UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________

FORM 10-QSB
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 000-51038

MedaSorb Technologies Corporation
(Exact Name of Small Business Issuer as Specified in Its Charter)

Nevada
98-0373793
(State or Other Jurisdiction of
Incorporation Or Organization)
(I.R.S. Employer Identification No.)
 
 
7 Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852
(Address of Principal Executive Offices)
 
 (732) 329-8885     
(Issuer’s Telephone Number, Including Area Code)

_______________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ Yes   ¨ No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes   þ No
 
As of November 15, 2007 there were 25,044,932 shares of the issuer’s common stock outstanding.
 
Transitional Small Business Disclosure Format:   ¨ Yes   þ No
 
 
MedaSorb Technologies Corporation
(a development stage company)
FORM 10-QSB
 
TABLE OF CONTENTS
 
 
Page
    PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1. Financial Statements (September 30, 2007 and 2006 are unaudited)
 
 
Consolidated Balance Sheets  
3
 
Consolidated Statements of Operations
4
 
Consolidated Statements of Changes in Stockholders’ Equity
5
 
Consolidated Statements of Cash Flows
6
 
Notes to Consolidated Financial Statements  
8
 
 
 
 
Item 2. Management’s Discussion and Analysis or Plan of Operation
13
 
 
 
 
Item 3. Controls and Procedures
14
 
 
 
  PART II. OTHER INFORMATION
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
15
 
Item 6. Exhibits
15
 
 
PART I -- FINANCIAL INFORMATION
 
Item 1. Financial Statements. 
 
(a development stage company)
  
 
  
 
  
 
  
    CONSOLIDATED BALANCE SHEETS
  
 
  
 
  
 
  
 
  
September 30,
  
December 31,
  
 
  
2007
  
2006
  
   
 
(Unaudited)
  
 
  
 
  
 
  
 
  
ASSETS
  
 
  
 
  
 
  
 
  
 
  
Current Assets:
  
 
  
 
  
Cash and cash equivalents
  
$
774,658
  
$
2,873,138
  
Prepaid expenses and other current assets
    
115,155
    
24,880
  
 
          
Total current assets
    
889,813
    
2,898,018
  
 
          
Property and equipment - net
    
186,975
    
303,560
  
 
          
Other assets
    
248,812
    
243,471
  
 
          
Total long-term assets
    
435,787
    
547,031
  
 
          
Total Assets
  
$
1,325,600
  
$
3,445,049
  
 
          
LIABILITIES AND STOCKHOLDERS' EQUITY
         
 
          
Current Liabilities:
          
Accounts payable
  
$
706,004
  
$
942,265
  
Accrued expenses and other current liabilities
    
166,418
    
69,779
  
Accrued interest
    
--
    
70,000
  
                                 
 
          
Total current liabilities
    
872,422
    
1,082,044
  
 
          
Stockholders’ Equity:
          
10% Series A Preferred Stock, Par Value $0.001, 100,000,000
              
shares authorized at September 30, 2007 and December 31, 2006,
              
7,823,907 and 7,403,585 shares issued and outstanding, respectively
    
7,823
    
7,403
  
Common Stock, Par Value $0.001, 100,000,000
         
Shares authorized at September 30, 2007 and December 31, 2006,
          
25,044,932 and 24,628,274 shares issued and outstanding, respectively
   
25,045
    
24,629
  
Additional paid-in capital
    
71,163,575
    
69,757,556
  
Deficit accumulated during the development stage
    
(70,743,265
)
  
(67,426,583
)
 
          
Total stockholders' equity
   
453,178
    
2,363,005
  
 
          
Total Liabilities and Stockholders' Equity
  
$
1,325,600
  
$
3,445,049
  
 
See accompanying notes to consolidated financial statements. 

3

 
  
 
  
 
  
 
  
   MEDASORB TECHNOLOGIES CORPORATION
  
 
  
 
  
 
  
 
  
 
  
  (a development stage company)
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
   
 
          CONSOLIDATED STATEMENTS OF OPERATIONS
  
 
  
Period from
January 22,1 997
(date of inception ) to
September 30, 
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
 
  
 
  
2007
  
2007
  
2006
  
2007
  
2006
  
 
  
 
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
   
 
  
 
 
 
  
 
  
 
  
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Revenue
      
$
--
  
$
--
  
$
--
  
$
--
  
$
--
  
 
                          
Expenses:
                            
 
                          
