UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
________________________
 
FORM 8-K
 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): June 30, 2006
 
GLIDER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
000-51038
 
98-0373793
(State or other jurisdiction
 
(Commission
 
(I.R.S. Employer
of incorporation)
 
File Number)
 
Identification Number )
 
7 Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852
(Address of principal executive office)    (Zip Code)
 
Registrant’s telephone number, including area code: (732) 329-8885

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.below):
 
[_]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
   
[_]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
   
[_]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
   
[_]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13c-4(c))
 

 
Item 1.01.  Entry into a Material Definitive Agreement.
 
Merger
 
On June 30, 2006, Gilder Enterprises, Inc., a Nevada corporation (“Registrant”) completed the acquisition of MedaSorb Corporation, a Delaware corporation (“MedaSorb”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Registrant, MedaSorb Acquisition Inc., a Delaware corporation (“Acquisition Sub”) and MedaSorb. A copy of the Merger Agreement is filed as Exhibit 2.1 to this Current Report on Form 8-K.
 
The principal terms of the merger and a description of the business of MedaSorb is set forth below in Item 2.01.
 
Private Placement
 
Immediately following the merger, we sold 5,25 0,000 shares of our Series A 10% Cumulative Convertible Preferred Stock, par value $.001 per share (“Series A Preferred Stock”), to three institutional investors pursuant to a Subscription Agreement filed as Exhibit 4.3 to this Current Report on Form 8-K and incorporated herein by reference, in a private offering exempt from registration pursuant to Section 4(2) and Regulation D (Rule 506) under the Securities Act of 1933, as amended (the “Securities Act”). The 5,250,000 shares of Series A Preferred Stock are initially convertible into 4,200,000 shares our common stock, par value $.001 per share (“Common Stock”).
 
The Series A Preferred Stock has a stated value of $1.00 per share and was sold for a purchase price equal to the stated value. 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 (the “Certificate of Designations”), is not then continuing. A copy of the Certificate of Designations is filed as Exhibit 4.1 to this Current Report on Form 8-K and incorporated herein by reference.
 
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. Such 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.
 
2

In conjunction with the issuance of the Series A Preferred Stock to the investors, we issued to them, for no additional consideration, five-year warrants (the “Warrants”) to purchase an aggregate of 2,100,000 shares of Common Stock at an exercise price of $2.00 per share. The form of the Warrants is filed as Exhibit 4.2 to this Current Report on Form 8-K and incorporated herein by reference. The aggregate number of shares of Common Stock covered by the Warrants equals, at the date of issuance thereof, 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 such date. We have 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 such closing. We also granted the investors demand and piggyback registration rights with respect to such Common Stock.
 
Both the conversion price of the Series A Preferred Stock and the exercise price of the Warrants are subject to “full-ratchet” anti-dilution provisions, so that upon future issuances of our Common Stock or equivalents thereof, subject to specified customary exceptions, at a price below the conversion price of the Series A Preferred Stock and/or exercise price of the Warrants, such conversion price and/or exercise price will be reduced to such lower price.
 
In connection with the sale of the Series A Preferred Stock and Warrants to the investors, Margie Chassman, the beneficial holder of approximately 42% of our outstanding shares of Common Stock, agreed to pledge certain securities held by her to the investors, which such investors may sell to ensure they do not suffer a loss on their investment in the first year following the date of their investment. In consideration of her pledge to these investors, we agreed to pay Ms. Chassman (i) $525,000 in cash, and (ii) five-year warrants to purchase 10% of the shares of Series A Preferred Stock and 10% of the Warrants sold to these investors for an exercise price equal to the price paid by the investors in the private placement for the Series A Preferred Stock and Warrants.
 
We anticipate that our other fees and expenses in connection with the sale of the Series A Preferred Stock and Warrants will amount to approximately $775,000.
 
Additionally, in connection with the merger, certain stockholders of ours, including our former principal stockholder, 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, so that prior to giving effect to the merger, we had outstanding 3,750,000 shares of Common Stock.
 
After giving effect to the merger, the surrender of shares described above and the sale of the Series A Preferred Stock and Warrants, we had issued and outstanding 24,090,929 shares of Common Stock and convertible securities, options and warrants that may be converted into or exercised for 9,624,648 additional shares of Common Stock. In addition, the holders of 240,929 shares of Common Stock and warrants to purchase an additional 240,929 shares of Common Stock have the right to exchange such shares of Common Stock and warrants for approximately 800,000 shares of Series A Preferred Stock and Warrants to purchase 400,000 shares of Common Stock at a price of $2.00 per share.
 
3

The securities we sold in the private placement have not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements under the Securities Act.
 
In connection with the closing of the private placement, we agreed to make a short-term advance to Ms. Chassman in the amount of $500,000 bearing interest at the rate of 6% per annum, the repayment of which may be offset against amounts owed by us to Ms. Chassman under the $1,000,000 advance previously made by her to MedaSorb. The short-term advance will be secured by a pledge of publicly-traded securities with a market value equal to $500,000.
 
Termination of Joint Venture
 
On June 30, 2006, we also terminated our joint venture agreement with 5G Wireless pursuant to a Termination and Release Agreement, and in connection therewith, we sold our 51% interest in Nex Connectivity Solutions, Inc. to Dennis Tan, a Singapore national for $18,000 (Canadian). Accordingly, we are no longer engaged in the business of providing Internet access to hotels or other properties.
 
Item 2.01.  Completion of Acquisition or Disposition of Assets.
 
Principal Terms of the Reverse Merger
 
Pursuant to the Merger Agreement, on June 30, 2006, we completed the acquisition of MedaSorb through a reverse triangular merger in which Acquisition Sub, a wholly owned subsidiary of ours formed solely for the purpose of facilitating the merger, merged with MedaSorb.  MedaSorb is now a wholly owned subsidiary of ours, and its business (which is described below) is now our only business.
 
In connection with the merger (i) the former stockholders of MedaSorb were issued an aggregate of 20,340,929 shares of Common Stock in exchange for the same number of shares of MedaSorb common stock previously held by such stockholders, (ii) outstanding warrants and options to purchase a total of 1,697,648 shares of the common stock of MedaSorb were cancelled in exchange for warrants and stock options to purchase the same number of shares of our Common Stock at the same exercise prices and otherwise on the same general terms as the MedaSorb options and warrants that were cancelled (the options issued to the employees, directors and consultants of MedaSorb being issued under our 2006 Long Term Incentive Plan), and (iii) certain providers of legal services to MedaSorb who previously had the right to be issued approximately 997,000   shares of MedaSorb common stock as payment toward accrued legal fees, became entitled to instead be issued the same number of shares of our Common Stock as payment toward such services. Immediately prior to the merger, after giving effect to the share cancellation transaction referred to above, we had outstanding 3,750,000 shares of Common Stock and no warrants or options to purchase Common Stock.
 
4

Concurrently with the closing of the merger, Joseph G. Bowes, our sole director and officer prior to the merger, appointed Al Kraus, Joseph Rubin, Esq., and Kurt Katz to the Board of Directors, and then resigned from the Board and from his positions as an officer. In addition, at such time, Al Kraus was appointed our President and Chief Executive Officer, James Winchester, MD was appointed our Chief Medical Officer, Vincent Capponi was appointed our Chief Operating Officer and David Lamadrid was appointed our Chief Financial Officer. Additional information with respect to our new directors and officers is provided in Item 2.01 of this Current Report on Form 8-K.
 
For accounting purposes, the merger is being accounted for as a reverse merger, since we were a shell company prior to the merger, the former stockholders of MedaSorb now own a majority of the issued and outstanding shares of our Common Stock, and the directors and executive officers of MedaSorb became our directors and executive officers. Accordingly, MedaSorb is treated as the acquiror in the merger, which is treated as a recapitalization of MedaSorb, and the pre-merger financial statements of MedaSorb will now be deemed to be our historical financial statements.
 
In connection with the merger, we also changed our principal executive offices to those of MedaSorb, which are located at 7 Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852.
 
Form 10-SB Disclosure - Description of MedaSorb

Prior to closing of the merger, Registrant was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Accordingly, set forth below is the information that would be required if Registrant were filing a general form for registration of securities on Form 10-SB under the Exchange Act.
 
Unless otherwise indicated or the context otherwise requires, all references below to “we,” “us,” “MedaSorb” and the “Company” are to Registrant together with MedaSorb, its wholly-owned subsidiary.
 
General
 
We are a medical device company that is currently in the development stage, headquartered in Monmouth Junction, New Jersey (near Princeton). We have developed and are preparing to commercialize a breakthrough blood purification technology that efficiently removes toxic compounds from circulating blood. Current state-of-the-art blood purification technology (such as dialysis) is incapable of effectively clearing these toxins.
 
Our products, which have not yet been introduced to the market, are known medically as hemoperfusion devices, and incorporate our proprietary adsorbent polymer technology. We believe that there are many potential healthcare applications for our products, including:
 
5

 
·  
Adjunctive treatment and/or prevention of sepsis (bacterial infection of the blood);
 
·  
prevention of damage to organs donated for transplant prior to organ harvest;
 
·  
prevention of post-operative complications of cardiac surgery; and
 
·  
long-term treatment of chronic kidney failure.
 
Product Strategy
 
MedaSorb is developing two product lines, CytoSorb™ and BetaSorb™, for use in acute and chronic treatments, respectively.  CytoSorb™ will initially be targeted for use as an adjunctive therapy in the acute treatment of the systemic inflammatory response syndrome (SIRS). BetaSorb™ is intended to be used as a complement to dialysis in the treatment of chronic end stage renal disease (ESRD).  We will first focus our efforts on commercializing CytoSorb™, which we believe will provide a relatively faster regulatory pathway to market. BetaSorb™’s potential for usage in chronic conditions such as ESRD is anticipated to have a longer and more complex regulatory pathway and will be pursued after commercialization of the CytoSorb™ product.
 
The first indication for CytoSorb™ will be in the treatment of sepsis, as an adjunctive therapy to the current standard of care.  Following the sepsis indication, we intend to continue our research in other acute conditions where CytoSorb™ has indicated potential, such as for use in cardiopulmonary bypass surgery addressing post operative complications of inflammation, and organ donation from brain dead organ donors, addressing the so-called cytokine storm associated with the decrease of viable organs from donors. We are also exploring the potential benefits the CytoSorb™ device may have in removing drugs from blood in situations such as patient overdoses.
 
We had initially identified end stage renal disease as the target market for our polymer-based adsorbent technology. End stage renal disease affects more than 1.3 million people worldwide and is the single most common application of blood purification technology today, namely hemodialysis. Hemodialysis is a life saving intervention, but is not nearly as effective as a healthy kidney in removing toxins from the bloodstream.
 
During the development of our end stage renal product (BetaSorb™), we identified several applications for our adsorbent technology in the treatment of critical care patients and recognized that our absorbent polymer represented a   platform of broad application in medicine, well beyond the treatment of patients suffering from renal disease. As a result, we shifted our priorities to pursue critical care applications (such as for the treatment of sepsis) for our technology. We believe that, compared with the chronic renal application for our technology,
 
·  
we will able to obtain the necessary regulatory approvals in a shorter period of time, allowing us to bring our CytoSorb™ product to market in a shorter time frame;
 
6

 
·  
the production of CytoSorb™ will entail a lower capital requirement for manufacturing and generate significantly higher gross margins; and
 
·  
the use of CytoSorb™ in critical care applications will result in quicker reimbursement because the use of our products in these situations (generally on an in-patient basis) will generally not be subject to pre-approval, or require a separate decision, by Medicare or the relevant HMO or other providers of medical benefits.
 
However, we continue to remain confident of the commercial potential of our BetaSorb™ device for chronic applications and will continue its development as a secondary product.
 
Corporate History
 
MedaSorb was organized as a Delaware limited liability company in August 1997 as Advanced Renal Technologies, LLC. MedaSorb changed its name to RenalTech International, LLC in November 1998, and to MedaSorb Technologies, LLC in October, 2003.   In December 2005, MedaSorb converted from a limited liability company to a corporation, changing its name to MedaSorb Corporation.
 
MedaSorb has engaged in research and development since its inception, and prior to the merger, we had raised approximately $53 million   from investors. These proceeds have been used to fund the development of multiple product applications and to conduct clinical trials. 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.
 
Gilder Enterprises, Inc., a Nevada corporation, was incorporated on April 25, 2002. Prior to the merger, through a 51% interest in Nex Connectivity Solutions under a joint venture arrangement with 5G Wireless Communications Pte. Ltd, the Registrant was engaged in the business of installing and operating computer networks that enabled business travelers to have high-speed access to the Internet. In connection with the merger, we terminated the joint venture arrangement and disposed of our interest in Nex Connectivity Solutions, which had generated minimal revenues and no profits. At the effective time of the merger, the Registrant fell within the definition of a “shell company” under the Exchange Act.
 
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 addresses this shortcoming by efficiently removing toxins largely untouched by dialysis.
 
7

Our products 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 represents an effective therapeutic approach to severe health complications caused or complicated by large toxins circulating in the blood. Our technology has many potential applications in the treatment of common, chronic and acute healthcare complications including the treatment and/or prevention of sepsis; drug detoxification; the treatment of chronic kidney failure; the treatment of organ dysfunction resulting from trauma and severe burns; 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.
 
Our products will be easy to use and will be able to be incorporated into existing extracorporeal blood handling equipment, including heart-lung bypass circuits and hemodialysis machines. They will require no additional, expensive equipment and require minimal training.
 
Markets, Size and Economic Potential
 
Sepsis
 
In the United States alone, there are more than one million new cases of sepsis annually; extrapolated to a global population, the worldwide incidence is several million cases per year. Severe trauma and community acquired pneumonia are often associated with sepsis.
 
Sepsis patients are critically ill and suffer a very high mortality rate of between 28% and 60%. Because they are so expensive to treat, we believe that efficacy rather than cost will be the determining factor in the adoption of CytoSorb™ in the treatment of sepsis. Our current pricing model represents a fraction of what is currently spent on the treatment of a sepsis patient. Critical care specialists project that the average sepsis patient may require 10 CytoSorb™ (single-use, disposable) devices during a treatment regimen, based on the median number of days for which patients typically require ventilator support. Assuming only 2% of the sepsis patient population received CytoSorb™ therapy, based on a pricing model of $500 per device and 10 devices per episode, the annual revenue potential is $100 million in the U.S. alone and $200 million worldwide.
 
Brain-Dead Organ Donors
 
There are approximately 6,000 to 12,000 brain dead organ donors each year in the United States; worldwide, the number of these organ donors is estimated to be at least double the U.S. brain dead organ donor population. There is a severe shortage of donor organs. Currently, there are more than 85,000 individuals on transplant waiting lists in the United States. We expect that the use of our CytoSorb™ device in brain dead organ donors will increase the number of viable organs harvested from the donor pool and improve the survival of transplanted organs. At $500 per device, the worldwide revenue potential for this application is currently estimated at $12 million annually.
 
8

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. Nearly a third of all patients suffer from post-operative complications of cardiopulmonary bypass surgery, including complications from infection, pneumonia, pulmonary, and neurological dysfunction. Extended surgery time leads to longer ICU recovery time and hospital stays, both leading to higher costs - approximately $35,000 per coronary artery bypass graft procedure. We believe that the use of CytoSorb™ during and after the surgical procedure will prevent or mitigate post-operative complications for many CPB patients.
 
We anticipate that the CytoSorb™ device, incorporated into the extracorporeal 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. At $500 per CytoSorb™ device and one device per procedure, and assuming 50% of the patient population receives CytoSorb™ treatment, the annual revenue potential for this application is $100 million in the U.S. and $200 million worldwide.
 
Chronic Kidney Failure  
 
The National Kidney Foundation estimates that more than 20 million Americans have chronic kidney disease. Left untreated, chronic kidney disease can ultimately lead to chronic kidney failure, which requires a kidney transplant or chronic dialysis (generally three times per week) to sustain life. There are approximately 300,000 patients in the United States currently receiving chronic dialysis and more than 1.3 million worldwide. Approximately 85% of patients with chronic kidney disease are treated with hemodialysis.
 
Our BetaSorb™ device has been designed for use in conjunction with standard dialysis. Standard dialysis care typically involves three sessions per week, averaging approximately 150 sessions per year. Assuming BetaSorb™ use in each session, every 100,000 patients would require approximately 15 million devices annually.
 
Our pricing model for the BetaSorb™ device is based on a variety of cost/benefit assumptions. The current BetaSorb™ end-user pricing model is $35 per device, or $5,250 per patient per year. Based on high-volume finished product cost assumptions and the terms of our existing marketing and distribution agreement with Fresenius Medical Care (which owns more than 1,600 dialysis clinics with over 130,000 patients), we estimate annual revenue potential for the application of our technology to chronic kidney failure at approximately $780 million in the U.S. and $2.5 billion worldwide.
 
9

Other Applications  
 
Additional applications for the critical care market have been identified. These promising areas include:
 
·  
Drug detoxification
 
·  
Liver failure
 
·  
Regional high-dose chemotherapy
 
·  
Acute Respiratory Distress Syndrome (ARDS)
 
·  
Severe Acute Respiratory Syndrome (SARS)
 
·  
Equine sepsis
 
·  
Bio-terrorism
 
Products (Currently in Development)
 
The CytoSorb™ Device (Critical Care)
 
APPLICATION: Treatment and Prevention of Sepsis
 
Sepsis is defined by high levels of toxic compounds (“cytokines”) which are released into the blood stream as part of the body’s auto-immune response to severe infection or injury. These toxins cause severe inflammation and damage healthy tissues, which can lead to organ dysfunction and failure. Sepsis is very expensive to treat and has a high mortality rate.
 
Potential Benefits: By preventing or reducing the accumulation of cytokines in the circulating blood, we believe our adsorbent blood purification technology will 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 for Efficacy: We believe that the effective treatment of sepsis is the most valuable potential application for our technology. Sepsis carries mortality rate of between 28% and 60%. Death can occur within hours or days, depending on many variables, including cause, severity, patient age and co-morbidities. Researchers estimate that there are approximately one million new cases of sepsis in the U.S. each year; extrapolated to a global population, this equates to several million new cases annually. In the U.S. alone, treatment of sepsis costs nearly $20 billion annually. According to the Centers for Disease Control, sepsis is the tenth leading cause of death in the U.S., as reported by (CDC). More than 1,000 people die each day from sepsis.
 
An effective treatment for sepsis has been elusive. Pharmaceutical companies have been trying to develop drug therapies to treat the condition. With the exception of a single drug, Xigris® from Eli Lilly, which demonstrated a small improvement in survival in a small segment of the patient population, to our knowledge, all other efforts to date have failed to significantly improve patient survival.
 
10

Our technology presents a new therapeutic approach in the treatment of sepsis, and its potential efficacy is supported by scientific research. The potential benefits of blood purification in the treatment of sepsis patients are widely acknowledged by medical professionals and have been studied using dialysis and hemofiltration technology. These studies, while encouraging, demonstrated that dialysis alone produced only limited benefit to sepsis patients. The reason for this appears to be rooted in a primary limitation of dialysis technology itself: the inability of standard dialysis to effectively and efficiently remove larger toxins from circulating blood. Our CytoSorb™ device efficiently removes these larger toxins. CytoSorb’s™ toxin clearing ability and the ability to interact safely with blood (hemocompatibility) has been demonstrated clinically. Data collected during the “emergency and compassionate use” treatment of a single sepsis patient has been encouraging to us.
 
CytoSorb™ has been designed to achieve broad-spectrum removal of both pro- and anti-inflammatory cytokines, preventing or reducing the accumulation of high concentrations in the bloodstream. This approach is intended to modulate the immune response without blocking or suppressing the function of any of its mediators. For this reason, researchers have referred to the approach reflected in our technology as ‘immunomodulatory’ therapy.
 
Projected Timeline and Budget Requirements: Previous clinical studies in patients with chronic kidney failure have provided valuable data which underpin the development of the critical care applications for our technology. Our current device design has been extensively studied and shown to be efficacious in humans with kidney failure (in multiple treatment sessions lasting up to 4 hours, three times per week for up to 24 weeks in some patients). This same device design was tested on a single patient with bacterial sepsis, producing results that we found very encouraging and confirming to us that our device design is appropriate for a more extensive sepsis study. Our plans for the development of CytoSorb™ to treat sepsis patients are summarized in the table below.
 
Task
Estimated Time Required
Estimated Budget Requirements
1. Design pilot study
4 to 6 months
(nominal)
2. Conduct pilot study
6 to 9 months
$1.2 million
3. Design pivotal study
Concurrent with item 2
(nominal)
4. Conduct pivotal study
9 to 12 months
$1.8 million
5. Approval time following submission
6 to 9 months
 
Total
Approximately 25 to 36 months
$3.0 million
 
Because our technology pertains to a medical device, the regulatory pathway and approval process are faster and more straightforward than the process related to the approval of a drug.
 
11

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 : By preventing or reducing high-levels of cytokines from accumulating in the bloodstream of a brain-dead organ donor, CytoSorb™ aims to mitigate organ dysfunction and failure which results from severe inflammation following brain-death. The primary goals for this application are
 
·  
Improving the viability of organs which can be harvested from brain-dead organ donors, and
 
·  
increasing the likelihood of organ survival following transplant.
 
Background and Rationale for Efficacy: When brain death occurs, the body responds by generating large quantities of inflammatory cytokines. This process is similar to sepsis. A high percentage of donated organs are never transplanted due to this response, which damages healthy organs and prevents transplant. In addition, inflammation in the donor may damage organs that are harvested and reduce the probability of graft survival following transplant.
 
There is a shortage of donated organs worldwide, with approximately 85,000 people currently on the waiting list for organ transplants in the United States alone. Because there are an insufficient number of organs donated to satisfy demand, it is vital to maximize the number of viable organs donated, and optimize the probability of organ survival following transplant.
 
Projected Timeline and Budget Requirements: Studies are currently being conducted under a $1 million grant from the Health Resources and Services Administration (HRSA),   an agency of the U.S. Department of Health and Human Services, and extensive development work has already been completed. Researchers at the University of Pittsburgh Medical Center and the University of Texas, Houston Medical Center have made significant progress on the observational and dosing phases of the project. The observational portion of the study is ongoing, while the dosing study, involving eight non-viable donors, has been completed. These initial phases of the study are expected to be concluded in 2006. The next phase of this study, the treatment phase, will involve viable donors. In this phase of the project , viable donors will be treated and the survival and function of organs in transplant recipients will be tracked and measured. The treatment phase will be contingent upon further discussion with the FDA and HRSA regarding trial design, as well as obtaining additional funding.
 
APPLICATION: Prevention and treatment of post-operative complications of cardiopulmonary bypass surgery
 
Potential Benefits: By preventing or reducing 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 can be prevented or mitigated. The primary goals for this application are to
 
·  
reduce ventilator and oxygen therapy requirements;
 
·  
reduce length of stay in hospital intensive care units; and
 
12

 
·  
reduce the total cost of patient care.
 
Background and Rationale for Efficacy: Due to the highly invasive nature of cardiopulmonary bypass surgery, high levels of cytokines are produced by the body, triggering severe inflammation. By preventing or reducing 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 have completed an observational study of 32 patients to obtain information 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 our technology for application to cardiac surgery. Upon successful commercialization of the sepsis application, we will pursue the use of our polymer absorbent technology for other critical care uses, such as cardiopulmonary bypass surgery.
 
The BetaSorb™ Device (Chronic Care)
 
APPLICATION: Prevention and treatment of health complications caused by the accumulation of metabolic toxins in patients with chronic renal failure
 
Potential Benefits: By preventing or reducing high levels of metabolic waste products from accumulating in the blood and tissues of long-term dialysis patients, we anticipate that the health complications characteristic to these patients can be prevented or mitigated. The primary goals for this application are to
 
·  
improve and maintain the general health of dialysis patients;
 
·  
improve the quality of life of these patients
 
·  
reduce the total cost of patient care; and
 
·  
increase life expectancy.
 
Background and Rationale for Efficacy: 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. By routinely removing these toxins during dialysis and preventing or reducing 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.
 
13

The poor health experienced by chronic dialysis patients is illustrated by the fact that in the U.S. alone, more than $20 billion is spent annually caring for this patient population. While the cost of providing dialysis therapy alone is approximately $23,000 per patient per year, the total cost of caring for a patient ranges from $60,000 to more than $120,000 annually due to various health complications associated with dialysis.
 
Projected Timeline: We have collected a significant amount of empirical data for the development of this application. As the developer of this technology, we had to undertake extensive research, as no comparable technology was available for reference purposes. We have completed several pilot studies, and most recently a clinical pilot of six patients in California for up to 24 weeks in which our BetaSorb™ device removed the targeted toxins as expected.
 
As discussed above, due to practical and economic considerations, we are now focusing our efforts and resources on commercializing our CytoSorb™ device for critical care application. Following commercial introduction of the CytoSorb™ device, we expect to conduct additional clinical studies using the BetaSorb™ device in the treatment of end stage renal disease patients.
 
Commercial and Research Partners
 
University of Pittsburgh Medical Center
 
We are working with researchers at the University of Pittsburgh - Critical Care Medicine Department in the development of critical care applications for technology. Consisting of more than twenty physicians, as well as numerous full-time scientists, educators and administrative assistants, the Critical Care Medicine Department at the University of Pittsburgh is one of the largest organizations of its type in the world and has established an international reputation for excellence in clinical care, education, and research.
 
Researchers at UPMC have participated in nearly every major clinical trial of potential sepsis intervention during the past twenty years. Drs. Derek Angus and John Kellum were investigators for Ely Lilly ’s sepsis drug, Xigris®. Dr. Kellum, a member of the UPMC faculty since 1994, is our principal investigator for CytoSorb™. Dr. Kellum, together with several other researchers at UPMC, serve on our Critical Care Advisory Board. Dr. Kellum’s research interests span various aspects of Critical Care Medicine, but center on critical care nephrology (including acid-base, and renal replacement therapy), sepsis and multi-organ failure, and clinical epidemiology. He is Chairman of the Fellow Research Committee at the University of Pittsburgh Medical Center   and   has authored more than 70 publications and has received numerous research grants from foundations and industry.
 
14

Fresenius Medical Care AG
 
We have 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. The agreement, which we entered into in 1999 is a profit sharing plan under which both we and Fresenius are incentivized to minimize costs and maximize the price to end-users. In particular, under the agreement, to the extent that sales of our products by Fresenius results in gross margins to Fresenius in excess of targeted levels, we would share with Fresenius a portion of the revenues attributable to such excess.
 
With Fresenius as our exclusive distributor of our renal products, we believe that our agreement with Fresenius will maximize the potential for rapid product introduction and penetration of the chronic kidney failure market.
 
Today, Fresenius Medical Care is the world's largest, integrated provider of products and services for individuals with chronic kidney failure. Through its network of more than 1,600 dialysis clinics in North America, Europe, Latin America and Asia-Pacific, Fresenius Medical Care provides dialysis treatment to more than 130,000 patients around the globe. Fresenius Medical Care is also the world's largest provider of dialysis products, such as hemodialysis machines, dialyzers and related disposable products.
 
Royalty Agreement
 
In August 2003, in order to induce Guillermina Vega Montiel, a principal stockholder of ours, to make an additional investment in MedaSorb, we granted Ms. Montiel a perpetual royalty equal to three percent of all gross revenues received by us from sales of CytoSorb TM in the applications of sepsis, cardiopulmonary bypass surgery, organ donor, chemotherapy and inflammation control application.
 
P roduct Payment & Reimbursement  
 
Critical Care Applications
 
Payment for our CytoSorb™ device in the treatment and prevention of sepsis and other related acute care applications is anticipated to fall under the “diagnosis-related group” (DRG) in-patient reimbursement system, which is currently the predominant basis of hospital medical billing in the United States. Under this system, predetermined payment amounts are assigned to categories of medical patients with respect to their treatments at medical facilities based on the DRG that they fall within (which is a function of such characteristics as medical condition, age, sex, etc.) and the length of time spent by the patient at the facility. Reimbursement is not determined by the actual procedures used in the treatment of these patients, and a separate reimbursement decision would not be required to be made by Medicare, the HMO or other provider of medical benefits in connection with the actual method used to treat the patient.
 
15

Critical care applications such as those targeted by our CytoSorb™ device involve a high mortality rate and extended hospitalization, coupled with extremely expensive ICU time. In view of these high costs and high mortality rates, we believe acceptance of our proprietary technology by critical care practitioners and hospital administrators will primarily depend on safety and efficacy factors rather than cost.
 
Chronic Renal Failure
 
In the U .S., over 80% of chronic dialysis patients are Medicare-eligible, regardless of age. Therefore, it is expected that Medicare will be the primary payer for the BetaSorb™ device, either through the current “fee for service” mechanism or managed care programs. The large majority of costs not covered by federal programs are covered by the private insurance sector.
 
While the fee-for-service composite rate system is currently the dominant payment mechanism, many industry participants believe that a managed care system will become the dominant payment mechanism. We believe that movement to a full or shared-risk managed care system would speed market acceptance of BetaSorb™ because, under such a system, providers will have a strong incentive to adopt technologies that lower overall treatment costs. Fresenius is a leading participant in the move to managed care and will play a leading role in the demonstration and introduction of our product to Medicare.
 
Competition
 
Sepsis
 
We believe that our products represent a unique approach to disease states and health complications associated with sepsis, which is sometimes also referred to as systemic inflammatory response syndrome (SIRS). 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 larger 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.
 
The CytoSorb™ device is highly efficient in the removal of large toxins from circulating blood. Since the adsorbent device does not rely on fluid extraction for blood purification, it does not necessitate the use of replacement fluid. This represents a major advantage over any dialysis technique. A study conducted on a single patient with bacterial sepsis produced results that we believe demonstrate the ability of the CytoSorb™ device to remove the toxins acting in sepsis.
 
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 Ely Lilly drug, Xigris®, cleared by the FDA in November 2001, is the first and only drug to be approved for the treatment of severe sepsis. Clinical studies demonstrated that use of Xigris® resulted in a 6% reduction in the absolute risk of death, and a 13% risk reduction in the most severe sepsis patients. The drug remains controversial and is considered extremely expensive when compared to the percentage of patients who benefit.
 
16

While studies of other potential sepsis drug therapies are in progress, we are not aware of any other broad-spectrum blood detoxification therapy under development for this application that could be considered directly competitive with our approach.
 
C ardiopulmonary Bypass Surgery  
 
We are not aware of any practical competitive approaches for removing cytokines in CPB patients. Alternative therapies such as “off-pump” surgeries are available but “post-bypass” syndrome has not been shown to be reduced in this less invasive procedure. If successful, the CytoSorb™ is expected to be useful in both on-pump and off-pump procedures.
 
Chronic Dialysis  
 
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 larger toxins with enhanced dialyzer designs have achieved only marginal success. Many experts believe that dialyzer technology has reached its limit in this respect. A variation of high-flux hemodialysis, known as hemodiafiltration, has existed for many years. However, due to the complexity, cost and increased risks, this dialysis technique has not gained significant acceptance worldwide. In addition, many larger toxins are not effectively filtered by hemodiafiltration, despite its more open pore structure. As a result, hemodiafiltration does not approach the quantity of toxins removed by the BetaSorb™ device.
 
T reatment 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 Testing  
 
Our first clinical studies were conducted in patients with chronic renal failure. The health of these patients is challenged by high levels of toxins circulating in their blood but, unlike sepsis patients, they are not at imminent risk of death. The toxins involved in chronic renal failure are completely different from those involved in sepsis, eroding health gradually over time. The treatment of patients with chronic renal failure is a significant target market for us, although not the current focus of our efforts and resources. Our clinical testing and product development work in this application functioned as a low risk method of evaluating the safety of the technology in a clinical setting, with direct benefit to development of the critical care applications on which we are now focusing our efforts.
 
17

We believe that our device design, which has been tested in approximately 350 sessions, combined with hemodialysis, has been identified as a suitable candidate to pilot in clinical studies in the treatment of sepsis. We used this design in our first clinical experience treating a septic patient, which has produced results that we have found encouraging and indicative of the efficacy of our technology in the treatment of sepsis.
 
Government Research Grants
 
Three government research grants by the National Institutes of Health (NIH) and Health and Human Services (HHS) have been awarded to investigators to explore the use of our technology in sepsis and transplant organ preservation.
 
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. This clinical study is in progress.
 
The second grant, a $100,000 Phase I Small Business Technology Transfer grant from the National Institutes of Health, was directly awarded to us for the study of blood purification on survival time using a septic model.
 
Finally, University of Pittsburgh Medical Center was awarded a $7,000,000 grant from NIH entitled “Systems Engineering of a Pheresis Intervention for Sepsis (SEPsIS) to study the use of our adsorbent polymer technology in the treatment of severe sepsis. 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.
 
18

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 trials must also be submitted in support of a 510(k) Submission. If so, these data must be collected in a manner that conforms with specific requirements in accordance with federal regulations. The FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices covered by a 510(k) Submission which do not significantly affect safety or effectiveness can generally be made by us without additional 510(k) Submissions.
 
The second process requires that an application for PMA be made to the FDA to demonstrate that the device is safe and effective for its intended use as manufactured. This approval process applies to certain Class III devices. In this case, two steps of FDA approval are generally required before marketing in the U.S. can begin. First, investigational device exemption (IDE) regulations must be complied with in connection with any human clinical investigation of the device in the U.S. Second, the FDA must review the PMA application which contains, among other things, clinical information acquired under the IDE. The FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose.
 
In the European Union, distributors of medical devices are required to comply with the Medical Devices Directive and obtain CE Mark certification in order to market medical devices. The CE Mark certification, granted following approval from an independent Notified Body, is an international symbol of adherence to quality assurance standards and compliance with applicable European Medical Devices Directives. Distributors of medical devices may also be required to comply with other foreign regulations such as Ministry of Health Labor and Welfare approval in Japan. The time required to obtain these foreign approvals to market our products may be longer or shorter than that required in the U.S., and requirements for those approvals may differ from those required by the FDA.
 
In the United States, our CytoSorb™ and BetaSorb™ devices are classified as Class III (CFR 876.5870—Sorbent Hemoperfusion System) and will require 501(k) Submissions to the FDA. However, because the BetaSorb™ device is intended for chronic use, the FDA may require pre-market approval (PMA), which we will submit if required. In the case of CytoSorb™, because the application is for acute care (short term, less than 30 days), management believes that FDA approval for this product may be obtained based solely on the 510(k) Submission accompanied with clinical data. In Europe, our devices are expected to be classified as class IIb, and will conform to the ISO 13485 Quality Standard in support of our planned applications to obtain CE Mark certification in Europe, and applicable approvals in Canada and Japan.
 
19

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.
 
Given adequate funding, we expect that it will take approximately six months to begin the treatment phase of a pilot clinical study on the efficacy of our products in the treatment of sepsis. The pilot phase is expected to span six to nine months, and an additional one year pivotal study would then be undertaken for the purpose of compiling sufficient data to support both the U.S. 510(k) Submission and the application to obtain CE Mark certification in Europe. In the U.S., another six to nine months is anticipated for FDA review and approval of the 510(k) submission. Concurrent with these activities, we plan to pursue CE Mark certification of our products. Upon successful completion of a “quality systems audit” in combination with clinical data and the assembly of a technical file, we anticipate that CytoSorb™ device will receive CE Mark certification, all owing it to be sold in Europe.
 
The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement or refund of these devices and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiate action for criminal prosecution of such violations. International sales of medical devices manufactured in the U.S. that are not approved by the FDA for use in the U.S., or are banned or deviate from lawful performance standards, are subject to FDA export requirements. Exported devices are subject to the regulatory requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most foreign countries medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the U.S. to take advantage of differing regulatory requirements.
 
Sales and Marketing
 
We currently estimate, provided that we receive adequate funding to support our planned activities and that our products perform as expected in clinical studies, that we will obtain FDA approval of our CytoSorb™ device in the treatment of sepsis in 25 to 36 months from funding. As we approach regulatory approval, we plan to initially build a sales organization of approximately 15 representatives in the U.S. In addition, we plan on pursuing localized distribution agreements in rural areas.
 
20

We also plan to initiate sales in several European countries which are known as early adopters of new medical device technology. These countries primarily include Italy, Germany and the United Kingdom. We plan to initially operate through local distributors in each European country where we launch sales operations. Only after establishment of a limited network of local distributors and actual generation of sales, will we formulate a broader distribution strategy on a global basis.
 
Intellectual Property and Patent Litigation
 
The medic al device market in which we primarily participate is in large part technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. However, intellectual property litigation to defend or create market advantage is inherently complex, unpredictable and is expensive to pursue. Litigation often is not ultimately resolved until an appeal process is completed and appellate courts frequently overturn lower court patent decisions.
 
Moreover, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In addition, although monetary and injunctive relief is typically sought, remedies are generally not determined until the conclusion of the proceedings, and are frequently modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other forums, both domestic and international.
 
We rely on a combination of patents, trademarks, trade secrets and non-disclosure agreements to protect our intellectual property. We hold 21   U.S. patents, some of which have foreign counterparts, and additional patent applications pending worldwide that cover various aspects of our technology. There can be no assurance that pending patent applications will result in issued patents, that patents issued to us will not be challenged or circumvented by competitors, or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with a competitive advantage.
 
We 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.
 
21

We may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how and to determine the scope and validity of the proprietary rights of others. Patent litigation can be costly and time-consuming, and there can be no assurance that our litigation expenses will not be significant in the future or that the outcome of litigation will be favorable to us. Accordingly, we may seek to settle some or all of our pending litigation described below. Settlement may include cross-licensing of the patents which are the subject of the litigation as well as our other intellectual property and may involve monetary payments to or from third parties.
 
Employees and Properties
 
We currently have six   employees and operate a 6,575 sq. ft. facility near Princeton, New Jersey, housing research laboratories, clinical manufacturing operations and administrative offices, under a lease agreement which expires in February 2007. 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.
 
L egal Proceedings
 
Purolite
 
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 January, 2003, Purolite commenced an action against us in United States District Court for the Eastern District of Pennsylvania   asserting that our adsorbent technology was developed in part using Purolite’s technology, that two of its employees should be included as co-inventors on some of our patents, and that Purolite was therefor a joint owner of the technology and had rights to the use of the technology. Purolite recently expanded its claims, alleging they are the sole owner of these patents, and that we misappropriated these patents from them. Purolite now seeks equitable relief declaring that it is the exclusive owner of our technology, as well as monetary damages.  
 
We have filed a motion for summary judgment, which is pending before the Court, and have also engaged in efforts to settle the case.  In addition, the Court has ordered the matter to be mediated before a magistrate judge. Although there has been some progress in seeking a resolution of the litigation, to date no agreement has been reached, and there can be no assurance that the parties will be able to reach an accord. If the case is not settled, the Court will rule on our summary judgment motion.  If the motion is denied, we expect that the matter will go to trial within a few months following the Court’s ruling on our summary judgment motion.
 
Former Employee
 
In May 2006, a former employee of ours initiated a legal action against us in the United States District Court for the Southern District of New York, seeking damages in an amount exceeding $245,500. The employee alleges that we are required to pay or reimburse him for (as applicable) credit card charges to his account made by another former employee of ours and a related party. The matter is currently under review by our legal counsel.
 
22

Dow Chemical
 
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.
 
RISKS FACTORS
 
MedaSorb currently has no commercial operations and there can be no assurance that it 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, development, testing and financing and we will need to overcome significant regulatory burdens prior to commercialization. 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.
 
MedaSorb has a History of Losses and Expects to Incur Substantial Future Losses, and the Report of its Auditor on its Consolidated Financial Statements Expresses Substantial Doubt About its Ability to Continue as a Going Concern .
 
MedaSorb has experienced substantial operating losses since inception. As of March 31, 2006, MedaSorb had an accumulated deficit of $59,994,884, which included losses from operations of $3,665,596 for the year ended December 31, 2005 and $1,015,377 for the three-month period ended March 31, 2006. Due to these losses, MedaSorb’s audited consolidated financial statements have been prepared assuming MedaSorb will continue as a going concern, and the auditors’ report on those financial statements express substantial doubt about its ability to continue as a going concern. MedaSorb’s losses have resulted principally from costs incurred in the research and development of our polymer technology and general and administrative expenses. Because MedaSorb was a limited liability company until December 2005, substantially all of these losses were allocated to its members and will not be available for tax purposes to us in future periods. We intend to conduct significant additional research, development, and clinical testing 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.
 
23

We may have difficulty raising needed capital in the future because of our limited operating history and business risks associated with MedaSorb.
 
We generate no revenues from our proposed products or otherwise, and have expended and will continue to expend substantial funds in the research, development and clinical and pre-clinical testing of our polymer products. Following the merger, we completed a private placement of securities raising gross proceeds of $5.5 million. We anticipate that the net proceeds of the private placement will fund our operations for the next 15 months, following which we will need additional financing. However, there can be no assurance that financing will be available on acceptable terms or at all. Our future capital requirements will depend upon many factors, including, but not limited to, continued progress in our research and development activities, costs and timing of conducting clinical trials and seeking regulatory approvals and patent prosecutions, competing technological and market developments, and our ability to establish collaborative relationships with third parties. If adequate funds are unavailable, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs or product launches or marketing efforts or cease operations.
 
Our long-term capital requirements are expected to depend on many factors, including:
 
·  
continued progress and cost of our research and development programs;
·  
progress with pre-clinical studies and clinical trials;
·  
the time and costs involved in obtaining regulatory clearance;
·  
costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
·  
costs of developing sales, marketing and distribution channels;
·  
market acceptance of our products; and
·  
costs for training physicians and other health care personnel.
 
In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, we may have to relinquish economic and/or proprietary rights to some of our technologies or products under development that we would otherwise seek to develop or commercialize by ourself.
 
24

We depend upon key personnel who may terminate their employment with us at any time.
 
We currently have only six employees. Our success will depend to a significant degree upon the continued services of key management and advisors of MedaSorb, including Al Kraus, Dr. James Winchester, David Lamadrid and Vincent Capponi . These individuals, other than Mr. Kraus, whose employment agreement terminates in July 2008, do not have long-term employment agreements, and there can be no assurance that they will continue to provide services to us. In addition, our success will depend on our ability to attract and retain other highly skilled personnel. We may be unable to recruit such personnel on a timely basis, if at all. Management and other employees may voluntarily terminate their employment with us at any time. The loss of services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays in development or approval of our products, loss of sales and diversion of management resources.
 
Acceptance of MedaSorb’s medical devices in the marketplace is uncertain, and failure to achieve market acceptance will prevent or delay our ability to generate revenues.
 
Our future financial performance will depend, at least in part, upon the introduction and customer acceptance of our polymer products. Even if approved for marketing by the necessary regulatory authorities, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:
 
·  
the receipt of regulatory clearance of marketing claims for the uses that we are developing;
·  
the receipt of regulatory clearance of marketing claims for the uses that we are developing;
·  
the establishment and demonstration of the advantages, safety and efficacy of the our polymer technology;
·  
pricing and reimbursement policies of government and third-party payers such as insurance companies, health maintenance organizations and other health plan administrators;
·  
our ability to attract corporate partners, including medical device companies, to assist in commercializing our products; and
·  
our ability to market our products.
 
Physicians, patients, payers or the medical community in general may be unwilling to accept, utilize or recommend any of our products. If we are unable to obtain regulatory approval or commercialize and market our products when planned, we may not achieve any market acceptance or generate revenue.
 
25

We face litigation from third parties which claim that our products infringe on their intellectual property rights, or seek to challenge the validity of our patents.
 
Our future success is also dependent on the strength of our intellectual property, trade secrets and know-how, which have been developed from years of research and development. In addition to the “Purolite” litigation discussed below, 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. Purolite recently expanded its claims alleging they are the sole owner of these patents, and that we misappropriated these patents from them. We believe these claims are without merit. In management’s view, the suit was initiated to pressure us to reach an exclusive manufacturing agreement. Several negotiation efforts have been made to settle the case without success. The discovery phase has been completed and we have made an application to the court to dismiss the action, which is currently pending before the court. If our application is not granted, we expect that the matter will be tried in early 2006.
 
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 MedaSorb.
 
The failure to obtain government approvals, including required FDA approvals, for our polymer products, or to comply with ongoing governmental regulations could prevent, delay or limit introduction or sale of our products and result in the failure to achieve revenues or maintain our operations.
 
The manufacturing and marketing of our products will be subject to extensive and rigorous government regulation in the United States, in various states and in foreign countries. In the United States and other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive, and uncertain. There can be no assurance that we will ever obtain the necessary approvals to sell our products. Even if we do ultimately receive FDA approval for any of our products, we will be subject to extensive ongoing regulation.
 
26

Our products will be subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act. In the United States, the FDA enforces, where applicable, development, clinical testing, labeling, manufacturing, registration, notification, clearance or approval, marketing, distribution, record keeping, and reporting requirements for medical devices. Different regulatory requirements may apply to our products depending on how they are categorized by the FDA under these laws. Current FDA regulations classify our CytoSorb™ device (the first product we intend to seek FDA approval for) as a Class III device (CFR 876.5870—Sorbent Hemoperfusion System). We intend to submit a 510(k) pre-market notification to the FDA for approval to market this product. There can be no assurance, however, that the FDA will grant clearance to market CytoSorb™ in a timely manner, if at all, or that the FDA will not require the submission of additional clinical data or a pre-market approval application ("PMA"), which is a lengthier process. There can be no assurance that the clinical trials we conduct will demonstrate sufficient safety and efficacy to obtain the required regulatory approvals for marketing, or that we will be able to comply with any additional FDA, state or foreign regulatory requirements. In addition, there can be no assurance that government regulations applicable to our products or the interpretation of those regulations will not change. We also are and will be subject to other Federal, state, and local laws, regulations and recommendations relating to laboratory and manufacturing practices as well as Medicare, Medicaid and anti-kickback laws. Non-compliance with applicable requirements can result in civil penalties, the recall, injunction or seizure of products, an inability to import products into the United States, the refusal by the government to approve or clear product approval applications, the withdrawal of previously approved product applications and criminal prosecution. The extent of potentially adverse government regulation that might arise from future legislation or administrative action cannot be predicted.
 
Data obtained from clinical and pre-clinical trials is susceptible to varying interpretations, which could delay, limit or prevent regulatory clearances.
 
There can be no assurance that we will successfully complete the clinical trials necessary to receive regulatory approvals. While tests conducted by us and others have produced results we believe to be encouraging and indicative of the efficacy of our products and technology, data already obtained, or in the future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that will be obtained from later pre-clinical studies and clinical trials. Moreover, pre-clinical and clinical data is 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 trials, even after promising results in earlier trials. 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.
 
27

We rely extensively on research and testing facilities at various universities and institutions, which could be adversely affect us should we lose access to those facilities.
 
Although we have our own research laboratories and clinical facilities, we collaborate with numerous institutions, universities and commercial entities to conduct research and testing of our products. We currently maintain a good working relationship with these parties. However, should the situation change, the cost and time to establish or locate alternative research and development could be substantial and delay gaining FDA approval and commercializing our products.
 
We are and will be exposed to product liability risks, and clinical and preclinical liability risks, which could place a substantial financial burden upon us should we be sued.
 
Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices. We cannot be sure that claims will not be asserted against us. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
 
We do not currently have any product liability insurance or other liability insurance relating to clinical trials or any products. We cannot give assurances that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability insurance coverage that we may obtain could have a material adverse effect on our business, financial condition and results of operations.
 
Certain university and other relationships are important to our business and may potentially result in conflicts of interests.
 
Dr. John Kellum and Dr. David Powner, among others, are critical care advisors and consultants of ours and are associated with University of Pittsburgh Medical Center and University of Texas, respectively. Their association with these institutions may currently or in the future involve conflicting interests in the event they or these institutions enter into consulting or other arrangements with competitors of ours.
 
We have limited manufacturing experience, and once our products are approved, we may not be able to manufacture sufficient quantities at an acceptable cost, or without shut-downs or delays.
 
We remain in the research and development and clinical and pre-clinical trial phase of product commercialization. Accordingly, once our products are approved for commercial sale, we will need to establish the capability to commercially manufacture our products in accordance with FDA and other regulatory requirements. We have limited experience in establishing, supervising and conducting commercial manufacturing. If we or the third-party manufacturers of our products fail to adequately establish, supervise and conduct all aspects of the manufacturing processes, we may not be able to commercialize our products.
 
28

Due to our limited marketing, sales and distribution experience, we may be unsuccessful in our efforts to sell our products.
 
We expect to enter into agreements with third parties for the commercial manufacture and distribution of our products. There can be no assurance that parties we may engage to market and distribute our products will:
 
·  
satisfy their financial or contractual obligations to us;
·  
adequately market our products; or
·  
not offer, design, manufacture or promote competing products.
 
If for any reason any party 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.
 
29

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.
 
Directors, executive officers and principal stockholders are expected to own a significant percentage of the shares of Common Stock, which will limit your ability to influence corporate matters.
 
Our d irectors, executive officers and principal stockholders together beneficially own approximately 75% of our outstanding shares of Common Stock. Accordingly, these stockholders could have a significant influence over the outcome of any corporate transaction or other matter submitted to stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and also could prevent or cause a change in control. The interests of these stockholders may differ from the interests of our other stockholders. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership.
 
Our Series A Preferred Stock Provides for the Payment of Penalties; Dilution.
 
Immediately following the merger, we issued 5,250,000 shares of Series A 10% Cumulative Convertible Preferred Stock with an aggregate stated value of $5,250,000, and we may issue additional shares of this series of preferred stock. 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:
 
30

 
·  
the occurrence of “Non-Registration Events” including, the failure to cause a registration statement registering the shares of Common Stock underlying the Series A Preferred Stock and Warrants issued in connection therewith to be effective within 240 days following the closing of the private placement;

·  
an uncured breach by us of any material covenant, term or condition in the Certificate of Designation or any of the related transaction documents; and

·  
any money judgment or similar final process being filed against us for more than $100,000.

The registration rights provided for in the subscription agreement we entered into with the purchasers in this offering:

·  
require that we file a registration statement with the SEC on or before 120 days from the closing to register the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the Warrants, and cause such registration statement to be effective within 240 days following the closing; and

·  
entitles each of these investors to liquidated damages in an amount equal to two percent (2%) of the purchase price of the Series A Preferred Stock if we fail to timely file that registration statement with, or have it declared effective by, the SEC.

