 2018. In connection with Mr. Gunton’s
service as a director in 2009, the NJTC Venture Fund was entitled to
receive options to purchase 108,000 shares of our Common Stock.
These options were issued on January 1, 2010 with an exercise price of
$0.166 per share and expire on January 1,
2020.
|
|
|
(6)
|
At December 31, 2009, in
connection with his service as a director we had issued Mr. Kraus the
following: options to purchase 200,000 shares of our Common Stock at an
exercise price of $0.084 per share, which were granted on January 8, 2009
and expire on January 8, 2019; and options to purchase 100,000 shares of
our Common Stock at an exercise price of $0.166 per share, which were
granted on December 31, 2009 and expire on December 31,
2019.
|
|
|
(7)
|
Effective July 24, 2008, Dr. Chan
was appointed to the Company’s Board of Directors and Compensation
Committee. Effective January 1, 2009, Dr. Chan entered into an
employment agreement becoming interim Chief Executive Officer of the
Company. In January 2009, Dr. Chan resigned his position as a member
on the Compensation Committee. During 2009 Dr. Chan was an employee
Director and was not eligible to receive compensation for Director
services.
|
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 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.
In 2009,
the Board approved the issuance to each non-employee director, with the
exception of the Chairman, options to purchase up to 100,000 shares of Common
Stock on December 31, 2009 based on attendance at quarterly Board meetings held
during 2009.
In
connection with his appointment as Chairman of the Board in January 2009, we
agreed to compensate Mr. Kraus at the rate of $20,000 per annum, and on January
8, 2009 we issued Mr. Kraus a ten year option to purchase 200,000 shares of our
Common Stock at a price of $0.084 per share. In December 2009 we issued
Mr. Kraus an additional option to purchase 100,000 shares of Common Stock at an
exercise price of $0.166 per share. Additionally for services performed as
Chief Executive Office of the company through December 31, 2008, the Board
approved a 10 year option to purchase 450,000 shares of our Common Stock at a
price of $0.168 per share on January 28, 2009.
In 2010,
the Board approved the issuance to each non-employee director, with the
exception of the Chairman, options to purchase up to 100,000 shares of Common
Stock to be issued on December 31, 2010 based on attendance at quarterly Board
meetings held during 2010. For the Chairman, the Board approved the
issuance of options to purchase up to 125,000 shares of Common Stock to be
issued on December 31, 2010 based on attendance at quarterly Board meeting held
during 2010.
Employment
Agreement with Named Officers
We
entered into employment agreements with the named officer through December 2010.
The agreements provide for annual base salaries for varying amounts and
different stock upon plans.
Phillip
Chan
Effective
April 9, 2010, we renewed the employment agreement by and between Dr. Phillip
Chan and the Company as full-time Chief Executive Officer retroactive to January
1, 2010. Per the terms of the agreement, we agree to pay Phillip Chan an
initial annual base compensation of $216,351 payable in equal semimonthly
installments in accordance with our usual practice. This base compensation shall
be subject to semiannual review by our Compensation Committee, but his
compensation may not be reduced from then current level. He is eligible for
employee stock options, which will be adjusted on the same basis as all other
shareholders to account for any stock split, stock dividends, combination or
recapitalization.
Al Kraus
We
entered into an employment agreement with Al Kraus on June 18, 2008 as our Chief
Executive Officer. Pursuant to the employment agreement, we agreed to pay
Al Kraus an annual base compensation of $216,351 payable in equal semimonthly
installments in accordance with our usual practice.
On
October 22, 2008, Al Kraus provided notice that he would resign from his
position as President and Chief Executive Officer effective as of December 31,
2008.
Effective
January 7, 2009, we entered into a new agreement with Al Kraus, pursuant to
which he became Chairman of the Board of Directors for a two year term
terminating on January 7, 2011. Pursuant to this agreement, we agree to pay Al
Kraus compensation at a rate of $20,000 per year, payable in equal payments at
the end of each fiscal quarter. He is eligible for stock options, which
will be adjusted on the same basis as all other shareholders to account for any
stock split, stock dividends, combination or recapitalization.