Research and development
        
41,973,849
    
1,081,078
    
750,411
    
438,287
    
262,217
  
Legal, financial and other consulting
        
6,606,199
    
346,686
    
621,923
    
85,582
    
18,920
  
General and administrative
        
21,173,762
    
1,035,653
    
688,951
    
162,284
    
387,408
  
Change in fair value of management and incentive units       
   
(6,055,483
)
  
--
    
--
    
--
    
--
  
 
                          
Total expenses
        
63,698,327
    
2,463,417
    
2,061,285
    
686,153
    
668,545
  
 
                          
Gain on disposal of property and equipment
    
(21,663
)
  
--
    
--
    
--
    
--
  
Gain on extinguishment of debt
        
(216,617
)
  
(10,009
)
  
--
    
(3,695
)
  
--
  
Interest expense (income), net
        
5,580,914
    
(63,494
)
  
4,790,329
    
(14,496
)
  
(22,842
)
Penalties associated with non-registration of Series A Preferred Stock      
   
361,496
    
361,496
    
--
    
(79,135
)
  
--
  
Net loss
            
(69,402,457
)
  
(2,751,410
)
  
(6,851,614
)
  
(588,827
)
  
(645,703
)
Series A Preferred Stock Dividends
          
1,340,808
    
565,272
    
397,446
    
191,774
    
397,446
  
Net Loss available to common shareholders         
  
$
(70,743,265
)
$
(3,316,682
)
$
(7,249,060
)
$
(780,601
)
$
(1,043,149
)
 
                          
Basic and diluted net loss per common share
      
$
(0.13
)
$
(0.62
)
$
(0.03
)
$
(0.04
)
Weighted average number of shares of
                          
common stock outstanding
            
24,780,019
    
11,599,016
    
25,010,813
    
24,095,093
  
 
See accompanying notes to consolidated financial statements.

4
 
 
  
MEDASORB TECHNOLOGIES CORPORATION
  
 
  
  (a development stage company)
  
 
  
 
  
                   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Period from December 31, 2006
to September 30, 2007
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
              
 
  
 
 
 
  
 
 
 
 
 
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Deficit
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Accumulated
  
 
  
 
  
 
  
 
  
 
  
 
  
Additional
  
During the
  
Total
  
 
  
Common Stock 
  
Preferred Stock 
  
Paid-In
  
Development
  
Stockholders'
  
 
  
Shares
  
Par value
  
Shares
  
Par Value
  
Capital
  
Stage
  
Equity
 
           
 
    
 
     
 
     
 
    
 
    
 
    
 
     
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Balance at December 31, 2006
    
24,628,274
  
$
24,629
    
7,403,585
  
$
7,403
  
$
69,757,556
  
$
(67,426,583
)
$
2,363,005
  
 
                              
Issuance of stock options to employees, consultants, and directors
    
--
    
--
    
--
    
--
    
457,085
    
--
    
457,085
  
                                             
Issuance of common stock in settlement of accounts payable
    
11,501
    
11
    
--
    
--
    
22,991
    
--
    
23,002
  
                                             
Conversion of preferred stock
into Common Stock
    
405,157
    
405
    
(506,446
)
  
(506
)
  
101
    
--
    
--
  
                                             
Issuance of Series A Preferred Stock as dividends and settlement of dividends/penalties payable in connection with non-registration event
    
--
    
--
    
926,768
    
926
    
925,842
    
(565,272
)
  
361,496
 
                                             
Net loss
    
--
    
--
    
--
    
--
    
--
    
(2,751,410
)
  
(2,751,410
)
           
   
  
   
  
   
  
   
  
   
  
   
  
   
  
 
Balance at September 30, 2007 (Unaudited)
    
25,044,932
  
$
25,045
    
7,823,907
  
$
7,823
  
$
71,163,575
  
$
(70,743,265
)
$
453,178
  
 
See accompanying notes to consolidated financial statements.
 