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.

In addition, b oth the conversion price of the Series A Preferred Stock and the exercise price of the Warrants are subject to “full-ratchet” anti-dilution provisions, so that upon future issuances of our Common Stock or equivalents thereof, subject to specified customary exceptions, at a price below the conversion price of the Series A Preferred Stock and/or exercise price of the Warrants, such conversion price and/or exercise price will be reduced to such lower price, further diluting holders of our Common Stock.
 
31

There is no public market for our Common Stock.
 
Although our shares of Common Stock are eligible for quotation on the OTC Bulletin Board under the symbol “GDRE,” there is currently no public market for the Common Stock and there can be no expectation or assurance that a trading market will develop or, if a market develops, that it will be active or sustained.
 
Future Sales of Common Stock Could Result in a Decline in Market Price.

Following the completion of the merger, the holders 3,750,000 shares of Common Stock are able to sell such shares without registering them under the Securities Act. In addition, we are required to file a registration statement under the Securities Act covering the resale of the shares of Common Stock underlying the Series A Preferred Stock and Warrants sold in the offering, as well as the shares of Common Stock underlying the warrants we issued to Margie Chassman in consideration of her pledge of securities to investors in the offering as described above . 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 (to the extent a market develops for our Common Stock).
 
Penny Stock Regulations May Affect Your Ability To Sell Our Common Stock.

To the extent our Common Stock trades at a price below $5.00 per share, our Common Stock will be subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker dealers which sell these securities to persons other than established customers and accredited investors. Under these rules, broker-dealers who recommend penny stocks to persons other than established customers and "accredited investors" must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our Common Stock and may make it more difficult for holders of our Common Stock to sell shares to third parties or to otherwise dispose of them.
 
Our 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.
 
32

Once our Common Stock begins to trade, it may experienced price fluctuations.
 
A decrease in the market price of our Common Stock could result in substantial losses for investors. The market price of our Common Stock may be significantly affected by, among other things, one or more of the following factors:
 
·  
nnouncements or press releases relating to the medical device industry or to our own business or prospects;
 
·  
regulatory, legislative, or other developments affecting us or the medical device industry generally;
 
·  
the dilutive effect of conversion of our Series A Preferred Stock and exercise of our warrants, or the issuance by us of additional shares of Common Stock or convertible securities, at below current market prices; and
 
·  
general market conditions.
 
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 .

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. As discussed above, we are preparing to commercialize a blood purification technology that efficiently removes toxic compounds from circulating blood using our proprietary polymer-based adsorbent technology. We believe that our technology will support novel therapeutic approaches to critical health conditions, including sepsis, organ transplant, and post-operative complications of cardiopulmonary bypass surgery.
 
33

Our near term goal is focused on conducting clinical trials of our CytoSorb™ product in the treatment of sepsis. Over the next twelve months, provided that we have sufficient funds for our operations, we expect to design and conduct a pilot study of the use of our product on at least 10 sepsis patients. We believe that submission of data from this pilot study to the FDA will allow us to then conduct the pivotal study required for FDA approval of our CytoSorb™ product for sepsis treatment.
 
Our research and development costs for the years ended December 31, 2004 and 2005, were approximately $2,367,407 and $1,526,743, respectively. MedaSorb has experienced substantial operating losses since inception. As of March 31, 2006, MedaSorb had an accumulated deficit of $59,994,884, which included losses from operations of $3,665,596 for the year ended December 31, 2005 and $1,015,377 for the three-month period ended March 31, 2006. These losses have resulted principally from costs incurred in the research and development of our polymer technology, and general and administrative expenses, which together were approximately $2,162,703 and $426,756 respectively, for the year ended December 31, 2005 and the three months ended March 31, 2006.
 
Liquidity and Capital Resources
 
Since its inception, the operations of MedaSorb have been financed through the private placement of its debt and equity securities. At December 31, 2005, MedaSorb had cash of approximately $707,000, an amount sufficient to fund its operations for approximately four months. Due to its losses and available cash at that time, MedaSorb’s audited consolidated financial statements for its year ended December 31, 2005 have been prepared assuming MedaSorb will continue as a going concern, and the auditors’ report on those financial statements expresses substantial doubt about MedaSorb’s ability to continue as a going concern.
 
Immediately following the closing of the merger, we closed an offering of our securities that resulted in net proceeds to us of approximately $4.5 million, which are expected to be sufficient to fund our operations for the next 15 months, following which we will be required to raise additional capital. There can be no assurance that we will be successful in our capital raising efforts.
 
In October 2005, MedaSorb entered into an Investment Agreement with Margie Chassman pursuant to which she advanced $1,000,000 to MedaSorb to provide it with operating capital. The advance bears interest at the rate of 6% per annum, and at Ms. Chassman’s option, will be repaid in cash or converted into securities in our next offering of securities no later than December 31, 2006. The advance is subject to earlier repayment in the event we complete an offering of our securities that generates gross proceeds of $5.5 million or more (including the offering we completed following the merger, but excluding proceeds received from certain existing stockholders of ours), in the amount that those proceeds exceed $5.5 million; provided, however, that in the event that less than $6.5 million of gross proceeds are raised in such an offering within 120 days from the date subscription materials are first circulated to potential investors, the balance of the advance from Ms. Chassman then outstanding will, at our option, be converted into the securities sold in that offering.
 
34

In connection with the closing of the private placement, we agreed to make a short-term advance to Ms. Chassman in the amount of $500,000 bearing interest at the rate of 6% per annum, the repayment of which may be offset against amounts owed by us to Ms. Chassman under the $1,000,000 advance previously made by her to MedaSorb. The short-term advance will be secured by a pledge of publicly-traded securities with a market value equal to $500,000.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table sets forth information known to us with respect to the beneficial ownership of Common Stock held of record as of June 30, 2006, 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 OWNED 1
 
Number
Percent (%)
Beneficial Owners of more than 5% of Common Stock (other than directors and executive officers)
   
Margie Chassman (2)
7,995,000
33.1%
Guillermina Montiel (3)
5,052,456
20.3%
Margery Germain (4) 2,000,000      
8.3%
Robert Shipley (5)
1,248,372
5.0%
Directors and Executive Officers
   
Al Kraus
1,393,631
5.6%
David Lamadrid
501,704
2.0%
Vince Capponi
418,086
1.7%
Joseph Rubin (6)
127,207
*
James Winchester
52,519
*
Kurt Katz (7)
54,077
*
All directors and executive officers as a group ( six persons) (8)
2,547,224
10.2%

*  
Less than 1%.
   
1
Gives effect to the shares of Common Stock issuable upon the exercise of all options exercisable within 60 days of June 30, 2006 and other rights beneficially owned by the indicated stockholders on that date. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned. Percentage ownership is calculated based on 24,090,929 shares of the Common Stock outstanding as of June 30, 2006 immediately following the closing of the reverse merger.
 
35

 
   
2
Margie Chassman is married to David Blech. Mr. Blech disclaims beneficial ownership of these shares. Since 1980 Mr. Blech has been a founder of companies and venture capital investor in the biotechnology sector. His initial venture investment, Genetic Systems Corporation, which he helped found and served as treasurer and a member of the board of directors, was sold to Bristol Myers in 1986 for $294 million of Bristol Myers stock. Other companies he helped found include DNA Plant Technology, Celgene Corporation, Neurogen Corporation, Icos Corporation, Incyte Pharmaceuticals, Alexion Pharmaceuticals and Neurocrine Biosciences. He was also instrumental in the turnaround of Liposome Technology, Inc. and Biotech General Corporation. In 1990 Mr. Blech founded D. Blech & Company, which, until it ceased doing business in September 1994, was a registered broker-dealer involved in underwriting biotechnology issues. In May 1998, David Blech pled guilty to two counts of criminal securities fraud, and, in September 1999, he was sentenced by the U.S. District Court for the Southern District of New York to five years’ probation, which was completed in September 2004. Mr. Blech also settled administrative charges by the Commission in December 2000 arising out of the collapse in 1994 of D. Blech & Co., of which Mr. Blech was President and sole stockholder. The settlement prohibits Mr. Blech from engaging in future violations of the federal securities laws and from association with any broker-dealer. In addition, the District Business Conduct Committee for District No.10 of NASD Regulation, Inc. reached a decision, dated December 3, 1996, in a matter styled District Business Conduct Committee for District No. 10 v. David Blech, regarding the alleged failure of Mr. Blech to respond to requests by the staff of the National Association of Securities Dealers, Inc. (“NASD”) for documents and information in connection with seven customer complaints against various registered representatives of D. Blech & Co. The decision found that Mr. Blech failed to respond to such requests in violation of NASD rules and that Mr. Blech should, therefore, be censured, fined $20,000 and barred from associating with any member firm in any capacity. Furthermore, Mr. Blech was discharged in bankruptcy in the United States Bankruptcy Court for the Southern District of New York in March 2000.
 
3
Includes 58,472 shares issuable upon exercise of stock options.
   
4
Includes 1,700,000 shares of Common Stock held directly by Ms. Germain and 300,000 shares of Common Stock held by her minor children.
   
5
Includes 621,727 shares issuable upon exercise of stock options and warrants.
   
6
Includes 58,598 shares issuable upon exercise of stock options and warrants.
   
7
Includes 51,817 shares issuable upon exercise of stock options.
   
8
Includes 110,415 shares issuable upon exercise of stock options and warrants.
 
DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names of our directors and executive officers, their ages and the positions they hold. Each such person became an officer and/or director of the Registrant immediately after the closing of the merger and held the same positions set forth below with MedaSorb prior to the merger.
 
36

 
Name
Age
Position
     
Al Kraus
61
President and Chief Executive Officer, Director
     
James Winchester, MD
62
Chief Medical Officer
     
Vincent Capponi
48
Chief Operating Officer
     
     
David Lamadrid
35
Chief Financial Officer
     
Joseph Rubin, Esq.
67
Director
     
Kurt Katz
73
Director
 
Al Kraus. Mr. Kraus has more than twenty-five years’ experience managing companies in the dialysis, medical device products, personal computer and custom software industries. He was the President and Chief Executive Officer of MedaSorb since 2003. Prior to joining us, from 2001 to 2003, Mr. Kraus was President and CEO of NovoVascular Inc., an early stage company developing coated stent technology. From 1996 to 1998, Mr. Kraus was President and CEO of Althin Healthcare and from 1998 to 2000, of Althin Medical Inc., a manufacturer of products for the treatment of end stage renal disease. While CEO of Althin, he provided strategic direction and management for operations throughout the Americas. From 1979 to 1985, Mr. Kraus was U.S. Subsidiary Manager and Chief Operating Officer of Gambro Inc., a leading medical technology and healthcare company. Mr. Kraus was the Chief Operating Officer of Gambro when it went public in the United States in an offering led by Morgan Stanley.
 
James Winchester, M.D. Prior to joining MedaSorb in 2000, Dr. Winchester was Professor of Medicine and Director of Dialysis Programs at Georgetown University School of Medicine for more than 25 years. Dr. Winchester is also the Chief of the Nephrology Division at Beth Israel Medical Center, a position he has held since July 2004. He has published more than 200 articles in scientific and medical journals, and has co-authored eight books in the fields of renal replacement therapy and clinical poisoning management. Dr. Winchester is editor-in chief of Replacement of Renal Function , the most widely used textbook for nephrology fellows. Dr. Winchester has published more articles on hemoperfusion than any other nephrologist in the world. He is widely recognized as one of the world’s leading experts in hemoperfusion and toxicology, and is a former member of the Scientific Advisory Board for Total Renal Care (Davita). Dr. Winchester received his medical degree from the University of Glasgow and is a Fellow of the Royal College of Physicians and Surgeons of Glasgow , and a Fellow of the American College of Physicians.
 
Vincent Capponi . Mr. Capponi joined MedaSorb as Vice President of Operations in 2002 and became its Chief Operating Officer in July 2005. He has more than 20 years of management experience in medical device, pharmaceutical and imaging equipment at companies including Upjohn, Sims Deltec and Sabratek. Prior to joining MedaSorb in 2002, Mr. Capponi held several senior management positions at Sabratek and its diagnostics division GDS. Mr. Capponi 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.
 
37

David Lamadrid .   Mr. Lamadrid, has been with MedaSorb since 2000. He has over 13 years of business experience in finance and operations. Prior to joining MedaSorb in 2000, Mr. Lamadrid was a financial analyst at Chase Manhattan Bank working in the Middle Market Banking Group. Mr. Lamadrid received his MBA from New York University, a BS in Finance from St. John’s University, and an AAS in Accounting from S.U.N.Y. Rockland.
 
Joseph Rubin, Esq.   Mr. Rubin became a director of MedaSorb in 1997. Mr. Rubin is a founder and Senior Partner of Rubin, Bailin, and Ortoli, LLP an international and domestic corporate and commercial law firm in New York City, where he has practiced law since January 2000. Mr. Rubin also teaches at the Columbia University School of International and Public Affairs, where he is also Executive Director of the International Technical Assistance Program for Public Affairs (ITAP). Mr. Rubin was Adjunct Professor at the Columbia University Graduate School of Business from 1973 to 1994, and taught at Columbia Law School in 1996. Mr. Rubin received his law degree from Harvard Law School, and his B.A., MIA, and M.Phil degrees in political science and international relations from Columbia University.  
 
Kurt Katz, M.Ch.E. Mr. Katz became a director of MedaSorb in 1997. Since retiring from Peabody International Corporation in 1986, Mr. Katz has pursued various business interests. He is currently the Chairman of Polymeric Resources Corporation, a polymer company engaged in the manufacture of nylon and compounding. Mr. Katz served as President and Chief Operating Officer of Peabody, which specializes in energy and environmental products. Mr. Katz served as Executive Vice President and Chief Operating Officer of Peabody from 1981 to 1983, and was a Director from 1977 to 1985. Prior to joining Peabody in 1973, Mr. Katz held a variety of management positions with Westinghouse Electric Corporation, where he served for 18 years and was directly involved in the launching of new products, divisions and subsidiaries. . Mr. Katz has a B.S. and M.S. in chemical engineering, and an MBA.
 
Audit Committee Financial Expert
 
The Board of Directors does not have an Audit Committee, and therefor does not have an “audit committee financial expert,” as such term is defined in Item 401(e) of Regulation S-B.
 
38

Executive Compensation  
 
The following table sets forth for the periods indicated the compensation MedaSorb paid Al Kraus, our Chief Executive Officer, and each of our other most highly compensated executive officers during the years ended December 31, 2005, 2004 and 2003.
 
Summary Compensation Table
 
   
Annual Compensation
Long-Term Compensation
Name and Principal Positions
 
Year
 
Salary ($)
 
Bonus ($)
Stock Awards*
 
Securities Underlying Options
                   
Al Kraus Chief Executive Officer
 
200 5
2004
2003
 
173,899
152,301
73,710
 
150
1,090,680
164,665
138,286
 
__
__
__
               
Vincent Capponi,
Chief Operating Officer
 
200 5
2004
2003
 
152,504
133,987
195,501
 
150
374,383
15,070
7,535
 
__
__
__
David Lamadrid,
Chief Financial Officer
 
200 5
2004
2003
 
119,257
100,203
115,742
 
 
150
450,155
22,605
15,070
 
__
__
__
Dr. James Winchester Chief Medical Officer
 
200 5
2004
2003
 
116,541
143,319
233,422
 
150
__
16,954
7,535
 
__
__
__
 
* These officers were originally issued “Management Units” of MedaSorb Technologies, LLC, a limited liability company. The Management Units were ultimately converted into the number of shares of our Common Stock indicated in the table above following MedaSorb’s conversion to a corporation and reverse merger with Registrant.
 
O ption Grants in Last Fiscal Year
 
No options were granted to any of the individuals named in the Summary Compensation Table during 2005.
 
Aggregated Option Exercises in Fiscal 2005 and FY-End Option Values

None of the individuals named in the Summary Compensation Table held any options to purchase our Common Stock or the common stock of MedaSorb as of December 31, 2005.

39

 
Director Compensation
 
Our directors do not receive any cash compensation for their service on the Board of Directors, but from time to time are granted options for their services. In January 2006, each of our non-employee   directors was granted an option to purchase 10,000 shares of MedaSorb common stock at an exercise price of $1.25, and in June 2006, our non-employee   directors were granted options to purchase an aggregate of 62,536 shares of MedaSorb common stock at an exercise price of $1.25. These options became options to purchase the same number of shares of our Common Stock at the same exercise price following the merger. Our directors are reimbursed for actual out-of-pocket expenses incurred by them in connection with their attendance at meetings of the Board of Directors.
 
Employment Agreements
 
Agreement with Chief Executive Officer
 
MedaSorb entered into an Employment Agreement, dated as of July 18, 2003, with Al Kraus, our Chief Executive Officer. The Employment Agreement provides for an initial five-year term of employment as our Chief Executive Officer. Under the terms of the Employment Agreement, Mr. Kraus receives an annual base salary of $200,000. Under the Employment Agreement, Mr. Kraus was also granted an option to purchase 5% of the outstanding equity interests of MedaSorb ( which was then a limited liability company) on a fully-diluted basis, and will be issued additional options so that Mr. Kraus continues to hold options to purchase 5% of our outstanding equity on a fully diluted basis until such time as an aggregate of $20 million of financing has been received by MedaSorb (including Registrant) following the commencement of his employment. In 2005, MedaSorb’s board approved the issuance to Mr. Kraus of “Management Units” of the limited liability company in lieu of the options he was then entitled to under the Employment Agreement. As a result of the conversion of MedaSorb to a corporation and the merger, the Management Units issued under the Employment Agreement were exchanged for 1,393,631 shares of Common Stock. Mr. Kraus will continue to be issued options to purchase Common Stock pursuant to his Employment Agreement so that the combined total of his common stock and common stock issuable upon exercise of his options equals 5% of the Company’s outstanding common stock on a fully diluted basis, until such time as an aggregate of $20 million of financing has been received by us following the commencement of his employment.  
 
In the event that Mr. Kraus’s employment is terminated as a result of his death, his heirs will be entitled to 120-days of salary. In the event Mr. Kraus is terminated for “justifiable cause” we will pay him his accrued and unpaid base salary through the date of termination. If Mr. Kraus’s employment is terminated without cause or in the event of a Change of Control, he will be entitled to one-year’s base salary payable monthly over a period of one year.
 
40

Mr. Kraus is prohibited under the Employment Agreement from disclosing any of our confidential information (as defined in the agreement) during the term of his employment and any time thereafter and, following the termination of the agreement with us, from competing with us and directly or indirectly soliciting any of our customers or suppliers for a period of one year, and from soliciting our employees for a period of three years.
 
Agreement with Chief Operating Officer
 
MedaSorb entered into an Employment Agreement, dated as of July 1, 2005, with Vincent Capponi, our Chief Operating Officer. The Employment Agreement provides for an initial term of one-year, with automatic annual renewal unless either party provides notice to the other within 120 days prior to the end of the year of its intention not to renew. Under the terms of the Employment Agreement, Mr. Capponi receives an annual base salary of $181,886. Under the Employment Agreement, Mr. Capponi was also granted Management Units equal to 1.5% of the outstanding equity interests of MedaSorb (which was then a limited liability company) on a fully-diluted basis, and was entitled to receive additional Management Units so that Mr. Capponi continued to hold Management Units equal to 1.5% of the outstanding equity of MedaSorb on a fully diluted basis until December 31, 2005. As a result of the conversion of MedaSorb to a corporation and the merger, these Management Units were exchanged for 418,086 shares of our Common Stock
 
In the event that Mr. Capponi’s employment is terminated as a result of his death, his heirs will be entitled to 120-days of salary. In the event Mr. Capponi is terminated for “justifiable cause” we will pay him his accrued and unpaid base salary through the date of termination. If Mr. Capponi’s employment is terminated without cause or in the event of Change of Control, he will be entitled to one-year’s base salary payable monthly for a period of one year.
 
Mr. Capponi is prohibited under the Employment Agreement from disclosing any of our confidential information (as defined in the agreement) during the term of his employment and any time thereafter, and following the termination of the agreement with us, from competing with us and directly or indirectly soliciting any of our customers or suppliers for a period of one year, and from soliciting our employees for a period of three years.
 
Agreement with Chief Financial Officer
 
MedaSorb entered into an Employment Agreement, dated as of July 1, 2005, with David Lamadrid, our Chief Financial Officer. The Employment Agreement provides for an initial term of one-year, with automatic annual renewal unless either party provides notice to the other within 120 days prior to the end of the year of its intention not to renew. Under the terms of the Employment Agreement, Mr. Lamadrid receives an annual base salary of $135,629. Under the Employment Agreement, Mr. Lamadrid was also granted Management Units equal to 1.8% of the outstanding equity interests of MedaSorb (which was then a limited liability company) on a fully-diluted basis, and was entitled to receive additional Management Units so that Mr. Lamadrid continued to hold Management Units equal to 1.8% of the outstanding equity of MedaSorb on a fully diluted basis until December 31, 2005. As a result of the conversion of MedaSorb to a corporation and the merger, these Management Units were exchanged for 501,704 shares of our Common Stock.
 
41

In the event that Mr. Lamadrid’s employment is terminated as a result of his death, his heirs will be entitled to 120-days of salary. In the event Mr. Lamadrid is terminated for “justifiable cause” we will pay him his accrued and unpaid base salary through the date of termination. If Mr. Lamadrid’s employment is terminated without cause or in the event of Change of Control, he will be entitled to one-year’s base salary payable monthly for a period of one year.
 
Mr. Lamadrid is prohibited under the Employment Agreement from disclosing any of our confidential information (as defined in the agreement) during the term of his employment and any time thereafter, and following the termination of the agreement with us, from competing with us and directly or indirectly soliciting any of our customers or suppliers for a period of one year, and from soliciting our employees for a period of three years.
 
Agreement with Chief Medical Officer
 
MedaSorb entered into an Employment Agreement, dated as of July 1, 2004, with Dr. James Winchester, our Chief Medical Officer. The Employment Agreement provides for an initial term of one-year, with automatic annual renewal unless either party provides notice to the other within 90 days prior to the end of the year of its intention not to renew. Under the terms of the Employment Agreement, Dr. Winchester receives an annual base salary of $120,000.
 
Dr. Winchester is prohibited under his Employment Agreement from disclosing any of our confidential information (as defined in the agreement) during the term of his employment and any time thereafter, and following the termination of this agreement with us, from competing with us and directly or indirectly soliciting any of our customers, suppliers or employees for a period of one year.
 
During the period of March 2004 to February 2005, Al Kraus, Vincent Capponi, David Lamadrid and Dr. James Winchester agreed to forego salary in the amounts of $66,667, $60,000, $45,000, and $32,772 respectively. These amounts will be paid to these individuals at such time as we generate gross proceeds from the sale of our securities of $5,000,000, including sales we effected upon completion of the merger.
 
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
In October 2005, MedaSorb entered into an Investment Agreement with Margie Chassman pursuant to which she advanced $1,000,000 to MedaSorb to provide it with operating capital. The advance bears interest at the rate of 6% per annum, and at Ms. Chassman’s option, will be repaid in cash or converted into securities in our next offering of securities no later than December 31, 2006. The advance is subject to earlier repayment in the event we complete an offering of our securities that generates gross proceeds of $5.5 million or more (including the offering we completed following the merger, but excluding proceeds received from certain existing stockholders of ours), in the amount that those proceeds exceed $5.5 million; provided, however, that in the event that less than $6.5 million of gross proceeds are raised in such an offering within 120 days from the date subscription materials are first circulated to potential investors, the balance of the advance from Ms. Chassman then outstanding will, at our option, be converted into the securities sold in that offering.
 
42

In consideration for funding the $1 million advance, Ms. Chassman and her designees were   issued an aggregate of 10 million shares of Common Stock. These shares of Common Stock are subject to a 12-month lock-up agreement and a voting agreement entitling MedaSorb to voting rights with respect to such shares until the earlier to occur of a transfer of those shares to an unrelated third party or the expiration of two years.
 
In connection with the closing of the private placement, we agreed to make a short-term advance to Ms. Chassman in the amount of $500,000 bearing interest at the rate of 6% per annum, the repayment of which may be offset against amounts owed by us to Ms. Chassman under the $1,000,000 advance previously made by her to MedaSorb. The short-term advance will be secured by a pledge of publicly-traded securities with a market value equal to $500,000.
 
In connection with the sale of the Series A Preferred Stock and Warrants to the investors, Margie Chassman agreed to pledge certain securities held by her to the investors, which such investors may sell to ensure they do not suffer a loss on their investment in the first year following the date of their investment. In consideration of her pledge to these investors, we agreed to pay Ms. Chassman (i) $525,000 in cash, and (ii) five-year warrants to purchase 10% of the shares of Series A Preferred Stock and 10% of the Warrants sold to these investors for an exercise price equal to the price paid by the investors in the private placement.
 
In August 2003, in order to induce Guillermina Vega Montiel, a principal stockholder of ours, to make an additional investment in MedaSorb, we granted Ms. Montiel a perpetual royalty equal to three percent of all gross revenues received by us from sales of CytoSorb TM in the applications of sepsis, cardiopulmonary bypass surgery, organ donor, chemotherapy and inflammation control application.
 
Joseph Rubin is a director of ours and performs legal services from time to time. At December 31, 2005, we owed Mr. Rubin’s firm approximately $173,000 in respect of legal services provided by his firm to MedaSorb
 
DESCRIPTION OF SECURITIES

Our total authorized capital stock consists of 100,000,000 shares of Common Stock, par value $.001 per share and 100,000,000 shares of preferred stock, par value $.001 per share. After the closing of the reverse merger and the closing of the private placement completed on the same date, 24,090,929 shares of Common Stock were issued and outstanding, and 8,000,000 shares of preferred stock had been designated as Series A 10% Cumulative Convertible Preferred Stock , of which 5,250,000 shares were issued and outstanding.

43

The following description of our capital stock does not purport to be complete and is subject to and qualified by our Articles of Incorporation and By-laws, and by the provisions of applicable Nevada law.

Common Stock

Holders of our Common Stock are entitled to receive dividends out of assets legally available therefore at such times and in such amounts as the Board of Directors from time to time may determine. Holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. Cumulative voting with respect to the election of directors is not permitted by our Articles of Incorporation. Our Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock after payment of liquidation preferences, if any, on any outstanding stock having prior rights on such distributions and payment of other claims of creditors.

Preferred Stock
 
Our Articles of Incorporation authorizes the issuance of shares of preferred stock in one or more series. Our Board of Directors has the authority, without any vote or action by the stockholders, to create one or more series of preferred stock up to the limit of our authorized but unissued shares of preferred stock and to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series and the relative participating, option or other special rights (if any), and any qualifications, preferences, limitations or restrictions pertaining to such series which may be fixed by the Board of Directors pursuant to a resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.

The provisions of a particular series of authorized preferred stock, as designated by the Board of Directors, may include restrictions on the payment of dividends on Common Stock. Such provisions may also include restrictions on our ability to purchase shares of Common Stock or to purchase or redeem shares of a particular series of authorized preferred stock. Depending upon the voting rights granted to any series of authorized preferred stock, issuance thereof could result in a reduction in the voting power of the holders of Common Stock. In the event of our dissolution, liquidation or winding up, the holders of the preferred stock will receive, in priority over the holders of Common Stock, a liquidation preference established by the Board of Directors, together with accumulated and unpaid dividends. Depending upon the consideration paid for authorized preferred stock, the liquidation preference of authorized preferred stock and other matters, the issuance of authorized preferred stock could result in a reduction in the assets available for distribution to the holders of Common Stock in the event of our liquidation.

44

Series A 10% Cumulative Convertible Preferred Stock  

We have designated 8,000,000 shares of our preferred stock as Series A 10% Cumulative Convertible Preferred Stock (“Series A Preferred Stock”), of which 5,250,000 shares were issued in an offering that we closed immediately following the consummation of the merger. Each share of Series A Preferred Stock has a stated value of $1.00, is convertible at the holder’s option into that number of shares of our Common Stock equal to the stated value of such share of Series A Preferred Stock divided by an initial conversion price of $1.25. Upon the occurrence of a stock split, stock dividend, combination of our Common Stock into a smaller number of shares, issuance of any of our shares or other securities by reclassification of our Common Stock, merger or sale of substantially all of our assets, the conversion rate will be adjusted so that the conversion rights of the Series A Preferred Stock stockholders will be equivalent to the conversion rights of the Series A Preferred Stock stockholders prior to such event. In addition, in the event we sell shares of our Common Stock (or the equivalent thereof) following the issuance of shares of Series A Preferred Stock at a price of less than $1.25 per share, the conversion price of the shares of Series A Preferred Stock will be reduced to such lower price.
 
The Series A Preferred Stock bears a dividend of 10% per annum payable quarterly, commencing September 30, 2006, at our election in cash or additional shares of our Series A Preferred Stock valued at the stated value thereof; provided, however, that we must pay the dividend in cash if an “Event of Default” as defined in the Certificate of Designation designating the Series A Preferred Stock has occurred and is then continuing. In addition, upon an Event of Default, the dividend rate increases to 20% per annum. An Event of Default includes, but is not limited to, the following:

·  
the occurrence of “Non-Registration Events” including, the failure to cause a registration statement registering the shares of Common Stock underlying the Series A Preferred Stock and Warrants issued in connection therewith to be effective within 240 days following the closing of the private placement;

·  
an uncured breach by us of any material covenant, term or condition in the Certificate of Designation or any of the related transaction documents; and

·  
any money judgment or similar final process being filed against us for more than $100,000.

In the event of our dissolution, liquidation or winding up, the holders of the Series A Preferred Stock will receive, in priority over the holders of Common Stock, a liquidation preference equal to the stated value of such shares plus accrued dividends thereon.
 
45

The Series A Preferred Stock is not redeemable at the option of the holder but may be redeemed by us at our option following the third anniversary of the issuance of the Series A Preferred Stock for 120% of the stated value thereof plus any accrued but unpaid dividends upon 30 days' prior written notice, during which time the Series A Preferred Stock may be converted, provided a registration statement is effective under the Securities Act with respect to the Common Stock into which such Preferred is convertible and an Event of Default is not then continuing.  

Holders of Series A Preferred Stock do not have the right to vote on matters submitted to the holder of our Common Stock.
 
The registration rights provided for in the subscription agreement we entered into with the purchasers of the Series A Preferred Stock:
 
·  
require that we file a registration statement with the SEC on or before 120 days from the closing to register the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the Warrants, and cause such registration statement to be effective within 240 days following the closing; and

·  
entitles each of these investors to liquidated damages in an amount equal to two percent (2%) of the purchase price of the Series A Preferred Stock if we fail to timely file that registration statement with, or have it declared effective by, the SEC.

The transaction documents we entered into with the purchasers of the Series A Preferred Stock also provide for various penalties and fees for breaches or failures to comply with provisions of those documents, such as the timely payment of dividends, delivery of stock certificates, and obtaining and maintaining an effective registration statement with respect to the shares of Common Stock underlying the Series A Preferred Stock and warrants sold in the offering.
 
In addition, both the conversion price of the Series A Preferred Stock and the exercise price of the Warrants are subject to “full-ratchet” anti-dilution provisions, so that upon future issuances of our Common Stock or equivalents thereof, subject to specified customary exceptions, at a price below the conversion price of the Series A Preferred Stock and/or exercise price of the Warrants, such conversion price and/or exercise price will be reduced to such lower price, further diluting holders of our Common Stock.
 
Market for Registrant’s Common Equity and Related Stockholder Matters
 
Our Common Stock is quoted on the OTC Bulletin Board under the symbol “GDRE”, but to date, no trades in our Common Stock have been reported. Immediately following the closing of the merger, but before giving effect to the private placement, there were outstanding options and warrants to purchase an aggregate of 1,697,648 shares of our Common Stock, and certain providers of legal services had the right to acquire approximately 997,000 shares of our Common Stock. Of the 24,090,929 shares of our Common Stock outstanding immediately following the merger 3,750,000 shares were eligible for resale under Rule 144 under the Securities Act. In addition, we are obligated to file a registration statement under the Securities Act registering the resale of the 7,260,000 shares of Common Stock underlying the shares of Series A Preferred Stock and Warrants we issued in the offering that closed immediately following the merger.
 
46

 
The number of holders of record for our Common Stock immediately after giving effect to the merger was approximately 415 .
 
We have not paid any dividends on our Common Stock since our inception and do not intend to pay any cash dividends to our stockholders in the foreseeable future. In addition, the terms of our Series A Preferred Stock prohibit the payment of dividends on our Common Stock.
 
Equity Compensation Plan Information
 
The following table summarizes outstanding options as of June 30, 2006, after giving effect to the merger.  The Registrant had no options outstanding prior to the merger, and all of the options below were issued in connection with the merger to former option holders of MedaSorb.

 
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of outstanding options
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column)
Equity compensation plans approved by stockholders`
0
n/a
400,000(1)
       
Equity compensation plans not approved by stockholders  
594,003
$23.88
2,298,300(2)
       
Total
594,003
$23.88
2,698,300
 
1.
Represents options that may be issued under our 2003 Stock Option Plan.
   
2.
Represents options that may be issued under our 2006 Long-Term Incentive Plan.
 
Changes in and Disagreements with Accountants .
 
Effective on the closing of the merger, our Board of Directors dismissed BDO Dunwoody LLP as our independent accountants and engaged WithumSmith+Brown, MedaSorb’s accountants prior to the merger.  For further information on the change in our accountants, see item 4.01 of this Current Report on Form 8-K.
 
47

Recent Sales of Unregistered Securities

In connection with the Merger, we issued 20,340,929 shares of our Common Stock to the former stockholders of MedaSorb in exchange for all the issued and outstanding shares of MedaSorb Common Stock, and issued stock options and warrants to purchase a total of 1,697,648 shares of our Common Stock in exchange for the cancellation of all outstanding warrants and stock options of MedaSorb, with the warrants and options issued by us having the same exercise prices and other terms as the cancelled warrants and stock options to purchase MedaSorb Common Stock. The shares of Common Stock issued in the merger were issued in reliance on the exemption from registration afforded by Regulation D (Rule 506) under the Securities Act and corresponding provisions of state securities laws, which exempts transactions by an issuer not involving any public offering. Accordingly, all of such shares are “restricted securities” and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements under the Securities Act.
 
In addition, immediately following the merger, we sold 5 ,250,000 shares of our Series A Preferred Stock to four institutional investors in a private offering exempt from registration pursuant to Section 4(2) and Regulation D (Rule 506) under the Securities Act. The shares of Series A Preferred Stock we issued are initially convertible into 4,200,000 shares of our Common Stock. In conjunction with the issuance of the Series A Preferred Stock to the investors, we issued to them, for no additional consideration, five-year Warrants to purchase an aggregate of 2,100,000 shares of Common Stock at the exercise price of $2.00 per share, subject to adjustment in certain cases as set forth in the Warrants. We also granted these purchasers registration rights with respect to the Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the Warrants issued in the private placement. The rights, preferences and other terms of the Series A Preferred Stock and the private placement of these securities are described further above under “Series A Preferred Stock”. Additional information with respect to this offering is provided above in Item 1.01 of this Current Report on Form 8-K.
 
Indemnification of Officers and Directors
 
Our Articles of Incorporation eliminates the personal liability of directors to us and our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Nevada law. Additionally, we have included in our By-laws provisions to indemnify our directors, officers, employees and agents and to purchase insurance with respect to liability arising out of the performance of their duties as directors, officers, employees and agents as permitted by Nevada General Corporation Law. The effect of the foregoing is to require us, to the extent permitted by law, to indemnify our officers, directors, employees and agents for any claims arising against such person in their official capacities, if such person acted in good faith and in a manner that he reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the company pursuant to the foregoing, or otherwise, the company has been advised that the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
48

Item 3.02. Unregistered Sales of Equity Securities.

Reference is made to the disclosure made under Items 1.01 and 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.

ITEM 4.01. Changes in Registrant’s Certifying Accountant
 
Immediately following the closing of the merger, our Board of Directors dismissed BDO Dunwoody LLP as our independent accountants and engaged WithumSmith+Brown, the accountants of MedaSorb prior to the merger, as our new independent accountants.
 
The audit reports of BDO Dunwoody on the financial statements of Gilder Enterprises, Inc. as of May 31, 2005 and 2004 and for the years then ended did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports were prepared assuming “the Company will continue as a going concern” and stated that “as discussed in Note 1 to the consolidated financial statements, the Company had accumulated operating losses of $169,199 since its inception and has a working capital deficit of $67,768. These condition raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan in regard to these matters are described in Note 1.  These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty”.
 
During the two most recent fiscal years of Gilder Enterprises, Inc. and the subsequent interim period through February 28, 2006, there were no disagreements between Gilder Enterprises, Inc. and BDO Dunwoody as to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Dunwoody, would have caused BDO Dunwoody to make reference in their reports on the financial statements for such years to the subject matter of the disagreement.
 
Item 5.01. Changes in Control of Registrant
 
As described in more detail under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference, as a result of the merger, a change in control of the Registrant has occurred.
 
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

Concurrently with the closing of the merger, Joseph G. Bowes, who was our sole director and officer prior to the merger, appointed Al Kraus, Joseph Rubin, Esq., and Kurt Katz to the Board of Directors, and then resigned from the Board and from his positions as an officer. In addition, at such time, Al Kraus was appointed Registrant’s President and Chief Executive Officer, James Winchester, MD was appointed Registrant’s Chief Medical Officer, Vincent Capponi was appointed Registrant’s Chief Operating Officer and David Lamadrid was appointed our Chief Financial Officer.
 
49

For certain biographical and other information regarding the newly appointed officers and directors, see the disclosure under the heading “Directors and Executive Officers” under Item 2.01 of this Current Report on Form 8-K, which is incorporated herein by reference.
 
Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
 
As a result of the merger, our fiscal year was changed to a calendar year. Because reverse merger accounting dictates that the historical financial statements of MedaSorb are now our financial statements, we will not file a transition report. Exhibit 99.1 to this Current Report on Form 8-K includes MedaSorb’s annual financial statements for the years ended December 31, 2005 and 2004. Our next Annual Report on Form 10-KSB will cover the complete 12-month period ended December 31, 2006 .

Item 5.06. Change in Shell Company Status
 
Reference is made to the disclosure set forth under Item 2.01 of this Current Report on Form 8-K, which disclosure is incorporated herein by reference.
 
Item 9.01. Financial Statements and Exhibits.
 
(a) Financial Statements of business acquired.
 
Audited financial statements of MedaSorb (formerly MedaSorb Technologies, LLC) for the fiscal years ended December 31, 2004 and 2005 are filed as Exhibit 99.1 to this Current Report on Form 8-K and unaudited financial statements of MedaSorb for the interim period ended March 31, 2006 are filed as Exhibit 99.2 to this Current Report on Form 8-K.
 
(b) Pro Forma Financial Information.
 
Pro forma financial statements for the Registrant reflecting the merger are filed as Exhibit 99.3 to this Current Report on Form 8-K.

50

(d)   Exhibits.
 
Exhibit 2.1
Agreement and Plan of Merger, dated as of June 29, 2006, by and among Gilder Enterprises, Inc., MedaSorb Corporation and MedaSorb Acquisition Inc.
   
Exhibit 3.1
Articles of Incorporation of Gilder Enterprises, Inc. (filed as Exhibit 3.1 to Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004, and incorporated herein by reference).
   
Exhibit 3.2
By-Laws of Gilder Enterprises, Inc. (filed as Exhibit 3.2 to Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004, and incorporated herein by reference).
   
Exhibit 4.1
Certificate To Set Forth Designations, Voting Powers, Preferences, Limitations, Restrictions, And Relative Rights Of Series A 10% Cumulative Convertible Preferred Stock, $.001 Par Value Per Share
   
Exhibit 4.2
Form of Warrant issued to purchasers of Series A Preferred Stock, dated June __, 2006.
   
Exhibit 4.3
Subscription Agreement, dated as of June 30, 2006, by and among Gilder Enterprises, Inc. and the purchasers party thereto.
   
Exhibit 10.1
Employment Agreement, dated as of July 18, 2003, between Al Kraus and MedaSorb Technologies, LLC.
   
Exhibit 10.2
Employment Agreement, dated as of July 1, 2005, between Vincent Capponi and MedaSorb Technologies, LLC.
   
Exhibit 10.3
Employment Agreement, dated as of July 1, 2005, between David Lamadrid and MedaSorb Technologies, LLC.
   
Exhibit 10.4
Employment Agreement, dated as of July 1, 2004, between Dr. James Winchester and MedaSorb Technologies, LLC.
   
Exhibit 10.5
Gilder Enterprises, Inc. 2006 Long Term Incentive Plan.
   
Exhibit 99.1
Audited financial statements of MedaSorb for the fiscal years ended December 31, 2004 and 2005.
   
Exhibit 99.2
Unaudited financial statements of MedaSorb for the three month interim period ended March 31, 2006.
   
Exhibit 99.3
Pro forma financial statements of the Registrant reflecting the merger.
 
 
51

 
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 hereunto duly authorized.
 
Date: July 6, 2006
     
  GILDER ENTERPRISES, INC.
 
 
 
 
 
 
  By:   /s/ Al Kraus  
 

Al Kraus,
President and Chief Executive Officer
   
 
   
52

EXHIBIT INDEX  
 
No. Description
   
Exhibit 2.1
Agreement and Plan of Merger, dated as of June 29, 2006, by and among Gilder Enterprises, Inc., MedaSorb Corporation and MedaSorb Acquisition Inc.
   
Exhibit 3.1
Articles of Incorporation of Gilder Enterprises, Inc. (filed as Exhibit 3.1 to Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004, and incorporated herein by reference).
   
Exhibit 3.2
By-Laws of Gilder Enterprises, Inc. (filed as Exhibit 3.2 to Registrant’s Registration Statement on Form SB-2 filed on March 29, 2004, and incorporated herein by reference).
   
Exhibit 4.1
Certificate To Set Forth Designations, Voting Powers, Preferences, Limitations, Restrictions, And Relative Rights Of Series A 10% Cumulative Convertible Preferred Stock, $.001 Par Value Per Share
   
Exhibit 4.2
Form of Warrant issued to purchasers of Series A Preferred Stock, dated June __, 2006.
   
Exhibit 4.3
Subscription Agreement, dated as of June 30, 2006, by and among Gilder Enterprises, Inc. and the purchasers party thereto.
   
Exhibit 10.1
Employment Agreement, dated as of July 18, 2003, between Al Kraus and MedaSorb Technologies, LLC.
   
Exhibit 10.2
Employment Agreement, dated as of July 1, 2005, between Vincent Capponi and MedaSorb Technologies, LLC.
   
Exhibit 10.3
Employment Agreement, dated as of July 1, 2005, between David Lamadrid and MedaSorb Technologies, LLC.
   
Exhibit 10.4
Employment Agreement, dated as of July 1, 2004, between Dr. James Winchester and MedaSorb Technologies, LLC.
   
Exhibit 10.5
Gilder Enterprises, Inc. 2006 Long Term Incentive Plan.
   
Exhibit 99.1
Audited financial statements of MedaSorb for the fiscal years ended December 31, 2004 and 2005.
   
Exhibit 99.2
Unaudited financial statements of MedaSorb for the three month interim period ended March 31, 2006.
   
Exhibit 99.3
Pro forma financial statements of the Registrant reflecting the merger.

53




AGREEMENT AND PLAN OF MERGER
by and among
GILDER ENTERPRISES, INC.,
MEDASORB ACQUISITION, INC.
and
MEDASORB CORPORATION
June 29, 2006









TABLE OF CONTENTS
Page
   
ARTICLE I DEFINITIONS
1
   
ARTICLE II THE MERGER
5
   
SECTION 2.1
MERGER
5
     
SECTION 2.2
EFFECTIVE TIME
5
     
SECTION 2.3
CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS
5
     
SECTION 2.4
EFFECTS OF THE MERGER
6
     
SECTION 2.5
CLOSING
6
     
ARTICLE III MERGER CONSIDERATION; CONVERSION OF SECURITIES
6
   
SECTION 3.1
MANNER AND BASIS OF CONVERTING CAPITAL STOCK
6
     
SECTION 3.2
ISSUANCE OF CERTIFICATES
7
     
SECTION 3.3
OPTIONS, WARRANTS
8
     
SECTION 3.4
PARENT COMMON STOCK
8
     
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
9
   
SECTION 4.1
ORGANIZATION
9
     
SECTION 4.2
AUTHORIZATION; VALIDITY OF AGREEMENT
9
     
SECTION 4.3
CAPITALIZATION
9
     
SECTION 4.4
CONSENTS AND APPROVALS; NO VIOLATIONS
9
     
SECTION 4.5
FINANCIAL STATEMENTS
10
     
SECTION 4.6
NO UNDISCLOSED LIABILITIES
10
     
SECTION 4.7
LITIGATION
10
     
SECTION 4.8
NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS
10
     
SECTION 4.9
BROKER’S AND FINDER’S FEES
10
     
SECTION 4.10
ASSETS AND CONTRACTS
11
     
SECTION 4.11
TAX RETURNS AND AUDITS
11
     
SECTION 4.12
PATENTS AND OTHER INTANGIBLE ASSETS
12
     
SECTION 4.13
EMPLOYEE BENEFIT PLANS; ERISA
12
     
SECTION 4.14
TITLE TO PROPERTY AND ENCUMBRANCES
12
     
SECTION 4.15
CONDITION OF PROPERTIES
13
     
SECTION 4.16
INSURANCE COVERAGE
13
     
SECTION 4.17
INTERESTED PARTY TRANSACTIONS
13
     
SECTION 4.18
ENVIRONMENTAL MATTERS
13
     
SECTION 4.19
DISCLOSURE
14
     
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION
 
CORP.
14
   
SECTION 5.1
ORGANIZATION
14
     
SECTION 5.2
AUTHORIZATION; VALIDITY OF AGREEMENT
14
     
SECTION 5.3
CONSENTS AND APPROVALS; NO VIOLATIONS
15
 
ii

 
 
SECTION 5.4
LITIGATION
15
   
 
SECTION 5.5
NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS
15
     
SECTION 5.6
BROKER’S AND FINDER’S FEES; BROKER/DEALER OWNERSHIP
15
     
SECTION 5.7
CAPITALIZATION OF PARENT
15
     
SECTION 5.8
ACQUISITION CORP
16
     
SECTION 5.9
VALIDITY OF SHARES
16
   
 
SECTION 5.10
SEC REPORTING AND COMPLIANCE
16
   
 
SECTION 5.11
FINANCIAL STATEMENTS
17
   
 
SECTION 5.12
NO GENERAL SOLICITATION
17
   
 
SECTION 5.13
ABSENCE OF UNDISCLOSED LIABILITIES
17
   
 
SECTION 5.14
CHANGES
17
   
 
SECTION 5.15
TAX RETURNS AND AUDITS
18
   
 
SECTION 5.16
EMPLOYEE BENEFIT PLANS; LABOR
18
   
 
SECTION 5.17
INTERESTED PARTY TRANSACTIONS
19
   
 
SECTION 5.18
QUESTIONABLE PAYMENTS
19
   
 
SECTION 5.19
OBLIGATIONS TO OR BY STOCKHOLDERS
19
   
 
SECTION 5.20
ASSETS AND CONTRACTS
19
   
 
SECTION 5.21
ENVIRONMENTAL MATTERS
20
     
SECTION 5.22
DISCLOSURE
21
   
 
ARTICLE VI CONDUCT OF BUSINESSES PENDING THE MERGER
21
 
 
SECTION 6.1
CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER
21
   
 
SECTION 6.2
CONDUCT OF BUSINESS BY PARENT AND ACQUISITION CORP. PENDING THE MERGER
22
   
 
ARTICLE VII ADDITIONAL AGREEMENTS
22
 
 
SECTION 7.1
ACCESS AND INFORMATION
22
   
 
SECTION 7.2
ADDITIONAL AGREEMENTS
23
   
 
SECTION 7.3
PUBLICITY
23
   
 
SECTION 7.4
APPOINTMENT OF DIRECTORS
24
   
 
SECTION 7.5
STOCKHOLDER CONSENT
24
   
 
ARTICLE VIII CONDITIONS OF PARTIES’ OBLIGATIONS
24
 
 
SECTION 8.1
COMPANY OBLIGATIONS
24
   
 
SECTION 8.2
PARENT AND ACQUISITION CORP. OBLIGATIONS
25
   
 
ARTICLE IX TERMINATION PRIOR TO CLOSING
27
 
 
SECTION 9.1
TERMINATION OF AGREEMENT
27
   
 
SECTION 9.2
TERMINATION OF OBLIGATIONS
28
   
 
ARTICLE X MISCELLANEOUS
28
 
 
SECTION 10.1
AMENDMENTS.
28
   
 
SECTION 10.2
NOTICES
28
   
 
SECTION 10.3
ENTIRE AGREEMENT
29
   
 
SECTION 10.4
EXPENSES
29
   
 
SECTION 10.5
SEVERABILITY
29
   
 
SECTION 10.6
SUCCESSORS AND ASSIGNS; ASSIGNMENT
30
 
 
iii

 
 
   
 
SECTION 10.7
NO THIRD PARTY BENEFICIARIES
30
     
SECTION 10.8
COUNTERPARTS; DELIVERY BY FACSIMILE
30
   
 
SECTION 10.9
WAIVER
30
   
 
SECTION 10.10
NO CONSTRUCTIVE WAIVERS
30
   
 
SECTION 10.11
FURTHER ASSURANCES
31
   
 
SECTION 10.12
HEADINGS
31
   
 
SECTION 10.13
GOVERNING LAW
31
   
 
SECTION 10.14
DISPUTE RESOLUTION
31
   
 
SECTION 10.15
INTERPRETATION
31

 
LIST OF SCHEDULES AND EXHIBITS
Company Disclosure Schedules
Schedule 3.3   - Company Stock Options
Schedule 4.3   - Stockholders
Schedule 4.7   - Litigation
Schedule 4.10 - Contracts
Schedule 4.11   - Taxes
Schedule 4.16 - Insurance
 
Parent Disclosure Schedules
Schedule 5.7 - Capitalization
 
Exhibits
Exhibit A        Post-Closing Directors and Officers of Parent

 


 
iv

 
AGREEMENT AND PLAN OF MERGER
 
THIS AGREEMENT AND PLAN OF MERGER is entered into as of June 29, 2006 by and among GILDER ENTERPRISES , INC. a Nevada corporation (“ Parent ”), MEDASORB ACQUISITION, INC., a Delaware corporation and a wholly-owned subsidiary of Parent (“ Acquisition Corp. ”), and MEDASORB CORPORATION., a Delaware corporation (the “ Company ”).
 
