CTSO

Business Context and Reporting Period

Company: MedaSorb Technologies Corporation (operating subsidiary renamed CytoSorbents, Inc. in November 2008).
Reporting Period: Quarterly period ended September 30, 2008 (Form 10-Q).
Status: Development stage company with no commercial revenue. The company is focused on the research, development, and commercialization of the CytoSorb blood purification device, primarily targeting the treatment of sepsis. Operations are currently funded by equity and debt financing.

Key Financial Metrics

Liquidity: Cash increased significantly from $211,613 at December 31, 2007, to $3,375,041 at September 30, 2008, primarily due to a $5.29 million private placement of Series B Preferred Stock in June and August 2008.

Material Changes vs. Prior Period

• Financing Activity: The company raised approximately $5.29 million through the issuance of Series B Preferred Stock, a significant increase in capital compared to the prior year period which had no such financing activity.
• Expense Reduction: Total expenses for the nine months ended September 30, 2008, decreased by approximately $135,000 compared to the same period in 2007, driven largely by a reduction in legal, financial, and consulting fees.
• Equity Structure: Issuance of 54,203.54 shares of 10% Series B Preferred Stock and 616,625 shares of Series A Preferred Stock as dividends. The company also converted $175,000 of promissory notes into Series B Preferred Stock.
• Legal Proceedings: Settled a trademark infringement lawsuit with Alkermes, Inc. regarding the name "MedaSorb." The operating subsidiary ceased using the name and was renamed CytoSorbents, Inc.

Outlook, Risks, and Management Commentary

• Going Concern: The company has a history of negative cash flows and an accumulated deficit of over $74 million. Management states that continued operations depend on the ability to raise additional capital. There is no assurance that future financing will be available on acceptable terms.
• Regulatory Strategy: The company is prioritizing regulatory approval in Europe (CE Mark) over the U.S. (FDA) for its CytoSorb device, believing the European pathway is faster. A clinical study in Germany involving up to 80 patients is underway, with 13 patients enrolled as of the filing date.
• Management Changes: CEO Al Kraus tendered his resignation effective December 31, 2008, to be replaced by Dr. Philip Chan. Mr. Kraus will remain on the Board of Directors.
• Risk Factors: Key risks include the inability to secure future funding, failure to obtain regulatory approvals (FDA or CE Mark), product liability, and competition. The company has no revenue and no assurance of future commercial success.
• Contingencies: The company has royalty agreements (3% on gross revenues) and license agreements (2.5% to 5% royalties) that will only incur costs upon commercial sales. No liability has been accrued as no revenue has been generated.

Investor Verification Checklist

• Cash Runway: Verify if the $3.37 million cash balance is sufficient to fund operations until the next anticipated financing round, given the burn rate of approximately $2.36 million for the nine-month period.
• Series B Terms: Review the specific conversion rights, dividend rates (10% standard, 20% on default), and liquidation preferences of the newly issued Series B Preferred Stock, which ranks senior to common stock.
• Clinical Trial Progress: Monitor the enrollment and results of the European clinical study for CytoSorb, as this is the primary catalyst for future revenue.
• Management Transition: Assess the impact of the CEO transition from Al Kraus to Dr. Philip Chan on the company's strategic direction.
• Dilution Risk: Note the significant number of outstanding warrants and options (over 25 million incremental shares) and the potential for further dilution upon conversion of preferred stock.