5
 
 
  
  MEDASORB TECHNOLOGIES CORPORATION
  
 
  
  (a development stage company)
  
 
  
 
  
 
  
 
  
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
  
 
  
Period from
January 22, 1997
(date of inception) to September 30, 2007
  
 Nine months ended
September 30, 2007
  
Nine months Ended
September 30, 2006
  
 
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
Cash flows from operating activities:
  
 
  
 
  
 
  
Net loss
  
$
(69,402,457
)
$
(2,751,410
)
$
(6,851,614
)
Adjustments to reconcile net loss to net cash used in operating activities:
              
Common stock issued as inducement to convert
              
convertible notes payable and accrued interest
    
3,351,961
    
--
    
3,351,961
  
Issuance of common stock to consultant for services
    
30,000
    
--
    
--
  
Depreciation and amortization
    
2,191,556
    
144,931
    
191,644
  
Amortization of debt discount
    
1,000,000
    
--
    
1,000,000
  
Gain on disposal of property and equipment
    
(21,663
)
  
--
    
--
  
Gain on extinguishment of debt
    
(216,617
)
  
(10,009
)
  
--
  
Abandoned patents
    
183,556
    
--
    
1,347
  
Bad debts - employee advances
    
255,882
    
--
    
--
  
Contributed technology expense
    
4,550,000
    
--
    
--
  
Consulting expense
    
237,836
    
--
    
--
  
Management unit expense
    
1,334,285
    
--
    
--
  
Expense for issuance of warrants
    
478,409
    
--
    
--
  
Expense for issuance of options
    
848,062
    
457,085
    
104,738
  
Amortization of deferred compensation
    
74,938
    
--
    
--
  
Penalties in connection with non-registration event
    
361,496
    
361,496
    
--
  
Changes in operating assets and liabilities:
              
Prepaid expenses and other current assets
    
(386,703
)
  
(90,275
)
  
(22,542
)
Other assets
    
(53,893
)
  
--
    
(2,730
)
Accounts payable and accrued expenses
    
2,691,632
    
(106,612
)
  
(462,281
)
Accrued interest expense
    
1,823,103
    
(70,000
)
  
488,310
  
     
   
 
   
 
   
  
 
Net cash used by operating activities
    
(50,668,617
)
  
(2,064,794
)
  
(2,201,167
)
 
              
Cash flows from investing activities:
              
Proceeds from sale of property and equipment
    
32,491
    
--
    
--
  
Purchases of property and equipment
    
(2,220,522
)
  
(21,428
)
  
--
  
Patent costs
    
(405,677
)
  
(12,258
)
  
(9,147
)
Loan receivable
    
(1,632,168
)
  
--
    
--
  
    
    
  
   
  
   
  
 
Net cash used by investing activities
    
(4,225,876
)
  
(33,686
)
  
(9,147
)
 
              
Cash flows from financing activities:
              
Proceeds from issuance of common stock
    
400,490
    
--
    
400,490
  
Proceeds from issuance of preferred stock
    
4,679,437
    
--
    
4,679,437
  
Equity contributions - net of fees incurred
    
41,711,198
    
--
    
--
  
Proceeds from borrowings
    
8,378,631
    
--
    
--
  
Proceeds from subscription receivables
    
499,395
    
--
    
--
  
   
    
  
   
   
    
  
 
Net cash provided by financing activities
    
55,669,151
    
--
    
5,079,927
  
 
See accompanying notes to consolidated financial statements.
6
 
 
  
Period from
January 22, 1997
(date of inception) to September 30, 2007
  
 Nine months ended
September 30, 2007
  
Nine months Ended
September 30, 2006
  
 
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
 
Net increase in cash and cash equivalents
    
774,658
    
(2,098,480
)
  
2,869,613
  
 
              
Cash and cash equivalents - beginning of period
    
--
    
2,873,138
    
707,256
  
   
   
  
   
  
   
  
 
Cash and cash equivalents - end of period
  
$
774,658
  
$
774,658
  
$
3,576,869
  
 
              
 
              
Supplemental disclosure of cash flow information:
              
 
              
Cash paid during the period for interest
  
$
588,116
  
$
76,336
  
$
--
  
 
              
Supplemental schedule of noncash investing and financing activities:
              
 
              
Note payable principal and interest conversion to equity
  
$
10,201,714
  
$
--
  
$
8,030,149
  
 
              
Issuance of member units for leasehold improvements
  
$
141,635
  
$
--
  
$
--
  
 
              
Issuance of management units in settlement of cost of raising capital
  
$
437,206
  
$
--
  
$
--
  
 
              
Change in fair value of management units for cost of raising capital
  
$
278,087
  
$
--
  
$
--
  
 
              
Exchange of loan receivable for member units
  
$
1,632,168
  
$
--
  
$
--
  
 
              
Issuance of equity in settlement of accounts payable
  
$
1,609,446
  
$
23,002
  
$
420,720
  
 
              
Issuance of common stock in exchange for stock subscribed
  
$
399,395
  
$
--
  
$
399,395
  
 
              