WITNESSETH :
 
WHEREAS, the Company is primarily engaged in the business of commercializing hemoperfusion devices, initially for the treatment of sepsis;
 
WHEREAS, the Board of Directors of each of Parent, Acquisition Corp. and the Company has approved, and deems it advisable and in the best interests of their respective stockholders to consummate, the acquisition of the Company by Parent, which acquisition is to be effected by the merger of Acquisition Corp. with and into the Company, with the Company being the surviving entity (the “ Merger ”), upon the terms and subject to the conditions set forth in this Agreement (as defined herein); and
 
WHEREAS, the parties hereto intend that the Merger shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the “ Code ”), by reason of Section 368(a)(2)(E) of the Code .
 
NOW, THEREFORE, in consideration of the mutual agreements and covenants hereinafter set forth, the parties hereto agree as follows:
 
ARTICLE I
DEFINITIONS
 
Capitalized terms used in this Agreement shall have the following meanings:
 
Acquisition Corp. ” shall have the meaning given to such term in the preamble to this Agreement.
 
Acquisition Proposal ” shall have the meaning given to such term in Section 6.2 hereof.
 
Action ” shall mean any claim, action, suit, proceeding, investigation or order.
 
Affiliate ” shall mean, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with, such Person. For the purposes of this definition, “ control ” (including, with correlative meaning, the terms “ controlling ,” “ controlled by ” and “ under common control with ”) means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of such Person through the ownership of voting securities, by contract or otherwise.
 
Agreement ” shall mean this Agreement and Plan of Merger, including the schedules and exhibits attached hereto or referred to herein, as the same may be amended or modified from time to time in accordance with the provisions hereof.
 

Balance Sheet ” shall have the meaning given to such term in Section 4.5 hereof.
 
Balance Sheet Date ” shall have the meaning given to such term in Section 4.5 hereof.
 
By-laws ” shall have the meaning given to such term in Section 2.3(b) hereof.
 
Certificate of Incorporation ” shall have the meaning given to such term in Section 2.3(a) hereof.
 
Closing ” shall have the meaning given to such term in Section 2.5 hereof.
 
Closing Date ” shall have the meaning given to such term in Section 2.5 hereof.
 
Code ” shall have the meaning given to such term in the third recital to this Agreement.
 
Commission ” shall mean the United States Securities and Exchange Commission.
 
Common Stock Options ” shall have the meaning given to such term in Section 3.3(a) hereof.
 
Company ” shall have the meaning given to such term in the preamble to this Agreement.
 
Company Common Stock ” shall mean the common stock, par value $.001 per share, of the Company.
 
Company Material Adverse Effect ” shall mean any change, effect or circumstance that by itself, or together with other changes, effects and circumstances is materially adverse or is reasonably likely to be materially adverse to the business, assets, liabilities, condition (financial or otherwise) or operations of the Company.
 
Contract ” shall have the meaning given to such term in Section 4.4 hereof.
 
Consents ” shall mean any permits, filings, notices, licenses, consents, authorizations, accreditation, waivers, approvals and the like of, to, with or by any Person.
 
DGCL ” shall mean the General Corporation Law of the State of Delaware, as amended.
 
Dissenting Shares ” shall have the meaning given to such term in Section 3.2(b) hereof.
 
Effective Time ” shall have the meaning given to such term in Section 2.2 hereof.
 
Employee Benefit Plans ” shall have the meaning assigned to it in Section 4.13 hereof.
 
Environmental Law ” shall mean the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 et seq.; the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. §§ 136 et seq. and comparable state statutes dealing with the registration, labeling and use of pesticides and herbicides; the Clean Air Act, 42 U.S.C. §§ 7401 et seq.; the Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C. §§ 1251 et seq.; the Safe Drinking Water Act, 42 U.S.C. §§ 300f et seq.; and the Hazardous Materials Transportation Act, 49 U.S.C. §§ 1801 et seq., as any of the above referenced statutes have been amended as of the date hereof, all rules, regulations and policies promulgated pursuant to any of the above referenced statutes, and any other foreign, federal, state or local law, statute, ordinance, rule, regulation or policy governing environmental matters, as the same have been amended as of the date hereof.
 
2

ERISA ” shall mean the Employee Retirement Income Securities Act of 1974, as amended, and the regulations issued thereunder.
 
Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations issued thereunder.
 
GAAP ” shall mean generally accepted accounting principles as in effect from time to time in the United States consistently applied.
 
Hazardous Material ” means any substance or material meeting any one or more of the following criteria: (a) it is or contains a substance designated as or meeting the characteristics of a hazardous waste, hazardous substance, hazardous material, pollutant, chemical substance or mixture, contaminant or toxic substance under any Environmental Law; (b) its presence at some quantity requires investigation, notification or remediation under any Environmental Law; or (c) it contains, without limiting the foregoing, asbestos, polychlorinated biphenyls, petroleum hydrocarbons, petroleum derived substances or waste, pesticides, herbicides, crude oil or any fraction thereof, nuclear fuel, natural gas or synthetic gas.
 
Indebtedness ” shall mean any obligation of the Company that under GAAP is required to be shown on the Balance Sheet of the Company as a Liability. Any obligation secured by a Lien on, or payable out of the proceeds of production from, property of the Company shall be deemed to be Indebtedness even though such obligation is not assumed by the Company.
 
Indebtedness for Borrowed Money ” shall mean (a) all Indebtedness in respect of money borrowed including, without limitation, Indebtedness which represents the unpaid amount of the purchase price of any property and is incurred in lieu of borrowing money or using available funds to pay such amounts and not constituting an account payable or expense accrual incurred or assumed in the ordinary course of business of the Company, (b) all Indebtedness evidenced by a promissory note, bond or similar written obligation to pay money, or (c) all such Indebtedness guaranteed by the Company or for which the Company is otherwise contingently liable.
 
Investment Company Act ” shall mean the Investment Company Act of 1940, as amended.
 
Liability ” shall mean any liability, debt, obligation, deficiency, Tax, penalty, fine, claim, cause of action or other loss, cost or expense of any kind or nature whatsoever, whether asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and whether due or to become due and regardless of when asserted.
 
Lien ” shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction and including any lien or charge arising by statute or other law.
 
2

Merger ” shall have the meaning given to such term in the second recital to this Agreement.
 
Parent ” shall have the meaning given to such term in the preamble to this Agreement.
 
Parent Balance Sheet ” shall have the meaning assigned to such term in Section 5.13 hereof.
 
Parent Balance Sheet Date ” shall have the meaning assigned to it in Section 5.14 hereof.
 
Parent Common Stock ” shall mean the common stock, par value $.001 per share, of the Parent.
 
Parent Financial Statements ” shall have the meaning assigned to such term in Section 5.11 hereof.
 
Parent Material Adverse Effect ” means any change, effect or circumstance that by itself, or together with other changes, effects and circumstances is materially adverse or is reasonably likely to be materially adverse to the business, assets, liabilities, condition (financial or otherwise) or operations of Parent and its subsidiaries, taken as a whole.
 
Parent SEC Documents ” shall have the meaning assigned to such term in Section 5.10(b) hereof.
 
Permitted Liens ” shall mean (a) Liens for taxes and assessments or governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings; (b) Liens in respect of pledges or deposits under workmen’s compensation laws or similar legislation, carriers’, warehousemen’s, mechanics’, laborers’ and materialmens’ and similar Liens, if the obligations secured by such Liens are not then delinquent or are being contested in good faith by appropriate proceedings; and (c) Liens incidental to the conduct of the business of the Company that were not incurred in connection with the borrowing of money or the obtaining of advances or credits and which do not in the aggregate materially detract from the value of its property or materially impair the use made thereof by the Company in its business.
 
Person ” shall mean any individual, corporation, limited liability company, partnership, joint venture, trust or other entity or organization, including any government or political subdivision or an agency or instrumentality thereof.

Securities Act ” shall mean the Securities Act of 1933, as amended, and the rules and regulations issued thereunder.

Stock Option Plan ” shall mean the 2006 Long-Term Incentive Option Plan of Parent, approved by the Board of Directors of Parent on or before the Closing and providing for 2,500,000 shares of Parent Common Stock to be reserved for issuance upon exercise of stock options and other stock-based awards to be issued thereunder to directors, officers, employees and consultants of Parent and the Surviving Corporation.
 
3

Stockholder ” shall mean any record holder of Company Common Stock.
 
Surviving Corporation ” shall have the meaning given to such term in Section 2.1 hereof.
 
Tax ” or “ Taxes ” shall mean (a) any and all taxes, assessments, customs, duties, levies, fees, tariffs, imposts, deficiencies and other governmental charges of any kind whatsoever (including, but not limited to, taxes on or with respect to net or gross income, franchise, profits, gross receipts, capital, sales, use, ad valorem, value added, transfer, real property transfer, transfer gains, transfer taxes, inventory, capital stock, license, payroll, employment, social security, unemployment, severance, occupation, real or personal property, estimated taxes, rent, excise, occupancy, recordation, bulk transfer, intangibles, alternative minimum, doing business, withholding and stamp), together with any interest thereon, penalties, fines, damages costs, fees, additions to tax or additional amounts with respect thereto, imposed by the United States (federal, state or local) or other applicable jurisdiction; (b) any liability for the payment of any amounts described in clause (a) as a result of being a member of an affiliated, consolidated, combined, unitary or similar group or as a result of transferor or successor liability, including, without limitation, by reason of Code Section 1.1502-6; and (c) any liability for the payments of any amounts as a result of being a party to any tax sharing agreement or as a result of any express or implied obligation to indemnify any other Person with respect to the payment of any amounts of the type described in either clauses (a) or (b).
 
Tax Return ” shall include all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns (including Form 1099 and partnership returns filed on Form 1065)) required to be supplied to a Tax authority relating to Taxes.
 
ARTICLE II
THE MERGER
 
Section 2.1   Merger . Upon the terms and subject to the conditions of this Agreement, at the Effective Time, the Company shall be merged with and into Acquisition Corp. in accordance with Section 251 of the DGCL. Following the Effective Time, the separate corporate existence of the Company shall cease, and Acquisition Corp. shall continue as the corporation surviving the Merger (sometimes hereinafter referred to as the “ Surviving Corporation ”).
 
Section 2.2   Effective Time . The Company and Acquisition Corp. shall cause a certificate of merger to be filed on the Closing Date (or on such other date as the Company and Parent may agree in writing) with the Secretary of State of Delaware as provided in Section 251 of the DGCL, and shall make all other filings or recordings required by the DGCL in connection with the Merger. The Merger shall become effective at such time as the certificate of merger is duly filed in accordance with Section 251 of the DGCL with the Secretary of State of the State of Delaware or such later time as specified in the certificate of merger, and such time is hereinafter referred to as the “ Effective Time .”
 
Section 2.3   Certificate of Incorporation; By-laws; Directors and Officers .
 
 
4

(a)   The certificate of incorporation of Acquisition Corp. as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation (the “ Certificate of Incorporation ”) from and after the Effective Time until thereafter changed or amended as provided therein or in accordance with applicable law, except that Article First of the Certificate of Incorporation shall be amended and restated to read as follows: “ FIRST : The name of the corporation is MedaSorb Corporation (hereinafter referred to as the “ Corporation ”).”
 
(b)   The by-laws of Acquisition as in effect immediately prior to the Effective Time, shall be the by-laws of the Surviving Corporation (the “ By-laws ”) from and after the Effective Time until thereafter changed or amended as provided therein or in accordance with applicable law.
 
(c)   The officers and directors of the Company immediately prior to the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation. The individuals identified on Exhibit A shall, following the Effective Time, be the officers and directors of the Parent until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and By-laws of Parent.
 
Section 2.4   Effects of the Merger . The Merger shall have the effects set forth in Section 259 of the DGCL. Without limiting the generality of the foregoing, at the Effective Time, except as otherwise provided herein, all of the property, rights, privileges, powers and franchises of the Company and Acquisition Corp. shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Acquisition Corp. shall become the debts, liabilities and duties of the Surviving Corporation. The Company acknowledges that, upon the effectiveness of the Merger, Parent shall have the absolute and unqualified right to deal with the assets and business of the Surviving Corporation as its own property without limitation on the disposition or use of such assets or the conduct of such business.
 
Section 2.5   Closing . The consummation of the transactions contemplated by this Agreement, including the Merger (the “ Closing ”), shall take place: (a) at the offices of Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York at 10:00 a.m. local time on the date on which all of the conditions to the Closing set forth in Article VIII hereof shall be fulfilled or waived in accordance with this Agreement (other than conditions that can be satisfied only at the Closing, but subject to the fulfillment or waiver of those conditions at the Closing); or (b) at such other place, time and date as the Company and Parent may agree in writing (the “ Closing Date ”).
 
ARTICLE III
MERGER CONSIDERATION; CONVERSION OF SECURITIES
 
Section 3.1   Manner and Basis of Converting Capital Stock . At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent or Acquisition Corp. or the holders of any outstanding shares of capital stock or other securities of the Company, Parent or Acquisition Corp.:
 
5

(a)   Acquisition Corp. Stock . Each share of common stock, par value $.001 per share, of Acquisition Corp. issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of capital stock, par value $.001 per share, of the Surviving Corporation, such that Parent shall be the holder of all of the issued and outstanding shares of capital stock of the Surviving Corporation following the Merger.
 
(b)   Company Common Stock . Except as provided in Section 3.1(c) and Section 3.2(d) hereof, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive one (1) share of Parent Common Stock.
 
(c)   Treasury Stock . Notwithstanding any provision of this Agreement to the contrary, each share of Company Common Stock held in the treasury of the Company immediately prior to the Effective Time shall be canceled in the Merger and shall not be converted into the right to receive any shares of capital stock or other securities of Parent.
 
(d)   No Fractional Shares . No fractional shares of Parent Common Stock shall be issued in, or as a result of, the Merger. Any fractional share of Parent Common Stock that a holder of record of Company Common Stock would otherwise be entitled to receive as a result of the Merger shall be aggregated. If a fractional share of Parent Common Stock results from such aggregation, the number of shares required to be issued to such record holder shall be rounded up to the nearest whole number of shares of Parent Common Stock.
 
Section 3.2   Issuance of Certificates .
 
(a)   Certificates . Within a reasonable time after the Effective Time, Parent shall cause to be mailed and issued to each former holder of record of Company Common Stock (as set forth on Schedule 4.3 ) that was converted into the right to receive Parent Common Stock pursuant to Section 3.1 hereof, a certificate or certificates registered in the name of such former record holder representing the number of shares of Parent Common Stock that such former record holder is entitled to receive in accordance with Section 3.1 hereof.  
 
(b)   Dissenting Shares . Notwithstanding any provision of this Agreement to the contrary, shares of Company Common Stock issued and outstanding immediately prior to the Effective Time and held by a Stockholder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares of Company Common Stock in accordance with Section 262 of the DGCL (“ Dissenting Shares ”) shall not be entitled to vote for any purpose or receive dividends, shall not be converted into the right to receive Parent Common Stock in accordance with Section 3.1 hereof, and shall only be entitled to receive such consideration as shall be determined pursuant to Section 262 of the DGCL; provided , however , that if, after the Effective Time, such Stockholder fails to perfect or withdraws or loses his or her right to appraisal or otherwise fails to establish the right to be paid the value of such Stockholder’s shares of Company Common Stock under the DGCL, such shares of Company Common Stock shall be treated as if they had converted as of the Effective Time into the right to receive Parent Common Stock in accordance with Section 3.1 hereof, and such shares of Company Common Stock shall no longer be Dissenting Shares.  
 
6

(c)   Stock Transfer Books . At the Effective Time, the stock transfer books of the Company will be closed and there will be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company.  
 
Section 3.3   Options, Warrants .
 
(a)   Common Stock Options . The Company has issued and outstanding warrants and options to purchase shares of Company Common Stock (collectively, the “ Common Stock Options ”). At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent or Acquisition Corp. or the holders of any outstanding Common Stock Options, the right to acquire a share of Company Common Stock under each Common Stock Option shall be converted into the right to acquire one (1) share of Parent Common Stock at an exercise price equal to the exercise price stated in the Common Stock Option, subject in all respects to all other terms and conditions of the Common Stock Option, provided , however , that with respect to Common Stock Options issued to employees, directors and consultants of the Company prior to the Merger, as set forth on Schedule 3.3 , the right to acquire shares of Parent Common Stock under this Section 3.3 by virtue of the Merger shall be subject to and issued under Parent’s Stock Option Plan. Except for the change in security underlying the Common Stock Options from Company Common Stock to Parent Common Stock, it is the intent of the parties hereto that the Common Stock Options shall continue after the Effective Time, and that the terms and conditions of the Common Stock Options shall otherwise remain unchanged.
 
(b)   No Fractional Shares . Notwithstanding anything to the contrary in this Section 3.3 , no fractional shares of the Parent Common Stock shall be issued in, or as a result of, the Merger. Any fractional share of the Parent Common Stock that a Person would otherwise be entitled to receive as a result of the transactions referenced in this Section 3.3 shall be rounded up to the nearest whole number of shares of Parent Common Stock.
 
Section 3.4   Parent Common Stock . Parent shall reserve a sufficient number of shares of Parent Common Stock to complete the conversion and exchange of Company Common Stock into Parent Common Stock contemplated by Sections 3.1 and 3.2 hereof and the issuance of any Parent Common Stock in accordance with Section 3.3 . Parent covenants and agrees that immediately prior to the Effective Time there will be no more than 7,855,000 shares of Parent Common Stock issued and outstanding, of which 4,105,000 shares will be cancelled immediately following the Effective Time, and that no other common or preferred stock or equity securities of the Parent, or any options, warrants, rights or other agreements or instruments convertible, exchangeable or exercisable into common or preferred stock or equity securities of the Parent, shall be issued or outstanding at the Effective Time.
 
7

 
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
 
The Company hereby represents and warrants to Parent as follows:
 
Section 4.1   Organization . The Company (i) is duly organized, validly existing and in good standing (or its equivalent) under the laws of the State of Delaware, (ii) has all licenses, permits, authorizations and other Consents necessary to own, lease and operate its properties and assets and to carry on its business as it is now being conducted, except where such failure would not have, or be reasonably likely to have, a Company Material Adverse Effect, and (iii) has all requisite corporate or other applicable power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted, except where such failure would not have, or be reasonably likely to have, a Company Material Adverse Effect. The Company is duly qualified or authorized to conduct business and is in good standing (or its equivalent) as a foreign corporation or other entity in all jurisdictions in which the ownership or use of its assets or nature of the business conducted by it makes such qualification or authorization necessary, except where the failure to be so duly qualified, authorized and in good standing would not have a Company Material Adverse Effect. The Company has no subsidiaries.
 
Section 4.2   Authorization; Validity of Agreement . The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby, have been duly authorized by the Board of Directors of the Company and no other action (except the approval of the Stockholders solely with respect to consummation of the Merger) on the part of the Company or any of its Stockholders or subsidiaries is necessary to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company (and assuming due and valid authorization, execution and delivery hereof by Parent and Acquisition Corp.) is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
 
Section 4.3   Capitalization . As of the date hereof, the authorized capital stock of the Company consists of 300,000,000 shares of Company Common Stock. As of the date hereof, there are 20,340,929 shares of Company Common Stock issued and outstanding. Schedule 4.3 sets forth (i) the name of each Person owning shares of Company Common Stock and (ii) the number of shares of Company Common Stock owned by each such Person. All the outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and non-assessable. There are issued and outstanding Company Stock Options to purchase 1,697,648 shares of Company Common Stock. In addition, certain providers of legal services to the Company had the right to be issued approximately 997,000   shares of Company Common Stock as payment for accrued legal fees.
 
Section 4.4   Consents and Approvals; No Violations . Except for (a) approval of the Merger by the Stockholders and (b) filing of the certificate of merger with the Secretary of State of the State of Delaware, neither the execution, delivery or performance of this Agreement by the Company nor the consummation of the transactions contemplated hereby will (i) violate any provision of its certificate of incorporation or by-laws; (ii) violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, require the consent of or result in the creation of any encumbrance upon any of the properties of the Company under, any material note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement or other instrument (collectively, “ Contract ”) to which the Company or any of its properties may be bound; (iii) require any Consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental entity by or with respect to the Company; or (iv) violate any order, writ, judgment, injunction, decree, law, statute, rule or regulation applicable to the Company or any of its properties or assets.
 
8

Section 4.5   Financial Statements . The Company has delivered or made available as of the date hereof or shall, prior to the Closing Date, deliver or make available to Parent the balance sheet (the “ Balance Sheet ”) of the Company as at March 31, 2006 and the related statements of income, stockholders’ equity and cash flows of the Company for the three months ended March 31, 2006 (the “ Balance Sheet Date ”). The foregoing financial statements (i) have been prepared based upon the books and records of the Company, (ii) have been prepared in accordance with GAAP (except as otherwise noted therein), and (iii) present fairly, in all material respects, the financial position, results of operations and cash flows of the Company as at their respective dates and for the periods then ended subject to normal year-end adjustments.
 
Section 4.6   No Undisclosed Liabilities . Except (a) for Liabilities described on or reflected on the face of the Balance Sheet and (b) Liabilities of the same type, magnitude and scope as those reflected on the Balance Sheet which have arisen since the date of the Balance Sheet in the ordinary course of business, and which would not, individually or in the aggregate, result in a Company Material Adverse Effect, the Company does not have any Liability.
 
Section 4.7   Litigation . Except as set forth on Schedule 4.7 , there is no Action pending or, to the knowledge of the Company, threatened, involving the Company with respect to the Company’s business by or before any governmental entity or by any third party and the Company has not received notice that any such Action is threatened. The Company is not in default under any judgment, order or decree of any governmental entity applicable to its business.
 
Section 4.8   No Default; Compliance with Applicable Laws . The Company is not in default or violation of any material term, condition or provision of (i) its certificate of incorporation or by-laws or (ii) any law applicable to the Company or its property and assets, except where such default or violation would not have, or be reasonably likely to have, a Company Material Adverse Effect, and the Company has not received notice of any violation of or Liability under any of the foregoing (whether material or not).
 
Section 4.9   Broker’s and Finder’s Fees . No Person has, or as a result of the transactions contemplated or described herein will have, any right or valid claim against the Company, Parent, Acquisition Corp. or any Stockholder for any commission, fee or other compensation as a finder or broker, or in any similar capacity, with respect to the consummation of the Merger.
 
9

Section 4.10   Assets and Contracts . Except for this Agreement and except as described in Schedule 4.10 , the Company is not a party to any Contract not made in the ordinary course of business that is material to the Company, (a) with a labor union, (b) for the purchase of fixed assets or for the purchase of materials, supplies or equipment in excess of $100,000, (c) for the employment of any officer, individual employee or other Person on a full-time basis, (d) with respect to bonus, pension, profit sharing, retirement, stock purchase, deferred compensation, medical, hospitalization or life insurance or similar plan, contract or understanding for any or all of the employees of the Company or any other Person, (e) relating to or evidencing Indebtedness for Borrowed Money or subjecting any asset or property of the Company to any Lien or evidencing any Indebtedness, (f) guaranteeing any Indebtedness, (g) under which the Company is lessee of or holds or operates any property, real or personal, owned by any other Person under which payments to such Person exceed $100,000 per year and with an unexpired term (including any period covered by an option to renew exercisable by any other party) of more than 60 days, (h) under which the Company is lessor or permits any Person to hold or operate any property, real or personal, owned or controlled by the Company, (i) granting any preemptive right, right of first refusal or similar right to any Person, (j) obligating the Company to pay any royalty or similar charge for the use or exploitation of any tangible or intangible property, (k) containing a covenant not to compete or other restriction on the Company’s ability to conduct a business or engage in any other activity, (l) with respect to any distributor, dealer, manufacturer’s representative, sales agency, franchise or advertising contract or commitment in excess of $100,000 per year, (m) regarding registration of securities under the Securities Act, (n) characterized as a collective bargaining agreement, or (o) with any Person continuing for a period of more than three months from the Closing Date which involves an expenditure or receipt by the Company in excess of $100,000. The Company has made available to Parent and Acquisition Corp. true and complete copies of all Contracts and other documents requested by Parent or Acquisition Corp.
 
Section 4.11   Tax Returns and Audits . Except as set forth on Schedule 4.11 or as would not have a Material Adverse Effect, all required federal, state and local Tax Returns of the Company have been accurately prepared and duly filed, and all federal, state and local Taxes required to be paid with respect to the periods covered by such returns have been paid. The Company is not and has not been delinquent in the payment of any Tax. The Company has not had a Tax deficiency proposed or assessed against it and has not executed a waiver of any statute of limitations on the assessment or collection of any Tax. None of the Company’s federal income Tax Returns nor any state or local income or franchise Tax Returns has been audited by governmental authorities. The reserves for Taxes reflected on the Balance Sheet (if any) are and will be sufficient for the payment of all unpaid Taxes payable by the Company as of the Balance Sheet Date. Since the Balance Sheet Date, the Company has made adequate provisions on its books of account for all Taxes with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees the amount of all Taxes (including, but not limited to, federal, state and local income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper Tax receiving officers or authorized depositaries. Except as set forth on Schedule 4.11 , there are no federal, state, local or foreign audits, actions, suits, proceedings, investigations, claims or administrative proceedings relating to Taxes or any Tax Returns of the Company now pending, and the Company has not received any notice of any proposed audits, investigations, claims or administrative proceedings relating to Taxes or any Tax Returns.
 
10

Section 4.12   Patents and Other Intangible Assets . Except as set forth in Schedule 4.7 , the Company (i) owns or has the right to use, free and clear of all Liens, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing used in or necessary for the conduct of its business without infringing upon or otherwise acting adversely to the right or claimed right of any Person under or with respect to any of the foregoing and (ii) is not obligated or under any obligation to make any payments by way of royalties, fees or otherwise to any owner or licensor of, or other claimant to, any patent, trademark, service mark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise.
 
Section 4.13   Employee Benefit Plans; ERISA .
 
(a)   All employee benefit plans, within the meaning of Section 3(3) of the ERISA, of the Company (“Employee Benefit Plans”) and other employee benefit or fringe benefit arrangements, practices, contracts, policies or programs of every type, other than programs merely involving the regular payment of wages, commissions, or bonuses established, maintained or contributed to by the Company, whether written or unwritten and whether or not funded, are in material compliance with the applicable requirements of ERISA, the Code and any other applicable state, federal or foreign law.
 
(b)   There are no pending claims or lawsuits that have been asserted or instituted against any Employee Benefit Plan, the assets of any of the trusts or funds under the Employee Benefit Plans, the plan sponsor or the plan administrator of any of the Employee Benefit Plans or against any fiduciary of an Employee Benefit Plan with respect to the operation of such plan, nor does the Company have any knowledge of any incident, transaction, occurrence or circumstance which might reasonably be expected to form the basis of any such claim or lawsuit.
 
(c)   There is no pending or, to the knowledge of the Company, contemplated investigation, or pending or possible enforcement action by the Pension Benefit Guaranty Corporation, the Department of Labor, the Internal Revenue Service or any other government agency with respect to any Employee Benefit Plan and the Company has no knowledge of any incident, transaction, occurrence or circumstance which might reasonably be expected to trigger such an investigation or enforcement action.
 
(d)   No actual or, to the knowledge of the Company, contingent Liability exists with respect to the funding of any Employee Benefit Plan or for any other expense or obligation of any Employee Benefit Plan, except as disclosed on the Balance Sheet, and no contingent Liability exists under ERISA with respect to any “multi-employer plan,” as defined in Section 3(37) or Section 4001(a)(3) of ERISA.
 
(e)   No events have occurred or are reasonably expected to occur with respect to any Employee Benefit Plan that would cause a material change in the costs of providing benefits under such Employee Benefit Plan or would cause a material change in the cost of providing such Employee Benefit Plan.
 
Section 4.14   Title to Property and Encumbrances . The Company has good and valid title to all properties and assets used in the conduct of its business (except for property held under valid and subsisting leases which are in full force and effect and which are not in default) free of all Liens except Permitted Liens and such ordinary and customary imperfections of title, restrictions and encumbrances as do not, individually or in the aggregate, constitute a Company Material Adverse Effect.
 
11

Section 4.15   Condition of Properties . All facilities, machinery, equipment, fixtures and other properties owned, leased or used by the Company are in operating condition, subject to ordinary wear and tear, and are adequate and sufficient for the Company’s existing business.
 
Section 4.16   Insurance Coverage . Schedule 4.16 sets forth a true, correct and complete list of all material insurance policies maintained by or on behalf of the Company and relating to its business and/or assets, indicating the type of coverage, name of insurance carrier or underwriter, premium thereon, policy limits and expiration date of each policy. All such insurance policies are in full force and effect, and the Company is not in default with respect to its obligations under any such insurance policy, except with respect to any such default which would not have a Company Material Adverse Effect, and no notice of cancellation or termination has been received with respect to any such policy.
 
Section 4.17   Interested Party Transactions . Except as disclosed in Schedule 4.10 , the Company is not a party to any contract, lease, license, commitment or arrangement, written or oral, which, were the Company a “Registrant” under the Exchange Act, would be required to be disclosed pursuant to Item 404(a) or (d) of Regulation S-B promulgated by the Commission, and there are no loans outstanding to or from any Person specified in Item 404(a) of Regulation S-B from or to the Company.
 
Section 4.18   Environmental Matters .
 
(a)   To the knowledge of the Company, the Company has never generated, used, handled, treated, released, stored or disposed of any Hazardous Materials on any real property on which it now has or previously had any leasehold or ownership interest, except in compliance with all applicable Environmental Laws.
 
(b)   To the knowledge of the Company, the historical and present operations of the business of the Company are in compliance with all applicable Environmental Laws, except where any non-compliance has not had and would not reasonably be expected to have a Company Material Adverse Effect.
 
(c)   There are no pending or, to the knowledge of the Company, threatened, material demands, claims, information requests or notices of noncompliance or violation against or to the Company relating to any Environmental Law; and, to the knowledge of the Company, there are no conditions or occurrences on any of the real property used by the Company in connection with its business that would reasonably be expected to lead to any such demands, claims or notices against or to the Company, except such as have not had, and would not reasonably be expected to have, a Company Material Adverse Effect.
 
12

(d)   To the knowledge of the Company, (i) the Company has not, sent or disposed of, otherwise had taken or transported, arranged for the taking or disposal of (on behalf of itself, a customer or any other party) or in any other manner participated or been involved in the taking of or disposal or release of a Hazardous Material to or at a site that is contaminated by any Hazardous Material or that, pursuant to any Environmental Law, (A) has been placed on the “National Priorities List”, the “CERCLIS” list, or any similar state or federal list, or (B) is subject to or the source of a claim, an administrative order or other request to take “removal”, “remedial”, “corrective” or any other “response” action, as defined in any Environmental Law, or to pay for the costs of any such action at the site; (ii) the Company is not involved in (and has no basis to reasonably expect to be involved in) any suit or proceeding and has not received (and has no basis to reasonably expect to receive) any notice, request for information or other communication from any governmental authority or other third party with respect to a release or threatened release of any Hazardous Material or a violation or alleged violation of any Environmental Law, and has not received (and has no basis to reasonably expect to receive) notice of any claims from any Person relating to property damage, natural resource damage or to personal injuries from exposure to any Hazardous Material; and (iii) the Company has timely filed every report required to be filed, acquired all necessary certificates, approvals and permits, and generated and maintained all required data, documentation and records under all Environmental Laws, in all such instances except where the failure to do so would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
 
Section 4.19   Disclosure . No representation or warranty by the Company herein and no information disclosed in the schedules hereto by the Company contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading.
 
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION CORP.
 
Parent and Acquisition Corp. hereby represent and warrant to the Company as follows:
 
Section 5.1   Organization . Each of Parent and Acquisition Corp. is duly organized, validly existing and in good standing under the laws of its State of incorporation or organization. Since the date of its formation, except as disclosed in the SEC Documents, Parent has not (i) engaged in any business activities or conducted any operations other than in connection with its organization and the transactions contemplated by this Agreement, or (ii) owned any assets or property (other than cash and cash equivalents).
 
Section 5.2   Authorization; Validity of Agreement . Each of Parent and Acquisition Corp. has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by each of Parent and Acquisition Corp. of this Agreement and all other agreements and instruments to be executed pursuant to this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by the Board of Directors of each of Parent and Acquisition Corp. and the stockholders of Acquisition Corp., and no other action on the part of either of Parent and Acquisition Corp. is necessary to authorize the execution and delivery of this Agreement and the consummation by either of Parent or Acquisition Corp. of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Parent and Acquisition Corp. (and assuming due and valid authorization, execution and delivery hereof by the Company) is a valid and binding obligation of each of Parent and Acquisition Corp., enforceable against each of them in accordance with its terms, except as such enforcement is limited by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.
 
13

Section 5.3   Consents and Approvals; No Violations . Except for filing of the certificate of merger with the Secretary of State of the State of Delaware, neither the execution, delivery or performance of this Agreement by either of Parent and Acquisition Corp. nor the consummation of the transactions contemplated hereby will (i) violate any provision of the certificate of incorporation or by-laws of Parent or Acquisition Corp.; (ii) violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, require the consent of or result in the creation of any Lien upon any of the properties of Parent or Acquisition Corp. under, any Contract to which Parent or Acquisition Corp. or any of their properties may be bound; (iii) require any Consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental entity by or with respect to Parent or any subsidiary of Parent, or (iv) violate any law applicable to any of Parent or Acquisition Corp. or any of their respective properties or assets.
 
Section 5.4   Litigation . There is no Action pending or, to the knowledge of the Parent, threatened, involving Parent and Acquisition Corp. or any subsidiary of Parent with respect to Parent’s and Acquisition Corp.’s, or any of Parent’s subsidiaries, business by or before any governmental entity or by any third party and neither Parent or Acquisition Corp. nor any subsidiary of Parent has received notice that any such Action is threatened. Neither Parent or Acquisition Corp. nor any subsidiary of Parent is in default under any judgment, order or decree of any governmental entity applicable to its business.
 
Section 5.5   No Default; Compliance with Applicable Laws . Neither Parent nor any of Parent’s subsidiaries is in default or violation of any material term, condition or provision of (i) their respective certificate of incorporation, by-laws or similar organizational documents or (ii) any law applicable to Parent or any of Parent’s subsidiaries or its property and assets and neither Parent nor any of Parent’s subsidiaries has received notice of any violation of or Liability under any of the foregoing (whether material or not).
 
Section 5.6   Broker’s and Finder’s Fees; Broker/Dealer Ownership . Except as set forth on Schedule 4.9 , no person, firm, corporation or other entity is entitled by reason of any act or omission of Parent or Acquisition Corp. to any broker’s or finder’s fees, commission or other similar compensation with respect to the execution and delivery of this Agreement or with respect to the consummation of the transactions contemplated hereby.
 
Section 5.7   Capitalization of Parent . The authorized capital stock of Parent consists of (a) 100,000,000 shares of Parent Common Stock, of which not more than 3,750,000 shares will be, immediately following the Effective Time, issued and outstanding without taking into consideration the issuance of Parent Common Stock in the Merger, (but taking into consideration the cancellation of 4,105,000 shares of Parent Common Stock as set forth in Section 3.4) and (b) 100,000,000 shares of preferred stock, none of which shall have been designated or issued immediately following the Effective Time. Schedule 5. 7 sets forth a true and complete list of the stockholders of Parent and the number of shares of Parent Common Stock owned by each such stockholder on the date shown. Parent has no outstanding options, rights or commitments to issue shares of Parent Common Stock or any capital stock or other securities of Parent or Acquisition Corp., and there are no outstanding securities convertible or exercisable into or exchangeable for shares of Parent Common Stock or any capital stock or other securities of Parent or Acquisition Corp. There is no voting trust, agreement or arrangement among any of the beneficial holders of Parent Common Stock affecting the nomination or election of directors or the exercise of the voting rights of Parent Common Stock. All outstanding shares of the capital stock of Parent are validly issued and outstanding, fully paid and nonassessable, and none of such shares have been issued in violation of the preemptive rights of any person.
 
14

Section 5.8   Acquisition Corp . Acquisition Corp. is a Delaware corporation and a wholly-owned subsidiary of Parent, was formed specifically for the purpose of the Merger and has not conducted any business or acquired any property, and will not conduct any business or acquire any property prior to the Closing Date, except in preparation for and otherwise in connection with the transactions contemplated by this Agreement. Parent owns all of the issued and outstanding capital stock of Acquisition Corp. free and clear of all Liens, and Acquisition Corp. has no outstanding options, warrants or rights to purchase capital stock or other securities of the Acquisition Corp., other than the capital stock of Acquisition Corp. owned by Parent. Except for Acquisition Corp., the Parent has no subsidiaries.
 
Section 5.9   Validity of Shares . The shares of Parent Common Stock to be issued in accordance with Article III hereof, when issued and delivered in accordance with the terms hereof, shall be duly and validly issued, fully paid and nonassessable.
 
Section 5.10   SEC Reporting and Compliance .
 
(a)   Parent has filed with the Commission all registration statements, proxy statements, information statements and reports required to be filed pursuant to the Exchange Act. Parent has not filed with the Commission a certificate on Form 15 pursuant to Rule 12h-3 of the Exchange Act.
 
(b)   Parent has delivered to the Company true and complete copies of the registration statements, information statements and other reports (collectively, the “ Parent SEC Documents ”) filed by the Parent with the Commission. None of the Parent SEC Documents, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained therein not misleading.
 
(c)   Parent has not filed, and nothing has occurred with respect to which Parent would be required to file, any report on Form 8-K since February 28, 2006. Prior to and until the Closing, Parent will provide to the Company copies of any and all amendments or supplements to the Parent SEC Documents filed with the Commission since February 28, 2006 and all subsequent registration statements and reports filed by Parent subsequent to the filing of the Parent SEC Documents with the Commission and any and all subsequent information statements, proxy statements, reports or notices filed by the Parent with the Commission or delivered to the stockholders of Parent.
 
(d)   Parent is not an “investment company” within the meaning of Section 3 of the Investment Company Act.
 
15

(e)   Between the date hereof and the Closing Date, Parent shall continue to satisfy the filing requirements of the Exchange Act and all other requirements of applicable securities laws.
 
(f)   To the best knowledge of the Parent, the Parent has complied with the Securities Act, Exchange Act and all other applicable federal and state securities laws.
 
Section 5.11   Financial Statements . The balance sheets, and statements of income, stockholders’ equity and cash flows contained in the Parent SEC Documents (the “ Parent Financial Statements ”) (i) have been prepared in accordance with GAAP, (ii) are in accordance with the books and records of the Parent, and (iii) present fairly in all material respects the financial condition of the Parent at the dates therein specified and the results of its operations and changes in financial position for the periods therein specified. During the two most recent fiscal years of the Parent and the subsequent interim period through February 28, 2006, there were no disagreements between Gilder the Parent and its independent auditors as to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of those independent auditors, would have caused those independent auditors to make reference in their reports on the financial statements for such years to the subject matter of the disagreement.
 
Section 5.12   No General Solicitation . In issuing Parent Common Stock in the Merger hereunder, neither Parent nor anyone acting on its behalf has offered to sell Parent Common Stock by any form of general solicitation or advertising.
 
Section 5.13   Absence of Undisclosed Liabilities . Neither Parent nor Acquisition Corp. has any Liability arising out of any transaction entered into at or prior to the Closing, except (a) as disclosed in the Parent SEC Documents, (b) to the extent set forth on or reserved against in the balance sheet of Parent as at February 28, 2006 (the “ Parent Balance Sheet ”) or the notes to the Parent Financial Statements, and (c) by the specific terms of any written agreement, document or arrangement attached as an exhibit to the Parent SEC Documents.
 
Section 5.14   Changes . Since February 28, 2006 (the “ Parent Balance Sheet Date ”), except as disclosed in the Parent SEC Documents, the Parent has not (a) incurred any debts, obligations or Liabilities, absolute, accrued or, to the Parent’s knowledge, contingent, whether due or to become due, except for current Liabilities incurred in the usual and ordinary course of business, (b) discharged or satisfied any Liens other than those securing, or paid any obligation or Liability other than, current liabilities shown on the Parent Balance Sheet and current Liabilities incurred since the Parent Balance Sheet Date, in each case in the usual and ordinary course of business, (c) mortgaged, pledged or subjected to Lien any of its assets, tangible or intangible, other than in the usual and ordinary course of business, (d) sold, transferred or leased any of its assets, except in the usual and ordinary course of business, (e) cancelled or compromised any debt or claim, or waived or released any right of material value, (f) suffered any physical damage, destruction or loss (whether or not covered by insurance) that could reasonably be expected to have a Parent Material Adverse Effect, (g) entered into any transaction other than in the usual and ordinary course of business, (h) encountered any labor union difficulties, (i) made or granted any wage or salary increase or made any increase in the amounts payable under any profit sharing, bonus, deferred compensation, severance pay, insurance, pension, retirement or other employee benefit plan, agreement or arrangement, other than in the ordinary course of business consistent with past practice, or entered into any employment agreement, (j) except as set forth on Schedule 5.7 , issued or sold any shares of capital stock, bonds, notes, debentures or other securities or granted any options (including employee stock options), warrants or other rights with respect thereto, (k) declared or paid any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding capital stock, (l) suffered or experienced any change in, or condition affecting, the financial condition of the Parent other than changes, events or conditions in the usual and ordinary course of its business, none of which (either by itself or in conjunction with all such other changes, events and conditions) could reasonably be expected to have a Parent Material Adverse Effect, (m) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted, (n) made or permitted any amendment or termination of any material Contract, agreement or license to which it is a party, (o) suffered any material loss not reflected in the Parent Balance Sheet or its statement of income for the year ended on the Parent Balance Sheet Date, (p) paid, or made any accrual or arrangement for payment of, bonuses or special compensation of any kind or any severance or termination pay to any present or former officer, director, employee, stockholder or consultant, (q) made or agreed to make any charitable contributions or incurred any non-business expenses in excess of $1,000 in the aggregate, or (r) entered into any Contract, agreement or license, or otherwise obligated itself, to do any of the foregoing.
 
16

Section 5.15   Tax Returns and Audits . All required federal, state and local Tax Returns of the Parent have been accurately prepared in all material respects and duly filed, and all federal, state and local Taxes required to be paid with respect to the periods covered by such returns have been paid to the extent that the same are material and have become due, except where the failure so to file or pay could not reasonably be expected to have a Parent Material Adverse Effect. The Parent is not and has not been delinquent in the payment of any Tax. The Parent has not had a Tax deficiency assessed against it. None of the Parent’s federal income Tax Returns nor any state or local income or franchise Tax Returns has been audited by governmental authorities. The reserves for Taxes reflected on the Parent Balance Sheet are sufficient for the payment of all unpaid Taxes payable by the Parent with respect to the period ended on the Parent Balance Sheet Date. There are no federal, state, local or foreign audits, actions, suits, proceedings, investigations, claims or administrative proceedings relating to Taxes or any Tax Returns of the Parent now pending, and the Parent has not received any notice of any proposed audits, investigations, claims or administrative proceedings relating to Taxes or any Tax Returns.
 
Section 5.16   Employee Benefit Plans; Labor .
 
(a)   Parent has no “employee benefit plans” (within the meaning of Section 3(3) of ERISA) nor any other employee benefit or fringe benefit arrangements, practices, contracts, policies or programs other than programs merely involving the regular payment of wages, commissions, or bonuses established, maintained or contributed to by the Parent.  
 
(b)   Parent has no employees, and except as disclosed in the SEC Documents, and is not a party to any employment or consulting agreements, compensation plans, bonus plans, or other similar agreement or arrangement. Parent is not under any obligation or liability to any current or former officer, director, employee or Affiliate of Parent.
 
17

(c)   Neither the execution and delivery of this Agreement nor the consummation of the Merger will entitle any current or former employee of Parent or any of its Affiliates to severance pay or other similar payment, or accelerate the time of payment or increase the amount of compensation due to any such employee or former employee.  
 
Section 5.17   Interested Party Transactions . Except as disclosed in the Parent SEC Documents, Parent is not a party to any contract, lease, license, commitment or arrangement, written or oral, which would be required to be disclosed pursuant to Item 404(a) or (d) of Regulation S-B promulgated by the Commission, and there are no loans outstanding to or from any Person specified in Item 404(a) of Regulation S-B from or to the Parent.
 
Section 5.18   Questionable Payments . Neither the Parent, Acquisition Corp. nor to the knowledge of the Parent, any director, officer, agent, employee or other Person associated with or acting on behalf of the Parent or Acquisition Corp., has a used any corporate funds for (a) unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) made any direct or indirect unlawful payments to government officials or employees from corporate funds, (c) established or maintained any unlawful or unrecorded fund of corporate monies or other assets, (d) made any false or fictitious entries on the books of record of any such corporations, or (e) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
 
Section 5.19   Obligations to or by Stockholders . Except as disclosed in the Parent SEC Documents, the Parent has no Liability or obligation or commitment to any stockholder of Parent or any Affiliate or “associate” (as such term is defined in Rule 405 under the Securities Act) of any stockholder of Parent, nor does any stockholder of Parent or any such Affiliate or associate have any Liability, obligation or commitment to the Parent.
 
Section 5.20   Assets and Contracts . Except as expressly set forth in this Agreement, the Parent Balance Sheet or the notes thereto, the Parent is not a party to any Contract, including, without limitation, (a) with any labor union, (b) for the purchase of fixed assets or for the purchase of materials, supplies or equipment in excess of normal operating requirements, (c) for the employment of any officer, individual employee or other Person on a full-time basis or any contract with any Person for consulting services, (d) with respect to bonus, pension, profit sharing, retirement, stock purchase, stock option, deferred compensation, medical, hospitalization or life insurance or similar plan, contract or understanding with any or all of the employees of Parent or any other Person, (e) relating to or evidencing Indebtedness for Borrowed Money or subjecting any asset or property of Parent to any Lien or evidencing any Indebtedness, (f) guaranteeing of any Indebtedness, (g) under which Parent is lessee of or holds or operates any property, real or personal, owned by any other Person, (h) under which Parent is lessor or permits any Person to hold or operate any property, real or personal, owned or controlled by Parent, (i) granting any preemptive right, right of first refusal or similar right to any Person, (j) with any Affiliate of Parent or any present or former officer, director or stockholder of Parent, (k) obligating Parent to pay any royalty or similar charge for the use or exploitation of any tangible or intangible property, (1) containing a covenant not to compete or other restriction on the parent’s ability to conduct a business or engage in any other activity, (m) with respect to any distributor, dealer, manufacturer’s representative, sales agency, franchise or advertising contract or commitment, (n) regarding the registration of securities under the Securities Act, (o) characterized as a collective bargaining agreement, or (p) with any Person continuing for a period of more than three months from the Closing Date that involves an expenditure or receipt by Parent in excess of $1,000. Parent does not own any real property. The Parent maintains no insurance policies and insurance coverage of any kind with respect to Parent, its business, premises, properties, assets, employees and agents. Parent has furnished to the Company true and complete copies of all agreements and other documents requested by the Company.
 
18

Section 5.21   Environmental Matters .
 
(a)   The Parent has never generated, used, handled, treated, released, stored or disposed of any Hazardous Materials on any real property on which it now has or previously had any leasehold or ownership interest, except in compliance with all applicable Environmental Laws.
 
(b)   The historical and present operations of the business of the Parent comply with all applicable Environmental Laws, except where any non-compliance has not had and would not reasonably be expected to have a Parent Material Adverse Effect.  
 
(c)   There are no pending or, to the knowledge of Parent, threatened, demands, claims, information requests or notices of noncompliance or violation against or to the Parent relating to any Environmental Law; and, to the knowledge of the Parent, there are no conditions or occurrences on any of the real property used by the Parent that would reasonably be expected to lead to any such demands, claims or notices against or to the Parent, except such as have not had, and would not reasonably be expected to have, a Parent Material Adverse Effect.
 
(d)   (i) The Parent has not, sent or disposed of, otherwise had taken or transported, arranged for the taking or disposal of (on behalf of itself, a customer or any other party) or in any other manner participated or been involved in the taking of or disposal or release of a Hazardous Material to or at a site that is contaminated by any Hazardous Material or that, pursuant to any Environmental Law, (A) has been placed on the “National Priorities List”, the “CERCLIS” list, or any similar state or federal list, or (B) is subject to or the source of a claim, an administrative order or other request to take “removal”, “remedial”, “corrective” or any other “response” action, as defined in any Environmental Law, or to pay for the costs of any such action at the site; (ii) the Parent is not involved in (and has no basis to reasonably expect to be involved in) any suit or proceeding and has not received (and has no basis to reasonably expect to receive) any notice, request for information or other communication from any governmental authority or other third party with respect to a release or threatened release of any Hazardous Material or a violation or alleged violation of any Environmental Law, and has not received (and has no basis to reasonably expect to receive) notice of any claims from any Person relating to property damage, natural resource damage or to personal injuries from exposure to any Hazardous Material; and (iii) the Parent has timely filed every report required to be filed, acquired all necessary certificates, approvals and permits, and generated and maintained all required data, documentation and records under all Environmental Laws, in all such instances except where the failure to do so would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect.

19

Section 5.22   Disclosure . No representation or warranty by Parent or Acquisition Corp. herein and no information disclosed in the schedules hereto by Parent or Acquisition Corp. contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein misleading.
 