Vincent
Capponi
We
entered into an employment agreement with Vincent Capponi on June 18, 2008,
which expired on December 31, 2008. Pursuant to this employment agreement, we
agree to pay Vincent Capponi an initial annual base compensation of $195,767
payable in equal semimonthly installments in accordance with our usual practice.
This base compensation shall be subject to annual review by our Compensation
Committee, but his compensation may not be reduced from then current level. He
is eligible for employee stock options which will be adjusted on the same basis
as all other shareholders to account for any stock split, stock dividends,
combination or recapitalization.
Effective
April 9, 2010, we renewed the employment agreement by and between Vincent
Capponi and the Company as Chief Operating Officer retroactive to January 1,
2010. Per the terms of the agreement, we agree to pay Vincent Capponi an initial
annual base compensation of $205,303 payable in equal semimonthly installments
in accordance with our usual practice. This base compensation shall be subject
to semiannual review by our Compensation Committee, but his compensation may not
be reduced from then current level. He is eligible for employee stock options,
which will be adjusted on the same basis as all other shareholders to account
for any stock split, stock dividends, combination or
recapitalization.
David
Lamadrid
We
entered into an employment agreement with David Lamadrid on June 18, 2008, which
expired on December 31, 2008. Pursuant to this employment agreement, we agree to
pay David Lamadrid an initial annual base compensation of $145,801 payable in
equal semimonthly installments in accordance with our usual practice. This base
compensation shall be subject to annual review by our Compensation Committee,
but his compensation may not be reduced from then current level. He is eligible
for employee stock options, which will be adjusted on the same basis as all
other shareholders to account for any stock split, stock dividends, combination
or recapitalization.
Effective
April 9, 2010, we renewed the employment agreement by and between David Lamadrid
and the Company as Chief Financial Officer retroactive to January 1, 2010.
Per the terms of the agreement, we agree to pay David Lamadrid an initial annual
base compensation of $175,000 payable in equal semimonthly installments in
accordance with our usual practice. This base compensation shall be subject to
semiannual review by our Compensation Committee. He is eligible for employee
stock options, which will be adjusted on the same basis as all other
shareholders to account for any stock split, stock dividends, combination or
recapitalization.
Robert
Bartlett
Effective
January 1, 2009, we entered into a new consulting agreement with Dr. Robert
Bartlett, pursuant to which his consulting will terminate on December 31, 2009.
Pursuant to this consulting agreement, we agree to pay Dr. Robert Bartlett
consulting fees at an annualized rate of $50,000 payable in equal monthly
installments of $4,166.67 per month. He is eligible for stock options, which
will be adjusted on the same basis as all other shareholders to account for any
stock split, stock dividends, combination or recapitalization.
Effective
April 9, 2010, we renewed the consulting agreement with Dr. Bartlett retroactive
to January 1, 2010. Pursuant to this consulting agreement, we agree to pay
Dr. Robert Bartlett consulting fees at an annualized rate of $50,000 payable in
equal monthly installments of $4,166.67 per month. He is eligible for stock
options, which will be adjusted on the same basis as all other shareholders to
account for any stock split, stock dividends, combination or
recapitalization.
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, 2009, we owed Mr. Rubin’s firm approximately $7,000 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, Al Kraus, formerly an employee, and Phillip
Chan, our Chief Executive Officer, are independent under the standards set forth
in Nasdaq Marketplace Rule 4200(a)(15).