Costs paid from proceeds in conjunction with issuance preferred stock
  
$
620,563
  
$
--
  
$
620,563
  
                     
Series A Preferred Stock Dividends
  
$
1,340,808
  
$
565,272
  
$
397,446
  
                     
Issuance of 10,000,000 shares of common stock in consideration for funding $1,000,000 convertible note payable
  
$
1,000,000
  
$
--
  
$
1,000,000
  
                     
Net effect of conversion of common stock to preferred stock prior to merger
  
$
559
  
$
--
  
$
559
  
                     
During the nine months ended September 30, 2007 and 2006, 506,446 and -0- Series A Preferred Shares were converted into 405,157 and -0- Common Shares, respectively. For the period from January 22, 1997 (date of inception) to September 30, 2007, 506,446 Series A Preferred Shares were converted into 405,157 Common Shares.
                    
                     
During the nine months ended September 30, 2007 and 2006, 553,629 and -0-Series A Preferred Shares were issued in connection with the non-registration event as settlement of dividends/penalties payable, respectively. For the period from January 22, 1997 (date of inception) to September 30, 2007, 553,629 Series A Preferred Shares were issued in connection with the non-registration event as settlement of dividends/penalties payable.
                    

See accompanying notes to consolidated financial statements.

7

MedaSorb Technologies Corporation
Notes to Consolidated Financial Statements
(UNAUDITED)
September 30, 2007   

1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-QSB and Item 310 of Regulation S-B of the Securities and Exchange Commission (the “Commission”) and include the results of MedaSorb Technologies Corporation (the “Parent”), formerly known as Gilder Enterprises, Inc., and MedaSorb Technologies, Inc., its wholly-owned subsidiary (the “Subsidiary”), collectively referred to as “the Company.” Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the year ended December 31, 2007. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company's consolidated financial position as of September 30, 2007 and the results of its operations and cash flows for the nine and three month periods ended September 30, 2007 and 2006, and for the period January 22, 1997 (date of inception) to September 30, 2007. Results for the nine and three months ended are not necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended December 31, 2006 as included in the Company’s Form 10-KSB filed with the Commission on March 30, 2007.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced negative cash flows from operations since inception and has a deficit accumulated during the development stage at September 30, 2007 of $70,743,265. The Company is not currently generating revenue and is dependent on the proceeds of present and future financings to fund its research, development and commercialization program. The Company is continuing its fund-raising efforts.  Although the Company has historically been successful in raising additional capital through equity and debt financings, there can be no assurance that the Company will be successful in raising additional capital in the future or that it will be on favorable terms.  Furthermore, if the Company is successful in raising the additional financing, there can be no assurance that the amount will be sufficient to complete the Company's plans. These consolidated financial statements do not include any adjustments related to the outcome of this uncertainty.

The Company is a development stage company and has not yet generated any revenues. Since inception, the Company's expenses relate primarily to research and development, organizational activities, clinical manufacturing, regulatory compliance and operational strategic planning.  Although the Company has made advances on these matters, there can be no assurance that the Company will continue to be successful regarding these issues, nor can there be any assurance that the Company will successfully implement its long-term strategic plans.

The Company has developed an intellectual property portfolio, including 24 issued and multiple pending patents, covering materials, methods of production, systems incorporating the technology and multiple medical uses.
 
2. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business
The Company, through its subsidiary, is engaged in the research, development and commercialization of medical devices with its platform blood purification technology incorporating a proprietary adsorbent polymer technology.  The Company is focused on developing this technology for multiple applications in the medical field, specifically to provide improved blood purification for the treatment of acute and chronic health complications associated with blood toxicity. As of September 30, 2007, the Company has not commenced commercial operations and, accordingly, is in the development stage.  The Company has yet to generate any revenue and has no assurance of future revenue.

Principles of Consolidation
The consolidated financial statements include the accounts of the Parent, MedaSorb Technologies Corporation, and its wholly-owned subsidiary, MedaSorb Technologies, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
 
8
Development Stage Corporation
The accompanying consolidated financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 7, "Accounting and Reporting by Development Stage Enterprises."

Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation of property and equipment is provided for by the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of their economic useful lives or the term of the related leases. Gains and losses on depreciable assets retired or sold are recognized in the statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.

Patents
Legal costs incurred to establish patents are capitalized. When patents are issued, capitalized costs are amortized on the straight-line method over the related patent term. In the event a patent is abandoned, the net book value of the patent is written off.