ARTICLE VI
CONDUCT OF BUSINESSES PENDING THE MERGER
 
Section 6.1   Conduct of Business by the Company Pending the Merger . Prior to the Effective Time, unless Parent or Acquisition Corp. shall otherwise agree in writing or as otherwise contemplated by this Agreement:
 
(i)   the business of the Company shall be conducted only in the ordinary course consistent with the past practice;
 
(ii)   the Company shall not (A) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares Company Capital Stock; (B) amend its certificate of incorporation or by-laws except to effectuate the transactions contemplated in this Agreement; or (C) split, combine or reclassify the outstanding Company Common Stock or declare, set aside or pay any dividend payable in cash, stock or property or make any distribution with respect to any such stock;
 
(iii)   the Company shall not (A) issue any additional shares of, or options, warrants or rights of any kind to acquire any shares of, Company Capital Stock, except to issue shares of Company Common Stock in connection with the exercise of Common Stock Options; (B) acquire or dispose of any fixed assets or acquire or dispose of any other substantial assets other than in the ordinary course of business; (C) incur additional Indebtedness or any other Liabilities or enter into any other transaction other than in the ordinary course of business; (D) enter into any Contract, agreement, commitment or arrangement with respect to any of the foregoing except this Agreement; or (E) except as contemplated by this Agreement, enter into any Contract, agreement, commitment or arrangement to dissolve, merge, consolidate or enter into any other material business combination;
 
(iv)   the Company shall use its reasonable best efforts to preserve intact the business of the Company, to keep available the service of its present officers and key employees, and to preserve the good will of those having business relationships with it; and
 
(v)   the Company will not enter into any new employment agreements with any of its officers or employees or grant any increases in the compensation or benefits of its officers and employees or amend any employee benefit plan or arrangement other than in the ordinary course of business and consistent with past practice.
 
20

Section 6.2   Conduct of Business by Parent and Acquisition Corp. Pending the Merger . Prior to the Effective Time, unless the Company shall otherwise agree in writing or as otherwise contemplated expressly permitted by this Agreement:
 
(i)   neither the Parent nor Acquisition Corp. shall conduct any business other than in connection with effecting the transactions contemplated hereby;
 
(ii)   neither Parent nor Acquisition Corp. shall (A) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares of its capital stock; (B) amend its certificate of incorporation or by-laws; or (C) split, combine or reclassify its capital stock or declare, set aside or pay any dividend payable in cash, stock or property or make any distribution with respect to such stock; and
 
(iii)   neither Parent nor Acquisition Corp. shall (A) issue or agree to issue any additional shares of, or options, warrants or rights of any kind to acquire shares of, its capital stock; (B) acquire or dispose of any assets other than in the ordinary course of business; (C) incur additional Indebtedness or any other Liabilities or enter into any other transaction except in the ordinary course of business; (D) enter into any Contract, agreement, commitment or arrangement with respect to any of the foregoing except this Agreement, or (E) except as contemplated by this Agreement, enter into any Contract, agreement, commitment or arrangement to dissolve, merge; consolidate or enter into any other material business contract or enter into any negotiations in connection therewith.
 
(iv)   neither Parent nor Acquisition Corp. will, nor will they authorize any director or authorize or permit any officer or employee or any attorney, accountant or other representative retained by them to, make, solicit, encourage any inquiries with respect to, or engage in any negotiations concerning, any Acquisition Proposal (as defined below). Parent will promptly advise the Company in writing of any such inquiries or Acquisition Proposal (or requests for information) and the substance thereof. As used in this paragraph, “ Acquisition Proposal ” shall mean any proposal for a merger or other business combination involving the Parent or Acquisition Corp. or for the acquisition of a substantial equity interest in either of them or any material assets of either of them other than as contemplated by this Agreement. Parent will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Person conducted heretofore with respect to any of the foregoing; and
 
(v)   neither Parent nor Acquisition Corp. will enter into any employment agreements with any Person or grant any increases in the compensation or benefits of their officers and employees.
 
21

ARTICLE VII
ADDITIONAL AGREEMENTS
 
Section 7.1   Access and Information . The Company, Parent and Acquisition Corp. shall each afford to the other and to the other’s accountants, counsel and other representatives reasonable access during normal business hours throughout the period prior to the Effective Time of all of its properties, books, contracts, commitments and records (including but not limited to Tax Returns) and during such period, each shall furnish promptly to the other all information concerning its business, properties and personnel as such other party may reasonably request, provided that no investigation pursuant to this Section 7.1 shall affect any representations or warranties made herein. Each party shall hold, and shall cause its employees and agents to hold, in confidence all such information (other than such information that (i) becomes generally available to the public other than as a result of a disclosure by such party or its directors, officers, managers, employees, agents or advisors, or (ii) becomes available to such party on a non-confidential basis from a source other than a party hereto or its advisors, provided that such source is not known by such party to be bound by a confidentiality agreement with or other obligation of secrecy to a party hereto or another party until such time as such information is otherwise publicly available; provided , however , that: (A) any such information may be disclosed to such party’s directors, officers, employees and representatives of such party’s advisors who need to know such information for the purpose of evaluating the transactions contemplated hereby (it being understood that such directors, officers, employees and representatives shall be informed by such party of the confidential nature of such information); (B) any disclosure of such information may be made as to which the party hereto furnishing such information has consented in writing; and (C) any such information may be disclosed pursuant to a judicial, administrative or governmental order or request provided , that the requested party will promptly so notify the other party so that the other party may seek a protective order or appropriate remedy and/or waive compliance with this Agreement and if such protective order or other remedy is not obtained or the other party waives compliance with this provision, the requested party will furnish only that portion of such information which is legally required and will exercise its best efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded the information furnished. If this Agreement is terminated, each party will deliver to the other all documents and other materials (including copies) obtained by such party or on its behalf from the other party as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof.
 
Section 7.2   Additional Agreements . Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its commercially reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its commercially reasonable best efforts to satisfy the conditions precedent to the obligations of any of the parties hereto to obtain all necessary waivers, and to lift any injunction or other legal bar to the Merger (and, in such case, to proceed with the Merger as expeditiously as possible). In order to obtain any necessary governmental or regulatory action or non-action, waiver, Consent, extension or approval, each of Parent, Acquisition Corp. and the Company agrees to take all reasonable actions and to enter into all reasonable agreements as may be necessary to obtain timely governmental or regulatory approvals and to take such further action in connection therewith as may be necessary. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and/or directors of Parent, Acquisition Corp. and the Company shall take all such necessary action.
 
22

Section 7.3   Publicity . No party shall issue any press release or public announcement pertaining to the Merger that has not been agreed upon in advance by Parent and the Company, except as Parent reasonably determines to be necessary in order to comply with the rules of the Commission; provided that in such case Parent will use its best efforts to allow Company to review and reasonably approve any same prior to its release.
 
Section 7.4   Appointment of Directors . Immediately upon the Effective Time, Parent shall accept the resignations of the current officers and directors of Parent as provided by Section 8.2(e)(5) hereof, and the persons listed as directors in Exhibit A hereto shall be elected to the Board of Directors of Parent.
 
Section 7.5   Stockholder Consent .
 
(a)   So long as the Board of Directors of the Company shall not have withdrawn, modified or changed its recommendation in accordance with the provisions of Section 7.5(b) hereof, the Company, acting through its Board of Directors, shall, in accordance with the DGCL and its certificate of incorporation and by-laws, take all actions reasonably necessary to obtain the requisite approval and adoption of this Agreement and the transactions contemplated hereby by the Stockholders as required by the DGCL and otherwise.
 
(b)   The Board of Directors of the Company shall recommend such approval and shall use all reasonable efforts to solicit and obtain such approval; provided , however , that the Board of Directors of the Company may at any time prior to approval of the Stockholders (i) decline to make, withdraw, modify or change any recommendation or declaration regarding this Agreement or the Merger or (ii) recommend and declare advisable any other offer or proposal, to the extent the Board of Directors of the Company determines in good faith, based upon advice of legal counsel, that withdrawing, modifying, changing or declining to make its recommendation regarding this Agreement or the Merger or recommending and declaring advisable any other offer or proposal is necessary to comply with its fiduciary duties under applicable law (which declinations, withdrawal, modification or change shall not constitute a breach by the Company of this Agreement). The Company shall provide written notice to Parent promptly upon the Company taking any action referred to in the foregoing proviso.
 
(c)   Pursuant to Section 251(d) of the DGCL, at any time before the certificate of merger is filed with the Secretary of State of the State of Delaware, including any time after the Merger is authorized by the Stockholders, the Merger may be abandoned and this Agreement may be terminated in accordance with the terms hereof, without further action by the Stockholders.
 
ARTICLE VIII
CONDITIONS OF PARTIES’ OBLIGATIONS
 
Section 8.1   Company Obligations . The obligations of Parent and Acquisition Corp. under this Agreement are subject to the fulfillment at or prior to the Closing of the following conditions, any of which may be waived in whole or in part by Parent.
 
(a)   Representations And Warranties . The representations and warranties of the Company under this Agreement shall be deemed to have been made again on the Closing Date and shall then be true and correct in all material respects.
 
23

(b)   Compliance with Agreement . The Company shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date.
 
(c)   No Company Material Adverse Effect . Since the date hereof, there shall not have been any event or circumstance that has resulted in, or would reasonably be expected to result in, a Company Material Adverse Effect.
 
(d)   Certificate of Officers . The Company shall have delivered to Parent and Acquisition Corp. a certificate dated the Closing Date, executed on its behalf by the Chief Executive Officer of the Company, certifying the satisfaction of the conditions specified in paragraphs (a), (b) and (c) of this Section 8.1.
 
(e)   No Restraining Action . No Action or proceeding before any court, governmental body or agency shall have been threatened, asserted or instituted to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the carrying out of the transactions contemplated by this Agreement.
 
(f)   Supporting Documents . Parent and Acquisition Corp. shall have received the following:
 
(1)   Copies of resolutions of the Board of Directors and the stockholders of the Company, certified by the Secretary of the Company, authorizing and approving the Merger and the execution, delivery and performance of this Agreement and all other documents and instruments to be delivered pursuant hereto and thereto.
 
(2)   A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute any documents referred to in this Agreement and further certifying that the certificate of incorporation and by-laws of the Company delivered to Parent and Acquisition Corp. at the time of the execution of this Agreement have been validly adopted and have not been amended or modified since the date hereof.
 
(3)   Evidence as of a recent date of the good standing and corporate existence of the Company issued by the Secretary of State of the State of Delaware.
 
Section 8.2   Parent and Acquisition Corp. Obligations . The obligations of the Company under this Agreement are subject to the fulfillment at or prior to the Closing of the following conditions any of which may be waived in whole or in part by the Company:
 
(a)   Representations And Warranties . The representations and warranties of Parent and Acquisition Corp. under this Agreement shall be deemed to have been made again on the Closing Date and shall then be true and correct in all material respects.
 
(b)   Compliance with Agreement . Parent and Acquisition Corp. shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them on or before the Closing Date.
 
24

(c)   No Parent Material Adverse Effect . Since the date hereof, there shall not have been any event or circumstance that has resulted in, or would reasonably be expected to result in, a Parent Material Adverse Effect.
 
(d)   Certificate of Officers . Parent and Acquisition Corp. shall have delivered to the Company a certificate dated the Closing Date, executed on their behalf by their respective Presidents, certifying the satisfaction of the conditions specified in paragraphs (a), (b), and (c) of this Section 8.2 .
 
(e)   Supporting Documents . The Company shall have received the following:
 
(1)   Copies of resolutions of Parent’s and Acquisition Corp.’s respective board of directors and the sole stockholder of Acquisition Corp., certified by their respective Secretaries, authorizing and approving the Merger and the execution, delivery and performance of this Agreement and all other documents and instruments to be delivered by them pursuant hereto.
 
(2)   A certificate of incumbency executed by the respective Secretaries of Parent and Acquisition Corp. certifying the names, titles and signatures of the officers authorized to execute the documents referred to in paragraph (1) above and further certifying that the certificates of incorporation and by-laws of Parent and Acquisition Corp. appended thereto have not been amended or modified.
 
(3)   A certificate, dated the Closing Date, executed by the Secretary of each of the Parent and Acquisition Corp., certifying that, except for the filing of the certificate of merger with the Secretary of State of the State of Delaware: (i) all consents, authorizations, orders and approvals of, and filings and registrations with, any court, governmental body or instrumentality that are required to be obtained by Parent or Acquisition Corp. for the execution and delivery of this Agreement and the consummation of the Merger shall have been duly made or obtained; and (ii) no action or proceeding before any court, governmental body or agency has been threatened, asserted or instituted against Parent or Acquisition Corp. to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the carrying out of the transactions contemplated by this Agreement.
 
(4)   (i) The executed resignations of all directors and officers of Parent, with the director resignations to take effect at the Effective Time, together with certified resolutions of Parent’s board of directors appointing the directors identified on Exhibit A to serve as their successors following such resignation and (ii) executed releases from each such director and officer in the form and substance acceptable to the Company in its sole discretion.
 
25

(5)   Evidence as of a recent date of the good standing and corporate existence of each of the Parent and Acquisition Corp. issued by the Secretary of State of their respective states of incorporation.
 
(6)   Such additional supporting documentation and other information with respect to the transactions contemplated hereby as the Company may reasonably request.
 
(f)   Due Diligence . The Company shall have been and shall continue to be satisfied in its sole discretion (regardless of (1) the satisfaction of any or all of the other closing conditions, (2) any knowledge of such matters on or prior to the Closing Date or (3) any indication previously given by, or on behalf of, Company with respect to the satisfaction of any such matter) with the results of its and its representatives’ due diligence investigation and evaluation of the Parent and Acquisition Corp. and each of the transactions contemplated hereby.
 
(g)   Limitation on Dissenting Shares . The holders of not more than one percent (1.0%) of the outstanding shares of Company Common Stock shall have exercised and not withdrawn such holder’s right to appraisal and payment under Section 262 of the DGCL.
 
(h)   Stock Option Plan . Parent’s Board of Directors shall have adopted and approved the Stock Option Plan.
 
ARTICLE IX
TERMINATION PRIOR TO CLOSING
 
Section 9.1   Termination of Agreement . This Agreement may be terminated at any time prior to the Closing:
 
(a)   by the mutual written consent of the Company, Acquisition Corp. and Parent;
 
(b)   by the Company, if Parent or Acquisition Corp. (i) fails to perform in any material respect any of its agreements contained herein required to be performed by it on or prior to the Closing Date, (ii) materially breaches any of its representations, warranties or covenants contained herein, which failure or breach is not cured within thirty (30) days after the Company has notified Parent and Acquisition Corp. of its intent to terminate this Agreement pursuant to this paragraph (b);
 
(c)   by Parent and Acquisition Corp., if the Company (i) fails to perform in any material respect any of its agreements contained herein required to be performed by it on or prior to the Closing Date, (ii) materially breaches any of its representations, warranties or covenants contained herein, which failure or breach is not cured within thirty (30) days after Parent or Acquisition Corp. has notified the Company of its intent to terminate this Agreement pursuant to this paragraph (c);
 
26

(d)   by either the Company, on the one hand, or Parent and Acquisition Corp., on the other hand, if there shall be any order, writ, injunction or decree of any court or governmental or regulatory agency binding on Parent, Acquisition Corp. or the Company, which prohibits or materially restrains any of them from consummating the transactions contemplated hereby; provided that the parties hereto shall have used their best efforts to have any such order, writ, injunction or decree lifted and the same shall not have been lifted within ninety (90) days after entry, by any such court or governmental or regulatory agency;
 
(e)   by either the Company, on the one hand, or Parent and Acquisition Corp., on the other hand, if the Closing has not occurred on or prior to July 15, 2006, for any reason other than delay or nonperformance of the party seeking such termination; or
 
(f)   by the Company if the Board of Directors of the Company determines in good faith, based upon advice of legal counsel, that termination pursuant to this Section 9.1(f) is necessary to comply with its fiduciary duties under applicable law as provided in Section 7.5(b) hereof.  
 
Section 9.2   Termination of Obligations . Termination of this Agreement pursuant to Section 9.1 hereof shall terminate all obligations of the parties hereunder, except for the obligations under Article IX , and Sections   7.1 , 10.4 , 10.7 , 10.14 and 10.15 hereof.
 
ARTICLE X
MISCELLANEOUS
 
Section 10.1   Amendments.
 
Subject to applicable law, this Agreement may be amended or modified by the parties hereto by written agreement executed by each party to be bound thereby and delivered by duly authorized officers of the parties hereto at any time prior to the Effective Time; provided , however , that after the approval of the Merger by the Stockholders, no amendment or modification of this Agreement shall be made that by law requires further approval from the Stockholders without such further approval.
 
Section 10.2   Notices . Any notice, request, instruction, other document or communications to be given hereunder by any party hereto to any other party hereto shall be in writing and shall be deemed to have been duly given (a) when delivered personally, (b) upon receipt of a transmission confirmation (with a confirming copy delivered personally or sent by overnight courier) if sent by facsimile or like transmission, or (c) on the next business day when sent by Federal Express, United Parcel Service, U.S. Express Mail or other reputable overnight courier for guaranteed next day delivery, as follows:
 
 
If to Parent or Acquisition Corp., to:
Gilder Enterprises , Inc.
Attention: Joseph Bowes
3639 Garibaldi Dr.
North Vancouver, BC CANADA V7H2W
Telephone: (604) 924-8180  
Facsimile:  
   
 
 
 
27

 
 
   
If to the Company, to:
MedaSorb Corporation
Attention: Al Kraus, President
7 Deer Park Drive, Suite K, Monmouth Junction, New Jersey 08852
Telephone: (732) 329-8885
Facsimile: (732) 329-8650
   
 
with a copy to:
 
 
Kronish Lieb Weiner & Hellman LLP
Attention: Alison Newman, Esq.
1114 Avenue of the Americas
New York, New York 10036
Telephone: (212) 479-6190
Facsimile: (212) 479-6275
   
or to such other persons or addresses as may be designated in writing by the party to receive such notice. Nothing in this Section 10.2 shall be deemed to constitute consent to the manner and address for service of process in connection with any legal proceeding (including arbitration arising in connection with this Agreement), which service shall be effected as required by applicable law.
 
Section 10.3   Entire Agreement . This Agreement, together with the schedules and the exhibits attached hereto or referred to herein, constitute the entire agreement of the parties hereto, and supersede all prior agreements and undertakings, both written and oral, among the parties hereto, with respect to the subject matter hereof and thereof.
 
Section 10.4   Expenses . Except as otherwise expressly provided herein, whether or not the Merger occurs, all expenses and fees incurred by Parent on one hand, and the Company on the other, shall be borne solely and entirely by the party that has incurred the same; provided , that if the Merger occurs, Parent agrees to pay, and shall cause the Surviving Corporation to pay, any unpaid fees and expenses of the Company (including fees and expenses of its counsel and other advisors) in connection with the consummation of the transactions contemplated by this Agreement.
 
Section 10.5   Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to amend or modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.
 
28

Section 10.6   Successors and Assigns; Assignment . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated by any of the parties hereto without, in the case of Parent, the prior written approval of the Company and, in the case of the Company, the prior written approval of Parent.
 
Section 10.7   No Third Party Beneficiaries . Except as set forth in Section 10.6 , nothing herein expressed or implied shall be construed to give any person other than the parties hereto (and their successors and assigns as permitted herein) any legal or equitable rights hereunder.
 
Section 10.8   Counterparts; Delivery by Facsimile . This Agreement may be executed in multiple counterparts, and by the different parties hereto in separate counterparts, each of which when executed will be deemed to be an original but all of which taken together will constitute one and the same agreement. This Agreement and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall re-execute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense.
 
Section 10.9   Waiver . At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other party hereto; (b) waive any inaccuracies in the representations and breaches of the warranties of the other party contained herein or in any document delivered pursuant hereto; and (c) waive compliance by the other party with any of the agreements or conditions contained herein. Any such extension or waiver will be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby.
 
Section 10.10   No Constructive Waivers . No failure or delay on the part of any party hereto in the exercise of any right hereunder will impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, agreement or covenant herein, nor will any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.
 
29

Section 10.11   Further Assurances . The parties hereto shall use their commercially reasonable efforts to do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments or documents as any other party hereto may reasonably request in order to carry out fully the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby.
 
Section 10.12   Headings . The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
 
Section 10.13   Governing Law . This Agreement and the agreements, instruments and documents contemplated hereby shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without regard to its conflicts of law principles.
 
Section 10.14   Dispute Resolution . The parties hereto shall initially attempt to resolve all claims, disputes or controversies arising under, out of or in connection with this Agreement by conducting good faith negotiations amongst themselves. If the parties hereto are unable to resolve the matter following good faith negotiations, the matter shall thereafter be resolved by binding arbitration and each party hereto hereby waives any right it may otherwise have to the resolution of such matter by any means other than binding arbitration pursuant to this Section 10.14 . Whenever a party shall decide to institute arbitration proceedings, it shall provide written notice to that effect to the other parties hereto. The party giving such notice shall, however, refrain from instituting the arbitration proceedings for a period of sixty (60) days following such notice. During this period, the parties shall make good faith efforts to amicably resolve the claim, dispute or controversy without arbitration. Any arbitration hereunder shall be conducted under the commercial arbitration rules of the American Arbitration Association. Any such arbitration shall be conducted in New York, New York by a panel of three arbitrators: one arbitrator shall be appointed by each of Parent and Company; and the third shall be appointed by the American Arbitration Association. The panel of arbitrators shall have the authority to grant specific performance. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based on the claim, dispute or controversy in question would be barred under this Agreement or by the applicable statute of limitations. The prevailing party in any arbitration in accordance with this Section 10.15 shall be entitled to recover from the other party, in addition to any other remedies specified in the award, all reasonable costs, attorneys’ fees and other expenses incurred by such prevailing party to arbitrate the claim, dispute or controversy.
 
Section 10.15   Interpretation .
 
(a)   When a reference is made in this Agreement to a section or article, such reference shall be to a section or article of this Agreement unless otherwise clearly indicated to the contrary.
 
(b)   Whenever the words “ include ”, “ includes ” or “ including ” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.”  
 
30

(c)   The words “ hereof ”, “ hereby ”, “ herein ” and “ herewith ” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified.
 
(d)   The words “ knowledge ,” or “ known to ,” or similar terms, when used in this Agreement to qualify any representation or warranty, refers to the knowledge or awareness of certain specific facts or circumstances related to such representation or warranty of the persons in the Applicable Knowledge Group (as defined herein) which a prudent business person would have obtained after reasonable investigation or due diligence on the part of any such person. For the purposes hereof, the “ Applicable Knowledge Group ” with respect to the Company shall be Al Kraus. For the purposes hereof, the “ Applicable Knowledge Group ” with respect to Parent and the Acquisition Corp. shall be Joseph G. Bowes.
 
(e)   The word “ subsidiary ” shall mean any entity of which at least a majority of the outstanding shares or other equity interests having ordinary voting power for the election of directors or comparable managers of such entity is owned, directly or indirectly by another entity or person.
 
(f)   For purposes of this Agreement, “ ordinary course of business ” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).
 
(g)   The plural of any defined term shall have a meaning correlative to such defined term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning.
 
(h)   A reference to any legislation or to any provision of any legislation shall include any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto, unless the context requires otherwise.
 
(i)   The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

31



IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first above written by their respective officers thereunto duly authorized.
 
   
COMPANY:
     
   
MEDASORB CORPORATION
     
     
   
By:
_______________________________ 
    Name: Al Kraus
    Title: Chief Executive Officer and President
     
     
   
PARENT:
     
   
GILDER ENTERPRISES, INC.
     
     
   
By:
_______________________________
   
Name:
Joseph G. Bowes
   
Title:
President
     
     
   
ACQUISITION CORP.:
     
   
MEDASORB ACQUISITION, INC.
     
     
   
By:
_______________________________
   
Name:
Joseph G. Bowes
   
Title:
President

 


EXHIBIT A

Directors and Officers of Surviving Corporation

Directors:

Al Kraus
Joseph Rubin, Esq.
Kurt Katz

Officers:

Al Kraus
-    President and Chief Executive Officer
Vincent Capponi
-    Chief Operating Officer
David Lamadrid
-    Chief Financial Officer, Treasurer and Secretary
James Winchester, MD
-    Chief Medical Officer
 

CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES A 10% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $.001 PAR VALUE PER SHARE


It is hereby certified that:

I.   The name of the corporation is Gilder Enterprises, Inc. (the "Corporation"), a Nevada corporation.

II.   Set forth hereinafter is a statement of the voting powers, preferences, limitations, restrictions, and relative rights of shares of Series A 10% Cumulative Convertible Preferred Stock hereinafter designated as contained in a resolution of the Board of Directors of the Corporation pursuant to a provision of the Certificate of Incorporation of the Corporation permitting the issuance of said Series A 10% Cumulative Convertible Preferred Stock by resolution of the Board of Directors:

Series A 10% Cumulative Convertible Preferred Stock, $.001 par value.

1.   Designation: Number of Shares . The designation of said series of Preferred Stock shall be Series A 10% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 12,000,000. Each share of Series A Preferred Stock shall have a stated value equal to $1.00 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Stated Value"), and $.001 par value. The Corporation will not issue more than 8,000,000 shares of Series A Preferred Stock (“Original Issue”) and such additional shares of Series A Preferred Stock as may be issued in connection with the Original Issue.

2.   Dividends .

(a)   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 Corporation 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 stock presently authorized or to be authorized (the Common Stock, and such other stock being hereinafter collectively the "Junior Stock") at the rate of 10% per annum on the Stated Value, until the occurrence of an Event of Default (as defined in Paragraph 7 below) and thereafter at the rate of 20% per annum on the Stated Value, payable commencing with the period ending September 30, 2006 and on the last day of each calendar quarter thereafter. Dividends must be delivered to the Holders not later than five business days after the end of each period for which dividends are payable. At the Corporation’s option, provided an Event of Default has not occurred and is not continuing on the day such dividends have accrued, then such dividend payments may be made in additional shares of Series A Preferred Stock valued at the Stated Value thereof. The issuance of such shares of Series A Preferred Stock shall constitute full payment of such dividends.

(b)   The dividends on the Series A Preferred Stock at the rates provided above shall be cumulative whether or not declared so that, if at any time full cumulative dividends at the rate aforesaid on all shares of the Series A Preferred Stock then outstanding from the date from and after which dividends thereon are cumulative to the end of the annual dividend period next preceding such time shall not have been paid or declared and set apart for payment, or if the full dividend on all such outstanding Series A Preferred Stock for the then current dividend period shall not have been paid or declared and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment before any sum shall be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition of the Series A Preferred Stock or any shares of any other class of stock ranking on a parity with the Series A Preferred Stock ("Parity Stock") and before any dividend or other distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for or applied to the purchase, redemption or other acquisition of Junior Stock.

 
1

 



(c)   Dividends on all shares of the Series A Preferred Stock shall begin to accrue and be cumulative from and after the date of issuance thereof. A dividend period shall be deemed to commence on the day following a dividend payment date herein specified and to end on the next succeeding dividend payment date herein specified.

3.   Liquidation and Optional Redemption Rights .

(a)   Upon the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, the Holders of the Series A Preferred Stock shall be entitled to receive, and before any payment or distribution shall be made on the Junior Stock, out of the assets of the Corporation available for distribution to stockholders, the Stated Value per share of Series A Preferred Stock and all accrued and unpaid dividends to and including the date of payment thereof. Upon the payment in full of all amounts due to Holders of the Series A Preferred Stock, the Holders of the Common Stock of the Corporation and any other class of Junior Stock shall receive all remaining assets of the Corporation legally available for distribution. If the assets of the Corporation available for distribution to the Holders of the Series A Preferred Stock shall be insufficient to permit payment in full of the amounts payable as aforesaid to the Holders of Series A Preferred Stock upon such liquidation, dissolution or winding-up, whether voluntary or involuntary, then all such assets of the Corporation shall be distributed to the exclusion of the Holders of shares of Junior Stock ratably among the Holders of the Series A Preferred Stock.

(b)   The purchase or the redemption by the Corporation of shares of any class of stock, the merger or consolidation of the Corporation with or into any other corporation or corporations or the sale or transfer by the Corporation of any material part of its assets shall be deemed to be a liquidation, dissolution or winding-up of the Corporation for the purposes of this paragraph 3 except in the event that in such transaction, the holders of Series A Preferred Stock receive securities of the surviving corporation having substantially similar rights as the Series A Preferred Stock and the stockholders of the Corporation immediately prior to such transaction are holders of at least a majority of the voting securities of the successor corporation immediately thereafter. This provision may be waived in writing by holders of 80% of the then outstanding Series A Preferred Stock.

 
2

 



(c)   Commencing on the third anniversary of the initial issue date of Series A Preferred Stock pursuant to the Subscription Agreement, provided an Event of Default has not occurred and is not then continuing, the Corporation will have the option of redeeming the Obligation Amount (defined below) ("Optional Redemption"), in whole or in part, by paying to the Holder a sum of money equal to one hundred twenty percent (120%) of the Obligation Amount to be redeemed (the "Redemption Amount"). The Corporation’s election to exercise its right to redeem must be by notice in writing (“Notice of Redemption”) and made proportionately to all Holders of Series A Preferred Stock. The Notice of Redemption shall specify the date for such Optional Redemption (the "Redemption Payment Date"), which date shall be not less than thirty (30) business days after receipt of the Notice of Redemption (the "Redemption Period"). A Notice of Redemption shall not be effective with respect to any portion of the Obligation Amount for which the Holder has a pending election to convert pursuant to Section 4 hereof, or for conversions initiated or made by the Holder during the Redemption Period. On the Redemption Payment Date, the Redemption Amount less any portion of the Redemption Amount against which the Holder has exercised its rights pursuant to Section 4, shall be paid in good funds to the Holder. In the event the Corporation fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then (i) such Notice of Redemption will be null and void, (ii) the Corporation will have no further right to deliver a Notice of Redemption, and (iii) the Corporation’s failure may be deemed by the Holder to be a non-curable Event of Default. The Corporation may not exercise its right to call for or execute an Optional Redemption unless: (A) the Registration Statement (as defined in Section 11.1(iv) of the Subscription Agreement) which includes the registration of all of the Common Stock issuable upon conversion of the entire Obligation Amount has been effective for the fifteen trading days preceding the date Notice of Redemption is given (“Lookback Period”) and through the Redemption Payment Date, or (B) all the Common Stock issuable upon conversion of the entire Obligation Amount may be publicly resold without volume limitations or restrictions on transfer pursuant to Rule 144(k) under the Securities Act of 1933; and the trading volume of the Common Stock as reported by Bloomberg LP for the Principal Market (as defined in Section 9(b) of the Subscription Agreement) for each day during the Lookback Period is not less than 200,000 shares.

4.   Conversion into Common Stock. Holders of shares of Series A Preferred Stock shall have the following conversion rights and obligations:

(a)   Subject to the further provisions of this paragraph 4 each Holder of shares of Series A Preferred Stock shall have the right at any time commencing after the issuance to the Holder of Series A Preferred Stock, to convert such shares, accrued and unpaid dividends on such shares, and any other sum owed by the Corporation arising from the Series A Preferred Stock or pursuant to a Subscription Agreement entered into by the Corporation and the Holder or Holder’s predecessor in connection with the issuance of Series A Preferred Stock (“Subscription Agreement”) (collectively “Obligation Amount”) into fully paid and non-assessable shares of Common Stock of the Corporation determined in accordance with the Conversion Price provided in paragraph 4(b) below (the "Conversion Price"). All issued or accrued but unpaid dividends may be converted at the election of the Holder simultaneously with the conversion of principal amount of Stated Value of Series A Preferred Stock being converted.

(b)   The number of shares of Common Stock issuable upon conversion of the Obligation Amount shall equal (i) the sum of (A) the Stated Value per share being converted, and (B) at the Holder's election, accrued and unpaid dividends on such share, divided by (ii) the Conversion Price. The Conversion Price shall be $1.25, subject to adjustment as described herein and in the Subscription Agreement.

(c)   Holder will give notice of its decision to exercise its right to convert the Series A Preferred Stock or part thereof by telecopying an executed and completed Notice of Conversion (a form of which is annexed as Exhibit A to the Certificate of Designation) to the Corporation via confirmed telecopier transmission or otherwise pursuant to Section 13(a) of the Subscription Agreement. The Holder will not be required to surrender the Series A Preferred Stock certificate until the Series A Preferred Stock has been fully converted. Each date on which a Notice of Conversion is telecopied to the Corporation in accordance with the provisions hereof shall be deemed a Conversion Date. The Corporation will itself or cause the Corporation’s transfer agent to transmit the Corporation's Common Stock certificates representing the Common Stock issuable upon conversion of the Series A Preferred Stock to the Holder via express courier for receipt by such Holder within three (3) business days after receipt by the Corporation of the Notice of Conversion (the "Delivery Date"). In the event the Common Stock is electronically transferable, then delivery of the Common Stock must be made by electronic transfer provided request for such electronic transfer has been made by the Holder. A Series A Preferred Stock certificate representing the balance of the Series A Preferred Stock not so converted will be provided by the Corporation to the Holder if requested by Holder, provided the Holder has delivered the original Series A Preferred Stock certificate to the Corporation. To the extent that a Holder elects not to surrender Series A Preferred Stock for reissuance upon partial payment or conversion, the Holder hereby indemnifies the Corporation against any and all loss or damage attributable to a third-party claim in an amount in excess of the actual amount of the Stated Value of the Series A Preferred Stock then owned by the Holder.

 
3

 



In the case of the exercise of the conversion rights set forth in paragraph 4(a) the conversion privilege shall be deemed to have been exercised and the shares of Common Stock issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Corporation of the Notice of Conversion. The person or entity entitled to receive Common Stock issuable upon such conversion shall, on the date such conversion privilege is deemed to have been exercised and thereafter, be treated for all purposes as the recordholder of such Common Stock and shall on the same date cease to be treated for any purpose as the record Holder of such shares of Series A Preferred Stock so converted.

Upon the conversion of any shares of Series A Preferred Stock no adjustment or payment shall be made with respect to such converted shares on account of any dividend on the Common Stock, except that the Holder of such converted shares shall be entitled to be paid any dividends declared on shares of Common Stock after conversion thereof.

The Corporation shall not be required, in connection with any conversion of Series A Preferred Stock, and payment of dividends on Series A Preferred Stock to issue a fraction of a share of its Series A Preferred Stock or Common Stock and shall instead deliver a stock certificate representing the next whole number.

The Corporation and Holder may not convert that amount of the Obligation Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on such Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Obligation Amount with respect to which the determination of this proviso is being made on such Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may revoke the conversion limitation described in this Paragraph, in whole or in part, upon 61 days prior notice to the Corporation. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion limitation described in this Section in whole or in part, upon and effective after 61 days prior written notice to the Company to increase such percentage to up to 9.99%.

(d)   The Conversion Price determined pursuant to Paragraph 4(b) shall be subject to adjustment from time to time as follows:

(i)   In case the Corporation shall at any time (A) declare any dividend or distribution on its Common Stock or other securities of the Corporation other than the Series A Preferred Stock, (B) split or subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares, or (D) issue by reclassification of its Common Stock any shares or other securities of the Corporation, then in each such event the Conversion Price shall be adjusted proportionately so that the Holders of Series A Preferred Stock shall be entitled to receive the kind and number of shares or other securities of the Corporation which such Holders would have owned or have been entitled to receive after the happening of any of the events described above had such shares of Series A Preferred Stock been converted immediately prior to the happening of such event (or any record date with respect thereto). Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made to the Conversion Price pursuant to this paragraph 4(d)(i) shall become effective immediately after the effective date of the event.

 
4

 



(ii)   For so long as Series A Preferred Stock is outstanding, the Holder is granted the anti-dilution and price protection rights set forth in the Subscription Agreement and herein.

(e)      (i) In case of any merger of the Corporation with or into any other corporation (other than a merger in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification, conversion, or change of the outstanding shares of Common Stock) then unless the right to convert shares of Series A Preferred Stock shall have terminated as part of such merger, lawful provision shall be made so that Holders of Series A Preferred Stock shall thereafter have the right to convert each share of Series A Preferred Stock into the kind and amount of shares of stock and/or other securities or property receivable upon such merger by a Holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such consolidation or merger. Such provision shall also provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in sub-paragraph (d) of this paragraph 4. The foregoing provisions of this paragraph 4(e) shall similarly apply to successive mergers.

(ii)   In case of any sale or conveyance to another person or entity of the property of the Corporation as an entirety, or substantially as an entirety, in connection with which shares or other securities or cash or other property shall be issuable, distributable, payable, or deliverable for outstanding shares of Common Stock, then, unless the right to convert such shares shall have terminated, lawful provision shall be made so that the Holders of Series A Preferred Stock shall thereafter have the right to convert each share of the Series A Preferred Stock into the kind and amount of shares of stock or other securities or property that shall be issuable, distributable, payable, or deliverable upon such sale or conveyance with respect to each share of Common Stock immediately prior to such conveyance.

(f)   Whenever the number of shares to be issued upon conversion of the Series A Preferred Stock is required to be adjusted as provided in this paragraph 4, the Corporation shall forthwith compute the adjusted number of shares to be so issued and prepare a certificate setting forth such adjusted conversion amount and the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Transfer Agent for the Series A Preferred Stock and the Common Stock; and the Corporation shall mail to each Holder of record of Series A Preferred Stock notice of such adjusted conversion price not later than the first business day after the event, giving rise to the adjustment.

(g)   In case at any time the Corporation shall propose:

(i)   to pay any dividend or distribution payable in shares upon its Common Stock or make any distribution (other than cash dividends) to the Holders of its Common Stock; or

(ii)   to offer for subscription to the Holders of its Common Stock any additional shares of any class or any other rights; or

(iii)   any capital reorganization or reclassification of its shares or the merger of the Corporation with another corporation (other than a merger in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification, conversion, or change of the outstanding shares of Common Stock); or

 
5

 



(iv)   the voluntary dissolution, liquidation or winding-up of the Corporation;

then, and in any one or more of said cases, the Corporation shall cause at least fifteen (15) days prior notice of the date on which (A) the books of the Corporation shall close or a record be taken for such stock dividend, distribution, or subscription rights, or (B) such capital reorganization, reclassification, merger, dissolution, liquidation or winding-up shall take place, as the case may be, to be mailed to the Transfer Agent for the Series A Preferred Stock and for the Common Stock and to the Holders of record of the Series A Preferred Stock.

(h)   So long as any shares of Series A Preferred Stock or any Obligation Amount shall remain outstanding and the Holders thereof shall have the right to convert the same in accordance with provisions of this paragraph 4 the Corporation shall at all times reserve from the authorized and unissued shares of its Common Stock 175% of the number of shares of Common Stock that would be necessary to allow the conversion of the entire Obligation Amount.

(i)   The term “Common Stock” as used in this Certificate of Designation shall mean the $.001 par value Common Stock of the Corporation as such stock is constituted at the date of issuance thereof or as it may from time to time be changed, or shares of stock of any class or other securities and/or property into which the shares of Series A Preferred Stock shall at any time become convertible pursuant to the provisions of this paragraph 4.

(j)   The Corporation shall pay the amount of any and all issue taxes (but not income taxes) which may be imposed in respect of any issue or delivery of stock upon the conversion of any shares of Series A Preferred Stock, but all transfer taxes and income taxes that may be payable in respect of any change of ownership of Series A Preferred Stock or any rights represented thereby or of stock receivable upon conversion thereof shall be paid by the person or persons surrendering such stock for conversion.

(k)   In the event a Holder shall elect to convert any shares of Series A Preferred Stock as provided herein, the Corporation may not refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, or for any other reason unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of said shares of Series A Preferred Stock shall have been sought and obtained by the Corporation or at the Corporation’s request or with the Corporation’s assistance and the Corporation posts a surety bond for the benefit of such Holder equal to 120% of the Obligation Amount sought to be converted, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in the event it obtains judgment.

(l)   In addition to any other rights available to the Holder, if the Corporation fails to deliver to the Holder such certificate or certificates pursuant to Section 4(c) by the Delivery Date and if within seven (7) business days after the Delivery Date the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Common Stock which the Holder anticipated receiving upon such conversion (a "Buy-In"), then the Corporation shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) within five (5) business days after written notice from the Holder, the amount by which (A) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate Stated Value of the shares of Series A Preferred Stock for which such conversion was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of Stated Value of Series A Preferred Stock, the Corporation shall be required to pay the Holder $1,000, plus interest. The Holder shall provide the Corporation written notice indicating the amounts payable to the Holder in respect of the Buy-In.

 
6

 



(m)   The Corporation understands that a delay in the delivery of Common Stock upon conversion of Preferred Stock in the form required pursuant to this Certificate and the Subscription Agreement after the Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, the Corporation agrees to pay (as liquidated damages and not as a penalty) to the Holder for such late issuance of Common Stock upon Conversion of the Series A Preferred Stock in the amount of $100 per business day after the Delivery Date for each $10,000 of Obligation Amount being converted of the corresponding Common stock which is not timely delivered. The Corporation shall pay any payments incurred under this section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the Corporation fails for any reason to effect delivery of the Common Stock by the Delivery Date, the Holder will be entitled to revoke all or part of the relevant Notice of Conversion or rescind all by delivery of a notice to such effect to the Corporation whereupon the Corporation and the Holder shall each be restored to their respective positions immediately prior to the delivery of such notice, except that the liquidated damages described above shall be payable through the date notice of revocation is given to the Corporation.

5.   Voting Rights . The Holder of shares of Series A Preferred Stock shall not have voting rights except as described in Section 6 hereof.

6.   Restrictions and Limitations .

(a)   Amendments to Charter . The Corporation shall not amend its certificate of incorporation without the approval by the holders of at least 80% of the then outstanding shares of Series A Preferred Stock if such amendment would:

(i)   change the relative seniority rights of the holders of Series A Preferred Stock as to the payment of dividends in relation to the holders of any other capital stock of the Corporation, or create any other class or series of capital stock entitled to seniority as to the payment of dividends in relation to the holders of Series A Preferred Stock;

(ii)   reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or change the relative seniority of the liquidation preferences of the holders of Series A Preferred Stock to the rights upon liquidation of the holders of other capital stock of the Corporation, or change the dividend rights of the holders of Series A Preferred Stock;

(iii)   cancel or modify the conversion rights of the holders of Series A Preferred Stock provided for in Section 4 herein; or

(iv)   cancel or modify the rights of the holders of the Series A Preferred Stock provided for in this Section 6.
 

 
7

 


7.   Event of Default .

Unless waived in writing by Holders of 80% of the then outstanding Series A Preferred Stock, the occurrence of any of the following events of default ("Event of Default") shall, after the applicable period to cure the Event of Default, cause the dividend rate of 10% described in paragraph 2 hereof to become 20% from and after the occurrence of such event:

(i)   The Corporation fails to timely pay any dividend payment or the failure to timely pay any other sum of money due to the Holder from the Corporation and such failure continues for a period of seven (7) days after written notice to the Corporation from the Holder.

(ii)   The Corporation breaches any material covenant, term or condition of the Subscription Agreement or in this Certificate of Designation, and if capable of being cured such breach continues for a period of ten (10) days after written notice to the Corporation from the Holder.

(iii)   Any material representation or warranty of the Corporation made in the Subscription Agreement, or in any agreement, statement or certificate given in writing pursuant thereto shall prove to have been false or misleading at the time when made.

(iv)   The Corporation or any of its subsidiaries shall make an assignment of a substantial part of its property or business for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

(v)   Any money judgment, confession of judgment, writ or similar process shall be entered against the Corporation, a subsidiary of the Corporation, or their property or other assets for more than $100,000, and is not vacated, satisfied, bonded or stayed within 45 days.

(vi)   Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by the Corporation or if instituted against the Corporation or any of its subsidiaries, is not dismissed within 45 days.

(vii)   An order entered by a court of competent jurisdiction, or by the Securities and Exchange Commission, or by the National Association of Securities Dealers, preventing purchase and sale transactions in the Corporation’s Common Stock for a period of five or more consecutive trading days.

(viii)   The Corporation's failure to timely deliver to the Holder Common Stock or a replacement Preferred Stock certificate (if required) within fifteen (15) business days of the required delivery date.

(ix)   The occurrence of a Non-Registration Event as described in Section 11.4 of the Subscription Agreement.
 
(x)   Delisting of the Common Stock from the OTC Bulletin Board (“OTCBB”) or such other principal market or exchange on which the Common Stock is listed for trading, if the Common Stock is not quoted or listed on such market or exchange, or quoted on the automated quotation system of a national securities association or listed on a national securities exchange, within ten (10) trading days after such delisting.

(xi)   The Corporation fails to reserve the amount of Common Stock required to be reserved pursuant to Section 4(h) hereof.

 
8

 



(xii)   A default by the Corporation of a material term, covenant, warranty or undertaking of any other agreement to which the Corporation and Holder are parties, or the occurrence of a material event of default under any such other agreement, in each case, which is not cured after any required notice and/or cure period, or if no such period is provided, within 15 days after the sooner of written notice from the Holder or the Corporation’s discovery of such default.

(xiii)   Upon the occurrence of a Change in Control. A “Change in Control” shall mean (i) the Corporation becoming a Subsidiary of another entity, (ii) a majority of the board of directors of the Corporation as of the Issue Date of Series A Preferred Stock or successors appointed by the board of directors having a majority consisting of such persons or their successors no longer serving as directors of the Corporation except due to natural causes, (iii) if any person or entity other than officers or directors or persons or entities beneficially owning more than ten percent (10%) or more of the voting power of outstanding capital stock of the Corporation as of the Issue date of Series A Preferred Stock, acquires fifty percent (50%) or more of the voting power of outstanding capital stock of the Corporation, (iv) the sale, lease or transfer of substantially all the assets of the Corporation or Subsidiaries.

8.   Status of Converted or Redeemed Stock . In case any shares of Series A Preferred Stock shall be redeemed or otherwise repurchased or reacquired, the shares so redeemed, converted, or reacquired shall resume the status of authorized but unissued shares of Preferred Stock and shall no longer be designated as Series A Preferred Stock.

IN WITNESS WHEREOF, the Corporation has caused this Certificate be duly executed by its undersigned officer thereunto duly authorized, this 29 th day of June, 2006.

   
 
GILDER ENTERPRISES, INC.
   
   
   
 
By:  
   



 

 
9

 


EXHIBIT A

NOTICE OF CONVERSION

(To Be Executed By the Registered Holder in Order to Convert the Series A Convertible Preferred Stock of Gilder Enterprises, Inc.)

The undersigned hereby irrevocably elects to convert $______________ of the Stated Value of the above Series A Convertible Preferred Stock into shares of Common Stock of Gilder Enterprises, Inc. (the "Corporation") according to the conditions hereof, as of the date written below.

Date of Conversion:__________________________________________________________________________


Applicable Conversion Price Per Share:_____________________________________________________


Number of Common Shares Issuable Upon This Conversion:____________________________________

Select one:
 
  o    A Series A Convertible Preferred Stock certificate is being delivered herewith. The unconverted portion of such certificate should be reissued and delivered to the undersigned.
 
  o    A Series A Convertible Preferred Stock certificate is not being delivered to Gilder Enterprises, Inc.

Signature:____________________________________________________________________________


Print Name:__________________________________________________________________________


Address:_____________________________________________________________________________

____________________________________________________________________________________

Deliveries Pursuant to this Notice of Conversion Should Be Made to:

____________________________________________________________________________________

____________________________________________________________________________________

____________________________________________________________________________________
 
 
10

 

THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO GILDER ENTERPRISES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED .

 
Right to Purchase ________ shares of Common Stock of Gilder Enterprises, Inc. (subject to adjustment as provided herein)

FORM OF CLASS A COMMON STOCK PURCHASE WARRANT
 
No. 2006-A-001
Issue Date: _________, 2006
 
GILDER ENTERPRISES, INC., a corporation organized under the laws of the State of Nevada (the “Company”), hereby certifies that, for value received, _________________, _____________________________________________________________________ Telecopier Number _______________ or its assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time commencing on the Issue Date and until 5:00 p.m., E.S.T on the fifth (5 th ) anniversary of the Issue Date (the “Expiration Date”), ________ fully paid and nonassessable shares of Common Stock at a per share purchase price of $2.00. The aforedescribed purchase price per share, as adjusted from time to time as herein provided, is referred to herein as the “Purchase Price.” The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The Company may reduce the Purchase Price without the consent of the Holder provided ten days prior notice of such reduction is given to the Holder. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Subscription Agreement (the “ Subscription Agreement ”), dated ________, 2006, entered into by the Company and initial Holder of this Warrant.

As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
 
(a)   The term “Company” shall mean Gilder Enterprises, Inc. and any corporation which shall succeed or assume the obligations of Gilder Enterprises, Inc. hereunder.
 
(b)   The term “Common Stock” includes (a) the Company’s common stock, $.001 par value per share, as authorized on the date of the Subscription Agreement, and (b) any Other Securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
 
(c)   The term “Other Securities” refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 or otherwise.
 
(d)   The term “Warrant Shares” shall mean the Common Stock issuable upon exercise of this Warrant.
 

 
 

 

1.   Exercise of Warrant .
 
1.1.   Number of Shares Issuable upon Exercise . From and after the Issue Date through and including the Expiration Date, the Holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, Common Stock of the Company, subject to adjustment pursuant to Section 4.
 
1.2.   Full Exercise . This Warrant may be exercised in full by the Holder hereof by delivery of an original or facsimile copy of the form of subscription attached as Exhibit A hereto (the “Subscription Form”) duly executed by such Holder and surrender of the original Warrant within four (4) days of exercise, to the Company at its principal office or at the office of its Warrant Agent (as provided hereinafter), accompanied by payment, in cash, wire transfer or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect.
 
1.3.   Partial Exercise . This Warrant may be exercised in part (but not for a fractional share) by surrender of this Warrant in the manner and at the place provided in subsection 1.2 except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of whole shares of Common Stock designated by the Holder in the Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, the whole number of shares of Common Stock for which such Warrant may still be exercised for the balance of.
 
1.4.   Fair Market Value . Fair Market Value of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
 
(a)   If the Company’s Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation (“NASDAQ”), National Market System, the NASDAQ Capital Market or the American Stock Exchange, LLC, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date;
 
(b)   If the Company’s Common Stock is not traded on an exchange or on the NASDAQ National Market System, the NASDAQ Capital Market or the American Stock Exchange, Inc., but is traded in the over-the-counter market, then the average of the closing bid and ask prices reported for the last business day immediately preceding the Determination Date;
 
(c)   Except as provided in clause (d) below, if the Company’s Common Stock is not publicly traded, then as the Holder and the Company agree, or in the absence of such an agreement, by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided; or
 
(d)   If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of all of the Warrants are outstanding at the Determination Date.
 

