By Thomas Kerr, CFA

NASDAQ:CTSO

READ THE FULL CTSO RESEARCH REPORT

On December 9, 2024, CytoSorbents (NASDAQ:CTSO) announced a shareholder friendly anticipated Rights Offering which is expected to substantially increase its liquidity position. Investors who own or have bought CTSO stock by the close of trading on Friday, December 13, 2024 will be considered stockholders of record on December 16, 2024. These shareholders will receive a dividend at no cost of one non-transferable Subscription Right Warrant for each share of common stock owned. Each Subscription Right, if exercised before the expiration date on January 10, 2025, enables a Unit purchase at a Unit subscription price of $1.00. Each Unit will consist of one share of common stock and two transferable short-term Right Warrants to purchase up to two additional shares of common stock, if available.

All net proceeds from the offering will go to the company and be used for general corporate purposes and to satisfy a debt covenant where raised equity proceeds of $3.0 million to $5.0 million will unlock $3.0 million to $5.0 million in restricted cash currently on our balance sheet on a dollar-for-dollar basis. For example, Aggregate proceeds of $5.0 million would result in increased liquidity to the company of approximately $10.0 million (which includes the $5.0 million in restricted cash). The offering is expected to fund the company’s operations through FDA and Health Canada decisions on its DrugSorb-ATR marketing applications in 2025, and if approved or cleared, the initial launch and commercialization of the product.

Each Subscription Right will provide the stockholder the opportunity, but not the obligation, to purchase a Unit at a subscription price of $1.00. Each Unit consists of:

• One share of CTSO common stock.

• One Series A Right Warrant to purchase an additional share of common stock 45 days from the initial Unit subscription closing date, or February 24, 2025, at an exercise price that is 90% of the 5-day volume weighted average price prior to February 24th, but no lower than $1.00 and no higher than $2.00, irrespective of the share price at the time.

• One Series B Right Warrant to purchase an additional share of common stock 90 days from the initial unit subscription closing date, or April 10, 2025, at an exercise price that is 90% of the 5-day volume weighted average price prior to April 10th, but no lower than $2.00 and no higher than $4.00, irrespective of the share price at the time.

The maximum number of Units to be issued is 6.25 million and the maximum number of shares to be issued through the total Offering as a whole is 12.5 million. This implies that if the Offering is successful, it could generate gross proceeds of at least $12.5 million and possibly higher.

We believe this rights offering provides benefits and advantages to the company and its shareholders when compared to a traditional secondary public offering. The financing overhang of available liquidity and cash burn rates has likely created a disconnect between the prevailing market value of the company and the true underlying value of the company’s overall business and potential. The current CTSO market value appears to be discounting the existing CytoSorb business that we estimate may generate total revenues of $38.0 million of which roughly $35.0 million would be in high gross margin product sales in 2024. The market also appears to be ignoring the proximity of potential major catalysts to the business such as the expected regulatory decisions on DrugSorb-ATR by the U.S. FDA and Health Canada. 

We believe the rights offering is a creative solution to both the financing overhang and the dilution dilemma to existing shareholders that comes with a typical secondary public offering to outside investors. 

A summary of potential benefits to shareholders who participate in this offering include:

• All net proceeds of this offering go directly to the company, which typically does not happen with open market purchases in the stock market.

• This is a BOGO (Buy One, Get One) leveraged match with regards to the company’s current liquidity situation. A raise of $3.0 million to $5.0 million will unlock, on a dollar-for-dollar basis, $3.0 million to $5.0 million in restricted cash already on the balance sheet that was received from its credit facility.

• The increase in cash position is expected to help protect shareholders’ existing investments in the company by financially strengthening the company and reducing and potentially eliminating the financing overhang. Net proceeds are expected to fund the company through Health Canada and FDA decisions, and if approved/cleared, through the initial commercial launch.

• Participation can help to reduce or prevent shareholder dilution, and can even increase ownership, depending on the level of participation.

• The right warrants represent a potential upside kicker, if the stock price or market value rises because of a positive regulatory decision, or a relief of the financing overhang from the rights offering, or another catalyst.

• Management and the Board of Directors of CytoSorbents are also large shareholders and are technically aligned with the interests of existing shareholders.

CytoSorbents has demonstrated solid execution on its stated plan to shareholders on multiple fronts. This includes:

• Regulatory front – The company has filed for both FDA (September 27, 2024) and Health Canada (November 1, 2024) marketing approvals of DrugSorb-ATR. The FDA has accepted its De Novo application and is in the substantive review process, potentially accelerated by priority review based upon its FDA Breakthrough Device Status. Health Canada is also in the review phase. 

• Commercial front – The company grew revenues 11.0% in the most recent quarter and reported product gross margins of 70% year-to-date as of the end of the 3^rd quarter of 2024. The company continues to prepare for potential commercial launches in the U.S. and Canada for DrugSorb-ATR, if cleared or approved, and that could be a significant catalyst for growth

• Operational front – The company significantly reduced its cash burn and operating loss in the 3^rd quarter of 2024, with the stated goal of driving a near-breakeven core business in the 2^nd half of 2025. 

A detailed presentation of the Rights Offering can be found here. In addition, an updated December 2024 investor presentation can be found on the company’s investor website here.

We are not adjusting our EPS estimates at this time as we await the results of the offering and the effect it will have on the diluted share count. We maintain our price target of $4.00.

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