Impairment or Disposal of Long-Lived Assets
The Company assesses the impairment of patents and other long-lived assets under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

Research and Development
All research and development costs, payments to laboratories and research consultants are expensed when incurred.

Income Taxes
Income taxes are accounted for under the asset and liability method prescribed by SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. Under Section 382 of the Internal Revenue Code the net operating losses (NOL) generated prior to the June 30, 2006 reverse merger may be limited due to the change in ownership. In addition, the Company was a limited liability company through December 31, 2005. Consequently, all losses generated prior to December 31, 2005 are not available for utilization as an NOL for the Company.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

Concentration of Credit Risk
The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and considers the Company’s risk negligible.

Financial Instruments
The carrying values of accounts payable and other debt obligations approximated their fair values due to their short-term nature.

Stock-Based Compensation
 
The Company accounts for its stock-based compensation under the recognition requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R). “Accounting for Stock-Based Compensation”, for employees and directors whereby each option granted is valued at fair market value on the date of grant. Under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.
 
The Company also follows the guidance in EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for equity instruments issued to consultants.

Net Loss Per Common Share
Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.
 
9
Effects of Recent Accounting Pronouncements

The Company has adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109 “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition classification, interest and penalties accounting in interim periods disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements or adjustments to our deferred tax assets and related valuation allowance. Our evaluation was performed for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2007.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as general and administrative expense.

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company has not yet determined the impact of this statement on its results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option for Financial Assets and Liabilities” to permit all entities to choose to elect to measure eligible financial instruments and certain other items at fair value. The decision whether to elect the fair value option may occur for each eligible items either on a specified election date or according to a preexisting policy for specified types of eligible items. However, that decision must also take place on a date on which criteria under SFAS 159 occurs. Finally, the decision to elect the fair value option shall be made on an instrument-by-instrument basis, except in certain circumstances. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. The Company is currently evaluating this pronouncement in connection with SFAS No. 157.

3. STOCKHOLDERS' EQUITY

The Company has recorded non-cash stock dividends in connection with the issuance of Series A Preferred Stock as a stock dividend to its preferred shareholders as of September 30, 2007. Prior to February 26, 2007 and after May 7, 2007, the dividend rate was 10% per annum. Effective February 26, 2007 due to the Company’s failure to have the registration statement it filed declared effective by the Commission within the time required under agreements with the June 30, 2006 purchasers of the Series A Preferred Stock (i) dividends on the shares of Series A Preferred Stock issued to those purchasers were required to be paid in cash, (ii) the dividend rate increased from 10% per annum to 20% per annum, and (iii) such purchasers were entitled to liquidating damages of 2% of their principal investment payable in cash per 30 day period until the registration statement was declared effective. In connection with such cash dividend and penalty obligations, as modified by the Settlement Agreement described below, the Company’s financial statements for the nine month period ending September 30, 2007 also reflects an aggregate charge of $361,496. On May 7, 2007 the Company’s registration statement filed in connection with the Company’s obligations to the June 30, 2006 purchasers of its Series A Preferred Stock was declared effective by the Commission.

Pursuant to a settlement agreement entered into in August 2007 with the June 30, 2006 purchasers of the Series A Preferred Stock, cash dividends stopped accruing on the Series A Preferred Stock effective on the date the Company’s registration statement was declared effective (May 7, 2007) and all cash dividends and penalties due through that date were paid with additional shares of Series A Preferred Stock at its stated value of $1.00 per share in lieu of cash. The settlement, did not result in a gain or loss on extinguishment of debt for the nine months ended September 30, 2007. Additionally, as part of the settlement, the dividend rate on the Series A Preferred Stock issued to these purchasers was reset to 10% effective as of May 7, 2007. During the nine months ended September 30, 2007, the Company issued 565,272 shares of Series A Preferred Stock as payment of stock dividends and 361,496 shares of Series A Preferred Stock as settlement of the dividends and penalties payable to the purchasers under the agreement. 
 
 
10

During the nine months ended September 30, 2007, 506,446 shares of Series A Preferred Stock were converted into 405,157 shares of Common Stock at a rate of $1.25 as stipulated in the preferred stock agreements. The conversions had no effect on the statement of operations for the nine months ended September 30, 2007.

During the nine months ended September 30, 2007, the Company issued stock options to employees, consultants and directors resulting in aggregate compensation expense of approximately $457,000, approximately $6,000 and $451,000 of which is presented in research and development expenses and general and administrative expenses, respectively.