 
2

 


 
1.5.   Company Acknowledgment . The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights.
 
1.6.   Trustee for Warrant Holders . In the event that a qualified bank or trust company shall have been appointed as trustee for the Holder of the Warrants pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1.
 
    1.7.   Delivery of Stock Certificates, etc. on Exercise . The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter (“Warrant Share Delivery Date”), the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share of Common Stock, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. The Company understands that a delay in the delivery of the Warrant Shares after the Warrant Share Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay (as liquidated damages and not as a penalty) to the Holder for late issuance of Warrant Shares upon exercise of this Warrant the amount of $100 per business day after the Warrant Share Delivery Date for each $10,000 of Purchase Price of Warrant Shares for which this Warrant is exercised which are not timely delivered. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of the Warrant Shares by the Warrant Share Delivery Date, the Holder may revoke all or part of the relevant Warrant exercise by delivery of a notice to such effect to the Company whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to the exercise of the relevant portion of this Warrant, except that the liquidated damages described above shall be payable through the date notice of revocation or rescission is given to the Company.
 
2.   Cashless Exercise .
 
(a)   Except as described below, if a Registration Statement (as defined in the Subscription Agreement) (“Registration Statement”) is effective and the Holder may sell its shares of Common Stock upon exercise hereof pursuant to the Registration Statement, this Warrant may be exercisable in whole or in part for cash only as set forth in Section 1 above. If no such Registration Statement is available during the time that such Registration Statement is required to be effective pursuant to the terms of the Subscription Agreement, payment upon exercise may be made at the option of the Holder either in cash, wire transfer or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Purchase Price or commencing one year after the Issue Date, (i) by cashless exercise in accordance with Section (b) below or (ii) by a combination of any of the foregoing methods, for the number of shares of Common Stock specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein.
 

 
3

 


 
(b)   If the Fair Market Value of one share of Common Stock is greater than the Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Subscription Form in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:
 
X= Y (A-B)
  A

   Where X=
  the number of shares of Common Stock to be issued to the holder

 
Y=
the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation)
 
 
A=
the average of the closing bid prices of the Common Stock for the five (5) Trading Days immediately prior to (but not including) the Exercise Date
 
 
B=
Purchase Price (as adjusted to the date of such calculation)
 
(c)   The Holder may employ the cashless exercise feature described in Section (b) above only during the pendency of a Non-Registration Event as described in Section 11 of the Subscription Agreement.
 
For purposes of Rule 144 promulgated under the 1933 Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued.
 
3.   Adjustment for Reorganization, Consolidation, Merger, etc.
 
3.1.   Reorganization, Consolidation, Merger, etc . In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1, at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4.
 
3.2.   Dissolution . In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable in accordance with Section 3.1 by the Holder upon their exercise after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company (a “Trustee”) having its principal office in New York, NY, as trustee for the Holder.
 

 
4

 


 
3.3.   Continuation of Terms . Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the Other Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any Other Securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transaction described in this Section 3, then only in such event will the Company’s securities and property (including cash, where applicable) receivable by the Holder of the Warrants be delivered to the Trustee as contemplated by Section 3.2.
 
3.4   Share Issuance . Until the Expiration Date, prior to the complete exercise of this Warrant, the Holder is granted the anti-dilution and price protection rights set forth in the Subscription Agreement and herein.
 
4.   Extraordinary Events Regarding Common Stock . In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise.
 
5.   Certificate as to Adjustments . In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
 

 
5

 


 
6.   Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial Statements . The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock from time to time issuable on the exercise of the Warrant. This Warrant entitles the Holder hereof to receive copies of all financial and other information distributed or required to be distributed to the holders of the Company’s Common Stock.
 
7.   Assignment; Exchange of Warrant . Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “Transferor”). On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with an opinion of counsel reasonably satisfactory to the Company that the transfer of this Warrant will be in compliance with applicable securities laws, the Company at its expense, twice, only, but with payment by the Transferor of any applicable transfer taxes, will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. No such transfers shall result in a public distribution of the Warrant.
 
8.   Replacement of Warrant . On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
 
9.   Registration Rights . The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in the Subscription Agreement. The terms of the Subscription Agreement are incorporated herein by this reference.
 
10.   Maximum Exercise . The Holder shall not be entitled to exercise this Warrant on an exercise date,   in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock on such date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99%. The restriction described in this paragraph may be waived, in whole or in part, upon sixty-one (61) days prior notice from the Holder to the Company to increase such percentage to up to 9.99%.
 
11.   Warrant Agent . The Company may, by written notice to the Holder of the Warrant, appoint an agent (a “Warrant Agent”) for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent.
 
12.   Transfer on the Company’s Books . Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
 

 
6

 


 
13.   Notices . All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur or (c) three business days after deposited in the mail if delivered pursuant to subsection (ii) above . The addresses for such communications shall be: (i) if to the Company to: Gilder Enterprises, Inc., 7 Deer Park Drive, Suite K, Monmouth Junction, NJ 08852, Attn: Al Kraus, CEO, telecopier: (732) 329-8650, with a copy by telecopier only to: Kronish Lieb Weiner & Hellman, LLP, 1114 Avenue of the Americas, New York, NY 10036, Attn: Alison Newman, Esq., telecopier: (212) 479-6275, and (ii) if to the Holder, to the addresses and telecopier number set forth in the first paragraph of this Warrant, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575.

14.   Miscellaneous . This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of New York. Any dispute relating to this Warrant shall be adjudicated in New York County in the State of New York. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

 
7

 

IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
 
 
GILDER ENTERPRISES, INC.
 
 
 
By:________________________________________
Name:
Title:
 
 
 
 
 
Witness:
 
 
_____________________________
   


 
8

 

Exhibit A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: Gilder Enterprises, Inc.
The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box):

___        ________ shares of the Common Stock covered by such Warrant; or
___        the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2.

The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes):
___         $__________ in lawful money of the United States; and/or
___         the cancellation of the Warrant to the extent necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2.

The undersigned requests that the certificates for such shares be issued in the name of, and delivered to _____________________________________________________ whose address is
 

 

Number of Shares of Common Stock Beneficially Owned on the date of exercise: Less than five percent (5%) of the outstanding Common Stock of Gilder Enterprises, Inc.
 
The undersigned represents and warrants that the representations and warranties in Section 4 of the Subscription Agreement (as defined in this Warrant) are true and accurate with respect to the undersigned on the date hereof.

The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”), or pursuant to an exemption from registration under the Securities Act.
 
Dated:___________________
 
(Signature must conform to name of holder as specified on the face of the Warrant)
 
 
 

(Address)


 
9

 


 
Exhibit B

FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Gilder Enterprises, Inc. to which the within Warrant relates specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Gilder Enterprises, Inc. with full power of substitution in the premises.
 
Transferees
Percentage Transferred
Number Transferred
     
     
     


Dated: ______________, ___________
 
 
 
Signed in the presence of:
 
 
(Name)
 
 
ACCEPTED AND AGREED:
[TRANSFEREE]
 
 
 
(Name)
 
 
(Signature must conform to name of holder as specified on the face of the warrant)
 
 
 
 
 

(address)
 
 
 

(address)

 

 
SUBSCRIPTION AGREEMENT
 
 
THIS SUBSCRIPTION AGREEMENT (this “ Agreement ”), dated as of June 30, 2006, by and among Gilder Enterprises, Inc., a Nevada corporation (the “ Company ”), and the subscribers identified on the signature page hereto (each a “ Subscriber ” and collectively “ Subscribers ”).
 
WHEREAS , the Company and the Subscribers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ Commission ”) under the Securities Act of 1933, as amended (the “ 1933 Act ”).
 
WHEREAS , the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Subscribers, as provided herein, and the Subscribers, in the aggregate, shall purchase not less than $3,500,000 and up to $8,000,000 of stated value of 10% Series A Preferred Stock of the Company (“ Preferred Stock ”) at a purchase price (the " Purchase Price ") equal to the stated value thereof which Preferred Stock shall be convertible into shares of the Company's common stock, $.001 par value (the " Common Stock ") hereof subject to the rights and preferences described in the form of Certificate of Designation annexed hereto as Exhibit A (“ Certificate of Designation ”), and common stock purchase warrants (the “ Warrants ”) in the form attached hereto as Exhibit B , to purchase shares of Common Stock (the “ Warrant Shares ”). The Preferred Stock, shares of Common Stock issuable upon conversion of the Preferred Stock (the “ Shares ”), the Warrants and the Warrant Shares are collectively referred to herein as the " Securities "; and
 
WHEREAS , the aggregate proceeds of the sale of the Preferred Stock and the Warrants contemplated hereby shall be held in escrow pursuant to the terms of a Funds Escrow Agreement to be executed by the parties substantially in the form attached hereto as Exhibit C (the " Escrow Agreement ").
 
NOW, THEREFORE , in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Subscribers hereby agree as follows:
 
1.   Closing . Subject to the satisfaction or waiver of the terms and conditions of this Agreement, on the “ Closing Date ” (as defined in Section 2 hereof), each Subscriber shall purchase and the Company shall sell to each Subscriber the Preferred Stock having the Stated Value set forth on the signature page hereto and the amount of Warrants determined pursuant to Section 3 below. The aggregate stated value of the Preferred Stock to be purchased by the Subscribers on the Closing Date shall, in the aggregate, be not less than $3,500,000 nor more than $8,000,000. The Closing Date shall be the date that subscriber funds representing the net amount due the Company from the Purchase Price of the Offering is transmitted by wire transfer or otherwise to or for the benefit of the Company.
 
2.   Closing Date . The consummation of the transactions contemplated herein shall take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, upon the satisfaction of all conditions to Closing set forth in this Agreement (“ Closing Date ”).

3.   Warrants . On the Closing Date, the Company will issue and deliver Warrants to the Subscribers. One Class A Warrant will be issued for each two Shares which would be issued on the Closing Date assuming the complete conversion of the Preferred Stock issued on the Closing Date at the Conversion Price in effect on the Closing Date. The per Warrant Share exercise price to acquire a Warrant Share upon exercise of a Class A Warrant shall be $2.00. The Class A Warrants shall be exercisable until five (5) years after the Issue Date of the Warrants.

1




4.   Subscriber's Representations and Warranties . Each Subscriber hereby represents and warrants to and agrees with the Company only as to such Subscriber that:
 
(a)   Organization and Standing of the Subscribers . If the Subscriber is an entity, such Subscriber is a corporation, partnership or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b)   Authorization and Power . Each Subscriber has the requisite power and authority to enter into and perform this Agreement and to purchase the Preferred Stock and Warrants being sold to it hereunder. The execution, delivery and performance of this Agreement by such Subscriber and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Subscriber or its Board of Directors, stockholders, partners, members, as the case may be, is required. This Agreement has been duly authorized, executed and delivered by such Subscriber and constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Subscriber enforceable against the Subscriber in accordance with the terms thereof.
 
(c)   No Conflicts . The execution, delivery and performance of this Agreement and the consummation by such Subscriber of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of such Subscriber’s charter documents or bylaws or other organizational documents or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument or obligation to which such Subscriber is a party or by which its properties or assets are bound, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Subscriber or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on such Subscriber). Such Subscriber is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to purchase the Preferred Stock or acquire the Warrants in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Subscriber is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein.

( d)   Information on Company . The Subscriber has been furnished with or has had access at the EDGAR Website of the Commission to (i) the Company's Form 10-KSB for the year ended May 31, 2005 and all periodic reports as filed with the Commission, and (ii) the draft 8-K in the form of Exhibit E hereto, to be filed by the Company with the Commission following the Closing (hereinafter collectively referred to as the " Reports "). In addition, the Subscriber has received in writing from the Company and its subsidiary such other information concerning their operations, financial condition and other matters as the Subscriber has requested in writing (such other information is collectively, the " Other Written Information "), and considered all factors the Subscriber deems material in deciding on the advisability of investing in the Securities.
 
(e)   Information on Subscriber . The Subscriber is, and will be at the time of the conversion of the Preferred Stock and exercise of the Warrants, an "accredited investor", as such term is defined in Regulation D promulgated by the Commission under the 1933 Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities. The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof. The information set forth on the signature page hereto regarding the Subscriber is accurate.

2



(f)   Purchase of Preferred Stock and Warrants . On the Closing Date, the Subscriber will purchase the Preferred Stock and Warrants as principal for its own account for investment only and not with a view toward, or for resale in connection with, the public sale or any distribution thereof.
(g)   Compliance with Securities Act . The Subscriber understands and agrees that the Securities have not been registered under the 1933 Act or any applicable state securities laws, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based in part on the accuracy of the representations and warranties of Subscriber contained herein), and that such Securities must be held indefinitely unless a subsequent disposition is registered under the 1933 Act or any applicable state securities laws or is exempt from such registration. Notwithstanding anything to the contrary contained in this Agreement, such Subscriber may transfer (without restriction and without the need for an opinion of counsel) the Securities to its Affiliates (as defined below) provided that each such Affiliate is an “accredited investor” under Regulation D and such Affiliate agrees to be bound by the terms and conditions of this Agreement. For the purposes of this Agreement, an “ Affiliate ” of any person or entity means any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with such person or entity. Affiliate when employed in connection with the Company includes each Subsidiary [as defined in Section 5(a)] of the Company. For purposes of this definition, “ control ” means the power to direct the management and policies of such person or firm, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.
 
  (h)   Shares Legend . The Shares and the Warrant Shares shall bear the following or similar legend:
 
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO GILDER ENTERPRISES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
 
(i)   Warrants Legend . The Warrants shall bear the following
 
or similar legend:
 
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO GILDER ENTERPRISES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."

3


 


(j)   Preferred Stock Legend . The Preferred Stock shall bear the following legend:
 
"THIS PREFERRED STOCK AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS PREFERRED STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS PREFERRED STOCK AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THESE PREFERRED STOCK MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THESE PREFERRED STOCK UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO GILDER ENTERPRISES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
 
(k)   Communication of Offer . The offer to sell the Securities was directly communicated to the Subscriber by the Company. At no time was the Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer.
 
( l )   Authority; Enforceability . This Agreement and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by the Subscriber and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity; and Subscriber has full corporate power and authority necessary to enter into this Agreement and such other agreements and to perform its obligations hereunder and under all other agreements entered into by the Subscriber relating hereto.

( m )   No Governmental Review . Each Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities or the suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(n)   Correctness of Representations . Each Subscriber represents as to such Subscriber that the foregoing representations and warranties are true and correct as of the date hereof and, unless a Subscriber otherwise notifies the Company prior to the Closing Date shall be true and correct as of the Closing Date.

(o)   Survival . The foregoing representations and warranties shall survive until three years after the Closing Date.
 
5.   Company Representations and Warranties . The Company represents and warrants to and agrees with each Subscriber that except as set forth in the Reports and as otherwise qualified in the Transaction Documents:

4


 

 
(a)   Due Incorporation . The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power to own its properties and to carry on its business is disclosed in the Reports . The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. For purpose of this Agreement, a “ Material Adverse Effect ” shall mean a material adverse effect on the financial condition, results of operations, properties or business of the Company taken as a whole. For purposes of this Agreement, “ Subsidiary ” means, with respect to any entity at any date, any corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity) of which more than 50% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity. All the Company’s Subsidiaries as of the Closing Date are set forth on Schedule 5(a) hereto.
 
(b)   Outstanding Stock . All issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable.
 
(c)   Authority; Enforceability . This Agreement, the Preferred Stock, Certificate of Designation, the Warrants, the Escrow Agreement, and any other agreements delivered together with this Agreement or in connection herewith (collectively “ Transaction Documents ”) have been duly authorized, executed and delivered by the Company and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. The Company has full corporate power and authority necessary to enter into and deliver the Transaction Documents and to perform its obligations thereunder.
 
(d)   Additional Issuances . There are no outstanding agreements or preemptive or similar rights affecting the Company's common stock or equity and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any shares of common stock or equity of the Company or other equity interest in any of the Subsidiaries of the Company except as described on Schedule 5(d) . The Common stock of the Company on a fully diluted basis outstanding as of the last trading day preceding the Closing Date is set forth on Schedule 5(d) .
 
(e)   Consents . No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its Affiliates, any Principal Market (as defined in Section 9(b) of this Agreement), nor the Company's shareholders is required for the execution by the Company of the Transaction Documents and compliance and performance by the Company of its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities. The Offering and Transaction Documents have been unanimously approved by the Company’s board of directors.
 
(f)   No Violation or Conflict . Assuming the representations and warranties of the Subscribers in Section 4 are true and correct, neither the issuance and sale of the Securities nor the performance of the Company’s obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will:
 
(i)   violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default in any material respect) of a material nature under (A) the articles or certificate of incorporation, charter or bylaws of the Company, (B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or over the properties or assets of the Company or any of its Affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or any of its Affiliates is a party, by which the Company or any of its Affiliates is bound, or to which any of the properties of the Company or any of its Affiliates is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company, or any of its Affiliates is a party except the violation, conflict, breach, or default of which would not have a Material Adverse Effect ; or

5


 

 
(ii)   result in the creation or imposition of any lien, charge or encumbrance upon the Securities or any of the assets of the Company or any of its Affiliates; or
 
(iii)   except as disclosed in Schedule 5(f) , result in the activation of any anti-dilution rights or a reset or repricing of any debt or security instrument of any other creditor or equity holder of the Company, nor result in the acceleration of the due date of any obligation of the Company; or
 
(iv)   result in the activation of any piggy-back registration rights of any person or entity holding securities or debt of the Company or having the right to receive securities of the Company.
 
(g)   The Securities . The Securities upon issuance:
 
(i)   are, or will be, free and clear of any security interests, liens, claims or other encumbrances, subject to restrictions upon transfer under the 1933 Act and any applicable state securities laws;

(ii)   have been, or will be, duly and validly authorized and on the date of issuance of the Shares upon conversion of the Preferred Stock and issuance of the Warrant Shares upon exercise of the Warrants will be duly and validly issued, fully paid and nonassessable or if registered pursuant to the 1933 Act, and resold pursuant to an effective Registration Statement (as defined in Section 11.1(iv) hereof) will be free trading and unrestricted;
 
(iii)   will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company;
 
(iv)   will not subject the holders thereof to personal liability by reason of being such holders provided Subscriber’s representations herein are true and accurate and Subscribers take no actions or fail to take any actions required for their purchase of the Securities to be in compliance with all applicable laws and regulations; and
 
(v)   will not result in a violation of Section 5 under the 1933 Act.
 
(h)   Litigation . There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates that would affect the execution by the Company or the performance by the Company of its obligations under the Transaction Documents. Except as disclosed in the Reports [or as set forth in Schedule 5(h) ], there is no pending or, to the best knowledge of the Company, basis for or threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates which litigation if adversely determined would have a Material Adverse Effect .
 
(i)   Reporting Company . The Company is a publicly-held company subject to reporting obligations pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (the “ 1934 Act ”) and has a class of common shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the provisions of the 1934 Act, the Company has timely filed all reports and other materials required to be filed thereunder with the Commission during the preceding twenty-four months.

6


 

 
(j)   No Market Manipulation . The Company and its Affiliates have not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold, provided, however, that this provision shall not prevent the Company from engaging in investor relations/public relations activities consistent with past practices.
 
(k)   Information Concerning Company and Subsidiary . The Reports contain all material information relating to the Company and its operations and financial condition as of their respective dates and all the information required to be disclosed therein. Since the last day of the fiscal year of the most recent annual audited financial statements included in the Reports (“ Latest Financial Date ”), and except as modified in the Other Written Information or in the Schedules hereto, there has been no Material Adverse Event relating to the Company's business, financial condition or affairs not disclosed in the Reports. The Reports do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made. The financial statements included in the Reports have been prepared in accordance with United States GAAP and do not require any restatement to comply with United States GAAP as of the Closing Date. The audited financial statements of Medasorb Corporation, a Subsidiary of the Company for the last two fiscal years ended December 31, 2004 and 2005 and unaudited statements for the fiscal quarter ended March 31, 2006 are attached hereto as Exhibit E . Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“ GAAP ”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
 
(l)   Stop Transfer . The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of any of the Securities, except as may be required by any applicable federal or state securities laws and unless contemporaneous notice of such instruction is given to the Subscriber.
 
(m)   Defaults . The Company is not in violation of its certificate or articles of incorporation or bylaws. The Company is (i) not in default under or in violation of any material agreement or instrument to which it is a party or by which it or any of its properties are bound or affected, which default or violation would have a Material Adverse Effect , (ii) not in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) to the Company’s knowledge not in violation of any statute, rule or regulation of any governmental authority which violation would have a Material Adverse Effect .

7


 

 
(n)   Not an Integrated Offering. Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offer of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the OTC Bulletin Board (“Bulletin Board”) any Principal Market [as defined in Section 9(b)] which would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder. Nor will the Company or any of its Affiliates take any action or steps that would cause the offer or issuance of the Securities to be integrated with other offerings which would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder. The Company will not conduct any offering other than the transactions contemplated hereby that will be integrated with the offer or issuance of the Securities, which would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder.
 
(o)   No General Solicitation . Neither the Company, nor any of its Affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities.
 
(p)   Listing . The Company's common stock is listed on the Bulletin Board under the symbol GDRE. The Company has not received any oral or written notice that the Common Stock is not eligible nor will become ineligible for listing on the Bulletin Board nor that the Common Stock does not meet all requirements for the continuation of such listing. The Company satisfies all the requirements for the continued quotation of the Common Stock on the Bulletin Board.
 
(q)   No Undisclosed Liabilities . The Company has no liabilities or obligations which are material, individually or in the aggregate, which are not disclosed in the Reports and Other Written Information, other than those incurred in the ordinary course of the Company’s businesses since the Latest Financial Date and which in the aggregate, would reasonably be expected to have a Material Adverse Effect , except as disclosed on Schedule 5(q) . As of the Closing Date, the net liabilities of the Company, not including the Subsidiaries, will not exceed $100,000.
 
(r)   No Undisclosed Events or Circumstances . Since the Latest Financial Date, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Reports.
 
(s)   Capitalization . The authorized and outstanding capital stock of the Company as of the date of this Agreement and the Closing Date (not including the Securities) are set forth on Schedule 5(d) . Except as set forth on Schedule 5(d) , there are no options, warrants, or rights to subscribe to, securities, rights or obligations convertible into or exchangeable for or giving any right to subscribe for any shares of capital stock of the Company or any of its Subsidiaries. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable.
 
(t)   Dilution . The Company's executive officers and directors understand the nature of the Securities being sold hereby and recognize that the issuance of the Securities will have a potential dilutive effect on the equity holdings of other holders of the Company’s equity or rights to receive equity of the Company. The board of directors of the Company has concluded, in its good faith business judgment that the issuance of the Securities is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Shares upon conversion of the Preferred Stock, and the Warrant Shares upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company or parties entitled to receive equity of the Company.
 
(u)   No Disagreements with Accountants and Lawyers. There are no disagreements of any kind during the two fiscal years preceding the date of this Agreement, presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company, including but not limited to disputes or conflicts over payment owed to such accountants and lawyers.

8


 


(v)   Transfer Agent . The name, address, telephone number, fax number, contact person and email address of the Company transfer agent is set forth on Schedule 5(v) hereto.

(w)   Investment Company . Neither the Company nor any Affiliate is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

(x)   Subsidiary Representations . The Company makes each of the representations contained in Sections 5(a), (b), (d), (e), (f), (h), (k), (m), (q), (r), (s), (u) and (w) of this Agreement, as same relate to each Subsidiary of the Company, including but not limited to Medasorb Corporation.

(y)   Company Predecessor . All representations made by or relating to the Company of a historical or prospective nature and all undertakings described in Sections 9(g) through 9(l) shall relate, apply and refer to the Company, its predecessors, and Subsidiaries, including but not limited to Medasorb Corporation.

(z)   Correctness of Representations . The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects, and, unless the Company otherwise notifies the Subscribers prior to the Closing Date, shall be true and correct in all material respects as of the Closing Date.
 
(AA)   Survival . The foregoing representations and warranties shall survive until three years after the Closing Date.
 
6.   Regulation D Offering . The offer and issuance of the Securities to the Subscribers is being made pursuant to the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing Date, the Company will provide an opinion reasonably acceptable to Subscriber from the Company's legal counsel opining on the availability of an exemption from registration under the 1933 Act as it relates to the offer and issuance of the Securities and other matters reasonably requested by Subscribers. A form of the legal opinion is annexed hereto as Exhibit D . The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably necessary for the issuance and resale of the Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants pursuant to an effective registration statement or Rule 144 under the 1933 Act.

7.1.   Conversion of Preferred Stock .

(a)   Upon the conversion of any Preferred Stock, the Company shall, at its own cost and expense, take all necessary action, including obtaining and delivering, an opinion of counsel to assure that the Company's transfer agent shall issue stock certificates in the name of Subscriber (or its nominee) or such other persons as designated by Subscriber and in such denominations to be specified at conversion representing the number of shares of Common Stock issuable upon such conversion. The Company warrants that no instructions other than these instructions have been or will be given to the transfer agent of the Company's Common Stock and that, unless waived by the Subscriber, the Shares will be freely transferable, and will not contain a legend other than the usual 1933 Act restriction from transfer legend. If and when the Subscriber sells the Shares and Warrant Shares, assuming (i) the Registration Statement (as defined below) is effective and the prospectus, as supplemented or amended, contained therein is current and (ii) the Subscriber confirms in writing to the transfer agent that the Subscriber has or will comply with the prospectus delivery requirements, upon delivery to the purchaser, the restrictive legend will be immediately removed and the Shares and Warrant Shares upon such sale will be free-trading, and freely transferable. In the event that the Shares and Warrant Shares are sold in a manner that complies with an exemption from registration, the Company will promptly instruct its counsel to issue to the transfer agent an opinion permitting removal of the legend (indefinitely, if pursuant to Rule 144(k) of the 1933 Act, or for 90 days if pursuant to the other provisions of Rule 144 of the 1933 Act).  

9




(b)   Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Subscriber and thus refunded to the Company.

7.2.   Adjustments. The Conversion Price, Warrant exercise price and amount of Shares issuable upon conversion of the Preferred Stock and exercise of the Warrants shall be equitably adjusted and as described in this Agreement, the Certificate of Designation and Warrants.
 
7.3.   Redemption . The Preferred Stock and Warrants shall not be redeemable or callable except as described in the Certificate of Designation or Warrants.

8.   Broker/Legal Fees.
 
(a)   Broker’s Fee. The Company on the one hand, and each Subscriber (for itself only) on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or finder’s fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby and arising out of such party’s actions. The Company represents that to its knowledge there are no parties entitled to receive fees, commissions, or similar payments from the Company in connection with the transaction described in this Agreement (“ Offering ”), except the party described on Schedule 8 hereto (“ Guarantor ”), who will receive a yield enhancement fee, described thereon.

(b)     Legal Fees . The Company shall pay to Grushko & Mittman, P.C., a cash fee of $25,000 (“ Legal Fees ”) as reimbursement for services rendered to the Subscribers in connection with this Agreement and the purchase and sale of the Preferred Stock and Warrants (the “ Offering ”). An additional cash Legal Fee of $45,000 will be paid to Greenberg & Kahr on the Closing Date out of funds held pursuant to the Escrow Agreement. The Legal Fees and reimbursement for UCC search fees, if any, to be paid by the Company will be payable on the Closing Date out of funds held pursuant to the Escrow Agreement. In the event the aggregate Purchase price of the Offering is less than $6,000,000, then the Company will pay one-half of the Legal Fees and the Guarantor will pay the other half of the Legal Fees.
 
(c)   Due Diligence Fee . On the Closing Date, a cash due diligence fee of $50,000 (“ Due Diligence Fee ”) will be paid to the party identified on Schedule 8 hereto (“ Due Diligence Fee Recipient ”). The Company will pay $25,000 of the Due Diligence Fee out of funds held pursuant to the Escrow Agreement. The Guarantor will pay $25,000 of the Due Diligence Fee.
 
9.   Covenants of the Company . The Company covenants and agrees with the Subscribers as follows:
 
(a)   Stop Orders . The Company will advise the Subscribers, within four hours after the Company receives notice of issuance by the Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.

10


 

 
(b)   Listing . The Company shall promptly secure the listing of the Shares and the Warrant Shares upon each national securities exchange, or electronic or automated quotation system upon which they are or become eligible for listing and shall maintain such listing so long as any Preferred Stock or Warrants are outstanding. The Company will maintain the listing of its Common Stock on the American Stock Exchange, Nasdaq SmallCap Market, Nasdaq National Market System, Bulletin Board, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock (the “ Principal Market ”)), and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market, as applicable. The Company will provide the Subscribers copies of all notices it receives notifying the Company of the threatened and actual delisting of the Common Stock from any Principal Market. As of the date of this Agreement, the Bulletin Board is the Principal Market.
 
(c)   Market Regulations . The Company shall notify the Commission, the Principal Market and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Subscribers and promptly provide copies thereof to Subscriber.
 
(d)   Filing Requirements . From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will (A) comply in all respects with its reporting and filing obligations under the 1934 Act, (B) cause its Common Stock to continue to be registered under Section 12(b) or 12(g) of the 1934 Act, and (C) comply with all requirements related to any registration statement filed pursuant to this Agreement. The Company will use its best efforts not to take any action or file any document (whether or not permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate or suspend such registration under the 1934 Act or to terminate or suspend its reporting and filing obligations under said acts until two (2) years after the Closing Date. Until the earlier of the resale of the Common Stock and the Warrant Shares by each Subscriber or two (2) years after the Warrants have been exercised, the Company will use its best efforts to continue the listing or quotation of the Common Stock on a Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market. The Company agrees to timely file a Form D with respect to the Securities if required under Regulation D, if required, and to provide a copy thereof to each Subscriber promptly after such filing.
 
(e)   Use of Proceeds . The proceeds of the Offering will be employed by the Company for the purposes set forth on Schedule 9(e) hereto.
 
(f)   Reservation . Prior to the Closing Date, the Company undertakes to reserve, pro   rata , on behalf of the Subscribers from its authorized but unissued common stock, a number of common shares equal to 175% of the amount of Common Stock necessary to allow each Subscriber to be able to convert all Preferred Stock issuable pursuant to this Agreement and dividends thereon and reserve 100% of the amount of Warrant Shares issuable upon exercise of the Warrants. Failure to have sufficient shares reserved pursuant to this Section 9(f) for five (5) consecutive business days or fifteen (15) days in the aggregate shall be a material default of the Company’s obligations under this Agreement and an Event of Default pursuant to the Certificate of Designation.
 
(g)   Taxes . From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefore.

11


 

 
(h)   Insurance . From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep its material assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company’s line of business, in amounts sufficient to prevent the Company from becoming a co-insurer and not in any event less than one hundred percent (100%) of the insurable value of the property insured; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and to the extent available on commercially reasonable terms.
 
(i)   Books and Records. From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis.
 
(j)   Governmental Authorities. From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company shall duly observe and conform in all material respects to all valid requirements of governmental authorities relating to the conduct of its business or to its properties or assets.
 
(k)   Intellectual Property . From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use intellectual property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business, unless it is sold for value.
 
(l)   Properties. From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company will keep its material properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all necessary and proper repairs, renewals, replacements, additions and improvements thereto; and the Company will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could reasonably be expected to have a Material Adverse Effect.

12


 

 
(m)   Confidentiality/Public Announcement. From the date of this Agreement and until the sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, the Company agrees that except in connection with a Form 8-K or the Registration Statement or as otherwise required in any other Commission filing, it will not disclose publicly or privately the identity of the Subscribers unless expressly agreed to in writing by a Subscriber, only to the extent required by law and then only upon five days prior notice to Subscriber. In any event and subject to the foregoing, the Company shall file a Form 8-K or make a public announcement describing the Offering not later than the third business day after the Closing Date. In the Form 8-K or public announcement, the Company will specifically disclose the amount of common stock outstanding immediately after the Closing. A form of the proposed Form 8-K or public announcement to be employed in connection with the Closing is annexed hereto as Exhibit F .
 
(n)   Further Registration Statements. Except for a registration statement filed exclusively on behalf of the Subscribers pursuant to Section 11 of this Agreement, the Company will not file any registration statements nor amend any already filed registration statement, including but not limited to Forms S-8, with the Commission or with state regulatory authorities without the consent of the Subscriber nor allow any other registration statement to be declared effective by the Commission until the sooner of (i) the Registration Statement shall have been current and available for use in connection with the resale of the Registrable Securities (as defined in Section 11.1(i)) for a period of 180 days, or (ii) until all the Shares and Warrant Shares have been resold or transferred by the Subscribers pursuant to the Registration Statement or Rule 144, without regard to volume limitations (“ Exclusion Period ”). The Exclusion Period will be tolled during the pendency of an Event of Default as defined in the Certificate of Designation.
 
(o)   Blackout. The Company undertakes and covenants that until the end of the Exclusion Period, the Company will not enter into any acquisition, merger, exchange or sale or other transaction that could have the effect of delaying the effectiveness of any pending registration statement or causing an already effective registration statement to no longer be effective or current for a period ten (10) or more consecutive days nor more than twenty (20) days in the aggregate during any consecutive three hundred and sixty-five (365) day period.
 
(p)   Non-Public Information . The Company covenants and agrees that neither it nor any other person acting on its behalf will provide any Subscriber or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Subscriber shall have agreed in writing to receive such information. The Company understands and confirms that each Subscriber shall be relying on the foregoing representations in effecting transactions in securities of the Company.

(q)   Negative Covenants . So long as at least twenty-five percent (25%) of the principal amount of the Preferred Stock issued on the Closing Date is outstanding and during the pendency of an Event of Default (as defined in the Certificate of Designation), without the consent of the Subscribers, the Company will not directly or indirectly:

(i)   create, incur, assume or suffer to exist any pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, mortgage, security deed or deed of trust, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction) (each, a “ Lien ”) upon any of its property, whether now owned or hereafter acquired except for (A) the Excepted Issuances (as defined in Section 12(a) hereof), (B) (a) Liens imposed by law for taxes that are not yet due or are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles; (b) carriers’, warehousemen’s, mechanics’, material men’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or that are being contested in good faith and by appropriate proceedings; (c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) Liens created with respect to the financing of the purchase of new property in the ordinary course of the Company’s business up to the amount of the purchase price of such property, or (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property (each of (a) through (f), a “ Permitted Lien ”) and (C) indebtedness for borrowed money which is not senior or pari passu to the rights of the Subscribers to receive assets of the Company upon bankruptcy or dissolution ;

13



 
        (ii)   amend its certificate of incorporation, bylaws or its charter documents so as to adversely affect any rights of the Subscriber;
 
 
(iii)   repay, repurchase or offer to repay, repurchase or otherwise acquire or make any dividend or distribution in respect of any of its Common Stock, preferred stock, or other equity securities other than to the extent permitted or required under the Transaction Documents;
 
 
(iv)   prepay any financing related debt obligations; or
 
 
(v)   engage in any transactions with any officer, director, employee or any Affiliate of the Company, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $25,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company, and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company, or interest previously owned by officers, directors, or employees of the Company as described on Schedule 9(q) .
 
10.   Covenants of the Company and Subscriber Regarding Indemnification.
 
(a)   The Company agrees to indemnify, hold harmless, reimburse and defend the Subscribers, the Subscribers' officers, directors, agents, Affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Subscriber or any such person which results, arises out of or is based upon (i) any material misrepresentation by Company or breach of any warranty by Company in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by the Company of any covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Subscriber relating hereto.
 
(b)   Each Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company’s officers, directors, agents, Affiliates, control persons against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company or any such person which results, arises out of or is based upon (i) any material misrepresentation by such Subscriber in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by such Subscriber of any covenant or undertaking to be performed by such Subscriber hereunder, or any other agreement entered into by the Company and Subscribers, relating hereto.

14


 

 
(c)   In no event shall the liability of any Subscriber or permitted successor hereunder or under any Transaction Document or other agreement delivered in connection herewith be greater in amount than the dollar amount of the net proceeds actually received by such Subscriber upon the sale of Registrable Securities (as defined herein).
 
(d)   The procedures set forth in Section 11.6 shall apply to the indemnification set forth in Sections 10(a) and 10(b) above.
 
11.1.   Registration Rights . The Company hereby grants the following registration rights to holders of the Securities.
 
(i)   On one occasion, for a period commencing one hundred and twenty-one (121) days after the Closing Date, but not later than two (2) years after the Closing Date, upon a written request therefor from any record holder or holders of more than 50% of the Shares issued and issuable upon conversion of the outstanding Preferred Stock and outstanding Warrant Shares, the Company shall prepare and file with the Commission a registration statement under the 1933 Act registering the Registrable Securities, as defined in Section 11.1(iv) hereof, which are the subject of such request for unrestricted public resale by the holder thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities shall not include Securities which are (A) registered for resale in an effective registration statement, (B) included for registration in a pending registration statement, (C) which have been issued without further transfer restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act, or (D) which may be sold under Rule 144(k). Upon the receipt of such request, the Company shall promptly give written notice to all other record holders of the Registrable Securities that such registration statement is to be filed and shall include in such registration statement Registrable Securities for which it has received written requests within ten (10) days after the Company gives such written notice. Such other requesting record holders shall be deemed to have exercised their demand registration right under this Section 11.1(i).
 
(ii)   If the Company at any time proposes to register any of its securities under the 1933 Act for sale to the public, whether for its own account or for the account of other security holders or both, except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Registrable Securities for sale to the public, provided the Registrable Securities are not otherwise registered for resale by the Subscribers or Holder pursuant to an effective registration statement, each such time it will give at least fifteen (15) days' prior written notice to the record holder of the Registrable Securities of its intention so to do. Upon the written request of the holder, received by the Company within ten (10) days after the giving of any such notice by the Company, to register any of the Registrable Securities not previously registered, the Company will cause such Registrable Securities as to which registration shall have been so requested to be included with the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition of the Registrable Securities so registered by the holder of such Registrable Securities (the “ Seller ” or “ Sellers ”). In the event that any registration pursuant to this Section 11.1(ii) shall be, in whole or in part, an underwritten public offering of common stock of the Company, the number of shares of Registrable Securities to be included in such an underwriting may be reduced by the managing underwriter if and to the extent that the Company and the underwriter shall reasonably be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the Company shall notify the Seller in writing of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company may withdraw or delay or suffer a delay of any registration statement referred to in this Section 11.1(ii) without thereby incurring any liability to the Seller.
 
(iii)   If, at the time any written request for registration is received by the Company pursuant to Section 11.1(i), the Company has determined to proceed with the actual preparation and filing of a registration statement under the 1933 Act in connection with the proposed offer and sale for cash of any of its securities for the Company's own account and the Company actually does file such other registration statement, such written request shall be deemed to have been given pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights of the holders of Registrable Securities covered by such written request shall be governed by Section 11.1(ii).

15


 

 
(iv)   The Company shall file with the Commission a Form SB-2 registration statement (the “ Registration Statement ”) (or such other form that it is eligible to use) in order to register the Registrable Securities for resale and distribution under the 1933 Act not later than one hundred and twenty (120) days after the Closing Date (the “ Filing Date ”), and cause to be declared effective not later than two hundred and forty (240) calendar days after the Closing Date (the “ Effective Date ”). The Company will register not less than a number of shares of common stock in the aforedescribed registration statement that is equal to 175% of the Shares issuable upon conversion of all of the Preferred Stock issuable to the Subscribers and the dividends thereon, and 100% of the Warrant Shares issuable pursuant to this Agreement upon exercise of the Warrants (collectively the “ Registrable Securities ”). The Registrable Securities shall be reserved and set aside exclusively for the benefit of each Subscriber and Warrant holder, pro   rata , and not issued, employed or reserved for anyone other than each such Subscriber and Warrant holder. The Registration Statement will immediately be amended or additional registration statements will be immediately filed by the Company as necessary to register additional shares of Common Stock to allow the public resale of all Common Stock included in and issuable by virtue of the Registrable Securities. Except with the written consent of the Subscriber, or as described on Schedule 11.1 hereto, no securities of the Company other than the Registrable Securities will be included in the Registration Statement. It shall be deemed a Non-Registration Event if at any time after the date the Registration Statement is declared effective by the Commission (“ Actual Effective Date ”) the Company has registered for unrestricted resale on behalf of the Sellers fewer than 125% of the amount of Common Shares issuable upon full conversion of all sums due under the Preferred Stock and 100% of the Warrant Shares issuable upon exercise of the Warrants.
 
11.2.   Registration Procedures . If and whenever the Company is required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the registration of any Registrable Securities under the 1933 Act, the Company will, as expeditiously as possible:
 
(a)   subject to the timelines provided in this Agreement, prepare and file with the Commission a registration statement required by Section 11, with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), promptly provide to the holders of the Registrable Securities copies of all filings and Commission letters of comment and notify Grushko & Mittman, P.C. (by telecopier or by email to Counslers@aol.com ) on or before 6:00 PM EST not later than the first business Day after the Company receives notice that (i) the Commission has no comments or no further comments on the Registration Statement, and (ii) the registration statement has been declared effective (failure to timely provide notice as required by this Section 11.2(a) shall be a material breach of the Company’s obligation and an Event of Default as defined in the Preferred Stock and a Non-Registration Event as defined in Section 11.4 of this Agreement);
 
(b)   prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until such registration statement has been effective for a period of two (2) years or the sale or transfer of all Registrable Securities pursuant to the Registration Statement or pursuant to Rule 144, without regard to volume limitations, and comply with the provisions of the 1933 Act with respect to the disposition of all of the Registrable Securities covered by such registration statement in accordance with the Sellers’ intended method of disposition set forth in such registration statement for such period;
 
(c)   furnish to the Sellers, at the Company’s expense, such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or their disposition of the securities covered by such registration statement or make them electronically available;
 
 

16


 
(d)   use its commercially reasonable best efforts to register or q ualify the Registrable Securities covered by such registration statement under the securities or “blue sky” laws of New York and such jurisdictions as the Sellers shall request in writing, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;
 
(e)   if applicable, list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed;
 
(f)   notify the Subscribers within four hours of the Company’s becoming aware that a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing or which becomes subject to a Commission, state or other governmental order suspending the effectiveness of the registration statement covering any of the Shares;
 
(g)   provided same would not be in violation of the provision of Regulation FD under the 1934 Act, reasonably make available for inspection by the Sellers, and any attorney, accountant or other agent retained by the Seller or underwriter, upon prior written request, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the seller, attorney, accountant or agent in connection with such registration statement; and
 
(h)   provide to the Sellers copies of the Registration Statement and amendments thereto not later than three business days prior to the filing thereof with the Commission.
 
11.3.   Provision of Documents . In connection with each registration described in this Section 11, each Seller will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws.

17


 

 
11.4.   Non-Registration Events . The Company and the Subscribers agree that the Sellers will suffer damages if the Registration Statement is not filed by the Filing Date and not declared effective by the Commission by the Effective Date, and any registration statement required under Section 11.1(i) or 11.1(ii) is not filed within 60 days after written request and declared effective by the Commission within 120 days after such request or, if later, within 240 calendar days after the Closing Date with respect to any Registration Statement required under Section 11.1(ii), and maintained in the manner and within the time periods contemplated by Section 11 hereof, and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if (A) the Registration Statement is not filed on or before the Filing Date, (B) is not declared effective on or before the Effective Date, (C) due to the action or inaction of the Company the Registration Statement is not declared effective within three (3) business days after receipt by the Company or its attorneys of a written or oral communication from the Commission that the Registration Statement will not be reviewed or that the Commission has no further comments which time will be reasonably extended if the Company is required to amend the Registration Statement to include additional financial statements, (D) if the registration statement described in Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written request, or is not declared effective within 120 days after such written request or, if later, within 240 calendar days after the Closing Date with respect to any Registration Statement required under Section 11.1(ii), or (E) any registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease to be effective without being succeeded within twenty (20) business days by an effective replacement or amended registration statement or for a period of time which shall exceed 30 days in the aggregate per year (defined as a period of 365 days commencing on the Actual Effective Date (each such event referred to in clauses (A) through (E) of this Section 11.4 is referred to herein as a "Non-Registration Event"), then the Company shall deliver to the holder of Registrable Securities, as Liquidated Damages, an amount equal to two percent (2%) for each thirty (30) days or part thereof of the Purchase Price of the Preferred Stock remaining unconverted and purchase price of Shares issued upon conversion of the Obligation Amount (as defined in the Certificate of Designation) owned of record by such holder which are subject to such Non-Registration Event until such time as the Non-Registration Event is cured. The Company must pay the Liquidated Damages in cash. The Liquidated Damages must be paid within ten (10) days after the end of each thirty (30) day period or shorter part thereof for which Liquidated Damages are payable. In the event a Registration Statement is filed by the Filing Date but is withdrawn prior to being declared effective by the Commission, then such Registration Statement will be deemed to have not been filed. All oral or written comments received from the Commission relating to the Registration Statement must be satisfactorily responded to within fifteen (15) business days after receipt of comments from the Commission. Failure to timely respond to Commission comments is a Non-Registration Event for which Liquidated Damages shall accrue and be payable by the Company to the holders of Registrable Securities at the same rate set forth above. Notwithstanding the foregoing, the Company shall not be liable to the Subscriber under this Section 11.4 for any events or delays occurring as a consequence of the acts or omissions of the Subscribers contrary to the material obligations undertaken by Subscribers in this Agreement. Liquidated Damages will not accrue nor be payable pursuant to this Section 11.4 nor will a Non-Registration Event be deemed to have occurred for times during which Registrable Securities are transferable by the holder of Registrable Securities pursuant to Rule 144(k) under the 1933 Act.
 
11.5.   Expenses . All expenses incurred by the Company in complying with Section 11, including, without limitation, all registration and filing fees, printing expenses (if required), fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, and fees of transfer agents and registrars, are called “ Registration Expenses .” All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called " Selling Expenses ." The Company will pay all Registration Expenses in connection with the registration statement under Section 11. Selling Expenses in connection with each registration statement under Section 11 shall be borne by the Seller and may be apportioned among the Sellers in proportion to the number of shares sold by the Seller relative to the number of shares sold under such registration statement or as all Sellers thereunder may agree.
 
11.6.   Indemnification and Contribution .
 
(a)   In the event of a registration of any Registrable Securities under the 1933 Act pursuant to Section 11, the Company will, to the extent permitted by law, indemnify and hold harmless the Seller, each officer of the Seller, each director of the Seller, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such Seller or underwriter within the meaning of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Seller, or such underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities was registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made, and will subject to the provisions of Section 11.6(c) reimburse the Seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to the Seller to the extent that any such damages arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) the Seller failed to send or deliver a copy of the final prospectus or supplement to the final prospectus delivered by the Company to the Seller with or prior to the delivery of written confirmation of the sale by the Seller to the person asserting the claim from which such damages arise, (ii) the final prospectus or supplement to the final prospectus would have corrected such untrue statement or alleged untrue statement or such omission or alleged omission, or (iii) to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Seller, or any such controlling person in writing specifically for use in such registration statement or prospectus.

18


 

 
(b)   In the event of a registration of any of the Registrable Securities under the 1933 Act pursuant to Section 11, each Seller severally but not jointly will, to the extent permitted by law, indemnify and hold harmless the Company, and each person, if any, who controls the Company within the meaning of the 1933 Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the 1933 Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the 1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Seller, as such, furnished in writing to the Company by such Seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Seller hereunder shall be limited to the net proceeds actually received by the Seller from the sale of Registrable Securities covered by such registration statement.
 
(c)   Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 11.6(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 11.6(c), except and only if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 11.6(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties, as a group, shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred.

19


 

 
(d)   In order to provide for just and equitable contribution in the event of joint liability under the 1933 Act in any case in which either (i) a Seller, or any controlling person of a Seller, makes a claim for indemnification pursuant to this Section 11.6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 11.6 provides for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of the Seller or controlling person of the Seller in circumstances for which indemnification is not provided under this Section 11.6; then, and in each such case, the Company and the Seller will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Seller is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (y) the Seller will not be required to contribute any amount in excess of the public offering price of all such securities sold by it pursuant to such registration statement; and (z) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.
 
11.7.   Delivery of Unlegended Shares .
 
(a)   Within three (3) business days (such third business day being the “ Unlegended Shares Delivery Date ”) after the business day on which the Company has received (i) a notice that Shares or Warrant Shares or any other Common Stock held by a Subscriber have been sold pursuant to the Registration Statement or Rule 144 under the 1933 Act, (ii) a representation that the prospectus delivery requirements, or the requirements of Rule 144, as applicable and if required, have been satisfied, and (iii) the original share certificates representing the shares of Common Stock that have been sold, and (iv) in the case of sales under Rule 144, customary representation letters of the Subscriber and/or Subscriber’s broker regarding compliance with the requirements of Rule 144, the Company at its expense, (y) shall deliver, and shall cause legal counsel selected by the Company to deliver to its transfer agent (with copies to Subscriber) an appropriate instruction and opinion of such counsel, directing the delivery of shares of Common Stock without any legends including the legend set forth in Section 4( h ) above, reissuable pursuant to any effective and current Registration Statement described in Section 11 of this Agreement or pursuant to Rule 144 under the 1933 Act (the “ Unlegended Shares ”); and (z) cause the transmission of the certificates representing the Unlegended Shares together with a legended certificate representing the balance of the submitted Shares certificate, if any, to the Subscriber at the address specified in the notice of sale, via express courier, by electronic transfer or otherwise on or before the Unlegended Shares Delivery Date.
 
(b)   In lieu of delivering physical certificates representing the Unlegended Shares, if the Company’s transfer agent is participating in the Depository Trust Company (“ DTC ”) Fast Automated Securities Transfer program, upon request of a Subscriber, so long as the certificates therefor do not bear a legend and the Subscriber is not obligated to return such certificate for the placement of a legend thereon, the Company agrees to cause its transfer agent to electronically transmit the Unlegended Shares by crediting the account of Subscriber’s prime Broker with DTC through its Deposit Withdrawal Agent Commission system. Such delivery must be made on or before the Unlegended Shares Delivery Date.