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information known to us with respect to the
beneficial ownership of Common Stock held of record as of May 28, 2010, 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
|
|
|
Number
|
|
|
Percent (%)
|
|
|
There
are no Beneficial Owners of more than 5% of Common Stock as of May
28,
2010 except for the directors and executive officers listed
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Al
Kraus(2)
|
|
|
9,932,001
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
Chan (3)
|
|
|
3,237,504
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
David
Lamadrid (4)
|
|
|
3,896,234
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Vince
Capponi (5)
|
|
|
3,555,586
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Rubin (6)
|
|
|
1,035,270
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Bartlett (7)
|
|
|
47,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Gunton (8)
|
|
|
15,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
R. Jones (9)
|
|
|
182,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive
officers as a group (eight persons)(10)
|
|
|
21,901,595
|
|
|
|
18.1
|
%
|
|
1
|
Gives effect to the shares of
Common Stock issuable upon the exercise of all options exercisable within
60 days of May 28, 2010 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 101,175,222 shares of Common
Stock outstanding as of May 28, 2010 plus any Common Stock issuable
pursuant to any Series A and Series B Preferred Stock conversion rights or
through exercise of any options or warrants owned by the indicated
stockholders.
|
|
2
|
Includes 8,538,370 shares of
Common Stock issuable upon exercise of stock
options.
|
|
3
|
Includes 618,646 shares of Common
Stock issuable upon conversion of Series B Preferred Stock, and 2,618,858
shares of Common Stock issuable upon exercise of stock
options.
|
|
4
|
Includes 3,892,500 shares of
Common Stock issuable upon exercise of stock
options.
|
|
5
|
Includes 3,137,500 shares of
Common Stock issuable upon exercise of stock
options.
|
|
6
|
Includes 2,826 shares of Common
Stock issuable upon conversion of Series A Preferred Stock, 428,508 shares
of Common Stock issuable upon conversion of Series B Preferred Stock, and
521,672 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.
|
|
7
|
These shares are issuable upon
exercise of stock options.
|
|
8
|
These shares are issuable upon
exercise of stock options.
|
|
9
|
These shares are issuable upon
exercise of stock options.
|
|
10
|
Includes an aggregate of 2,826
shares of Common Stock issuable upon conversion of Series A Preferred
Stock, 1,047,154 shares of Common Stock issuable upon conversion of Series
B Preferred Stock, and 18,953,900 shares of Common Stock issuable upon
exercise of warrants and stock
options.
|
EQUITY
COMPENSATION PLAN INFORMATION
The
following table summarizes outstanding options as of December 31, 2009, after
giving effect to the merger and subsequent grants. The Registrant had no
options outstanding prior to the merger, and all of the options below were
issued either in connection with the merger to former option holders of MedaSorb
or subsequently as new grants to employees, directors, and
consultants.
|
|
|
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
|
|
|
23,577,704
|
|
|
$
|
0.84
|
|
|
|
16,422,296
|
(2)
|
|
Total
|
|
|
23,577,704
|
(3)
|
|
$
|
0.84
|
(3)
|
|
|
16,822,296
|
|
|
|
(1)
|
Represents options that may be
issued under our 2003 Stock Option
Plan.
|
|
|
(2)
|
Represents the unadjusted number
of options that may be issued under our 2006 Long-Term Incentive
Plan. The options available under the pool may be increased to
maintain 15% of the fully diluted share count as
needed.
|
|
|
(3)
|
Represents options to purchase
(i) 118,667 shares of Common Stock at a price of $41.47 per share, (ii)
232,051 shares of Common Stock at a price of $31.52 per share, (iii)
35,488 shares of Common Stock at a price of $21.57 per share, (iv)
15,944 shares of Common Stock at a price of $19.91 per share, (v) 439,740
shares of Common Stock at a price of $6.64 per share, (vi) 173,000 shares
of Common Stock at a price of $1.90 per share, (vii) 306,000 shares of
Common Stock at a price of $1.65 per share, (viii) 400,000 shares of
Common Stock at a price of $1.26 per share, (ix) 166,756 shares of Common
Stock at a price of $1.25 per share, (x) 3,014,000 shares of Common Stock
at a price of $0.25, (xi) 137,622 shares of Common Stock at a price of
$0.22, (xii) 2,365,000 shares of Common Stock at a price of $0.168, (xiii)
300,000 shares of Common Stock at a price of $0.166, (xiv) 2,753,858
shares of Common Stock at a price of $0.084, (xv) 115,000 shares of Common
Stock at a price of $0.08, and (xvi) 13,004,578 shares of Common Stock at
a price of $0.035.