During the nine months ended September 30, 2007, the Company issued 11,501 shares of common stock to settle accounts payable in the amount of $23,002. The settlement had no effect on the statements of operations for the nine months ended September 30, 2007.


The summary of the stock option activity for the nine months ended September 30, 2007 is as follows:
 
 
  
 
  
Weighted
  
Weighted
  
 
  
 
  
Average
  
Average
  
 
  
 
  
Exercise
  
Remaining
  
 
  
Shares
  
per Share
  
Life (Years)
  
 
  
 
  
 
  
 
  
Outstanding, January 1, 2007
    
1,185,001
  
$
15.66
    
6.7
  
Granted
    
776,000
  
$
1.50
    
9.3
  
Cancelled
    
121
  
$
41.47
    
0.0
  
Exercised
    
--
    
--
    
--
  
Outstanding September 30, 2007
    
1,960,880
  
$
10.06
    
7.7
  

At September 30, 2007, the aggregate intrinsic value of options outstanding and currently exercisable amounted to approximately $0.

The summary of the status of the Company’s non-vested options for the nine months ended September 30, 2007 is as follows:
 
 
  
 
  
Weighted
  
 
  
 
  
Average
  
 
  
 
  
Grant Date
  
 
  
Shares
  
Fair Value
  
 
  
 
  
 
  
Non-vested, January 1, 2007
    
79,665
  
$
.77
  
Granted
    
776,000
  
$
.73
  
Cancelled
    
--
    
--
  
Vested
    
664,668
  
$
.69
  
Exercised
    
--
    
--
  
Non-vested, September 30, 2007
    
190,997
  
$
.87
  
 
 
As of September 30, 2007, approximately $167,500 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 5.0 years.

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As of September 30, 2007, the Company has the following warrants to purchase common stock outstanding:
 
Number of Shares
    
Warrant Exercise
    
Warrant
  
To be Purchased
    
Price per Share
    
Expiration Date
  
 
    
 
    
 
  
15,569
  
$
6.64
    
March 31, 2010
  
816,691
 
$
4.98
    
June 30, 2011
  
2,100,000
 
$
2.00
    
June 30, 2011
  
339,954
  
$
2.00
    
September 30, 2011
  
52, 080
  
$
2.00
    
July 31, 2011
  
400,000
 
$
2.00
    
October 31, 2011
  
240,125
  
$
2.00
    
October 24, 2016
  
 

As of September 30, 2007, the Company has the following warrants to purchase preferred stock outstanding:

Number of
  
 Warrant Exercise
  
Warrant
  
Shares to be
  
 Price per
  
Expiration
 
Purchased
 
 Preferred Share
 
Date
  
525,000
  
$
1.00
    
June 30, 2011
  
 
If the holder of warrants for preferred stock exercises in full, the holder will receive additional five-year warrants to purchase a total of 210,000 shares of common stock at $2.00 per share.

4. COMMITMENTS AND CONTINGENCIES

Pending Litigation

The Company may at times, become involved in various claims and legal actions. At the date of this filing the Company was not involved in any legal claims expected to have a material adverse impact on the consolidated financial position of the Company and/or the results of its operations.  

Employment Agreements

The Company has employment agreements with certain key executives through July 2008. One of these agreements provides for an additional bonus payment based on achieving specific milestones as defined in the agreement. However, as of the date of this report, these milestones have not been met. Furthermore, this agreement includes an anti-dilution provision whereby the employee is entitled to be issued additional options to purchase common stock so as to maintain beneficial ownership of 5% of the outstanding stock of the Company on a fully diluted basis, until such time as the Company has raised $20 million in financing following the commencement of his employment.
 
Royalty Agreements

Pursuant to an agreement dated August 11, 2003, an existing investor agreed to make a $4 million equity investment in the Company. These amounts were received by the Company in 2003. In connection with this agreement, the Company granted the investor a future royalty of 3% on all gross revenues received by the Company from the sale of its CytoSorb device. The Company has not generated any revenue from this product and has not incurred any royalty costs through September 30, 2007. The amount of future revenue subject to the royalty agreement could not be reasonably estimated nor has a liability been incurred, therefore, an accrual for royalty payments has not been included in the consolidated financial statements.