20



(c)   The Company understands that a delay in the delivery of the Unlegended Shares pursuant to Section 11 hereof later than two business days after the Unlegended Shares Delivery Date could result in economic loss to a Subscriber. As compensation to a Subscriber for such loss, the Company agrees to pay late payment fees (as liquidated damages and not as a penalty) to the Subscriber for late delivery of Unlegended Shares in the amount of $100 per business day after the Delivery Date for each $10,000 of purchase price of the Unlegended Shares subject to the delivery default. If during any 360 day period, the Company fails to deliver Unlegended Shares as required by this Section 11.7 for an aggregate of thirty (30) days, then each Subscriber or assignee holding Securities subject to such default may, at its option, require the Company to redeem all or any portion of the Shares and Warrant Shares subject to such default at a price per share equal to 120% of the purchase price of such Common Stock and Warrant Shares (“ Unlegended Redemption Amount ”). The amount of the aforedescribed liquidated damages that have accrued or been paid for the twenty day period prior to the receipt by the Subscriber of the Unlegended Redemption Amount shall be credited against the Unlegended Redemption Amount. The Company shall pay any payments incurred under this Section in immediately available funds upon demand.
 
(d)   In addition to any other rights available to a Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares as required pursuant to this Agreement, within seven (7) business days after the Unlegended Shares Delivery Date and the Subscriber or a broker on the Subscriber’s behalf, purchases (in an open market transaction or otherwise) shares of common stock to deliver in satisfaction of a sale by such Subscriber of the shares of Common Stock which the Subscriber was entitled to receive from the Company (a " Buy-In "), then the Company shall pay in cash to the Subscriber (in addition to any remedies available to or elected by the Subscriber) the amount by which (A) the Subscriber's total purchase price (including brokerage commissions, if any) for the shares of common stock so purchased exceeds (B) the aggregate purchase price of the shares of Common Stock delivered to the Company for reissuance as Unlegended Shares   together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if a Subscriber purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase price of shares of Common Stock delivered to the Company for reissuance as Unlegended Shares, the Company shall be required to pay the Subscriber $ 1,000, plus interest. The Subscriber shall provide the Company written notice indicating the amounts payable to the Subscriber in respect of the Buy-In.
 
(e)   In the event a Subscriber shall request delivery of Unlegended Shares as described in Section 11.7 and the Company is required to deliver such Unlegended Shares pursuant to Section 11.7, the Company may not refuse to deliver Unlegended Shares based on any claim that such Subscriber or any one associated or affiliated with such Subscriber has been engaged in any violation of law, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such Unlegended Shares or exercise of all or part of said Warrant shall have been sought and obtained by the Company or at the Company’s request or with the Company’s assistance, and the Company has posted a surety bond for the benefit of such Subscriber in the amount of 120% of the amount of the aggregate purchase price of the Common Stock and Warrant Shares which are subject to the injunction or temporary restraining order, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Subscriber to the extent Subscriber obtains judgment in Subscriber’s favor.

21



12.   (a)   Right of First Refusal . Until one year after the Actual Effective Date, the Subscribers shall be given not less than seven (7) business days prior written notice of any proposed sale by the Company of its common stock or other securities or debt obligations, except in connection with (i) full or partial consideration in connection with a strategic merger, acquisition, consolidation or purchase of substantially all of the securities or assets of corporation or other entity which holders of such securities or debt are not at any time granted registration rights, (ii) the Company’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital which holders of such securities or debt are not at any time granted registration rights , (iii) the Company’s issuance of Common Stock or the issuances or grants of options to purchase Common Stock to employees, directors or consultants of the Company pursuant to stock option plans and employee stock purchase plans described on Schedule 5(d) hereto, (iv) as a result of the exercise of Warrants or conversion of Preferred Stock which are granted or issued pursuant to this Agreement, (v) the payment of dividends on the Preferred Stock and liquidated and other damages hereunder, and (vi)   as has been described in the Reports or Other Written Information filed with the Commission not later than three Business Days before the Closing Date and available on the EDGAR system, (vii) the issuance of securities in connection with a commercial bank lending arrangement, and (viii) as described on Schedule 12(a) hereto (collectively the foregoing are “ Excepted Issuances ”). The Subscribers who exercise their rights pursuant to this Section 12(a) shall have the right during the seven (7) business days following receipt of the notice to participate in such offering of common stock, debt or other securities in accordance with the terms and conditions set forth in the notice of sale in the same proportion to each other as their purchase of Preferred Stock in the Offering for up to the entire amount of such other offering. In the event such terms and conditions are modified during the notice period, the Subscribers shall be given prompt notice of such modification and shall have the right during the seven (7) business days following the notice of modification to exercise such right.
 
(b)   Favored Nations Provision . Other than in connection with the Excepted Issuances, for so long as Preferred Stock or Warrants are outstanding, if the Company shall offer, issue or agree to issue any Common Stock or securities convertible into or exercisable for shares of Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per share or conversion or exercise price per share which shall be less than the Conversion Price in respect of the Preferred Stock, or if less than the Warrant exercise price in respect of the Warrants, without the consent of each Subscriber holding Preferred Stock or Warrants, the Conversion Price of the Preferred Stock and the Warrant exercise price shall automatically be reduced to such lower price. For purposes of the adjustment described in this paragraph, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in the reduction in the Conversion Price and Exercise Price, if applicable, upon the sooner of the agreement to or actual issuance of such convertible security, warrant, right or option and again at any time upon any subsequent issuances of shares of Common Stock upon exercise of such conversion or purchase rights if such issuance is at a price lower than the Conversion Price or Warrant exercise price in effect upon such issuance. The rights of the Subscriber set forth in this Section 12 are in addition to any other rights the Subscriber has pursuant to this Agreement, the Certificate of Designation, any Transaction Document, any other agreement referred to or entered into in connection herewith, and at law, equity or otherwise.
 
(c)   Maximum Exercise of Rights . In the event the exercise of the rights described in Section 12(a) would result in the issuance of an amount of Common Stock of the Company that would exceed the maximum amount that may be issued to a Subscriber calculated in the manner described in Section 4(c) of the Certificate of Designation, then the issuance to Subscriber of such additional shares of Common Stock of the Company to such Subscriber will be deferred in whole or in part until such time as such Subscriber is able to beneficially own such Common Stock without exceeding the maximum amount set forth calculated in such manner. The determination of when such Common Stock may be issued shall be made by each Subscriber as to only such Subscriber.

22


 

 
13.   Miscellaneous .
 
(a)   Notices . All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company, to: Gilder Enterprises, Inc., 7 Deer Park Drive, Suite K, Monmouth Junction, NJ 08852, Attn: Al Kraus, CEO, telecopier: (732) 329-8650, with a copy by telecopier only to: Kronish Lieb Weiner & Hellman, LLP, 1114 Avenue of the Americas, New York, NY 10036, Attn: Alison Newman, Esq., telecopier: (212) 479-6275, and (ii) if to the Subscriber, to: the one or more addresses and telecopier numbers indicated on the signature pages hereto, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575.
 
(b)   Entire Agreement; Assignment . This Agreement and other documents delivered in connection herewith represent the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties. Neither the Company nor the Subscribers have relied on any representations not contained or referred to in this Agreement and the documents delivered herewith. No right or obligation of the Company shall be assigned without prior notice to and the written consent of the Subscribers.
 
(c)   Counterparts/Execution . This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile signature and delivered by facsimile transmission.
 
(d)   Law Governing this Agreement . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws   principles that would result in the application of the substantive laws of another jurisdiction. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the civil or state courts of New York or in the federal courts located in New York County. The parties and the individuals executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.
 
(e)   Specific Enforcement, Consent to Jurisdiction . The Company and Subscriber acknowledge and agree that irreparable damage may occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to seek one or more preliminary and final injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. Subject to Section 13(d) hereof, each of the Company, Subscriber and any signator hereto in his personal capacity hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction in New York of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.

23


 

 
(f)   Damages . In the event the Subscriber is entitled to receive any liquidated damages pursuant to the Transactions, the Subscriber may elect to receive the greater of actual damages or such liquidated damages.
 
(g)   Independent Nature of Subscribers .      The Company acknowledges that the obligations of each Subscriber under the Transaction Documents are several and not joint with the obligations of any other Subscriber, and no Subscriber shall be responsible in any way for the performance of the obligations of any other Subscriber under the Transaction Documents. The Company acknowledges that each Subscriber has represented that the decision of each Subscriber to purchase Securities has been made by such Subscriber independently of any other Subscriber and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Subscriber or by any agent or employee of any other Subscriber, and no Subscriber or any of its agents or employees shall have any liability to any Subscriber (or any other person) relating to or arising from any such information, materials, statements or opinions.  The Company acknowledges that nothing contained in any Transaction Document, and no action taken by any Subscriber pursuant hereto or thereto (including, but not limited to, the (i) inclusion of a Subscriber in the Registration Statement and (ii) review by, and consent to, such Registration Statement by a Subscriber) shall be deemed to constitute the Subscribers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Subscribers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.  The Company acknowledges that each Subscriber shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of the Transaction Documents, and it shall not be necessary for any other Subscriber to be joined as an additional party in any proceeding for such purpose.  The Company acknowledges that it has elected to provide all Subscribers with the same terms and Transaction Documents for the convenience of the Company and not because Company was required or requested to do so by the Subscribers.  The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Subscribers are in any way acting in concert or as a group with respect to the Transaction Documents or the transactions contemplated thereby.
 
(h)   Consent . As used in the Agreement, “consent of the Subscribers” or similar language means the consent of holders of not less than 80% of the total of the Shares issuable upon conversion of outstanding Preferred Stock owned by Subscribers on the date consent is requested.
 
(i)   Equal Treatment . No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of the Transaction Documents unless the same consideration is also offered to all the parties to the Transaction Documents.
 
[THIS SPACE INTENTIONALLY LEFT BLANK]
 

 


24



 
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

 
GILDER ENTERPRISES, INC.
 
a Nevada corporation
   
   
   
 
By:_____________________________
 
Name: Al Kraus
 
Title: CEO
   
   
 
Dated: _____________, 2006



SUBSCRIBER
PURCHASE PRICE AND STATED VALUE OF PREFERRED STOCK
CLASS A WARRANTS
ALPHA CAPITAL AKTIENGESELLSCHAFT
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Fax: 011-42-32323196
 
 
 
______________________________________
(Signature)
By:
$1,000,000.00
400,000




 
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
 

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

GILDER ENTERPRISES, INC.
a Nevada corporation



By:_________________________________
Name: Al Kraus
Title: CEO


Dated: _____________, 2006



SUBSCRIBER
PURCHASE PRICE AND STATED VALUE OF PREFERRED STOCK
CLASS A WARRANTS
LONGVIEW FUND, LP
600 Montgomery Street, 44th Floor
San Francisco, CA 94111
Fax: (415) 981-5301
 
 
 
______________________________________
(Signature)
By:
$3,000,000.00
1,200,000




 
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (C)
 

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

GILDER ENTERPRISES, INC.
a Nevada corporation


By:_________________________________
Name: Al Kraus
Title: CEO

Dated: _____________, 2006




SUBSCRIBER
PURCHASE PRICE AND STATED VALUE OF PREFERRED STOCK
CLASS A WARRANTS
PLATINUM PARTNERS LONG TERM GROWTH III LLC
11 Dr. Roy’s Road
Grand Cayman, Cayman Islands
Fax:
 
 
 
 
 
 
 
 
 
______________________________________
(Signature)
By:
$1,000,000.00
400,000




 
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (D)
 

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

GILDER ENTERPRISES, INC.
a Nevada corporation


By:_________________________________
Name: Al Kraus
Title: CEO

Dated: _____________, 2006




SUBSCRIBER
PURCHASE PRICE AND STATED VALUE OF PREFERRED STOCK
CLASS A WARRANTS
ELLIS INTERNATIONAL LTD.
53 rd Street Urbanizacion Obarrio
Swiss Tower, 16 th Floor, Panama
Republic of Panama
Fax: (516) 887-8990
 
 
 
 
 
 
 
 
 
______________________________________
(Signature)
By:
$250,000.00
100,000







 
LIST OF EXHIBITS AND SCHEDULES
 
 
Exhibit A
Certificate of Designation
Exhibit B
Form of Warrant
Exhibit C
Escrow Agreement
Exhibit D
Form of Legal Opinion
Exhibit E
Medasorb Corporation Financial Statements
Exhibit F
Form of Public Announcement or Form 8-K
Schedule 5(d)
Additional Issuances / Capitalization
Schedule 5(f)
Outstanding Reset Rights
Schedule 5(h)
Litigation
Schedule 5(q)
Undisclosed Liabilities
Schedule 5(v)
Transfer Agent
Schedule 8
Broker/Broker’s Fee/Due Diligence Fee
Schedule 9(e)
Use of Proceeds
Schedule 11.1
Other Registrable Securities
Schedule 12(a)
Other Excepted Issuances
 
 

 

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into this 18th day of July, 2003, by and between Renal Tech International, LLC, (the "Company"), and Al Kraus ("Employee").

The Company wishes to employ Employee as Chief Financial Officer upon the terms and conditions set forth in this Agreement and Employee is willing to accept employment subject to the terms and conditions set forth below. Accordingly, the parties, intending to be legally bound, agree as follows:

1. Employment and Term

1.1 Employment. Subject to the terms and conditions hereof, the Company hereby employs Employee during the term of employment set forth in Section 1.2 to serve as President and Chief Executive Officer of the Company and perform such services and duties as are normally and customarily associated with such position as well as such other associated duties as the Board of Managers shall determine. Employee hereby accepts such employment and agrees to devote sufficient time, attention and energies during regular business hours to effectively perform his duties and obligations hereunder, devoting three full business days each week to the Company's business either at the Company's offices or traveling on Company business and being available by telephone, e-mail or other communication for the remainder of the normal work week, until the BetaSorb device, or other significant product shall achieve FDA market approval, at which time Employee shall devote his full business time solely to the business of the Company; provided that the Company and Employee mutually agree upon an increase in compensation and associated benefits. In the event the Company and Employee do not agree on an increase in compensation and benefits, the terms of this Agreement shall remain in effect including employee's obligation to devote no more than three full business days each week.

1.2 Term. The term of employment of Employee under this Agreement shall begin on the date hereof and end on the fifth anniversary of such date, subject to the provisions for early termination set forth herein.

2. Compensation. In consideration of the services to be rendered hereunder, the Company hereby agrees to (a) pay Employee an annual base compensation of $200,000 payable in equal semimonthly installments in accordance with the usual practice of the Company which base compensation shall be subject to annual review (but his compensation may not be reduced from then current level) by the Compensation Committee, and (b) grant Options for that number of Membership Units equal to 5% of the outstanding Membership Units of the equity of the Company determined and granted on the date hereof at an exercise price of $1.00 per Unit (the "Options"), said number of units to vest as follows: 25% on the first anniversary of this Agreement and 25% on each of the next three subsequent anniversaries, subject to the terms hereof. Notwithstanding anything set forth herein to the contrary, in the event of the issuance of additional Membership Units, granting of options to third parties or the issuance of securities convertible or exercisable into Membership Units of the Company, then the Company agrees to immediately adjust in favor of the Employee the number of Options granted hereunder to assure that Employee at all times retains a 5% equity interest in the Company on a fully diluted basis until such time as the Company obtains additional equity (including any form of financing that converts to equity) capital of $20 million. It is also understood that the Employee's Options will be adjusted on the same basis as all other Unit holders to account for any stock split, stock dividend, combination or recapitalization.


3. Benefits.

3.1 Participation in Plans. During the term hereof, Employee shall be entitled to participate on the same terms as afforded other executive officers in any group insurance, hospitalization, medical, dental, health and accident, disability or similar plan or program of the Company now existing or established hereafter to the extent that he is eligible under the general provisions thereof; provided that in no case shall the benefits be reduced or less than that granted, awarded or provided to Employee on the date hereof.

3.2 Reasonable Business Expenses. Employee shall be allowed reimbursement for reasonable business expenses in connection with the performance of his duties hereunder upon presentation by Employee of the details of, vouchers for, such expenses, including tourist class commercial air travel, and Employee shall be furnished reasonable office space, assistance and facilities.

3.3 Vacation. Employee shall be entitled to a vacation (without deduction of salary or other compensation) for the period as is in conformity with the Company's policy regarding vacations for management employees (but in no event less than four weeks per year).

3.4 Bonuses. (a) Employee may receive such discretionary bonuses as the Board of Managers, in its sole discretion and from time to time, deem appropriate; and (b) Employee shall be entitled to receive a bonus of up to $100,000 upon achieving the milestones set forth in Appendix A.

3.5 Automobile Allowance. The Company agrees to pay Employee each month an automobile allowance of $500.00 per month throughout the term of this Agreement.

4. Early Termination of Employment

4.1 Termination for Justifiable Cause. In addition to termination pursuant to Section 1.2, the Company, by written notice to Employee authorized by a majority of the Managers other than Employee, may terminate Employee's employment for "justifiable cause", which shall mean any of the following events: (a) adjudication by a court of competent jurisdiction that Employee has committed an act of fraud or dishonesty resulting or intended to result, directly or indirectly, in personal enrichment at the expense of the Company; (b) an indictment of a felony (other than a motor vehicle related matter) involving moral turpitude; (c) repeated failure or refusal by Employee to follow written policies and directions reasonably established by the Board of Managers that go uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; or (d) persistent willful failure by Employee to fulfill his duties hereunder that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided Employee.


4.2 In the event that the Board of Managers reasonably determines that Employee has committed a felony (other than a motor vehicle related matter), a material act of fraud or other willful tort against the Company, it shall have the right to suspend Employee from his position and duties hereunder without compensation until such time as either the action is dropped or no longer pursued or a final adjudication of Employee's actions is made by a court (whether civil or criminal as appropriate) of competent jurisdiction. Should said adjudication find Employee innocent (or not at fault) or the action is dropped or no longer pursued, the Company shall promptly pay him all unpaid back salary together with interest on said amount (at the average consumer loan rate published by Citibank, N.A., during the suspension period) and, if said final adjudication is rendered or action dropped or no longer pursued within 12 months of Employee's suspension, he may, at his option, be reinstated to his position and this Agreement continued as if never interrupted.

4.3 Permanent Disability of Employee. The Company shall have the right to terminate Employee's employment hereunder if the Managers shall in good faith and on the basis of reasonable medical evidence determine that Employee, by reason of physical or mental disability, has been unable to perform the services required of him hereunder for more than 120 consecutive days or an aggregate of 180 calendar days, during any 12-month period. Such termination shall be effective as of the last day of the month following the month in which the Company shall have given notice to Employee of its intention to terminate pursuant to this paragraph. Company paid Disability Benefits will be activated 90 days after termination.

4.4 Compensation Upon Early Termination.

(a) In the event of termination of this Agreement for "justifiable cause" as described in Section 4.1, or pursuant to Section 1.2 hereof, Employee shall be entitled to the compensation earned by him before the effective date of termination, as provided for in this Agreement, computed pro rata up to and including that date, in lieu of salary and other benefits under this Agreement.

(b) If prior to the expiration of the term of this Agreement Employee dies, the Company shall continue Employee's compensation and coverage of Employee's direct dependents (if any and if they are eligible) under all plans or programs of the types listed in Section 3.1 for a period of 120 days, provided that no benefits will continue past the end of the term of this Agreement.


(c) Upon a Change of Control or upon Employee's termination for "Good Reason" as defined below, Employee shall then be entitled to receive, in lieu of salary and other benefits under this Agreement, (i) an amount equal to his then-current base salary, payable monthly in arrears without interest for a period of one year, (ii) continued coverage under all plans or programs of the types listed in Section 3.1 until the sooner of 1.5 years or one (1) month after Employee becomes otherwise employed and eligible for other comparable coverage, and (iii) all other benefits provided to Employee under this Agreement for a period of thirty (30) days.

4.5 In the event Employee is terminated for any reason other than for "justifiable cause" as defined in Section 4.1 hereof, death, disability or voluntary termination (unless the Company and Employee mutually agree to such voluntary termination), then all unexercised options granted to Employee under the Company's option plan (including without limitation the Options granted pursuant to Section 2(b) hereof) shall be deemed fully vested and exercisable immediately upon Employee's termination. The foregoing benefit shall be in addition to, and not in lieu of, any similar benefit that may be contained in any other agreement between Company and Employee.

4.6 (a) Upon the occurrence of a Change of Control of the Company or Employee terminates for Good Reason pursuant to Section 4.6(d)(i), all options granted to Employee under the Company option plan and the Options granted to Employee pursuant to Section 2(b) hereof shall be automatically fully vested and exercisable immediately upon a Change of Control.

(b) For purposes of this Agreement, "Change of Control" shall be deemed to have occurred if, during the term of this agreement:

(i) the beneficial ownership of at least 50% of the Company's voting securities or all or substantially all of the assets of the Company shall have been acquired, directly or indirectly by a single person or a group of affiliated persons, other than the Employee or a group in which the Employee is a member, in any transaction or series of transactions; or

(ii) as the result of or in connection with any cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity the new Board of Managers is comprised of a majority of Managers chosen or elected by the members of the new/combined entity who were not members of the Company before such cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity.

(c) For purposes of this Agreement, the date of Change of Control shall mean the earlier to occur of:


(i) the first date on which a single person or group of affiliated persons acquires the beneficial ownership of 50% or more of the Company's voting securities or all or substantially all of the Company's assets in any transaction or series of transactions; or

(ii) the date on which a cash tender offer, exchange offer, sale of assets, merger, consolidation other business combination resulting in the change in the Board of Managers contemplated by Section 4.5 hereof is consummated.

(d) For purposes of this Agreement, the term "Good Reason" shall mean the occurrence of any of the following events without the Employee's express written consent.

(i) the assignment to Employee of any duties that are not in the same corporate capacity or area of operations or are not of the same general nature as Employee's duties with Company; or

(ii) the Company's assigning Employee to an office other than the principal office of the Company. The current principal office is located in Princeton, New Jersey and the Company represents to Employee that there is at this time no intention on the part of the Company to move said principal office beyond a radius of 50 miles from Princeton, New Jersey. This clause (ii), however, shall in no way limit the complete discretion of the Board of Managers to relocate the principal office of the Company at any time in the future. In the event, however, that the Company does move its principal office beyond a 50 mile radius of Princeton, N.J., Employee shall have the right, for 120 days after the decision of the Board of Managers to relocate, to elect (by written notice to the Board of Managers) to terminate this Agreement and receive upon the date of termination, in lieu of all compensation and privileges provided for herein (except as set forth in the subsequent sentence), that number of options equal to one additional year's vesting hereunder, provided Employee remains with the Company for a period (up to 12 months) (the "Transition Period") sufficient to assist the Company to make an expeditious and effective transition to the new location. The end of such Transition Period shall be deemed the date o termination for the purposes of this Section. Notwithstanding anything set forth herein to the contrary, in the event the Company moves its principal office beyond a 50 mile radius from Princeton, New Jersey, the Company shall be obligated to pay to Employee the amount of compensation and benefits set forth in Section 4.4(c) hereof commencing after the Transition Period set forth above.

5. Confidentiality and Non-Competition.

5.1 (i) Confidentiality. During the term of employment under this Agreement, Employee will have access to and become acquainted with various confidential information including without limitation, trade secrets, customer relationships, formulas, devices, inventions, processes, know-how, financial information and other compilations of information, records, and specifications, which are owned by the Company. Employee shall not disclose


any of the Company's confidential information, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment for the Company. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of the Company, whether prepared by Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed from the premises of the Company under any circumstances whatsoever without the prior written consent of the Company, and if removed shall be immediately returned to the Company upon any termination of his employment and no copies thereof shall be kept by Employee, provided, however, that Employee shall be entitled to retain documents reasonably related to his interest as a shareholder.

(ii) Inventions and Shop Right. Every invention, discovery or improvement made or conceived by Employee related to the business of the Company during his employment by the Company whenever and wherever made or conceived, and whether or not during business hours, of any product, article, appliance, tool, device, formula, process, machinery or pattern similar to, or which constitutes an improvement, on those heretofore, now or at any time during this employment, manufactured or used by the Company in connection with the manufacture or process of any product heretofore or now or hereafter manufactured by the Company, or of any product which shall or could reasonably be manufactured in the reasonable expansion of the Company's business, shall be and continue remain the Company's exclusive property, without any added compensation or any reimbursement for expenses to Employee, and upon the conception of any and every such invention, discovery or improvement and without waiting to perfect or complete it, Employee promises and agrees that he will immediately disclose it to the Company and to no one else and thenceforth will treat it as the property and secret of the Company. Employee will also execute any instruments requested from time to time by the Company to vest in it complete title and ownership to such invention, discovery or improvement and will, at the request of the Company, do such acts and execute such instruments as the Company may require but at the Company's expense to obtain Letters Patent in the United States and foreign countries, for such invention, discovery or improvement and for the purpose of vesting title thereto in the Company, all without any reimbursement for expenses or otherwise and without any additional compensation of any kind to Employee.

5.2 Non-Competition. In the event of a termination of this Agreement for any reason, Employee shall be prohibited for a period of one (1) year from the effective date of this separation from engaging in any business in competition with that of the Company in those states within the United States and those countries outside the United States in which the Company at the time of Employee's separation has conducted business or where Company has written a reasonable plan to conduct business in the next 12 months or directly or indirectly advising or consulting to or otherwise performing services for or providing assistance to any person, firm, corporation, or other entity engaged in such competitive business, provided, however, nothing herein contained shall be construed as (a) preventing Employee from investing


his personal assets in any businesses which do not compete directly or indirectly with the Company, provided such investment or investments do not require any services on his part in the operation of the affairs of the entity in which such investment is made and in which his participation is solely that of an investor, (b) preventing Employee from purchasing securities in any corporation whose securities in any corporation whose securities are regularly traded, if such purchases shall not result in his owning beneficially at any time 3% or more of equity securities of any corporation engaged in a business which is competitive, directly or indirectly, to that of the Company, (c) preventing Employee from engaging in any activities, if he receives the prior authorization of the Managers. Notwithstanding anything herein to the contrary this Section 5.2 shall not be effective in the event Employee has been discharged for any reason other than "justifiable cause" or voluntarily leaves the employment of the Company with the mutual agreement of the Company.

5.3 Subsequent to the termination of this Agreement, Employee will not for a period of one (1) year materially interfere with or disrupt the Company's business relationship with its customers or suppliers or employ any person who was employed with the Company at any time during the 6 months prior to Employee's termination, or for a period of three (3) years, directly or indirectly solicit any of the employees to leave the employ of the Company.

6. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its President or Secretary) or forty eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, addressed to Employee, at last known address as carried in the records of the Company, or to the Company, at the corporate headquarters, to the attention of the Secretary, or to such other address as the party to be notified may specify by notice to the other party.

7. Assigns and Successors. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company and the rights and obligations of Employee shall move to the benefit of and shall be binding on Employee and his legal representatives or heirs. This agreement constitutes a personal service agreement and Employee's obligations hereunder may not be transferred or assigned by Employee.

8. Amendment Waiver. This Agreement may be amended, and any right or claim hereunder waived, only by a written instrument signed by both Employee and the Company, following authorization by a majority of Managers. Nothing in this Agreement, express or implied, is intended to confer upon any third person any rights or remedies under or by reason of this Agreement. No amendment or waiver of this Agreement requires the consent of any individual, partnership, corporation or other entity not a party of this Agreement.

9. Injunction.

(a) Should Employee at any time violate or threaten to violate any of the provisions of this Agreement, the Company shall be entitled to an injunction restraining Employee from doing or continuing to do or performing any such acts, and Employee hereby consents to the issuance of such an injunction.


(b) In the event that a proceeding is bought in equity to enforce the provisions of this paragraph, Employee shall not urge as a defense that there is an adequate remedy at law, nor shall the Company be prevented from seeking any other remedies which may be available.

(c) The existence of a claim or cause of action by the Company against Employee, or by Employee against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the endorsement by the Company of the foregoing restrictive covenants but shall be litigated separately.

(d) The provisions of this Section 9 shall survive termination of this Agreement.

10. Governing Law and Jurisdiction. This Agreement in its interpretation and application and enforcement shall be governed by the law of the State of New Jersey without application of its conflict of laws provisions, and any legal action commenced by either party seeking interpretation, application and/or enforcement of this Agreement shall be brought only in the State of New Jersey of federal court sitting in Princeton, NJ.

11. Prior Agreements. This Agreement supersedes and replaces any and all prior agreements between the parties as to its subject matter.

12. Construction. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of this Agreement.

13. Effective Date. The effective date of this Agreement shall be July 18, 2003.

IN WITNESS WHEREOF, the parties have executed this Agreement.

RENALTECH INTERNATIONAL, LLC                    EMPLOYEE


By: ___________________________________         ____________________
      Bruce Davis, Acting President and         Al Kraus
      Chief Executive Officer

Approved and Accepted:

Board of Managers

By:_________________________


Appendix A - Management Targets

Completion Date   Target

Q4 03             Commence Beta-Sorb Pivotal Human Clinical Trial-50 patients

Q4 03             DMC Meeting FDA, approval to continue trial

Q4 03             Conclude 20mm financing round

Q1 04             Initiate Cohort B of Pivotal Trial

Q3 04             Conclude Commercial Polymer Supply Agreement

3Q 04             Complete Beta-Sorb Pivotal Human Trial-50 patients

3Q 04             Consolidate Company Operations in Princeton NJ

4Q 04             Complete Data Analysis and Study Report

4Q 04             Submit Beta-Sorb Marketing Application


Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into this first day of July, 2005, by and between MedaSorb Technologies, LLC, (the "Company"), and Vincent Capponi ("Employee").

The Company wishes to employ Employee as Chief Operating Officer upon the terms and conditions set forth in this Agreement and Employee is willing to accept employment subject to the terms and conditions set forth below. Accordingly, the parties, intending to be legally bound, agree as follows:

1. Employment and Term

1.1 Employment. Subject to the terms and conditions hereof, the Company hereby employs Employee during the term of employment set forth in Section 1.2 to serve as Chief Operating Officer of the Company and perform such services and duties as are normally and customarily associated with such position as well as such other associated duties as the Chief Executive Officer (CEO) shall determine. Employee hereby accepts such employment and agrees to devote sufficient time, attention and energies during regular business hours to effectively perform his duties and obligations hereunder.

1.2 Term. The term of employment of Employee under this Agreement shall be one (1) year commencing July 1, 2005 and expiring on July 1 , 2006 (the "Term") and automatically renewed thereafter from year to year unless within 120 days prior to end of initial term or the end of any renewal year, either party gives the other written notice of its intention not to renew in which event this Agreement shall terminate at the end of the initial Term or the end of that renewal year term, subject to the provisions for early termination set forth herein.

2. Compensation. In consideration of the services to be rendered hereunder, the Company hereby agrees to (a) pay Employee an annual base compensation of $181,886 payable in equal semimonthly installments in accordance with the usual practice of the Company which base compensation shall be subject to annual review (but his compensation may not be reduced from then current level) by the Compensation Committee, and (b) grant Management Units for that number of Membership Units which equal 1.5% of the outstanding Membership Units of the equity of the Company determined and granted on July 1, 2005 at a Measurement Value of $0.50 per Unit (the "Management Units") in lieu of all employee grants made prior to the date hereof, said number of units to vest as follows: 74% on the date hereof, 15% on 12/31/05 and 11% on 12/31/06, subject to the terms hereof. Notwithstanding anything set forth herein to the contrary, in. In the event of the issuance of additional Membership Units, granting of options to third parties or the issuance of securities convertible or exercisable into Membership Units of the Company, then the Company agrees to immediately adjust in favor of the Employee the number of Management Units granted hereunder to assure that Employee at all times retains a 1.5% equity interest in the Company on a fully diluted basis until 12-31-05. It is also understood that the Employee's Management Units will be adjusted on the same basis as all other Unit holders to account for any stock split, stock dividend, combination or recapitalization.


3. Benefits.

3.1 Participation in Plans. During the term hereof, Employee shall be entitled to participate on the same terms as afforded other executive officers in any group insurance, hospitalization, medical, dental, health and accident, disability or similar plan or program of the Company now existing or established hereafter to the extent that he is eligible under the general provisions thereof; provided that in no case shall the benefits be reduced or less than that granted, awarded or provided to Employee on the date hereof.

3.2 Reasonable Business Expenses. Employee shall be allowed reimbursement for reasonable business expenses in connection with the performance of his duties hereunder upon presentation by Employee of the details of, vouchers for, such expenses, including tourist class commercial air travel, and Employee shall be furnished reasonable office space, assistance and facilities.

3.3 Vacation. Employee shall be entitled to a vacation (without deduction of salary or other compensation) for the period as is in conformity with the Company's policy regarding vacations for management employees (but in no event less than three weeks per year).

3.4 Bonuses. Employee may receive such discretionary bonuses as the CEO, in its sole discretion and from time to time, deem appropriate.

4. Early Termination of Employment

4.1 Termination for Justifiable Cause. In addition to termination pursuant to Section 1.2, the Company, by written notice to Employee authorized by the CEO may terminate Employee's employment for "justifiable cause", which shall mean any of the following events: (a) adjudication by a court of competent jurisdiction that Employee has committed an act of fraud or dishonesty resulting or intended to result, directly or indirectly, in personal enrichment at the expense of the Company; (b) an indictment of a felony (other than a motor vehicle related matter) involving moral turpitude; (c) repeated failure or refusal by Employee to follow written policies and directions reasonably established by the CEO that go uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; or (d) persistent willful failure by Employee to fulfill his duties hereunder that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided Employee.

2

4.2 In the event that the CEO reasonably determines that the Employee has committed a felony (other than a motor vehicle related matter), a material act of fraud or other willful tort against the Company, it shall have the right to suspend Employee from his position and duties hereunder without compensation until such time as either the action is dropped or no longer pursued or a final adjudication of Employee's actions is made by a court (whether civil or criminal as appropriate) of competent jurisdiction. Should said adjudication find Employee innocent (or not at fault) or the action is dropped or no longer pursued, the Company shall promptly pay him all unpaid back salary together with interest on said amount (at the average consumer loan rate published by Citibank, N.A., during the suspension period) and, if said final adjudication is rendered or action dropped or no longer pursued within 12 months of Employee's suspension, he may, at his option, be reinstated to his position and this Agreement continued as if never interrupted.

4.3 Permanent Disability of Employee. The Company shall have the right to terminate Employee's employment hereunder if the CEO shall in good faith and on the basis of reasonable medical evidence determine that Employee, by reason of physical or mental disability, has been unable to perform the services required of him hereunder for more than 120 consecutive days or an aggregate of 180 calendar days, during any 12-month period. Such termination shall be effective as of the last day of the month following the month in which the Company shall have given notice to Employee of its intention to terminate pursuant to this paragraph. Company paid Disability Benefits will be activated 90 days after termination.

4.4 Compensation Upon Early Termination.

(a) In the event of termination of this Agreement for "justifiable cause" as described in Section 4.1, or pursuant to Section 1.2 hereof, Employee shall be entitled to the compensation earned by him before the effective date of termination, as provided for in this Agreement, computed pro rata up to and including that date, in lieu of salary and other benefits under this Agreement.

(b) If prior to the expiration of the term of this Agreement Employee dies, the Company shall continue Employee's compensation and coverage of Employee's direct dependents (if any and if they are eligible) under all plans or programs of the types listed in Section 3.1 for a period of 120 days, provided that no benefits will continue past the end of the term of this Agreement.

(c) Upon a Change of Control or upon Employee's termination for "Good Reason" as defined below, Employee shall then be entitled to receive, in lieu of salary and other benefits under this Agreement,
(i) an amount equal to his then-current base salary, payable monthly in arrears without interest for a period of one year, (ii) continued coverage under all plans or programs of the types listed in Section 3.1 until the sooner of 1 year or one (1) month after Employee becomes otherwise employed and eligible for other comparable coverage, and (iii) all other benefits provided to Employee under this Agreement for a period of thirty (30) days.

3

4.5 In the event Employee is terminated for any reason other than for "justifiable cause" as defined in Section 4.1 hereof, death, disability or voluntary termination (unless the Company and Employee mutually agree to such voluntary termination), then all unexercised options granted to Employee under the Company's option plan (including without limitation the Management Units granted pursuant to Section 2(b) hereof) shall be deemed fully vested and exercisable immediately upon Employee's termination. The foregoing benefit shall be in addition to, and not in lieu of, any similar benefit that may be contained in any other agreement between the Company and Employee.

4.6 (a) Upon the occurrence of a Change of Control of the Company or Employee terminates for Good Reason pursuant to Section 4.6(d), all options granted to Employee under the Company option plan and the Management Units granted to Employee pursuant to Section 2(b) hereof shall be automatically fully vested and exercisable immediately upon a Change of Control.

(b) For purposes of this Agreement, "Change of Control" shall be deemed to have occurred if, during the term of this agreement:

(i) the beneficial ownership of at least 50% of the Company's voting securities or all or substantially all of the assets of the Company shall have been acquired, directly or indirectly by a single person or a group of affiliated persons, other that the Employee or a group in which the Employee is a member, in any transaction or series of transactions; or

(ii) as the result of or in connection with any cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity the new Board of Managers is comprised of a majority of Managers chosen or elected by the members of the new/combined entity who were not members of the Company before such cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity

(c) For purposes of this Agreement, the date of Change of Control shall mean the earlier to occur of:

(i) the first date on which a single person or group of affiliated persons acquires the beneficial ownership of 50% or more of the Company's voting securities or all or substantially all of the Company's assets in any transaction or series of transactions; or

4

(ii) the date on which a cash tender offer, exchange offer, sale of assets, merger, consolidation other business combination resulting in the change in the Board of Managers contemplated by Section 4.5 hereof is consummated.

(d) For purposes of this Agreement, the term "Good Reason" shall mean the assignment to Employee of any duties that are not in the same corporate capacity or area of operations or are not of the same general nature as Employee's duties with Company without the Employee's express written consent.

5. Confidentiality and Non-Competition.

5.1 (i) Confidentiality. During the term of employment under this Agreement, Employee will have access to and become acquainted with various confidential information including without limitation, trade secrets, customer relationships, formulas, devices, inventions, processes, know-how, financial information and other compilations of information, records, and specifications, which are owned by the Company. Employee shall not disclose any of the Company's confidential information, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment for the Company. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of the Company, whether prepared by Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed from the premises of the Company under any circumstances whatsoever without the prior written consent of the Company, and if removed shall be immediately returned to the Company upon any termination of his employment and no copies thereof shall be kept by Employee, provided, however, that Employee shall be entitled to retain documents reasonably related to his interest as a shareholder.

(ii) Inventions and Shop Right. Every invention, discovery or improvement made or conceived by Employee related to the business of the Company during his employment by the Company whenever and wherever made or conceived, and whether or not during business hours, of any product, article, appliance, tool, device, formula, process, machinery or pattern similar to, or which constitutes an improvement, on those heretofore, now or at any time during this employment, manufactured or used by the Company in connection with the manufacture or process of any product heretofore or now or hereafter manufactured by the Company, or of any product which shall or could reasonably be manufactured in the reasonable expansion of the Company's business, shall be and continue remain the Company's exclusive property, without any added compensation or any reimbursement for expenses to Employee, and upon the conception of any and every such invention, discovery or improvement and without waiting to perfect or complete it, Employee promises and agrees that he will immediately disclose it to the Company and to no one else and thenceforth will treat it as the property and secret of the Company. Employee will also execute any instruments requested from time to time by the Company to vest in it complete title and ownership to such invention, discovery or improvement and will, at the request of the Company, do such acts and execute such instruments as the Company may require but at the Company's expense to obtain Letters Patent in the United States and foreign countries, for such invention, discovery or improvement and for the purpose of vesting title thereto in the Company, all without any reimbursement for expenses or otherwise and without any additional compensation of any kind to Employee.

5

5.2 Non-Competition. In the event of a termination of this Agreement for any reason, Employee shall be prohibited for a period of one (1) year from the effective date of this separation from engaging in any business in competition with that of the Company in those states within the United States and those countries outside the United States in which the Company at the time of Employee's separation has conducted business or where Company has written a reasonable plan to conduct business in the next 12 months or directly or indirectly advising or consulting to or otherwise performing services for or providing assistance to any person, firm, corporation, or other entity engaged in such competitive business, provided, however, nothing herein contained shall be construed as (a) preventing Employee from investing his personal assets in any businesses which do not compete directly or indirectly with the Company, provided such investment or investments do not require any services on his part in the operation of the affairs of the entity in which such investment is made and in which his participation is solely that of an investor, (b) preventing Employee from purchasing securities in any corporation whose securities in any corporation whose securities are regularly traded, if such purchases shall not result in his owning beneficially at any time 3% or more of equity securities of any corporation engaged in a business which is competitive, directly or indirectly, to that of the Company, (c) preventing Employee from engaging in any activities, if he receives the prior authorization of the Managers. Notwithstanding anything herein to the contrary this Section 5.2 shall not be effective in the event Employee has been discharged for any reason other than "justifiable cause" or voluntarily leaves the employment of the Company with the mutual agreement of the Company.

5.3 Subsequent to the termination of this Agreement, Employee will not for a period of one (1) year materially interfere with or disrupt the Company's business relationship with its customers or suppliers or employ any person who was employed with the Company at any time during the 6 months prior to Employee's termination, or for a period of three (3) years, directly or indirectly solicit any of the employees to leave the employ of the Company.

6. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its President or Secretary) or forty eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, addressed to Employee, at last known address as carried in the records of the Company, or to the Company, at the corporate headquarters, to the attention of the Secretary, or to such other address as the party to be notified may specify by notice to the other party.

6

7. Assigns and Successors. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company and the rights and obligations of Employee shall move to the benefit of and shall be binding on Employee and his legal representatives or heirs. This agreement constitutes a personal service agreement and Employee's obligations hereunder may not be transferred or assigned by Employee.

8. Amendment Waiver. This Agreement may be amended, and any right or claim hereunder waived, only by a written instrument signed by both Employee and the Company, following authorization by the CEO. Nothing in this Agreement, express or implied, is intended to confer upon any third person any rights or remedies under or by reason of this Agreement. No amendment or waiver of this Agreement requires the consent of any individual, partnership, corporation or other entity not a party of this Agreement.

9. Injunction.

(a) Should Employee at any time violate or threaten to violate any of the provisions of this Agreement, the Company shall be entitled to an injunction restraining Employee from doing or continuing to do or performing any such acts, and Employee hereby consents to the issuance of such an injunction.

(b) In the event that a proceeding is bought in equity to enforce the provisions of this paragraph, Employee shall not urge as a defense that there is an adequate remedy at law, nor shall the Company be prevented from seeking any other remedies which may be available.

(c) The existence of a claim or cause of action by the Company against Employee, or by Employee against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the endorsement by the Company of the foregoing restrictive covenants but shall be litigated separately.

(d) The provisions of this Section 9 shall survive termination of this Agreement.

10. Governing Law and Jurisdiction. This Agreement in its interpretation and application and enforcement shall be governed by the law of the State of New Jersey without application of its conflict of laws provisions, and any legal action commenced by either party seeking interpretation, application and/or enforcement of this Agreement shall be brought only in the State of New Jersey of federal court sitting in Princeton, NJ.

11. Prior Agreements. This Agreement supercedes and replaces any and all prior agreements between the parties as to its subject matter.

12. Construction. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of this Agreement.

7

13. Effective Date. The effective date of this Agreement shall be July 1, 2005.

IN WITNESS WHEREOF, the parties have executed this Agreement.

MEDASORB TECHNOLOGIES, LLC                      EMPLOYEE


By: ___________________________________         ____________________
      Al Kraus, President and                   Vincent Capponi
      Chief Executive Officer

8

Exhibit 10.3

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into this first day of July, 2005, by and between MedaSorb Technologies, LLC, (the "Company"), and David Lamadrid ("Employee").

The Company wishes to employ Employee as Chief Financial Officer upon the terms and conditions set forth in this Agreement and Employee is willing to accept employment subject to the terms and conditions set forth below. Accordingly, the parties, intending to be legally bound, agree as follows:

1. Employment and Term

1.1 Employment. Subject to the terms and conditions hereof, the Company hereby employs Employee during the term of employment set forth in Section 1.2 to serve as Chief Financial Officer of the Company and perform such services and duties as are normally and customarily associated with such position as well as such other associated duties as the Chief Executive Officer (CEO) shall determine. Employee hereby accepts such employment and agrees to devote sufficient time, attention and energies during regular business hours to effectively perform his duties and obligations hereunder.

1.2 Term. The term of employment of Employee under this Agreement shall be one (1) year commencing July 1, 2005 and expiring on July 1 , 2006 (the "Term") and automatically renewed thereafter from year to year unless within 120 days prior to end of initial term or the end of any renewal year, either party gives the other written notice of its intention not to renew in which event this Agreement shall terminate at the end of the initial Term or the end of that renewal year term, subject to the provisions for early termination set forth herein.

2. Compensation. In consideration of the services to be rendered hereunder, the Company hereby agrees to (a) pay Employee an annual base compensation of $135,629 payable in equal semimonthly installments in accordance with the usual practice of the Company which base compensation shall be subject to annual review (but his compensation may not be reduced from then current level) by the CEO, and (b) grant Management Units for that number of Membership Units which equal to 1.8% of the outstanding Membership Units of the equity of the Company determined and granted on July 1, 2005 at a Measurement Value of $0.50 per Unit (the "Management Units") in lieu of all employee grants made prior to the date hereof, said number of units to vest as follows: 66% on the date hereof, 20% on 12/31/05 and 14% on 12/31/06, subject to the terms hereof. Notwithstanding anything set forth herein to the contrary, in the event of the issuance of additional Membership Units, granting of options to third parties or the issuance of securities convertible or exercisable into Membership Units of the Company, then the Company agrees to immediately adjust in favor of the Employee the number of Management Units granted hereunder to assure that Employee at all times retains a 1.8% equity interest in the Company on a fully diluted basis until 12-31-05. It is also understood that the Employee's Management Units will be adjusted on the same basis as all other Unit holders to account for any stock split, stock dividend, combination or recapitalization.


3. Benefits.

3.1 Participation in Plans. During the term hereof, Employee shall be entitled to participate on the same terms as afforded other executive officers in any group insurance, hospitalization, medical, dental, health and accident, disability or similar plan or program of the Company now existing or established hereafter to the extent that he is eligible under the general provisions thereof; provided that in no case shall the benefits be reduced or less than that granted, awarded or provided to Employee on the date hereof.

3.2 Reasonable Business Expenses. Employee shall be allowed reimbursement for reasonable business expenses in connection with the performance of his duties hereunder upon presentation by Employee of the details of, vouchers for, such expenses, including tourist class commercial air travel, and Employee shall be furnished reasonable office space, assistance and facilities.

3.3 Vacation. Employee shall be entitled to a vacation (without deduction of salary or other compensation) for the period as is in conformity with the Company's policy regarding vacations for management employees (but in no event less than three weeks per year).

3.4 Bonuses. Employee may receive such discretionary bonuses as the CEO, in its sole discretion and from time to time, deem appropriate.

3.5 Travel Expenses. Employee shall be allowed reimbursement for expenses incurred while traveling to and from New York and MedaSorb facilities in New Jersey.

4. Early Termination of Employment

4.1 Termination for Justifiable Cause. In addition to termination pursuant to Section 1.2, the Company, by written notice to Employee authorized by the CEO may terminate Employee's employment for "justifiable cause", which shall mean any of the following events: (a) adjudication by a court of competent jurisdiction that Employee has committed an act of fraud or dishonesty resulting or intended to result, directly or indirectly, in personal enrichment at the expense of the Company; (b) an indictment of a felony (other than a motor vehicle related matter) involving moral turpitude; (c) repeated failure or refusal by Employee to follow written policies and directions reasonably established by the CEO that go uncorrected for a period of thirty (30) consecutive days after written notice has been provided to Employee; or (d) persistent willful failure by Employee to fulfill his duties hereunder that goes uncorrected for a period of thirty (30) consecutive days after written notice has been provided Employee.

2

4.2 In the event that the CEO reasonably determines that the Employee has committed a felony (other than a motor vehicle related matter), a material act of fraud or other willful tort against the Company, it shall have the right to suspend Employee from his position and duties hereunder without compensation until such time as either the action is dropped or no longer pursued or a final adjudication of Employee's actions is made by a court (whether civil or criminal as appropriate) of competent jurisdiction. Should said adjudication find Employee innocent (or not at fault) or the action is dropped or no longer pursued, the Company shall promptly pay him all unpaid back salary together with interest on said amount (at the average consumer loan rate published by Citibank, N.A., during the suspension period) and, if said final adjudication is rendered or action dropped or no longer pursued within 12 months of Employee's suspension, he may, at his option, be reinstated to his position and this Agreement continued as if never interrupted.

4.3 Permanent Disability of Employee. The Company shall have the right to terminate Employee's employment hereunder if the CEO shall in good faith and on the basis of reasonable medical evidence determine that Employee, by reason of physical or mental disability, has been unable to perform the services required of him hereunder for more than 120 consecutive days or an aggregate of 180 calendar days, during any 12-month period. Such termination shall be effective as of the last day of the month following the month in which the Company shall have given notice to Employee of its intention to terminate pursuant to this paragraph. Company paid Disability Benefits will be activated 90 days after termination.

4.4 Compensation Upon Early Termination.

(a) In the event of termination of this Agreement for "justifiable cause" as described in Section 4.1, or pursuant to Section 1.2 hereof, Employee shall be entitled to the compensation earned by him before the effective date of termination, as provided for in this Agreement, computed pro rata up to and including that date, in lieu of salary and other benefits under this Agreement.

(b) If prior to the expiration of the term of this Agreement Employee dies, the Company shall continue Employee's compensation and coverage of Employee's direct dependents (if any and if they are eligible) under all plans or programs of the types listed in Section 3.1 for a period of 120 days, provided that no benefits will continue past the end of the term of this Agreement.

(c) Upon a Change of Control or upon Employee's termination for "Good Reason" as defined below, Employee shall then be entitled to receive, in lieu of salary and other benefits under this Agreement,
(i) an amount equal to his then-current base salary, payable monthly in arrears without interest for a period of one year, (ii) continued coverage under all plans or programs of the types listed in Section 3.1 until the sooner of 1 year or one (1) month after Employee becomes otherwise employed and eligible for other comparable coverage, and (iii) all other benefits provided to Employee under this Agreement for a period of thirty (30) days.