|
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports and other information with the SEC. You
may read and copy any reports, statements or other information we file at the
SEC’s public reference rooms in Washington D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
We have
filed a registration statement on Form S-1 under the Securities Act with the SEC
covering the Common Stock to be offered by the selling stockholders. As
permitted by the rules and regulations of the SEC, this document does not
contain all information set forth in the registration statement and exhibits
thereto, all of which are available for inspection as set forth above. For
further information, please refer to the registration statement, including the
exhibits thereto. Statements contained in this document relating to the contents
of any contract or other document referred to herein are not necessarily
complete, and reference is made to the copy of that contract or other document
filed as an exhibit to the registration statement or other document, and each
statement of this type is qualified in all respects by that
reference.
No person
is authorized to give any information or make any representation not contained
in this document. You should not rely on any information provided to you that is
not contained in this document. This prospectus does not constitute an offer to
sell or a solicitation of an offer to purchase the securities described herein
in any jurisdiction in which, or to any person to whom, it is unlawful to make
the offer or solicitation. Neither the delivery of this document nor any
distribution of shares of Common Stock made hereunder shall, under any
circumstances, create any implication that there has not been any change in our
affairs as of any time subsequent to the date hereof.
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements.
CYTOSORBENTS
CORPORATION
(f/k/a
MedaSorb Technologies Corporation)
(a
development stage company)
CONSOLIDATED
BALANCE SHEETS
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,346,301
|
|
|
$
|
1,595,628
|
|
|
Prepaid
expenses and other current assets
|
|
|
72,489
|
|
|
|
369,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,418,790
|
|
|
|
1,964,719
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
17,758
|
|
|
|
18,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
251,583
|
|
|
|
254,908
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
269,341
|
|
|
|
273,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,688,131
|
|
|
$
|
2,238,480
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
888,071
|
|
|
$
|
852,167
|
|
|
Accrued
expenses and other current liabilities
|
|
|
260,200
|
|
|
|
118,598
|
|
|
Notes
payable
|
|
|
172,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,320,771
|
|
|
|
970,765
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,320,771
|
|
|
|
970,765
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
10%
Series B Preferred Stock, Par Value $0.001, 200,000 shares authorized at
March 31, 2010 and December 31, 2009, respectively; 67,446.24 and
68,723.88 shares issued and outstanding, respectively
|
|
|
67
|
|
|
|
69
|
|
|
10%
Series A Preferred Stock, Par Value $0.001, 12,000,000 shares authorized
at March 31, 2010 and December 31, 2009, respectively; 5,903,306 and
6,255,813 shares issued and outstanding, respectively
|
|
|
5,903
|
|
|
|
6,256
|
|
|
Common
Stock, Par Value $0.001, 500,000,000 shares authorized at March 31, 2010
and December 31, 2009, 79,574,856 and 66,374,856 shares issued and
outstanding, respectively
|
|
|
79,575
|
|
|
|
66,375
|
|
|
Additional
paid-in capital
|
|
|
80,934,751
|
|
|
|
80,097,536
|
|
|
Deficit
accumulated during the development stage
|
|
|
(80,652,936
|
)
|
|
|
(78,902,521
|
)
|
|
Total
stockholders' equity (deficit)
|
|
|
367,360
|
|
|
|
1,267,715
|
|
|
Total
Liabilities and Stockholders' Equity (Deficit)
|
|
$
|
1,688,131
|
|
|
$
|
2,238,480
|
|
See
accompanying notes to consolidated financial statements.
CYTOSORBENTS
CORPORATION
(f/k/a
MedaSorb Technologies Corporation)
(a
development stage company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 22,1997
|
|
|
|
|
|
|
|
|
|
|
(date of inception) to
|
|
|
Three months ended March
31,
|
|
|
|
|
March 31, 2010
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
46,934,938
|
|
|
|
681,215
|
|
|
|
488,555
|
|
|
Legal,
financial and other consulting
|
|
|
7,380,909
|
|
|
|
72,932
|
|
|
|
|