License Agreements

In an agreement dated September 1, 2006, the Company entered into a license agreement which provides the Company the exclusive right to use its patented technology and proprietary know how relating to adsorbent polymers for a period of 18 years. Under the terms of the agreement, MedaSorb has agreed to pay royalties of 2.5% to 5% on the sale of certain of its products if and when those products are sold commercially for a term not greater than 18 years commencing with the first sale of such product The Company has not generated any revenue from its products and has not incurred any royalty costs through September 30, 2007.The amount of future revenue subject to the license agreement could not be reasonably estimated nor has a liability been incurred, therefore, an accrual for royalty payments has not been included in the consolidated financial statements.
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5. NET LOSS PER SHARE

Basic loss per share and diluted loss per share for the nine months ended September 30, 2007 and 2006 have been computed by dividing the net loss for each respective period by the weighted average number of shares outstanding during that period. All outstanding warrants and options representing 5,925,299 and 4,253,767 incremental shares at September 30, 2007 and 2006, respectively, as well as shares issuable upon conversion of Series A Preferred Stock and Preferred Stock Warrants representing 6,889,126 and 5,614,908 incremental shares at September 30, 2007 and 2006 respectively, have been excluded from the computation of diluted loss per share as they are anti-dilutive.

6. SUBSEQUENT EVENTS

In August 2007, the Company received a notice of allowance for one of its pending patent applications from the U.S. Patent and Trademark Office.

Item 2. Management’s Discussion and Analysis or Plan of Operation.
 
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, 2006 as included in the Company’s Form 10-KSB filed with the Securities and Exchange Commission (the “Commission”) on March 30, 2007.
 
Forward-looking statements
 
Statements contained in this Quarterly Report on Form 10-QSB, other than the historical financial information, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievement of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Primary risk factors include, but are not limited to: ability to successfully develop commercial operations; the ability to obtain adequate financing in the future when needed; dependence on key personnel; acceptance of the Company's medical devices in the marketplace; obtaining government approvals, including required FDA approvals; compliance with governmental regulations; reliance on research and testing facilities of various universities and institutions; product liability risks; limited manufacturing experience; limited marketing, sales and distribution experience; market acceptance of the Company's products; competition; unexpected changes in technologies and technological advances; and other factors detailed in the Company's Current Report on Form 10-KSB filed with the Commission on March 30, 2007. 

Plan Of Operations

We are a development stage company and expect to remain so for at least the next twelve months. We have not generated revenues to date and do not expect to do so until we commercialize and receive the necessary approvals to sell our proposed products. We will seek to commercialize a blood purification technology that efficiently removes middle molecular weight toxins from circulating blood.
 
We intend to initially focus our efforts on the commercialization of our CytoSorb™ product which we believe will provide a relatively faster regulatory pathway to market. The first indication for CytoSorb™ will be in the 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. We believe that current state of the art blood purification technology (such as dialysis) is incapable of effectively clearing the toxins intended to be adsorbed by our CytoSorb™ device.

Following the sepsis indication, we intend to continue our research in other acute conditions where CytoSorb™ has indicated potential in preliminary studies to prevent or reduce the accumulation of cytokines in the bloodstream. These conditions include the prevention of post-operative complications of cardiac surgery (cardiopulmonary bypass surgery) and damage to organs donated for transplant prior to organ harvest. We are also exploring the potential benefits the CytoSorb™ device may have in removing drugs from blood in situations such as patient overdoses.

In the first quarter of 2007, the Company received approval from the FDA to conduct a limited study of five patients in the adjunctive treatment of sepsis. The Company had also been pursuing approval to conduct clinical trials in Europe with the ultimate goal being to obtain a CE Mark for its CytoSorb™ device. In August of 2007, the German Ethics Committee approved MedaSorb’s application to proceed with a clinical trial enrolling up to 80 patients with acute respiratory distress syndrome or acute lung injury in the setting of sepsis. The Company estimates that the market potential in Europe for its products are substantially equivalent to that in the U.S. Given the opportunity to conduct a much larger clinical study in Europe, and the Company’s belief that the path to a CE Mark should be faster than that of an FDA approval, MedaSorb intends to launch its next clinical study in Germany. The Company will, however, continue to work with the FDA and keep the FDA informed of its progress with its European clinical trial. The clinical protocol has been designed to support future U.S. studies after the Company receives the CE Mark and successfully commercializes its products in the European market. 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.
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Our research and development costs were, $1,081,078 and $750,411 for the nine months ended September 30, 2007 and 2006, respectively, and $438,287 and $262,217, for the three months ended September 30, 2007 and 2006 respectively. We have experienced substantial operating losses since inception. As of September 30, 2007, we had an accumulated deficit of $70,743,265 which included losses from operations of $588,827 and $2,751,410, respectively, for the three and nine month periods ended September 30, 2007. In comparison, we had losses from operations of $645,703 and $6,851,614, respectively, for the three and nine month periods ended September 30, 2006. 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 $600,571 and $2,116,731, respectively, for the three and nine month periods ended September 30, 2007.