3

4.5 In the event Employee is terminated for any reason other than for "justifiable cause" as defined in Section 4.1 hereof, death, disability or voluntary termination (unless the Company and Employee mutually agree to such voluntary termination), then all unexercised options granted to Employee under the Company's option plan (including without limitation the Management Units granted pursuant to Section 2(b) hereof) shall be deemed fully vested and exercisable immediately upon Employee's termination. The foregoing benefit shall be in addition to, and not in lieu of, any similar benefit that may be contained in any other agreement between the Company and Employee.

4.6 (a) Upon the occurrence of a Change of Control of the Company or Employee terminates for Good Reason pursuant to Section 4.6(d), all options granted to Employee under the Company option plan and the Management Units granted to Employee pursuant to Section 2(b) hereof shall be automatically fully vested and exercisable immediately upon a Change of Control.

(b) For purposes of this Agreement, "Change of Control" shall be deemed to have occurred if, during the term of this agreement:

(i) the beneficial ownership of at least 50% of the Company's voting securities or all or substantially all of the assets of the Company shall have been acquired, directly or indirectly by a single person or a group of affiliated persons, other that the Employee or a group in which the Employee is a member, in any transaction or series of transactions; or

(ii) as the result of or in connection with any cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity the new Board of Managers is comprised of a majority of Managers chosen or elected by the members of the new/combined entity who were not members of the Company before such cash tender offer, exchange offer, sale of assets, merger, consolidation or other business combination of the Company with another corporation or entity

(c) For purposes of this Agreement, the date of Change of Control shall mean the earlier to occur of:

(i) the first date on which a single person or group of affiliated persons acquires the beneficial ownership of 50% or more of the Company's voting securities or all or substantially all of the Company's assets in any transaction or series of transactions; or

4

(ii) the date on which a cash tender offer, exchange offer, sale of assets, merger, consolidation other business combination resulting in the change in the Board of Managers contemplated by Section 4.5 hereof is consummated.

(d) For purposes of this Agreement, the term "Good Reason" shall mean the assignment to Employee of any duties that are not in the same corporate capacity or area of operations or are not of the same general nature as Employee's duties with Company without the Employee's express written consent.

5. Confidentiality and Non-Competition.

5.1 (i) Confidentiality. During the term of employment under this Agreement, Employee will have access to and become acquainted with various confidential information including without limitation, trade secrets, customer relationships, formulas, devices, inventions, processes, know-how, financial information and other compilations of information, records, and specifications, which are owned by the Company. Employee shall not disclose any of the Company's confidential information, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment for the Company. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of the Company, whether prepared by Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed from the premises of the Company under any circumstances whatsoever without the prior written consent of the Company, and if removed shall be immediately returned to the Company upon any termination of his employment and no copies thereof shall be kept by Employee, provided, however, that Employee shall be entitled to retain documents reasonably related to his interest as a shareholder.

(ii) Inventions and Shop Right. Every invention, discovery or improvement made or conceived by Employee related to the business of the Company during his employment by the Company whenever and wherever made or conceived, and whether or not during business hours, of any product, article, appliance, tool, device, formula, process, machinery or pattern similar to, or which constitutes an improvement, on those heretofore, now or at any time during this employment, manufactured or used by the Company in connection with the manufacture or process of any product heretofore or now or hereafter manufactured by the Company, or of any product which shall or could reasonably be manufactured in the reasonable expansion of the Company's business, shall be and continue remain the Company's exclusive property, without any added compensation or any reimbursement for expenses to Employee, and upon the conception of any and every such invention, discovery or improvement and without waiting to perfect or complete it, Employee promises and agrees that he will immediately disclose it to the Company and to no one else and thenceforth will treat it as the property and secret of the Company. Employee will also execute any instruments requested from time to time by the Company to vest in it complete title and ownership to such invention, discovery or improvement and will, at the request of the Company, do such acts and execute such instruments as the Company may require but at the Company's expense to obtain Letters Patent in the United States and foreign countries, for such invention, discovery or improvement and for the purpose of vesting title thereto in the Company, all without any reimbursement for expenses or otherwise and without any additional compensation of any kind to Employee.

5

5.2 Non-Competition. In the event of a termination of this Agreement for any reason, Employee shall be prohibited for a period of one (1) year from the effective date of this separation from engaging in any business in competition with that of the Company in those states within the United States and those countries outside the United States in which the Company at the time of Employee's separation has conducted business or where Company has written a reasonable plan to conduct business in the next 12 months or directly or indirectly advising or consulting to or otherwise performing services for or providing assistance to any person, firm, corporation, or other entity engaged in such competitive business, provided, however, nothing herein contained shall be construed as (a) preventing Employee from investing his personal assets in any businesses which do not compete directly or indirectly with the Company, provided such investment or investments do not require any services on his part in the operation of the affairs of the entity in which such investment is made and in which his participation is solely that of an investor, (b) preventing Employee from purchasing securities in any corporation whose securities in any corporation whose securities are regularly traded, if such purchases shall not result in his owning beneficially at any time 3% or more of equity securities of any corporation engaged in a business which is competitive, directly or indirectly, to that of the Company, (c) preventing Employee from engaging in any activities, if he receives the prior authorization of the Managers. Notwithstanding anything herein to the contrary this Section 5.2 shall not be effective in the event Employee has been discharged for any reason other than "justifiable cause" or voluntarily leaves the employment of the Company with the mutual agreement of the Company.

5.3 Subsequent to the termination of this Agreement, Employee will not for a period of one (1) year materially interfere with or disrupt the Company's business relationship with its customers or suppliers or employ any person who was employed with the Company at any time during the 6 months prior to Employee's termination, or for a period of three (3) years, directly or indirectly solicit any of the employees to leave the employ of the Company.

6. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its President or Secretary) or forty eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, addressed to Employee, at last known address as carried in the records of the Company, or to the Company, at the corporate headquarters, to the attention of the Secretary, or to such other address as the party to be notified may specify by notice to the other party.

6

7. Assigns and Successors. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company and the rights and obligations of Employee shall move to the benefit of and shall be binding on Employee and his legal representatives or heirs. This agreement constitutes a personal service agreement and Employee's obligations hereunder may not be transferred or assigned by Employee.

8. Amendment Waiver. This Agreement may be amended, and any right or claim hereunder waived, only by a written instrument signed by both Employee and the Company, following authorization by the CEO. Nothing in this Agreement, express or implied, is intended to confer upon any third person any rights or remedies under or by reason of this Agreement. No amendment or waiver of this Agreement requires the consent of any individual, partnership, corporation or other entity not a party of this Agreement.

9. Injunction.

(a) Should Employee at any time violate or threaten to violate any of the provisions of this Agreement, the Company shall be entitled to an injunction restraining Employee from doing or continuing to do or performing any such acts, and Employee hereby consents to the issuance of such an injunction.

(b) In the event that a proceeding is bought in equity to enforce the provisions of this paragraph, Employee shall not urge as a defense that there is an adequate remedy at law, nor shall the Company be prevented from seeking any other remedies which may be available.

(c) The existence of a claim or cause of action by the Company against Employee, or by Employee against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the endorsement by the Company of the foregoing restrictive covenants but shall be litigated separately.

(d) The provisions of this Section 9 shall survive termination of this Agreement.

10. Governing Law and Jurisdiction. This Agreement in its interpretation and application and enforcement shall be governed by the law of the State of New Jersey without application of its conflict of laws provisions, and any legal action commenced by either party seeking interpretation, application and/or enforcement of this Agreement shall be brought only in the State of New Jersey of federal court sitting in Princeton, NJ.

11. Prior Agreements. This Agreement supercedes and replaces any and all prior agreements between the parties as to its subject matter.

12. Construction. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of this Agreement.

7

13. Effective Date. The effective date of this Agreement shall be July 1, 2005.

IN WITNESS WHEREOF, the parties have executed this Agreement.

MEDASORB TECHNOLOGIES, LLC                      EMPLOYEE


By: ___________________________________         ____________________
      Al Kraus, President and                   David Lamadrid
      Chief Executive Officer

8

Exhibit 10.4

EMPLOYMENT AGREEMENT

Agreement made as of July 1, 2004, between MEDASORB TECHNOLOGIES, LLC, a Delaware Limited Liability Company with offices at 7 Deer Park Drive, Suite K, Monmouth Junction, NJ 08852 ("MEDASORB") and DR. JAMES WINCHESTER, an individual residing at 1323 Pine Tree Road, McLean, Virginia 22101-2416 ("WINCHESTER")

RECITALS

WHEREAS, MEDASORB is engaged in the development and sale of certain medical technology including the development and production of a polymer resin useful in the treatment of blood purification, and

WHEREAS, MEDASORB desires to employ WINCHESTER, and WINCHESTER desires to serve MEDASORB as its Chief Medical Officer ("CMO") with administrative and technical responsibilities.

TERMS OF AGREEMENT

In consideration of the foregoing and the mutual promises set forth below, the parties agree as follows:

1. TERM:

1.1 The term of this Agreement shall be one (1) year commencing July 1, 2004 ("Effective Date") and expiring on June 30, 2005 (the "Term"). The Term of this Agreement shall be automatically renewed for successive one year periods thereafter unless within 90 days prior to the end of the initial term or the end of any renewal year, either party gives the other written notice of its intention not to renew in which event this Agreement shall terminate at the end of the initial Term or the end of that renewal year term.

2. EMPLOYMENT DUTIES:

2.1 So long as this Agreement continues in effect, WINCHESTER will devote his full business time and energies to the business and affairs of MEDASORB as CMO and shall not engage in any other-part or full-time outside employment or business activity (other than passive investment) unless specifically agreed to in writing by MEDASORB or as otherwise set forth on Exhibit A. WINCHESTER will use his best efforts, skill and abilities to promote MEDASORB's interests and perform the customary duties of a CMO including, without limitation: overseeing all clinical trials conducted by MEDASORB, which shall include interfacing with MEDASORB's product development department and patients, clinicians and technicians; organizing, implementing and managing pre-clinical studies and other clinical research; assisting in the management of MEDASORB by participating in decisions relating to product manufacture and/or sourcing, product development and qualification, vendor selection, development of technical specifications, and long-term research and development; and any other duties which may be reasonably assigned to him by the Board of Managers.


3. REMUNERATION:

3.1 Salary: MEDASORB will pay WINCHESTER, for his services hereunder a base salary ("Base Salary") of One Hundred Twenty Thousand Dollars ($120,000) per annum, payable in accordance with the usual payroll practices of MEDASORB, but not less frequently than bimonthly installments.

3.2 Performance Bonus Plan: WINCHESTER shall at the discretion of the Managers, be entitled to participate in any bonus plan provided to senior executives including stock option plans, profit sharing plans and/ or their equivalent.

4. BENEFITS:

4.1 Insurance

MEDASORB will not be responsible for WINCHESTER's life, medical, or disability insurance. MEDASORB will continue WINCHESTER's insurance coverage currently in place for a period of up to 120 days from the date of this Agreement until such time as WINCHESTER notifies MEDASORB that he has established his own private insurance plan.

4.2 Travel Expenses

During the Term of this Agreement MEDASORB will reimburse WINCHESTER for approved business travel expenses incurred.

5. VACATION TIME:

WINCHESTER will be entitled to vacation time in accordance with the customary practices of MEDASORB regarding senior executives which time, however, shall not be less than three weeks per year. WINCHESTER shall take vacation hereunder during each year of this Agreement at reasonable times considering the business activities of MEDASORB.

6. EXPENSES:

MEDASORB will pay or reimburse WINCHESTER for all reasonable and necessary expenses incurred or paid by Employee in connection with the performance of his services under this Agreement, on presentation pf expense statements or vouchers and such other supporting information as is customarily required by MEDASORB.

7. DISABILITY:


7.1 If during the Term, WINCHESTER, by reason of physical or mental disability or incapacity, shall be unable to perform his duties hereunder for ninety (90) successive days or a period of one hundred twenty (120) days in the aggregate in any year of the Term, MEDASORB, at its option, may terminate this Agreement by written notice to WINCHESTER given within fifteen (15) days after the end of such ninety (90) or one hundred twenty (120) day period.

7.2 If this Agreement is terminated under Section 7.1, MEDASORB shall pay WINCHESTER his salary through the date of termination.

8. DEATH

If WINCHESTER should die during the Term, MEDASORB shall pay to such payee or payees as he has designated by written notice to MEDASORB, or in default of such designation then to his estate, all Base Salary and Benefits through the date of death.

9. TERMINATION OF EMPLOYMENT:

9.1 Notwithstanding any other provision of this Agreement, WINCHESTER's employment may be terminated prior to the end of the Term hereof as follows:

9.1.1 Automatically upon the death of WINCHESTER, in which event the provisions of Article 8 hereof shall govern;

9.1.2 Upon a finding of disability of WINCHESTER pursuant to Article 7, in which event the provisions of that Article shall govern;

9.1.3 At MEDASORB's option, on dismissal of WINCHESTER for "Cause". "Cause" shall mean one or more of the following:

(a) The willful commission by WINCHESTER of a dishonest , or tortuous act, as such is reasonably and in good faith determined by the Managers, with respect to MEDAORB or any subsidiary or affiliate thereof; or

(b) WINCHESTER is convicted of a criminal act (MEDASORB may suspend WINCHESTER without pay upon indictment for commission of a crime); or

(c) WINCHESTER's failure to perform a substantial portion of his duties and responsibilities hereunder, which failure continues for more than ten (10) days after receipt by WINCHESTER of written notice given by the Managers of MEDASORB, setting forth in reasonable detail the nature of such failure; or


(d) Alcoholism or drug abuse; or

(e) Breach by WINCHESTER of any material provisions of this Agreement or the rules or policies established by the Managers; or

(f) Willful misconduct or negligence by WINCHESTER in the performance of his duties under this Agreement.

9.1.4 On dissolution of MEDASORB or on cessation by MEDASORB of active operations, provided in either case, not in connection with the conversion of MEDASORB from a Limited Liability Company to a "C" corporation.

10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION; INVENTIONS; SHOP RIGHTS:

10.1 WINCHESTER shall not use or disclose to any person or entity any confidential information relating to MEDASORB including, but not limited to, technical, scientific or medical information, or information relating to its business operations including, but not limited to, its customer list, financial information, sales and marketing data, or its manufacturing methods and/or arrangements, obtained during the course of his employment, without MEDASORB's prior written consent.

10.2 Every invention, discovery or improvement made or conceived by WINCHESTER during his employment by MEDASORB, whenever or wherever made or conceived, and whether or not during business hours, of any product, tool, device, formula, or process, software program similar to, or which constitutes an improvement, on those heretofore, now or at any time during his employment, developed or used by MEDASORB in connection with the development, design, or process of any product related to MEDASORB's business, or of any product which shall or could reasonably be developed, designed, or marketed in the reasonable expansion of the business of MEDASORB, shall be and continue to remain MEDASORB's exclusive property without any added compensation or any reimbursement for expenses to WINCHESTER, and upon the conception of any and every such invention, discovery or improvement and without waiting to perfect or complete it, WINCHESTER promises and agrees that he will immediately disclose it to MEDASORB and to no one else and thenceforth will treat it as the property and secret of MEDASORB. WINCHESTER will also execute any instruments reasonably requested from time to time by MEDASORB to vest in MEDASORB complete title and ownership to such invention, discovery or improvement and will, at the request of MEDASORB, do such acts and execute such instruments as MEDASORB may require but at MEDASORB's expense to obtain Letters Patent in the United States and foreign countries, for such invention, discovery or improvement and for the purpose of vesting title thereto in MEDASORB, without any additional compensation of any kind to WINCHESTER.


11. COVENANTS NOT TO COMPETE AND OTHER PROVISIONS

11.1 "Competitive Activity" as used herein shall mean (i) engaging directly or indirectly, on behalf of himself or in any way on behalf of any other person, corporation or other entity, in any advising, investing, consulting or other business activity including becoming employed by, or acting as an agent or principal or any person, firm, corporation or other entity that is engaged in any business activity relating in any manner to any product, process, service or business activity that competes or potentially could compete with any product, process, service or business activity of MEDASORB or any product, service or activity being developed by MEDASORB or whose development, to the extent WINCHESTER knows or has reason to know, is being contemplated by MEDASORB, including but not limited to products or services relating to the detoxification of blood with adsorbent polymers or the use of adsorbent polymers in any other medical application; (ii) accepting employment with or being directly or indirectly involved as an independent contractor, consultant or otherwise with any company that is, or has been at any time in the prior twelve months, a customer or client of MEDASORB;
(iii) soliciting for employment or consulting, employing or retaining, or assisting another person to employ or retain, directly or indirectly, any employees of MEDASORB or any person who was an employee of MEDASORB in the prior twelve months; provided, however, that employing or retaining, or assisting another person to employ or retain, any person whose employment with MEDASORB has been terminated without Cause shall not be considered Competitive Activity; (iv) soliciting, contacting, or otherwise doing business with any person that is, or at any time in the prior twelve months has been, a customer, licensor, licensee, client, agent, broker or dealer of or for MEDASORB.

11.2 In consideration of this Agreement WINCHESTER agrees during the Term and for a period ending one year following the date of termination of this Agreement, not to engage in any Competitive Activity, except as consented to by MEDASORB in writing. Notwithstanding the foregoing, in no event will WINCHESTER be prohibited from engaging in the practice of medicine as a nephrologist.

11.3 WINCHESTER acknowledges that MEDASORB will suffer irreparable harm in the event WINCHESTER reveals any confidential information relating to MEDASORB, or during any restricted period engages or threatens to engage in any Competitive Activity or any activity in violation of this Agreement, and therefore, agrees that in addition to its remedies by law, MEDASORB shall be entitled to injunctive relief as a consequence of a violation or threatened violation of the provisions of this Agreement.


11.4 On the expiration or earlier termination of the Term or WINCHESTER's resignation, discharge or earlier departure from MEDASORB, WINCHESTER shall promptly surrender to MEDASORB all of MEDASORB's books, records, documents, and customer lists and/or other of MEDASORB's materials or records he may have in his possession.

12. NOTICES:

All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or mailed, by certified mail, return receipt requested, as follows:

To Company:

MedaSorb Technologies, LLC
7 Deer Park Drive, Suite K
Monmouth Junction, NJ 08852

To Attorney:

Rubin Bailin Ortoli Mayer Baker & Fry LLP
405 Park Avenue, 15th Floor
New York, NY 10022

Attn. Joseph Rubin, Esq.

To Employee:

Dr. James Winchester
1323 Pine Tree Road
McLean, VA 22101-2416

With a copy to:

and/or to such persons and addresses as any party shall have specified in writing to the other by notice as aforesaid.

13. ASSIGNABILITY:


This Agreement (a) may not be assigned by WINCHESTER and (b) shall be binding on MEDASORB's successors and assigns.

14. WAIVER:

The failure of any party at any time or times to require the performance of any provisions of this Agreement will in no manner affect the right at a later time to enforce it. No waiver by any party of any condition or of the breach of any term contained in this Agreement, whether by conduct or otherwise, in any one or more instances, will be deemed to be or construed as a further or continuing waiver of the breach of any other term of this Agreement.

15. SEVERABILITY:

The invalidity or unenforceability of any provision of this Agreement will not affect any other provision, and the remainder of the Agreement will be construed as if the invalid and unenforceable provision were omitted.

16. POWERS AND AUTHORITY:

Each party represents and warrants that it has the right, power and authority to enter into this Agreement, and to fully perform its respective obligations hereunder.

17. ENTIRE AGREEMENT:

This Agreement sets forth the entire agreement and understanding of the parties in respect of the subject matter and supercedes any and all prior agreements, arrangements, understandings and representations relating to the subject matter.

18. GOVERNING LAW:

This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within that State.

19. MISCELLANEOUS:

19.1 Binding Effect

This Agreement will be binding on and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns.

19.2 Headings

Paragraph headings are inserted for convenience or reference only and do not form a party of this Agreement, and no construction or inference will be derived therefrom.


19.3 Counterparts

This Agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

19.4 Amendment; Waiver, Etc.

This Agreement may be amended, modified, superceded or canceled, and any of its terms may be waived, only by a written instrument executed by each party or, in the case of a waiver, by the party or parties waiving compliance.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written.

MEDASORB TECHNOLOGIES, LLC

By:_____________________________
Al Kraus, President and CEO

By:_____________________________
James Winchester, M.D.


Exhibit A

Chief Nephrologist at Beth Israel Medical Center

Professor at Beth Israel Medical Center, includes teaching, medical care and other activities in conjunction with the Renal Research Institute

Editorial Work with respect to Advances in Renal Replacement Therapy

Adjunct Professor at Down State Medical Center

Invited Lecturer

Expect Witness Assignments

Medical Association Executive Positions


200 6 LONG-TERM INCENTIVE PLAN
 
OF
 
GILDER ENTERPRISES, INC.
 
I.   Purpose
 
The purpose of the Gilder Enterprises, Inc. 2006 Long-Term Incentive Plan (the “Plan”) is to attract and retain and provide incentives to employees, officers, directors and consultants of the Corporation and its Subsidiaries, and to thereby increase overall stockholders’ value. The Plan generally provides for the granting of stock, stock options, stock appreciation rights, restricted shares or any combination of the foregoing to the eligible participants.
 
II.   Definitions
 
(a)   “Award” includes, without limitation, stock options (including incentive stock options within the meaning of Section 422(b) of the Code), stock appreciation rights, dividend equivalent rights, stock awards, restricted share awards, or other awards that are valued in whole or in part by reference to, or are otherwise based on, the Common Stock (“other Common Stock-based Awards”), all on a stand alone, combination or tandem basis, as described in or granted under this Plan.
 
(b)   “Award Agreement” means a written agreement setting forth the terms and conditions of each Award made under this Plan.
 
(c)   “Board” means the Board of Directors of the Corporation.
 
(d)   “Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
(e)   “Committee” means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan or if no such committee is designated, the Board.
 
(f)   “Common Stock” means the common stock of the Corporation, par value $.001 per share, or any other securities of the Corporation into which such common stock is reclassified or reconstituted.
 
(g)   “Corporation” means Gilder Enterprises, Inc., a Nevada corporation.
 
(h)   “Employee” means an employee of the Corporation or a Subsidiary.
 
(i)   “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
 
(j)   “Fair Market Value” means (i) if the Common Stock is listed on an established stock exchange or exchanges or the NASDAQ National Market, the closing price per share on the last trading day immediately preceding such date on the principal exchange on which it is traded or as reported by NASDAQ; or (b) if the Common Stock is not then listed on an exchange or the NASDAQ National Market, but is quoted on the NASDAQ Capital Market, the NASD OTC bulletin board or the National Quotation Bureau pink sheets, the average of the closing bid and asked prices per share for the Common Stock as quoted by the NASD or the National Quotation Bureau, as the case may be, on the last trading day immediately preceding such date; or (c) if the Common Stock is not then listed on an exchange or the NASDAQ National Market, or quoted by NASD or the National Quotation Bureau, an amount determined in good faith by resolution of the Committee (whose determination shall be conclusive), based on the best information available to it.
 
 
 

 
(k)   “Participant” means an Employee, officer, director or consultant who has been granted an Award under the Plan.
 
(l)   “Plan Year” means a twelve-month period beginning with January 1 of each year.
 
(l)   “Subsidiary” means any corporation or other entity, whether domestic or foreign, in which the Corporation has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise.
 
III.   Eligibility
 
Any Employee, officer, director or consultant of the Corporation or a Subsidiary selected by the Committee is eligible to receive an Award.
 
IV.   Plan Administration
 
(a)   Except as otherwise determined by the Board, the Plan shall be administered by the Committee. The Board, or the Committee to the extent determined by the Board, shall periodically make determinations with respect to the participation of Employees, officers, directors and consultants in the Plan and, except as otherwise required by law or this Plan, the grant terms of Awards, including vesting schedules, price, restriction or option periods, dividend rights, post-retirement and termination rights, payment alternatives such as cash, stock, contingent awards or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Board or the Committee deems appropriate which shall be contained in an Award Agreement with respect to a Participant.
 
(b)   The Committee shall have authority to interpret and construe the provisions of the Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation’s Certificate of Incorporation, as it may be amended from time to time.
 
(c)   The Committee shall have the authority at any time to provide for the conditions and circumstances under which Awards shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the times at which any Award becomes exercisable.
 
V.   Capital Stock Subject to the Provisions of this Plan
 
(a)   The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section X, and Sections V(b) and (c) below, the total number of shares of Common Stock available for grants of Awards shall not exceed 2,500,000.
 
(b)   The grant of a restricted share Award shall be deemed to be equal to the maximum number of shares which may be issued under the Award. Awards payable only in cash will not reduce the number of shares available for Awards granted under the Plan.
 
(c)   There shall be carried forward and be available for Awards under the Plan, in addition to shares available for grant under paragraph (a) of this Section V, all of the following: (i) any unused portion of the limit set forth in paragraph (a) of this Section V; (ii) shares represented by Awards which are cancelled, forfeited, surrendered, terminated, paid in cash or expire unexercised; and (iii) the excess amount of variable Awards which become fixed at less than their maximum limitations.
 
VI.   Awards Under This Plan
 
As the Committee may determine, the following types of Awards and other Common Stock-based Awards may be granted under this Plan on a stand alone, combination or tandem basis:
 
 
(a)   Stock Option . A right to buy a specified number of shares of Common Stock at a fixed exercise price during a specified time, all as the Committee may determine.
 
(b)   Incentive Stock Option . An Award in the form of a stock option which shall comply with the requirements of Section 422 of the Code or any successor section as it may be amended from time to time. Subject to adjustment in accordance with the provisions of Section X, the aggregate number of shares which may be subject to incentive stock option Awards under this Plan shall not exceed 2,500,000, subject to Section V above. To the extent that Section 422 of the Code requires certain provisions to be set forth in a written plan, said provisions are incorporated herein by this reference.
 
(c)   Stock Appreciation Right . A right, which may or may not be contained in the grant of a stock option or incentive stock option, to receive in cash (or its equivalent value in Common Stock) the excess of the Fair Market Value of a share of Common Stock on the date the right is surrendered over the option exercise price or other price specified in the Award Agreement.
 
 
2

 
(d)   Restricted Shares . The issuance of Common Stock to a Participant subject to forfeiture until such restrictions, terms and conditions as the Committee may determine are fulfilled.
 
(e)   Dividend or Equivalent . A right to receive dividends or their equivalent in value in Common Stock, cash or in a combination of both with respect to any new or previously existing Award.
 
(f)   Stock Award . The issuance of Common Stock, which may be on a contingent basis, to a Participant.
 
(g)   Other Stock-Based Awards . Other Common Stock-based Awards which are related to or serve a similar function to those Awards set forth in this Section VI.
 
VII.   Award Agreements
 
Each Award under the Plan shall be evidenced by an Award Agreement that shall set forth the terms and conditions of the Award and shall be executed by the Corporation and the Participant.
 
VIII.   Other Terms and Conditions
 
(a)   Assignability . Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will or by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant.
 
(b)   Termination of Employment or Other Relationship . The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant’s employment or other relationship with the Corporation or a Subsidiary.
 
(c)   Rights as a Stockholder . A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. Except as provided in Section X, no adjustment will be made for dividends or other rights for which the record date is prior to such date.
 
(d)   No Obligation to Exercise . The grant of an Award shall impose no obligation upon the Participant to exercise the Award.
 
(e)   Payments by Participants . The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a Fair Market Value equal to the total payment due from the Participant; (iii) pursuant to a broker-assisted “cashless exercise” program if established by the Corporation; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate.
 
(f)   Withholding . Except as otherwise provided by the Committee, (i) the deduction of withholding and any other taxes required by law will be made from all amounts paid in cash and (ii) in the case of payments of Awards in shares of Common Stock, the Participant shall be required to pay the amount of any taxes required to be withheld prior to receipt of such stock, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the payment.
 
(g)   Maximum Awards . The maximum number of shares of Common Stock that may be issued to any single Participant pursuant to Awards under this Plan in any single Plan Year is 2,500,000.
 
IX.   Termination, Modification and Amendments
 
(a)   The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Corporation present or represented and entitled to vote at a duly held stockholders meeting.
 
(b)   Notwithstanding the provisions of Section IX(a) above, the Board may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board shall not make any material amendments to the Plan without the approval of at least the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Corporation present or represented and entitled to vote at a duly held stockholders meeting.
 
 
3

 
(c)   No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof.
 
X.   Recapitalization
 
The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award and the price per share thereof in each such Award, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, or other change in corporate or capital structure; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. The Committee may also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent it is deemed necessary or desirable to preserve the intended benefits of the Plan for the Corporation and the Participants in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction.
 
XI.   No Right to Employment
 
No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in any other relationship with, the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award Agreement issued hereunder.
 
XII.   Governing Law
 
To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Nevada.
 
XIII.   Savings Clause
 
This Plan is intended to comply in all aspects with applicable laws and regulations. In case any one or more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulation, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws so as to foster the intent of this Plan.
 
XIV.   Effective Date and Term
 
The effective date of this Plan is June __, 2006. The Plan shall terminate on June __, 2016. No awards shall be granted after the termination of the Plan.
 
 
4

 
 


MEDASORB CORPORATION
(fka MEDASORB TECHNOLOGIES, LLC)
(a development stage company)

FINANCIAL STATEMENTS

DECEMBER 31, 2005




MEDASORB CORPORATION
(a development stage company)

CONTENTS
December 31, 2005

 
 
 
 
 
 
Reports of Independent Registered Public Accounting Firms
1-2
 
 
   
Financial Statements:
 
   
Balance Sheets
3
Statements of Operations
4
Statements of Changes in Stockholders’ Equity (Deficiency)
5-9
Statements of Cash Flows
10-11
Notes to Financial Statements
12-24


 
 


 
WithumSmith+Brown
A Professional Corporation
Certified Public Accountants and Consultants
 
120 Albany Street
Suite 201
New Brunswick, New Jersey 08901 USA
732 828 1614 . fax 732 828 5156
www.withurn.com
 
Additional Offices in New Jersey
and Pennsylvania
 
Report of Independent Registered Public Accounting Firm
 

 
To the Board of Directors and Stockholders,
Medasorb Corporation:
 
We have audited the accompanying balance sheets of Medasorb Corporation (a development stage company), as of December 31, 2005 and 2004, and the related statements of operations, stockholders’ equity and cash flows for the years then ended and the cumulative period from January 1, 2001 to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medasorb Corporation as of December 31, 2005 and 2004 and the results of its operations and cash flows for the years then ended and the cumulative period from January 1, 2001 to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring net losses and negative cash flows from operations and has a working capital deficiency. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ WithumSmith+Brown P.C.
 
New Brunswick, New Jersey
March 30, 2006
 

 
 
 

 
Report of Independent Public Accountants
 

To the Board of Directors and Stockholders,
Medasorb Corporation:

We have audited the accompanying balance sheets of Medasorb Corporation (a development stage company), as of December 31, 2000 and 1999, and the related statements of operations, changes in members’ equity and cash flows for the period from inception (January 22, 1997) through December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medasorb Corporation as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the period from inception (January 22, 1997) to December 31, 2000, in conformity with accounting principles generally accepted in the United States.



Arthur Andersen, LLP

New York, New York
December 27, 2001





MEDASORB CORPORATION
(a development stage company)
 
BALANCE SHEETS
 
             
December 31,
 
2005
   
2004
 
             
             
ASSETS
           
             
Current Assets:
           
Cash and cash equivalents
$
707,256
 
$
16,749
 
Prepaid expenses and other current assets
 
19,261
   
61,159
 
             
Total current assets
 
726,517
   
77,908
 
             
Property and equipment - net
 
553,657
   
820,321
 
             
Other assets
 
181,307
   
349,898
 
Total long-term assets
 
734,964
   
1,170,219
 
             
Total Assets
$
1,461,481
 
$
1,248,127
 
             
LIABILITIES AND STOCKHOLDERS'/MEMBERS' DEFICIENCY
           
             
Current Liabilities:
           
Accounts payable
$
1,802,788
 
$
2,284,050
 
Accrued expenses and other current liabilities
 
412,646
   
167,038
 
Accrued interest
 
1,056,960
   
298,933
 
Stock subscribed
 
399,395
   
--
 
Convertible notes payable
 
3,429,899
   
1,346,050
 
             
Total current liabilities
 
7,101,688
   
4,096,071
 
             
Long-term liabilities:
           
Convertible notes payable
 
4,120,000
   
4,120,000
 
             
Total liabilities
 
11,221,688
   
8,216,071
 
             
Stockholders' Deficiency:
           
             
Common Stock, Par Value $0.001, 300,000,000 shares
           
authorized, 4,829,120 shares issued and outstanding
 
4,829
   
--
 
Additional paid-in capital
 
49,214,431
   
--
 
Contributions by members
 
--
   
48,345,927
 
Deficit accumulated during the development stage
 
(58,979,467
)
 
(55,313,871
)
             
Total stockholders' deficiency
 
(9,760,207
)
 
(6,967,944
)
             
Total Liabilities and Stockholders' Deficiency
$
1,461,481
 
$
1,248,127
 

 
3



MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF OPERATIONS
 
                     
   
Period from
             
   
January 22,
1997
 
 
 
 
 
 
 
 
 
(date of inception) to
 
 
Year ended
 
 
Year ended
 
 
 
December 31,
 
 
December 31,
 
 
December 31,
 
 
 
 
2005
 
 
2005
 
 
2004
 
                     
Revenue
 
$
--
 
$
--
 
$
--
 
                     
Expenses:
                   
                     
Research and development
   
39,779,967
   
1,526,743
   
2,367,407
 
Legal, financial and other consulting
   
5,347,134
   
948,209
   
948,079
 
General and administrative
   
19,198,981
   
635,960
   
705,372
 
Change in fair value of management and incentive units
   
(6,055,483
)
 
(14,551
)
 
(3,488,993
)
                     
Total expenses
   
58,270,599
   
3,096,361
   
531,865
 
                     
Other (income) expenses:
                   
Gain on disposal of property and equipment
   
(21,663
)
 
(21,663
)
 
--
 
Gain on extinguishment of debt
   
(175,000
)
 
(175,000
)
 
--
 
Interest expense, net
   
905,531
   
765,898
   
564,818
 
                     
Total other (income) expense
   
708,868
   
569,235
   
564,818
 
                     
Net loss
 
$
(58,979,467
)
$
(3,665,596
)
$
(1,096,683
)

4

 

MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 
Period from January 22, 1997 (date of inception) to December 31, 2005
 
                                             
                                             
 
                                 
Deficit
       
                                 
Accumulated
       
 
   
Members'
                     
Additional
   
During the
 
  Total
 
   
Equity
   
Deferred
 
Common Stock
 
Paid-In
   
Development
    Stockholders'  
   
(Deficiency)
   
Compensation
   
Shares
Par value
Capital
   
Stage
  Equity (Deficit)
Balance at January 22, 1997 (date of inception)
 
$
--
 
$
--
   
--
 
$
--
 
$
--
 
$
--
 
$
--
 
                                             
Equity contributions
   
1,143,487
   
--
   
--
   
--
   
--
   
--
   
1,143,487
 
                                             
Subscriptions receivable
   
440,000
   
--
   
--
   
--
   
--
   
--
   
440,000
 
                                             
Technology contribution
   
4,550,000
   
--
   
--
   
--
   
--
   
--
   
4,550,000
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(5,256,012
)
 
(5,256,012
)
                                             
Balance at December 31, 1997
   
6,133,487
   
--
   
--
   
--
   
--
   
(5,256,012
)
 
877,475
 
                                             
Equity contributions
   
2,518,236
   
--
   
--
   
--
   
--
   
--
   
2,518,236
 
                                             
Options issued to consultants
   
1,671
   
--
   
--
   
--
   
--
   
--
   
1,671
 
                                             
Subscriptions receivable
   
50,000
   
--
   
--
   
--
   
--
   
--
   
50,000
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(1,867,348
)
 
(1,867,348
)
                                             
Balance at December 31, 1998
   
8,703,394
   
--
   
--
   
--
   
--
   
(7,123,360
)
 
1,580,034
 
 
 
5

 

MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 
Period from January 22, 1997 (date of inception) to December 31, 2005
 
                                   
Deficit
       
                                   
Accumulated
       
     
Members'
                     
Additional
   
During the  
   
  Total
 
     
Equity
   
Deferred
   
Common Stock
   
Paid-In
   
Development
      Stockholders'    
     
(Deficiency)
   
Compensation
   
Shares
 
Par value
 
Capital
   
Stage
    Equity (Deficit)    
Equity contributions
   
1,382,872
   
--
   
--
   
--
   
--
   
--
   
1,382,872
 
                                             
Equity issued to consultants
   
88,363
   
--
   
--
   
--
   
--
   
--
   
88,363
 
                                             
Recognition of deferred compensation
   
47,001
   
(47,001
)
 
--
   
--
   
--
   
--
   
--
 
                                             
Amortization of deferred compensation
   
--
   
15,667
   
--
   
--
   
--
   
--
   
15,667
 
                                             
Subscriptions receivable
   
100,000
   
--
   
--
   
--
   
--
   
--
   
100,000
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(3,066,388
)
 
(3,066,388
)
                                             
Balance at December 31, 1999
   
10,321,630
   
(31,334
)
 
--
   
--
   
--
   
(10,189,748
)
 
100,548
 
                                             
Equity contributions
   
14,407,916
   
--
   
--
   
--
   
--
   
--
   
14,407,916
 
                                             
Equity issued to consultants
   
1,070,740
   
--
   
--
   
--
   
--
   
--
   
1,070,740
 
                                             
Warrants issued to consultants
   
468,526
   
--
   
--
   
--
   
--
   
--
   
468,526
 
                                             
Recognition of deferred compensation
   
27,937
   
(27,937
)
 
--
   
--
   
--
   
--
   
--
 
                                             
Amortization of deferred compensation
   
--
   
46,772
   
--
   
--
   
--
   
--
   
46,772
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(10,753,871
)
 
(10,753,871
)
                                             
Balance at December 31, 2000
   
26,296,749
   
(12,499
)
 
--
   
--
   
--
   
(20,943,619
)
 
5,340,631
 
 
6


MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 
Period from January 22, 1997 (date of inception) to December 31, 2005
 
 
                                   
Deficit
       
                                   
Accumulated
       
     
Members'
                     
Additional
   
During the
   
Total  
 
     
Equity
   
Deferred
   
Common Stock
 
Paid-In
   
Development
      Stockholders'    
     
(Deficiency)
   
Compensation
   
Shares
 
Par value
 
Capital
   
Stage
 
  Equity (Deficit)  
Equity contributions
   
13,411,506
   
--
   
--
   
--
   
--
   
--
   
13,411,506
 
                                             
Equity issued to consultants
   
161,073
   
--
   
--
   
--
   
--
   
--
   
161,073
 
                                             
Stock options issued to employee
   
2,847
   
--
   
--
   
--
   
--
   
--
   
2,847
 
                                             
Fees incurred in raising capital
   
(1,206,730
)
 
--
   
--
   
--
   
--
   
--
   
(1,206,730
)
                                             
Amortization of deferred compensation
   
--
   
12,499
   
--
   
--
   
--
   
--
   
12,499
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(15,392,618
)
 
(15,392,618
)
                                             
Balance at December 31, 2001
   
38,665,445
   
--
   
--
   
--
   
--
   
(36,336,237
)
 
2,329,208
 
                                             
Equity contributions
   
6,739,189
   
--
   
--
   
--
   
--
   
--
   
6,739,189
 
                                             
Equity issued to consultants
   
156,073
   
--
   
--
   
--
   
--
   
--
   
156,073
 
                                             
Options issued to consultant
   
176,250
   
--
   
--
   
--
   
--
   
--
   
176,250
 
                                             
Options issued to employee
   
2,847
   
--
   
--
   
--
   
--
   
--
   
2,847
 
                                             
Fees incurred in raising capital
   
(556,047
)
 
--
   
--
   
--
   
--
   
--
   
(556,047
)
                                             
Forgiveness of loan receivable in exchange for equity
   
(1,350,828
)
 
--
   
--
   
--
   
--
   
--
   
(1,350,828
)
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(11,871,668
)
 
(11,871,668
)
                                             
Balance at December 31, 2002
   
43,832,929
   
--
   
--
   
--
   
--
   
(48,207,905
)
 
(4,374,976
)
 
7


MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 
Period from January 22, 1997 (date of inception) to December 31, 2005
 
 
                                   
Deficit
       
                                   
Accumulated
       
     
Members'
                     
Additional
   
During the
   
  Total
 
     
Equity
   
Deferred
 
  Common Stock
 
Paid-In
   
Development
      Stockholders'    
     
(Deficiency)
   
Compensation
   
Shares
 
Par value
 
Capital
   
Stage
    Equity (Deficit)    
Equity contributions
   
4,067,250
   
--
   
--
   
--
   
--
   
--
   
4,067,250
 
                                             
Equity issued to consultants
   
16,624
   
--
   
--
   
--
   
--
   
--
   
16,624
 
                                             
Change in fair value of management units
   
2,952,474
   
--
   
--
   
--
   
--
   
--
   
2,952,474
 
                                             
Options issued to consultant
   
65,681
   
--
   
--
   
--
   
--
   
--
   
65,681
 
                                             
Fees incurred in raising capital
   
(343,737
)
 
--
   
--
   
--
   
--
   
--
   
(343,737
)
                                             
Forgiveness of loan receivable in exchange for equity
   
(281,340
)
 
--
   
--
   
--
   
--
   
--
   
(281,340
)
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(6,009,283
)
 
(6,009,283
)
                                             
Balance at December 31, 2003
   
50,309,881
   
--
   
--
   
--
   
--
   
(54,217,188
)
 
(3,907,307
)
                                             
Equity contributions
   
512,555
   
--
   
--
   
--
   
--
   
--
   
512,555
 
                                             
Change in fair value of management units
   
(2,396,291
)
 
--
   
--
   
--
   
--
   
--
   
(2,396,291
)
                                             
Fees incurred in raising capital
   
(80,218
)
 
--
   
--
   
--
   
--
   
--
   
(80,218
)
                                             
Net Loss
   
--
   
--
   
--
   
--
   
--
   
(1,096,683
)
 
(1,096,683
)
                                             
Balance at December 31, 2004
   
48,345,927
   
--
   
--
   
--
   
--
   
(55,313,871
)
 
(6,967,944
)
 
8


MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 
Period from January 22, 1997 (date of inception) to December 31, 2005
 
 
                                   
Deficit
       
                                   
Accumulated
       
     
Members'
                     
Additional
   
During the
   
  Total
 
     
Equity
   
Deferred
   
Common Stock      
   
Paid-In
   
Development  
      Stockholders'    
     
(Deficiency)
   
Compensation
   
Shares
   
Par value  
   
Capital
   
Stage
    Equity (Deficit)    
Equity contributions
   
92,287
   
--
   
--
   
--
   
--
   
--
   
92,287
 
                                             
Settlement of accounts payable in exchange for equity
   
836,319
   
--
   
--
   
--
   
--
   
--
   
836,319
 
                                             
Conversion of convertible notes payable and accrued interest for
                                           
member units
   
51,565
   
--
   
--
   
--
   
--
   
--
   
51,565
 
                                             
Change in fair value of management units
   
(14,551
)
 
--
   
--
   
--
   
--
   
--
   
(14,551
)
                                             
Fees incurred in raising capital
   
(92,287
)
 
--
   
--
   
--
   
--
   
--
   
(92,287
)
                                             
Reorganization from LLC to "C" Corporation
   
(49,219,260
)
 
--
   
4,829,120
   
4,829
   
49,214,431
   
--
   
--
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(3,665,596
)
 
(3,665,596
)
                                             
Balance at December 31, 2005
 
$
--
 
$
--
 
$
4,829,120
 
$
4,829
 
$
49,214,431
 
$
(58,979,467
)
$
(9,760,207
)
 
 
9

 

MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CASH FLOWS
 
   
For the
         
   
Period from
         
 
  January 22, 1997
         
  (date of inception) to
 
Year ended
 
Year ended
 
   
December 31,
 
December 31,
 
December 31,
 
   
2005
 
2005
 
2004
 
               
Cash flows from operating activities:
                   
Net loss
 
$
(58,979,467
)
$
(3,665,596
)
$
(1,096,683
)
Adjustments to reconcile net loss to net cash
                   
used in operating activities:
                   
Depreciation and amortization
   
1,791,099
   
265,264
   
312,221
 
Gain on disposal of property and equipment
   
(21,663
)
 
(21,663
)
 
--
 
Gain on extinguishment of debt
   
(175,000
)
 
(175,000
)
 
--
 
Abandoned patents
   
183,556
   
183,556
   
--
 
Bad debts - employee advances
   
255,882
   
--
   
--
 
Contributed technology expense
   
4,550,000
   
--
   
--
 
Consulting expense
   
237,836
   
--
   
--
 
Management unit expense
   
1,334,285
   
(14,551
)
 
(2,438,754
)
Incentive units expense
   
--
   
--
   
(1,050,239
)
Expense for issuance of warrants
   
468,526
   
--
   
--
 
Expense for issuance of options
   
247,625
   
--
   
--
 
Accrued interest expense
   
1,399,793
   
760,860
   
418,933
 
Amortization of deferred compensation
   
74,938
   
--
   
--
 
Changes in operating assets and liabilities:
                   
Prepaid expenses and other current assets
   
(290,809
)
 
41,898
   
86,487
 
Other assets
   
(51,163
)
 
--
   
(26,276
)
Accounts payable and accrued expenses
   
3,219,921
   
775,665
   
1,011,392
 
Net cash used in operating activities
   
(45,754,641
)
 
(1,849,567
)
 
(2,782,919
)
                     
Cash flows from investing activities:
                   
Proceeds from sale of property and equipment
   
32,491
   
32,491
   
--
 
Purchase of property and equipment
   
(2,199,094
)
 
(4,000
)
 
--
 
Patent costs
   
(328,556
)
 
(20,393
)
 
--
 
Loan Receivable
   
(1,632,168
)
 
--
   
--
 
Net cash provided by (used in) financing
                   
activities
   
(4,127,327
)
 
8,098
   
--
 
                     
Cash flows from financing activities:
                   
Equity contributions - net of fees incurred
   
41,711,198
   
--
   
474,800
 
Proceeds from borrowing
   
8,378,631
   
2,132,581
   
1,346,050
 
Proceeds from subscription receivables
   
499,395
   
399,395
   
--
 
Net cash provided by financing activities
   
50,589,224
   
2,531,976
   
1,820,850
 
                     
Net increase (decrease) in cash and cash equivalents
   
707,256
   
690,507
   
(962,069
)
                     
Cash and cash equivalents at beginning of period
   
--
   
16,749
   
978,818
 
Cash and cash equivalents at end of period
 
$
707,256
 
$
707,256
 
$
16,749
 
                     
                     
Supplemental disclosure of cash flow information:
                   
                     
Cash paid during the period for interest
 
$
511,780
 
$
7,871
 
$
149,080
 
                     
Supplemental schedule of noncash financing activities:
                   
                     
Note payable principal and interest conversion to equity
 
$
1,171,565
 
$
51,565
 
$
--
 
                     
Issuance of member units for leasehold improvements
 
$
141,635
 
$
--
 
$
--
 
                     
Issuance of management units in settlement of cost of
                   
raising capital
 
$
437,206
 
$
92,287
 
$
42,463
 
                     
Change in fair value of management units for cost of
                   
raising capital
 
$
278,087
 
$
--
 
$
42,463
 
                     
Exchange of loan receivable for member units
 
$
1,632,168
 
$
--
 
$
--
 
                     
Issuance of equity in settlement of accounts payable
 
$
836,319
 
$
836,319
 
$
--
 
                     
 
 
10

 

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005  
 
 
1.
PRINCIPAL
BUSINESS
ACTIVITY AND
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES:
Nature of Business
MedaSorb Corporation, fka MedaSorb Technologies, LLC, ("MedaSorb" or the "Company"), a Delaware Corporation, was formed on January 22, 1997.  The Company is engaged in the research, development and commercialization of medical devices with its platform blood purification technology incorporating a proprietary absorbent 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.  In December 2005, the Company reorganized its capital structure and converted from an LLC to a Corporation. This reorganization had no effect on the carrying value of the Company’s net assets. As of December 31, 2005, 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.
     
   
The Company is a development stage company and has not yet generated any revenues. Since inception, the Company's expenses relate primarily to research and development, organizational activities, clinical manufacturing, regulatory compliance and operational strategic planning.  Although the Company has made advances on these matters, there can be no assurance that the Company will continue to be successful regarding these issues, nor can there be any assurance that the Company will successfully implement its long-term strategic plans.
     
   
The accompanying 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 and has a deficit accumulated during the development stage at December 31, 2005 of $58,979,467. 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 been successful in raising additional equity and debt financing, 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 capital, there can be no assurance that the amount will be sufficient to complete the Company's plans.
     
   
The Company has developed an intellectual property portfolio, including 21 issued and 5 pending patents, covering materials, methods of production, systems incorporating the technology and multiple medical uses. 
     
   
Development Stage Corporation
The accompanying 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."
 
11

 

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005  
 
   
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
     
   
Property and Equipment
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 operations in the year of disposal. Repairs and maintenance expenditures are expenses 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. No provision for income taxes has been reflected in the accompanying financial statements since the Company was organized as a LLC through December 15, 2005 and the income or loss was included on the members individual income tax returns.
     
   
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.
 
12


MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005  
 
     
   
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and considers the Company’s risk negligible.
     
   
Financial Instruments
The carrying values of prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term nature. Convertible notes payable approximates its fair value based upon the borrowing rates available for the nature of the underlying debt.
     
   
Stock-Based Compensation
Through December 31, 2005, the Company has accounted for its stock compensation plans under the recognition and measurement principles of Accounting Principles Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. The Company has not adopted the recognition requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, “ Accounting for Stock-Based Compensation ”, for employees and directors and, accordingly, has made all pro forma disclosures required. The Company has adopted the requirements of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods and Services” with regard to non-employees. Each option granted is valued at fair market value on the date of grant. Had compensation cost for options granted to employees and directors been determined consistent with SFAS No. 123, the Company's pro forma net loss would have been as follows:

 
Period from
             
 
January 22, 1997
   
Year ended
   
Year ended
 
(date of inception) to
 
December 31,
   
December 31,
 
December 31, 2005
   
2005
   
2004
 
Net Loss
                   
As reported
  $ 58,979,467   $ 3,665,596   $ 1,096,683  
Pro forma
  $ 59,053,461   $ 3,692,026   $ 1,096,683  
 
     
   
Under SFAS No. 123, the fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: (1) expected lives of five-ten years, (2) dividend yield of 0%, (3) risk-free interest rates ranging from 3.25% - 5.63%, and (4) volatility percentage of 0.01%.
     