Our net loss available to common shareholders for the three and nine months ended September 30, 2007 includes $(79,135), and $361,496, respectively, for penalties and increased dividends payable to the June 30, 2006 purchasers of our Series A Preferred Stock. The penalties were payable as a result of our failure to have the registration statement we filed on behalf of these purchasers declared effective by the Commission by February 26, 2007. As a result, from that date through May 7, 2007 (the date the registration statement was declared effective by the SEC), (i) cash dividends on the shares of Series A Preferred Stock issued to those purchasers accrued at the rate of 20% per annum, and (ii) penalties of $105,000 per 30-day period accrued to those purchasers. The registration statement was declared effective by the Commission on May 7, 2007.

In August 2007, the Company entered into a settlement agreement with the June 30, 2006 purchasers of the Series A Preferred Stock. These purchasers had been entitled to receive cash dividends at a rate of 20% per annum and cash penalties as described above. Pursuant to the settlement agreement, cash dividends stopped accruing on the Series A Preferred Stock effective on the date the registration statement was declared effective (May 7, 2007) and all cash dividends and penalties due through that date were paid with additional shares of Series A Preferred Stock at its stated value of $1.00 per share in lieu of cash. Additionally, as part of the settlement, the dividend rate on the Series A Preferred Stock issued to these purchasers was reset to 10% effective as of May 7, 2007. The settlement, did not result in a gain or loss on extinguishment of debt for the nine months ended September 30, 2007.
 
Liquidity and Capital Resources
 
Since inception, our operations have been financed through the private placement of our debt and equity securities. At December 31, 2006 we had cash of $2,873,138. Due to our losses and limited amounts of available cash, our audited consolidated financial statements for the year ended December 31, 2006 have been prepared assuming we will continue as a going concern, and the auditors’ report on those financial statements expresses substantial doubt about our ability to continue as a going concern.
 
As of September 30, 2007 we had cash on hand of $774,658, and current liabilities of $872,422.   We believe that we have sufficient cash to fund our operation through the fourth quarter of 2007, following which time we will need additional financing before we can complete clinical studies and the commercialization of our proposed products. There can be no assurance that we will be successful in our capital raising efforts.
 
 Item 3. Controls and Procedures.
 
An evaluation was performed, under the supervision of, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were adequate and effective, as of September 30, 2007, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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We do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected.

There were no significant changes in our internal controls over financial reporting that occurred subsequent to our evaluation of our internal control over financial reporting for the three months ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In July 2007, one of the June 30, 2006 institutional purchasers of our Series A Preferred Stock converted an aggregate of 348,946 shares of such stock into 279,157 shares of our Common Stock. The issuance of such shares of Common Stock was exempt from registration pursuant to Sections 4(2) and 3(a)(9), and Regulation D, under the Securities Act.

In August 2007, pursuant to the Settlement Agreement described above, we issued an aggregate of 639,429 shares of Series A Preferred Stock to the June 30, 2006 purchasers of the Series A Preferred Stock in satisfaction of liquidated damages and accrued dividends owed to them. The issuance of such shares was exempt from registration pursuant to Section 4(2) and Regulation D under the Securities Act.


Item 6. Exhibits.
 
Number
Description
 
 
31.1
Certification of Al Kraus, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934
 
 
31.2
Certification of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934
 
 
32.1
Certification of Al Kraus, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934
 
 
32.2
Certification of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
 
 
   
MEDASORB TECHNOLOGIES CORPORATION
 
 		  
 		  
 
Date: November 15, 2007    By: /s/ David Lamadrid  
 
      Name: David Lamadrid
      Title: Chief Financial Officer
  (On behalf of the registrant and as
 principal accounting officer)
 
16

 
EXHIBIT INDEX
 
Number
Description
 
 
31.1
Certification of Al Kraus, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934
 
 
31.2
Certification of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934
 
 
32.1
Certification of Al Kraus, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934
 
 
32.2
Certification of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934

17