   
Reverse Unit Split and Conversion to Corporation
In December 2005, MedaSorb effected   an approximate 1 for 6.64 reverse unit split to unit holders. Immediately subsequent to the split, the Company converted to a corporation (see Note 4). All share and per share information has been retroactively adjusted to reflect the split.
 
13


MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005  
 
     
   
Effects of Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R “Share Based Payment.” This statement is a revision to SFAS 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments using the fair-value-based method. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. This statement is effective for all reporting periods beginning after December 15, 2005. Management is currently evaluating the effect of this pronouncement.
     
   
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29." The statement addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement is not anticipated to have a significant impact on the results of operations or financial position of the Company.
     
   
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB No. 20 and SFAS No. 3 and changes the requirements for the accounting and reporting of a change in accounting principle. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a significant impact on the results of operations or financial position of the Company.
     
   
In February 2006, the FASB issued SFAS No. 155,”Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the Impairment or Disposal of Long-Lived Assets, to allow a qualifying special-purpose entity (SPE) to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier application allowed. The Company does not expect that the adoption of SFAS No. 155 will have a significant impact on the results of operations or financial position of the Company.
     
 
 
14


MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005  
 
2.
PROPERTY AND
EQUIPMENT, NET:
Property and equipment - net, consists of the following:
     
 
 
           
Depreciation/
 
           
Amortization
 
December 31,
   
2005
   
2004
   
Period
 
                     
Furniture and fixtures
 
$
130,015
 
$
131,509
   
7 years
 
Equipment and computers
   
1,709,815
   
1,742,239
   
3 to 7 years
 
Leasehold improvements
   
462,980
   
462,980
 
Term of lease
 
     
2,302,810
   
2,336,728
       
Less accumulated depreciation
                   
and amortization
   
1,749,153
   
1,516,407
       
Property and Equipment, Net
 
$
553,657
 
$
820,321
       

 
Depreciation expense for the years ended December 31, 2005 and 2004 amounted to $259,836 and $307,126, respectively. Depreciation expense from inception to December 31, 2005 amounted to $1,776,242.
     
3.
OTHER ASSETS:
Other assets consist of the following:


December 31,
   
2005
   
2004
 
               
Intangible assets, net
 
$
130,143
 
$
298,734
 
Security deposits
   
51,164
   
51,164
 
Total
 
$
181,307
 
$
349,898
 

   
Intangible assets consist of the following:
 

December 31,
 
 
2005   
   
2004
 
 
   
Gross
   
Accumulated
   
Gross
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
                           
Patents
 
$
145,000
 
$
14,857
 
$
308,163
 
$
9,429
 

   
The issued patents that are capitalized are being amortized over a period of 17.5 years. All pending patents are not being amortized.
     
   
Amortization expense amounted to $5,428 and $5,095 for the years ended December 31, 2005 and 2004, respectively. Amortization expense from inception to December 31, 2005 amounted to $14,857.
 
 
 
15

 
MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005



   
Estimated amortization expense for the next five years is as follows:
     
   
Year ending December 31,
2006
 
$
5,500
 
2007
   
5,500
 
2008
   
5,500
 
2009
   
5,500
 
2010
   
5,500
 

 

4.
COMMITMENTS
AND
CONTINGENCIES:
The Company is obligated under non-cancelable operating leases for office space and equipment expiring at various dates through September 2009. The aggregate minimum future payments under these leases are approximately as follows:
     
   
Year ending December 31,
2006
 
$
173,000
 
2007
   
42,000
 
2008
   
5,000
 
2009
   
4,000
 
Total
 
$
224,000
 

   
The preceding data reflects existing leases and does not include replacements upon their expiration. In the normal course of business, operating leases are normally renewed or replaced by other leases.
     
   
Rent expense for the years ended December 31, 2005 and 2004 amounted to approximately $259,000 and $462,000, respectively.
     
   
The Company has employment agreements with certain key executives through July 2008. The agreements provide for annual base salaries of varying amounts. Future minimum annual salaries are approximately as follows:
 
Year ending December 31,
       
2006
 
$
418,758
 
2007
   
200,000
 
2008
   
108,333
 
Total
 
$
727,091
 

   
In addition, 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, three of the agreements include anti-dilution provisions whereby certain employees are granted options and management units for the right to obtain 5%, 1.8% and 1.5%, respectively, of the outstanding stock of the Company (see Note 7).
 
 
16

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005



   
The Company is involved in various claims and legal actions. Management is of the opinion that these claims and legal actions have no merit, but may have a material adverse impact on the financial position of the Company and/or the results of its operations.   Aside from normal trade creditor claims, the Company is involved with various claims and a legal action relating to its technology.  Management is of the opinion that these claims and legal action have no merit, but may have a material adverse impact on the financial position of the Company and/or the results of its operations.  In January 2003 the Company was sued by Brotech Corp. (Purolite International, Ltd.) claiming co-inventorship and/or joint ownership of some of the Company’s patents.  Recently Purolite expanded its claims, to allege that they are the sole owner of these patents and are seeking equitable relief and monetary damages.  The Company has filed a motion for summary judgment.  At the same time the parties have engaged in ongoing efforts to settle the case.  If the case is not settled, the Court will decide on the Company’s summary judgment motion.  If the motion is denied, the Company expects the matter will go to trial within a few months thereafter. As of the date of the financial statements, the outcome of the case could not be determined and the damages, if any, could not be reasonably estimated. Accordingly, a loss contingency has not been accrued.
     
   
Upon the Company’s successful merger with a public company, an existing Noteholder is entitled to be issued 10 million shares of common stock of the Company. These shares will not be issued until the Company meets a minimum capital raise amount and recapitalization of the Company prior to such a merger.
     
   
In an agreement dated August 11, 2003 the Company entered into an equity agreement with one of its current investors whereby the investor agreed to purchase $4 million of membership units. 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 their CytoSorb Device. The Company has not generated any revenue from this product and has not incurred any royalty costs through December 31, 2005. 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 financial statements.
     
5.
CONTRIBUTED
TECHONOLOGY:
On February 1, 1997, the Company exchanged 88.5% of its ownership rights for proprietary technology in the form of patents. The value of the technology was determined to be $4,550,000 by an independent asset valuation firm using the income and market value method. This amount has been expensed and was included in "research and development expenses" in the statements of operations for the period from January 22, 1997 (date of inception) to December 31, 2005.
     
6.
CONVERTIBLE
NOTES PAYABLE:
In 2003, MedaSorb received $3, 900,000 and issued a 12% callable convertible note with a conversion price of $33.18 per share due in 2008 to an existing investor. During 2004 and 2003, respectively, $120,000 and $100,000 of interest was incurred and added to the principal balance, thereby increasing the note to $4,120,000 at December 31, 2005 and 2004. During 2004 the terms of this note were revised to provide for conversion at $6.64 per share. During 2005 the terms of this note were further revised to provide for conversion at $3.32 per share. These revisions yielded no significant change in fair value.
 
 
 
17

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005


 

   
During 2004, MedaSorb raised approximately $904,000 and issued one year 12% Convertible Notes with a conversion price of $6.64 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will then receive a warrant to purchase two shares at a price of $6.64 each. In 2004, the Company also raised approximately $442,000 and issued one year 12% Convertible Notes with a conversion price of $3.32 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will receive a warrant to purchase two shares at a price of $4.98 each. The Company has not repaid any of these Convertible Notes as of December 31, 2005 and is continuing to accrue interest on the principal balances.
     
   
During 2005, MedaSorb received $ 1,132,582 from an existing Noteholder and issued a one year 12% secured convertible note with a conversion price of $3.32 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will then receive a warrant to purchase two shares at a price of $4.98 each. The Company has not repaid any of these Convertible Notes as of December 31, 2005 and is continuing to accrue interest on the principal balances.
     
   
Separately in 2005 the Company received a $1 million bridge loan as part of a proposed reverse merger transaction into a public shell company. The loan bears interest at 6% per annum, repayable in cash or, at the option of the Noteholder, converted into shares of the Company at a conversion price equal to the price per share offered in a future private placement of the Company. In consideration for funding the loan, the Noteholder is entitled to be issued 10 million shares of common stock of the Company, subject to certain adjustments, to be issued upon the occurrence of certain events (see Note 4).
     
   
The terms of the outstanding notes provide that the $4,120,000 Note is Senior Debt and is secured by all assets of the Company. Additional notes aggregating approximately $904,000 are subordinated to the Senior Note. They are secured by all assets of the Company. Notes amounting to $442,000 are subordinated to all other notes but are secured by all assets of the Company. Notes amounting to $1,132,582 are subordinated to all other notes but are secured by all assets of the Company.
     
   
The Company’s Senior Note in the amount of $4,120,000 is held by the largest shareholder (see Note 8).
     
7.
STOCKHOLDERS' EQUITY:
In December 2005, the Company effected   an approximate 1 for 6.64 reverse unit split to Unit holders of MedaSorb Technologies, LLC. Immediately subsequent to the split, the Company converted to a Corporation (“MedaSorb Corporation”). All share and per share information has been retroactively adjusted to reflect the split. Member and Management Units of the LLC were converted into shares of the corporation. Incentive Units and Options of the LLC were converted into options of the corporation. Warrants of the LLC were converted into warrants of the corporation. The Company is authorized to issue up to 300,000,000 Shares.

18

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005

 

   
In 2005 legal fees and rent approximating $952,000 and $59,000, respectively, were converted to equity. As a result of these conversions, the Company recognized a gain on extinguishment of debt of approximately $175,000. In addition, a Convertible Note in the principal amount of approximately $49,000 and accrued interest in the amount of approximately $2,900 was converted to equity.
     
   
Net losses of the Company for the 2005 fiscal year up until the conversion from an LLC to a corporation were allocated to the capital accounts of the members as described in the limited liability company agreement in proportion to their respective ownership interests.
     
   
In 2005 the Company sought to raise $6.5 million in an equity offering. As of December 31, 2005 approximately $399,000 was received from investors and booked as Stock Subscribed pending receipt of a dollar for dollar matching investment pledged by an existing investor (see Note 9).
     
   
Interest Option Plan
     
   
During 1998, the Company formally adopted its Interest Option Plan (the "Option Plan"), authorizing the distribution of stock options. This Option Plan provides for the award to certain members of management, employees, board of managers and consultants. These awards are 10-year incentive options/units to purchase Shares within the meaning of Section 422A of the Internal Revenue Code, stock appreciation rights, restricted stock subject to forfeiture and restrictions on transfer, and performance awards entitling the recipient to receive common stock in the future following the attainment of performance goals determined by the board of managers.
     
   
The following is a summary of the interest options granted, canceled or exercised under the Plan:
     


           
Weighted Average
 
           
Exercise Price
 
   
Shares
     
Per Share
 
                 
Outstanding - December 31, 2002
   
3,014
   
$
19.91
 
Granted
   
--
     
--
 
Cancelled
   
--
     
--
 
Exercised
   
--
     
--
 
Outstanding - December 31, 2003
   
3,014
   
$
19.91
 
Granted
   
--
     
--
 
Cancelled
   
--
     
--
 
Exercised
   
--
     
--
 
Outstanding - December 31, 2004
   
3,014
   
$
19.91
 
Granted
   
--
     
--
 
Cancelled
   
--
     
--
 
Exercised
   
--
     
--
 
Converted to Stock Options
   
3,014
     
19.91
 
Outstanding - December 31, 2005
   
--
   
$
--
 
 
 
19

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005

 

    Incentive Options
     
   
The following is a summary of the incentive options granted, canceled or exercised under the Plan:
     
 
 
         
Weighted Average
 
         
Exercise Price
 
   
Shares
   
Per Share
 
               
Outstanding - December 31, 2002
   
94,863
 
$
30.58
 
Granted
   
--
   
--
 
Cancelled
   
--
   
--
 
Exercised
   
--
   
--
 
Outstanding - December 31, 2003
   
94,863
 
$
30.58
 
Granted
   
--
   
--
 
Cancelled
   
--
   
--
 
Exercised
   
--
   
--
 
Outstanding - December 31, 2004
 
94,863
 
$
30.58
 
Granted
   
--
   
--
 
Cancelled
   
2,780
   
28.72
 
Exercised
   
--
   
--
 
Converted to Stock Options
   
92,083
   
30.64
 
Outstanding - December 31, 2005
   
--
 
$
--
 

 
As of December 31, 2005 all outstanding options of the LLC had been exchanged for options of the new corporation. There was no effect on the statements of operations or proforma statements of operations as a result of this exchange.
     
   
Incentive Units
     
   
The following is a summary of the incentive units granted, canceled or exercised under the Plan:
 
 
         
Weighted Average
 
 
         
Exercise Price
 
 
   
Shares
   
Per Share
 
               
Outstanding - December 31, 2002
   
428,908
 
$
31.66
 
Granted
   
20,872
   
10.79
 
Cancelled
   
3,893
   
41.47
 
Exercised
   
--
   
--
 
Outstanding - December 31, 2003
   
445,887
 
$
30.59
 
Granted
   
11,604
   
6.64
 
Cancelled
   
99,613
   
25.96
 
Exercised
   
--
   
--
 
Outstanding - December 31, 2004
   
357,878
 
$
31.11
 
Granted
   
--
   
--
 
Cancelled
   
728
   
11.27
 
Exercised
   
--
   
--
 
Converted to Stock Options
   
357,150
   
31.15
 
Outstanding - December 31, 2005
   
--
 
$
--
 

 
As of December 31, 2005 all outstanding Incentive Units had been exchanged for options of the new corporation. There was no effect on the statements of operations or proforma statements of operations as a result of this exchange.
     
 
20

 
MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005

 
 
Management Units
     
   
The following is a summary of the management units granted or canceled under the Plan:
 
 
   
Shares
 
         
Outstanding - December 31, 2002
   
3,014
 
Granted
   
183,496
 
Cancelled
   
--
 
Outstanding - December 31, 2003
   
186,510
 
Granted
   
361,769
 
Cancelled
   
--
 
Outstanding - December 31, 2004
   
548,279
 
Granted
   
1,995,778
 
Cancelled
   
22,856
 
Converted to Common Stock
   
2,521,201
 
Outstanding - December 31, 2005
   
--
 
 
 
Upon adoption of the Incentive Unit (“IU”) Plan, the Company is authorized to issue Management Units ("MU"). MUs are granted with no participation in the past appreciation (past accumulated value) of the Company as of the date of the MU grant and can appreciate only from future performance (future appreciation) of the Company.
     
   
MUs possess a "catch-up" feature which allocates future appreciation of the Company's assets in the following manner: 90% to MUs and 10% to regular Units until the value of the MU equals the value of a regular Unit on the date of the MU grant. Any additional appreciation of the Company is allocated to both MUs and regular Units equally. These MUs are required to be accounted for under variable accounting and changes in the valuation are included in the statements of operations.
     
   
Per an employment agreement’s anti dilution provision, a member of management holds 5% of the outstanding Units (on a fully diluted basis) in the form of Management Units. During 2005 the Board awarded two members of Management, Management Units sufficient to provide them with 1.8% and 1.5% respectively of the Company on a fully diluted basis to be determined on December 31, 2005.
     
   
As of December 31, 2005 all outstanding Management Units had been exchanged for shares of the new corporation. There was no effect on the statements of operations or proforma statements of operations as a result of this exchange.

 
21

 
MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005

 
  Stock Options
     
   
The following is a summary of the stock options granted, canceled or exercised under the Plan:
 
     
Weighted Average
 
         
Exercise Price
 
 
   
Shares
   
Per Share
 
               
Outstanding - December 31, 2004
   
--
 
$
--
 
Granted
   
60,000
   
1.25
 
Cancelled
   
--
   
--
 
Exercised
   
--
   
--
 
Conversions:
             
Interest Options
   
3,014
   
19.91
 
Incentive Options
   
92,083
   
30.64
 
Incentive Units
   
357,150
   
31.15
 
Outstanding - December 31, 2005
   
512,247
 
$
27.49
 
 
 
The following table summarizes information on stock options outstanding at December 31, 2005:
 
   
Options Outstanding
 
Options Exercisable
 
  
       
Weighted  
             
 
 
     
Average
   
Weighted
       
Weighted
 
 
     
Contractual
   
Average
       
Average
 
Range of
 
Number
   
Life
   
Exercise
 
Number
   
Exercise
 
Exercise Price
 
Outstanding
   
(Years)
 
 
Price
 
Exercisable
   
Price
 
                             
$1.25 - $41.47
 
512,247
   
6.2
 
$
27.49
 
511,142
 
$
27.47
 

 
 
Options typically vest over a period of 3 years and have a contractual life of 10 years.
     
   
The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The following is the average of the data used to calculate the fair value at December 31:
 

   
Risk-Free
   
Expected
   
Expected
   
Expected
 
   
Interest Rate
   
Life (Years)
 
 
Volatility
   
Dividends
 
                           
2005
   
4.39
%
 
10
   
0.01
%
 
0.00
%
2004
   
4.39
%
 
10
   
0.01
%
 
0.00
%
 
 
The weighted average fair value of the Company’s stock options calculated using the black-scholes option-pricing model for options granted during the years ended December 31, 2005 and 2004 was $0.44 and $-0- per share, respectively.
     
 
22

 
MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
December 31, 2005

 
 
Warrants
     
   
As of December 31, 2005, 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
 
               
25,995
 
$
19.91
   
February 8, 2007
 
15,569
 
$
6.64
   
March 31, 2010
 
2,652
 
$
41.47
   
May 30, 2007
 
603
 
$
41.47
   
February 24, 2007
 
1,206
 
$
41.47
   
January 9, 2007
 
 
 
8.  
AFFILIATED PARTIES:
The Company’s largest shareholder is also the holder of the Company’s senior note payable (see Note 6).
     
9. SUBSEQUENT
EVENTS:
During 2005 the Company began a new $6.5 million capital raise (see Note 7). By March 2006, the Company had received approximately an additional $400,000 under this raise from an existing investor to match funds received during 2005. The Company is working on completing the capital raise through an anticipated private placement to close concurrently with the planned reverse merger.
     
   
Subsequent to December 31, 2005 the Company issued 100,000 shares of common stock to settle a dispute regarding a price protection provision with an existing investor group.

 
23


MEDASORB CORPORATION
(fka MEDASORB TECHNOLOGIES, LLC)
(a development stage company)

FINANCIAL STATEMENTS

MARCH 31, 2006



MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006





Financial Statements :

Balance Sheets
1
Statements of Operations
2
Statements of Changes in Stockholders’ Equity (Deficiency)
3
Statements of Cash Flows
4
Notes to Financial Statements
5-13

 


MEDASORB CORPORATION
(a development stage company)
 
BALANCE SHEETS
 
           
   
March 31,
 
December 31,
 
   
2006
 
2005
 
   
(Unaudited)
     
           
ASSETS
             
     
 
       
Current Assets:
             
Cash and cash equivalents
 
$
631,189
 
$
707,256
 
Prepaid expenses and other current assets
   
34,014
   
19,261
 
               
Total current assets
   
665,203
   
726,517
 
               
Property and equipment - net
   
491,132
   
553,657
 
               
Other assets
   
182,950
   
181,307
 
               
Total long-term assets
   
674,082
   
734,964
 
               
Total Assets
 
$
1,339,285
 
$
1,461,481
 
               
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
             
               
Current Liabilities:
             
Accounts payable
 
$
2,007,193
 
$
1,802,788
 
Accrued expenses and other current liabilities
   
489,277
   
412,646
 
Accrued interest
   
1,268,615
   
1,056,960
 
Stock subscribed
   
--
   
399,395
 
Convertible notes payable
   
3,429,899
   
3,429,899
 
               
Total current liabilities
   
7,194,984
   
7,101,688
 
               
Long-term liabilities:
             
Convertible notes payable
   
4,120,000
   
4,120,000
 
               
Total long-term liabilities
   
4,120,000
   
4,120,000
 
               
Total liabilities
   
11,314,984
   
11,221,688
 
               
Stockholders Equity/(Deficit):
             
Common Stock, Par Value $0.001, 300,000,000 shares
             
authorized, 5,169,939 and 4,829,120 shares issued
             
and outstanding, respectively
   
5,170
   
4,829
 
Additional paid-in capital
   
50,013,975
   
49,214,431
 
Deficit accumulated during the development stage
   
(59,994,844
)
 
(58,979,467
)
               
Total stockholders' deficiency
   
(9,975,699
)
 
(9,760,207
)
               
Total Liabilities and Stockholders' Deficiency
 
$
1,339,285
 
$
1,461,481
 
 
 
1


MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF OPERATIONS
 
                     
Period from
             
January  22,1997
   
Three months
   
Three months
 
(date of inception) to
   
ended
   
ended
 
March 31, 2006
   
March 31, 2006
   
March 31, 2005
 
  (Unaudited)
   
(Unaudited)
 
 
(Unaudited)
 
     
 
         
 
 
                     
Revenue
 
$
--
 
$
--
 
$
--
 
                     
Expenses:
   
 
             
                     
Research and development
   
40,070,280
   
288,981
   
436,678
 
Legal, financial and other consulting
   
5,731,672
   
384,538
   
81,925
 
General and administrative
   
19,347,506
   
137,775
   
202,138
 
Change in fair value of management and incentive units
   
(6,055,483
)
 
--
   
--
 
                     
Total expenses
   
59,093,975
   
811,294
   
720,741
 
                     
Gain on disposal of property and equipment
   
(21,663
)
 
--
   
--
 
Gain on extinguishment of debt
   
(175,000
)
 
--
   
--
 
Interest expense, net
   
1,097,532
   
204,083
   
166,294
 
Net loss
 
$
(59,994,844
)
$
(1,015,377
)
$
(887,035
)
 
2

 
 

MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
 
               
Period from January 22, 1997 (date of inception) to March 31, 2006
 
 
 
                                 
Deficit
       
                                 
Accumulated
       
   
Members'
                     
Additional
   
During the
   
Total
 
 
   
Equity
   
Deferred
   
Common Stock
   
Paid-In
   
Development
   
Stockholders'
 
   
(Deficiency)
   
Compensation
   
Shares
  Par value  
Capital
   
Stage
 
  Equity (Deficit)
                                             
Balance at December 31, 2005
   
--
   
--
   
4,829,120
   
4,829
   
49,214,431
   
(58,979,467
)
 
(9,760,207
)
                                             
Issuance of common stock for stock subscribed
   
--
   
--
   
240,929
   
241
   
799,644
   
--
   
799,885
 
                                             
Issuance of common stock as price protection
   
--
   
--
   
100,000
   
100
   
(100
)
 
--
   
--
 
                                             
Net loss
   
--
   
--
   
--
   
--
   
--
   
(1,015,377
)
 
(1,015,377
)
                                             
Balance at March 31, 2006 (Unaudited)
 
$
--
 
$
--
   
5,170,049
 
$
5,170
 
$
50,013,975
 
$
(59,994,844
)
$
(9,975,699
)
 
 
 
3

 

MEDASORB CORPORATION
(a development stage company)
 
STATEMENTS OF CASH FLOWS
 
Period from
             
January 22,1997
 
 
Three months
   
Three months
 
(date of inception) to
 
 
ended
   
ended
 
March 31, 2006
   
March 31, 2006
   
March 31, 2005
 
   
(Unaudited)
 
(Unaudited)
 
 
(Unaudited)
 
Cash flows from operating activities:
                   
Net loss
 
$
(59,994,844
)
$
(1,015,377
)
$
(887,035
)
Adjustments to reconcile net loss to net cash
                   
used in operating activities:
                   
Depreciation and amortization
   
1,854,981
   
63,882
   
71,231
 
Gain on disposal of property and equipment
   
(21,663
)
 
--
   
--
 
Gain on extinguishment of debt
   
(175,000
)
 
--
   
--
 
Abandoned patents
   
183,556
   
--
   
--
 
Bad debts - employee advances
   
255,882
   
--
   
--
 
Contributed technology expense
   
4,550,000
   
--
   
--
 
Consulting expense
   
237,836
   
--
   
--
 
Management unit expense
   
1,334,285
   
--
   
--
 
Expense for issuance of warrants
   
468,526
   
--
   
--
 
Expense for issuance of options
   
247,625
   
--
   
--
 
Accrued interest expense
   
1,611,448
   
211,655
   
170,268
 
Amortization of deferred compensation
   
74,938
   
--
   
--
 
Changes in operating assets and liabilities:
                   
Prepaid expenses and other current assets
   
(305,562
)
 
(14,753
)
 
16,641
 
Other assets
   
(51,163
)
 
--
   
--
 
Accounts payable and accrued expenses
   
3,500,957
   
281,036
   
(731,742
)
Net cash used in operating activities
   
(46,228,198
)
 
(473,557
)
 
(1,360,637
)
                     
Cash flows from investing activities:
                   
Proceeds from sale of property and equipment
   
32,491
   
--
   
--
 
Purchases of property and equipment
   
(2,199,094
)
 
--
   
--
 
Patent costs
   
(331,556
)
 
(3,000
)
 
(12,717
)
Loan receivable
   
(1,632,168
)
 
--
   
--
 
                     
Net cash used in investing activities
   
(4,130,327
)
 
(3,000
)
 
(12,717
)
                     
Cash flows from financing activities:
                   
Proceeds from issuance of common stock
   
400,490
   
400,490
   
--
 
Equity contributions - net of fees incurred
   
41,711,198
   
--
   
1,062,885
 
Proceeds from borrowings
   
8,378,631
   
--
   
394,955
 
Proceeds from subscription receivables
   
499,395
   
--
   
--
 
Net cash provided by financing activities
   
50,989,714
   
400,490
   
1,457,840
 
                     
Net increase (decrease) in cash and cash equivalents
   
631,189
   
(76,067
)
 
84,486
 
                     
Cash and cash equivalents - beginning of period
   
--
   
707,256
   
16,749
 
Cash and cash equivalents - end of period
 
$
631,189
 
$
631,189
 
$
101,235
 
                     
                     
Supplemental disclosure of cash flow information:
                   
                     
Cash paid during the period for interest
 
$
511,780
 
$
--
 
$
--
 
                     
Supplemental schedule of noncash financing activities:
                   
                     
Note payable principal and interest conversion to equity
 
$
1,171,565
 
$
--
 
$
--
 
                     
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
 
$
836,319
 
$
--
 
$
--
 
                     
Issuance of common stock in exchange for stock
                   
subscribed
 
$
399,395
 
$
399,395
 
$
--
 
 
 
4

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
1.   BASIS OF
     PRESENTATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and include the results of MedaSorb Corporation. Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with generally accepted accounting principles 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 2006. In the opinion of the MedaSorb Corporation’s management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the MedaSorb Corporation's financial position as of March 31, 2006 and the results of its operations and cash flows for the three months ended March 31, 2006. Results for the three months ended are not necessarily indicative of results that may be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto, included elsewhere in the filing.
 
The accompanying 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 and has a deficit accumulated during the development stage at March 31, 2006 of $59,994,844. 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 been successful in raising additional equity and debt financing, 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 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.
 
5

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
 
The Company has developed an intellectual property portfolio, including 21 issued and 5 pending patents, covering materials, methods of production, systems incorporating the technology and multiple medical uses.
   
2.  PRINCIPAL BUSINESS
     ACTIVITY AND
     SUMMARY OF
     SIGNIFICANT
     ACCOUNTING
     POLICIES:
Nature of Business
MedaSorb Corporation, fka MedaSorb Technologies, LLC, ("MedaSorb" or the "Company"), a Delaware Corporation, was formed on January 22, 1997.  The Company is engaged in the research, development and commercialization of medical devices with its platform blood purification technology incorporating a proprietary absorbent 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.  In December 2005, the Company reorganized its capital structure and converted from an LLC to a Corporation. This reorganization had no effect on the carrying value of the Company’s net assets. As of March 31, 2006, the Company has not commenced commercial operations and, accordingly, is in the development stage.  The Company has yet to generate any revenue and has no assurance of future revenue.
 
Development Stage Corporation
The accompanying 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
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
 
Property and Equipment
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.
 
 
 
6

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
 
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.
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
 
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Management monitors the soundness of these institutions and considers the Company’s risk negligible.
 
Financial Instruments
The carrying values of prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term nature. Convertible notes payable approximate their fair value based upon the borrowing rates available for the nature of the underlying debt.
 
 
 
7

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
 
Stock-Based Compensation
Through December 31, 2005, the Company has accounted for its stock compensation plans under the recognition and measurement principles of Accounting Principles Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. The Company had not adopted the recognition requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, “ Accounting for Stock-Based Compensation ”, for employees and directors and, accordingly, has made all pro forma disclosures required. The Company has adopted the requirements of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods and Services” with regard to non-employees. Each option granted is valued at fair market value on the date of grant. Had compensation cost for options granted to employees and directors been determined consistent with SFAS No. 123, the Company's pro forma net loss would have been as follows:

   
Period from
       
 
  January 22, 1997
       
    (date of inception)    
Period Ended
 
   
to December 31,
   
March 31,
 
     
2005
   
2005
 
Net Loss
             
As reported
 
$
58,979,467
 
$
887,035
 
Pro forma
 
$
59,053,461
 
$
887,035
 
 
 
Under SFAS No. 123, the fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: (1) expected lives of five-ten years, (2) dividend yield of 0%, (3) risk-free interest rates ranging from 3.25% - 5.63%, and (4) volatility percentage of 0.01%.
 
Effective January 1, 2006, the Company has adopted the recognition requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, “ Accounting for Stock-Based Compensation ”, for employees and directors. The adoption of SFAS No. 123 did not have an effect on the previously issued financial statements.
 
 
Reverse Unit Split and Conversion to Corporation
In December 2005, MedaSorb effected   an approximate 1 for 6.64 reverse unit split to unit holders. Immediately subsequent to the split, the Company converted to a corporation. All share and per share information has been retroactively adjusted to reflect the split.
 
8

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
 
Effects of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29." The statement addresses the measurement of exchanges of non-monetary assets and eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Effective January 1, 2006, the Company has adopted SFAS No. 153. The adoption of SFAS No. 153 did not have an effect on the previously issued financial statements.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB No. 20 and SFAS No. 3 and changes the requirements for the accounting and reporting of a change in accounting principle. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have an effect on the previously issued financial statements.
 
In February 2006, the FASB issued SFAS No. 155,”Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the Impairment or Disposal of Long-Lived Assets, to allow a qualifying special-purpose entity (SPE) to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier application allowed. The Company is currently evaluating this pronouncement for its potential impact on the results of operations or financial position of the Company.
 
 
9

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
3. CONVERTIBLE NOTES
     PAYABLE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In 2003, MedaSorb received $3, 900,000 and issued a 12% callable convertible note with a conversion price of $33.18 per share due in 2008 to an existing investor. During 2004 and 2003, respectively, $120,000 and $100,000 of interest was incurred and added to the principal balance, thereby increasing the note to $4,120,000 at March 31, 2006 and December 31, 2005. During 2004 the terms of this note were revised to provide for conversion at $6.64 per share. During 2005 the terms of this note were further revised to provide for conversion at $3.32 per share. These revisions yielded no significant change in fair value.
 
During 2004, MedaSorb raised approximately $904,000 and issued one year 12% Convertible Notes with a conversion price of $6.64 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will then receive a warrant to purchase two shares at a price of $6.64 each. In 2004, the Company also raised approximately $442,000 and issued one year 12% Convertible Notes with a conversion price of $3.32 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will receive a warrant to purchase two shares at a price of $4.98 each. The Company has not repaid any of these Convertible Notes as of March 31, 2006 and is continuing to accrue interest on the principal balances.
 
During 2005, MedaSorb received $ 1,132,582 from an existing Noteholder and issued a one year 12% secured convertible note with a conversion price of $3.32 per share. For each dollar of principal and accrued interest that the Noteholder converts into shares, the Noteholder will then receive a warrant to purchase two shares at a price of $4.98 each. The Company has not repaid any of these Convertible Notes as of March 31, 2006 and is continuing to accrue interest on the principal balances.
 
Separately in 2005 the Company received a $1 million bridge loan as part of a proposed reverse merger transaction into a public shell company. The loan bears interest at 6% per annum, repayable in cash or, at the option of the Noteholder, converted into shares of the Company at a conversion price equal to the price per share offered in a future private placement of the Company. In consideration for funding the loan, the Noteholder is entitled to be issued 10 million shares of common stock of the Company, subject to certain adjustments, to be issued upon the occurrence of certain events (see Note 5).
 
The terms of the outstanding notes provide that the $4,120,000 Note is Senior Debt and is secured by all assets of the Company. Additional notes aggregating approximately $856,000 are subordinated to the Senior Note. They are secured by all assets of the Company. Notes amounting to $442,000 are subordinated to all other notes but are secured by all assets of the Company. Notes amounting to $1,132,582 are subordinated to all other notes but are secured by all assets of the Company.
   
 
The Company’s Senior Note in the amount of $4,120,000 is held by the largest shareholder.
 
10

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
   
4. STOCKHOLDERS'
     EQUITY
During the three months ended March 31, 2006 the Company received approximately $400,000 from an existing investor. For this investment as well as approximately $399,000 received in stock subscriptions during 2005, the Company issued 240,929 shares of common stock and five year warrants to purchase approximately 240,929 shares of common stock at an exercise price of $4.98. In the event the Company closes on a private placement of equity securities by September 2006 the investors who participated in this offering may elect to exchange their shares and warrants for the equivalent dollar amount of securities sold in the private placement.
 
The Company issued 100,000 shares of common stock to resolve a dispute regarding a price protection provision with an existing investor group.
 
For the three months ended March 31, 2006, no stock options were granted, canceled or exercised under the Plan.
 
As of March 31, 2006, 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
 
1,206
 
$
41.47
   
January 9, 2007
 
25,995
 
$
19.91
   
February 8, 2007
 
603
 
$
41.47
   
February 24, 2007
 
2,652
 
$
41.47
   
May 30, 2007
 
15,569
   
6.64
   
March 31, 2010
 
240,929
   
4.98
   
March 31, 2011
 
 
11

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
5.  COMMITMENTS AND
     CONTINGENCIES
The Company is involved in various claims and legal actions. Management is of the opinion that these claims and legal actions have no merit, but may have a material adverse impact on the financial position of the Company and/or the results of its operations.   Aside from normal trade creditor claims, the Company is involved with various claims and a legal action relating to its technology.  Management is of the opinion that these claims and legal action have no merit, but may have a material adverse impact on the financial position of the Company and/or the results of its operations.  In January 2003 the Company was sued by Brotech Corp. (Purolite International, Ltd.) claiming co-inventorship and/or joint ownership of some of the Company’s patents.  Recently Purolite expanded its claims, to allege that they are the sole owner of these patents and are seeking equitable relief and monetary damages.  The Company has filed a motion for summary judgment.  At the same time the parties have engaged in ongoing efforts to settle the case.  In addition, the Court ordered mediation with a magistrate judge and there has been some progress in seeking a resolution of the litigation, but there has still not been agreement on all issues and at this time there can be no assurance that the parties will be able to reach an accord. If the case is not settled, the Court will decide on the Company’s summary judgment motion.  If the motion is denied, the Company expects the matter will go to trial within a few months thereafter. As of the date of the financial statements, the outcome of the case could not be determined and the damages, if any, could not be reasonably estimated. Accordingly, a loss contingency has not been accrued.
 
A former employee of the Company has initiated a legal action against the Company seeking reimbursement of certain claimed expenses. The matter is under legal review by Company counsel. As of the date of the financial statements, the outcome of the case could not be determined and the financial impact, if any, could not be reasonably estimated. Accordingly, a loss contingency has not been accrued.
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 granted options for the right to obtain 5% of the outstanding stock of the Company on a fully diluted basis.
 
Upon the Company’s successful merger with a public shell company, an existing Noteholder is entitled to be issued 10 million shares of common stock of the Company. These shares will not be issued until the Company meets a minimum capital raise amount and recapitalization of the Company prior to such a merger.
 
12

MEDASORB CORPORATION
(a development stage company)

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2006

 
   
 
In an agreement dated August 11, 2003 an existing investor agreed to make a $4 million equity investment in the Company. These amounts were received by the Company in 2003. In connection with this agreement the Company granted the investor a future royalty of 3% on all gross revenues received by the Company from the sale of their CytoSorb Device. The Company has not generated any revenue from this product and has not incurred any royalty costs through March 31, 2006. The amount of future revenue subject to the royalty agreement could not be reasonably estimated nor, has a liability been incurred, therefore, an accrual for royalty payments has not been included in the financial statements.
 
6.   SUBSEQUENT
     EVENTS
Effective June 30, 2006 Gilder Enterprises, Inc. was acquired by MedaSorb Corporation in a reverse merger transaction. Accordingly, the reverse merger will be accounted for as a recapitalization in which the assets and liabilities of the Company will be recorded at their historical values, the outstanding capital stock and additional paid in capital will be restated to give effect to the shares of common and preferred stock issued in connection with the transaction to the stockholders of MedaSorb, the stockholders of Gilder Enterprise and to a holder of a convertible note.


13

UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2006

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

Effective June 30, 2006 Gilder Enterprises, Inc. (the Company) acquired all of the outstanding capital stock of MedaSorb Corporation (MedaSorb) in a reverser merger transaction (the Merger). For accounting purposes, MedaSorb is treated as the acquiror in the merger, which is accounted for as a recapitalization in which the assets and liabilities of MedaSorb have been recorded at their historical values, the outstanding capital stock and additional paid in capital have been restated to give effect to the shares of common stock issued in connection with the transaction to the stockholders of MedaSorb and to a holder of a convertible note. Immediately following the Merger, the Company also issued shares of preferred stock and warrants for cash.

The following unaudited pro forma financial statements of the Company present the unaudited pro forma combined statements of operations for the year ending December 31, 2005 and the three months ended March 31, 2006 as if the Merger had occurred on the first day of each of the periods presented and the unaudited pro forma combined balance sheets at March 31, 2006 and December 31, 2005, as if the Merger had occurred on March 31, 2006 and December 31, 2005, respectively.

The pro forma adjustments represent, in the opinion of management, all adjustments necessary to present the Company's pro forma results of operations and financial position in accordance with Article 11 of SEC Regulation S-X based upon available information and certain assumptions considered reasonable under the circumstances.

The unaudited pro forma financial statements presented herein do not purport to present what the Company's financial position or results of operations would actually have been had the events leading to the pro forma adjustments in fact occurred on the date or at the beginning of the periods operations for any future date or period.

The statement of operations included in the accompanying pro forma statement of operations for the three months ended March 31, 2006 were derived from MedaSorb’s unaudited quarterly financial data.

The unaudited pro forma financial statements should be read in conjunction with both the audited financial statements of MedaSorb as of and for the year ended December 31, 2005 and unaudited financial statements of MedaSorb as of and for the three months ended March 31, 2006 and the notes thereto, included elsewhere in the filing.




NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

Notes to unaudited pro forma balance sheets at March 31, 2006 and December 31, 2005.  

 
(A)
This adjustment represents the proceeds from issuance of preferred stock of $3,975,000, net of anticipated closing costs of $250,000, credit enhancement fees of $525,000, and the short term advance of $500,000.

 
(B)
Immediately prior to the closing of the transaction, $7,818,514 as of March 31, 2006 ($6,549,899 in principal and $1,268,615 in accrued interest) and $7,606,859 as of December 31, 2005 ($6,549,899 in principal and $1,056,960 in accrued interest) of convertible debt and related accrued interest on the debt of MedaSorb was converted into common stock. As part of conversion agreements with converting Noteholders, principal and accrued interest through November 30, 2005 is converting into equity. Upon closing of the Merger and conversion of the Notes, interest will cease to accrue and not be payable beyond November 30, 2005. In connection with this conversion, 5 year warrants were granted to purchase approximately 816,700 shares of common stock at an exercise price of $4.98 per share. As of March 31, 2006, the valuation of these warrants using the Black Scholes Model resulted in no value being assigned.

 
(C)
In connection with a $1,000,000 convertible note of MedaSorb which was not converted into equity and remains outstanding after the consummation of the transaction, the note holder and her designees were entitled to receive an aggregate of 10,000,000 shares of common stock of the Company. The issuance of these shares has been accounted for as a debt discount after allocation of the relative fair values of the instruments to each component and the related beneficial conversion feature of the debt in the amount of $1,000,000, which has been amortized in the pro forma statements of operations for the three months ended March 31, 2006 and the year ended December 31, 2005.

 
(D)
At the closing of the transaction the Company issued 5,250,000 shares of Series A 10% Cumulative Convertible Preferred Stock (Series A Preferred Stock) for $5,250,000. The Series A Preferred Stock has a stated value of $1.00 per share and is convertible into common stock at the conversion rate of one share of common stock for each $1.25 of stated value being converted. The purchasers of the Series A Preferred Stock were also issued, for no additional consideration, warrants to purchase one-half of the shares of common stock underlying the shares of Series A Preferred Stock purchased by them, at an exercise price of $2.00 per share of common stock. The 5,250,000 shares of Series A Preferred Stock are initially convertible into 4,200,000 shares of common stock, and the warrants are exercisable for 2,100,000 shares of common stock. The shares of common stock underlying the Series A Preferred Stock and warrants are required to be registered under the terms of the purchase agreement. As of March 31, 2006, the valuation of these warrants using the Black Scholes Model resulted in no value being assigned.

 
(E)
Represents the issuance of 24,090,929 of common stock (10,340,929 shares to the former stockholders of MedaSorb, including converted debt (see B above), 10,000,000 shares to the holder of the convertible note (see C above) and 3,750,000 shares to the stockholders of Gilder Enterprises, Inc.).

 
(F)
Represents the payment of $525,000 in credit enhancement fees associated with the preferred stock as a cost of raising capital.
 


 
 
(G)
Represents a short term advance to an existing investor in the amount of $500,000 bearing interest at 6% per annum, the repayment of which may be offset against amounts owed to Noteholder in C above.

Notes to unaudited pro forma statement of operations for the three months ended March 31, 2006 and the year ended December 31, 2005.

(1) This adjustment represents $1,000,000 amortization expense (based upon a one year life) of debt discount recorded as a result of shares of common stock issued in conjunction with $1,000,000 convertible note for the year ended December 31, 2005 for the three months ended March 31, 2006.

(2) Represents the elimination of interest expense in the amount of $211,655 and $760,950 for the three months ended March 31, 2006 and the year ended December 31, 2005, respectively, incurred by MedaSorb on the convertible debt, which would not have been outstanding for the period presented as a result of the conversion into equity. In addition, in order to induce conversion of the debt to equity, MedaSorb modified the terms of the conversion which resulted in additional shares of stock being issued with a value of $3,822,676 and $3,806,508 which has been recorded as interest expense for the three months ended March 31, 2006 and the year ended December 31, 2005, respectively.

(3) Represents the $5,000 of interest income associated with the short term advance (see G above)
 
 

 

MEDASORB CORPORATION
(a development stage company)
UNAUDITED PROFORMA BALANCE SHEET
 
 
       
Proforma
         
March 31, 2006
   
Medasorb
   
Adjustments
         
Proforma
 
                           
                           
ASSETS
                         
                           
Current Assets:
                         
Cash and cash equivalents
 
$
631,189
 
$
3,975,000
   
A,F
 
$
4,606,189
 
Prepaid expenses and other current assets
   
34,014
   
--
         
34,014
 
Short-term advance
   
--
   
500,000
   
G
   
500,000
 
                           
Total current assets
   
665,203
   
4,475,000
         
5,140,203
 
                           
Property and equipment - net
   
491,132
   
--
         
491,132
 
                           
Other assets
   
182,950
   
--
         
182,950
 
Total long-term assets
   
674,082
   
--
         
674,082
 
                           
Total Assets
 
$
1,339,286
 
$
4,475,000
       
$
5,814,286
 
                           
LIABILITIES AND STOCKHOLDERS DEFICIENCY
                         
                           
Current Liabilities:
                         
Accounts payable
 
$
2,007,193
 
$
--
       
$
2,007,193
 
Accrued expenses and other current liabilities
   
489,277
   
--
         
489,277
 
Accrued interest
   
1,268,615
   
(1,268,615
)
 
B
   
--
 
Convertible notes payable
   
3,429,899
   
(2,429,899
)
 
B,C
   
1,000,000
 
                           
Total current liabilities
   
7,194,985
   
(3,698,514
)
       
3,496,471
 
                           
Long-term liabilities:
                     
Convertible notes payable
   
4,120,000
   
(4,120,000
)
 
B
   
--
 
                           
Total long-term liabilities
   
4,120,000
   
(4,120,000
)
       
--
 
                           
Total liabilities
   
11,314,985
   
(7,818,514
)
       
3,496,471
 
                           
Stockholders' Equity/(Deficiency):
                         
Preferred stock
   
--
   
5,250
   
A,D
   
5,250
 
Common stock
   
5,170
   
18,921
   
E
   
24,091
 
 
         
  A,B
             
 
         
  C,D
             
Additional paid-in capital
   
50,013,975
   
17,092,019
   
E, F
   
67,105,994
 
Deficit accumulated during the
                         
development stage
   
(59,994,844
)
 
(4,822,676
)
 
B,C
   
(64,817,520
)
Total stockholders' deficiency
   
(9,975,699
)
 
12,293,514
         
2,317,815
 
                           
Total Liabilities and Stockholders' Deficiency
 
$
1,339,286
 
$
4,475,000
       
$
5,814,286
 
 
 

 

MEDASORB CORPORATION
(a development stage company)
PROFORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 2006
 
 
         
Proforma
             
 
   
Medasorb
   
Adjustments
         
Proforma
 
                           
Revenue
 
$
--
 
$
--
       
$
--
 
                           
Expenses:
                         
Research and development
   
288,981
   
--
         
288,981
 
Legal, financial and other consulting
   
384,538
   
--
         
384,538
 
General and administrative
   
137,775
   
--
         
137,775
 
                           
Total expenses
   
811,294
   
--
         
811,294
 
                           
                           
Net loss attributable to common shareholders
 
$
(1,015,377
)
$
(4,606,021
)
 
1,2,3
 
$
(5,621,398
)
                           
                           
Net loss per share, basic and diluted
                   
$
(0.23
)
                           
Weighted average number of shares outstanding
                     
24,090,929
 
 
 
 
 
 

 
 

MEDASORB CORPORATION
(a development stage company)
UNAUDITED PROFORMA BALANCE SHEET
 
 
                           
         
Proforma
             
December 31, 2005
   
Medasorb
   
Adjustments
         
Proforma
 
                           
                           
ASSETS
                         
                           
Current Assets:
                         
Cash and cash equivalents
 
$
707,256
 
$
3,975,000
   
A,F
 
$
4,682,256
 
Prepaid expenses and other current assets
   
19,261
   
--
         
19,261
 
Short-term advance
   
--
   
500,000
   
G
   
500,000
 
                           
Total current assets
   
726,517
   
4,475,000
         
5,201,517
 
                           
Property and equipment - net
   
553,657
   
--
         
553,657
 
                           
Other assets
   
181,307
   
--
         
181,307
 
Total long-term assets
   
734,964
   
--
         
734,964
 
                           
Total Assets
 
$
1,461,482
 
$
4,475,000
       
$
5,936,482
 
                           
LIABILITIES AND STOCKHOLDERS DEFICIENCY
                         
                           
Current Liabilities:
                         
Accounts payable
 
$
1,802,788
 
$
--
       
$
1,802,788
 
Accrued expenses and other current liabilities
   
412,646
   
--
         
412,646
 
Accrued interest
   
1,056,960
   
(1,056,960
)
 
B
   
--
 
Stock subscribed
   
399,395
   
--
         
399,395
 
Convertible notes payable
   
3,429,899
   
(2,429,899
)
 
B,C
   
1,000,000
 
                           
Total current liabilities
   
7,101,689
   
(3,486,859
)
       
3,614,830
 
                           
Long-term liabilities:
                     
Convertible notes payable
   
4,120,000
   
(4,120,000
)
 
B
   
--
 
                           
Total long-term liabilities
   
4,120,000
   
(4,120,000
)
       
--
 
                           
Total liabilities
   
11,221,689
   
(7,606,859
)
       
3,614,830
 
                           
Stockholders' Equity/(Deficiency):
                         
Preferred stock
   
--
   
5,250
   
A,D
   
5,250
 
Common stock
   
4,829
   
18,921
   
E
   
23,750
 
 
               
A,B
       
 
               
C,D
       
Additional paid-in capital
   
49,214,431
   
16,864,196
   
E,F
   
66,078,627
 
Deficit accumulated during the
                         
development stage
   
(58,979,467
)
 
(4,806,508
)
 
B,C
   
(63,785,975
)
Total stockholders' deficiency
   
(9,760,207
)
 
12,081,859
         
2,321,652
 
                           
Total Liabilities and Stockholders' Deficiency
 
$
1,461,482
 
$
4,475,000
       
$
5,936,482
 
 
 

 

MEDASORB CORPORATION
(a development stage company)
PROFORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
 
                   
       
Proforma
         
   
Medasorb
 
Adjustments
     
Proforma
 
                   
Revenue
 
$
--
 
$
--
       
$
--
 
                           
Expenses:
                         
Research and development
   
1,526,743
   
--
         
1,526,743
 
Legal, financial and other consulting
   
948,209
   
--
         
948,209
 
General and administrative
   
635,960
   
--
         
635,960
 
Change in fair value of management and
                     
--
 
incentive units
   
(14,551
)
 
--
         
(14,551
)
                           
Total expenses
   
3,096,361
   
--
         
3,096,361
 
                           
Gain on disposal of property and equipment
   
(21,663
)
 
--
         
(21,663
)
Gain on extinguishment of debt
   
(175,000
)
 
--
         
(175,000
)
Interest expense, net
   
765,898
   
4,040,558
   
1,2,3
   
4,806,456
 
                           
Net loss attributable to common shareholders
 
$
(3,665,596
)
$
(4,040,558
)
       
(7,706,154
)
                           
                           
Net loss per share, basic and diluted
                   
$
(0.32
)
                           
Weighted average number of shares outstanding
                     
23,750,000