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CTSO: Q2 Results / Operational Plan Moving Forward

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CTSO:  Q2 Results / Operational Plan Moving Forward

By Brian Marckx, CFA

CytoSorbents reported results for the second quarter ending June 30, 2012 on August 14th.  Financial results as well as the operational update that the company provided were in-line with our expectations.  We have made no material changes to our model or outlook for CytoSorbents following Q2 results and are maintaining our Outperform rating and $0.50/share price target.

Q2 revenue came in at $33k (compared to our $19k estimate), representing sales during the initial test market roll-out.  Operating expenses were $1.03 million, slightly below our $1.15 million estimate.  Net income and EPS were $(1.63) million and $(0.01) compared to our $(2.01) million and $(0.01) estimates.  The majority of the difference in net income a result of less than modeled conversion of promissory notes to equity in the quarter (debt discount is immediately amortized to interest expense with conversion).


Cash used in operations was $1.15 million, roughly flat from the $1.07 million used in Q1.  CTSO exited Q2 with $1.74 million in cash and equivalents, slightly down from $1.80 million at the end of Q1.  During Q2 CTSO raised $1.1 million from the sale of about 8.9 million shares under the LPC stock purchase agreement.

Operational Update

On the operational side, in late-June CytoSorbents brought on a VP of Sales and Marketing (see our 6/12/2012 Investor Note here… which also marked the official launch of CytoSorb in Germany.  CytoSorbents also recently added three additional key sales people.  CTSO notes that the sales team has now completed training and commenced calling on their already established network of customer contacts.

Also on the business development side, additional sites have started using CytoSorbents and the company has started to get some outside, unsolicited interest from doctors who’ve become aware of the device and CTSO's technology.  CytoSorbents remains focused on building awareness and expects to attend several industry conferences and events in the coming months.  We continue to expect a measured roll-out and incremental building of the sales force with no expectations for significant sales during the current year.  

The most recent news came in early August that CTSO was awarded a milestone-based contract from DARPA worth up to $3.8 million over the next five years, including $1.5 million expected during year 1 (we think related revenue could commence as early as Q3).  Relative to other grants and contracts, CTSO notes in the Q2 results update that following completion of the Phase I portion of the SBIR grant that they have now submitted for the Phase II grant, which could be worth up to $1 million.


CTSO Scores DARPA Contract  (from our August 6, 2012 Investor Note)

This morning (8/6/2012) CytoSorbents Corp announced they were awarded a contract from DARPA worth up to $3.8 million over the next five years under the agency's Dialysis-Like Theraputics (DLT) program.  As a reminder, CytoSorbents had been in contract negotiations with DARPA for use of the company's technology as part of the U.S. government agency's DLT program to develop a blood purification device in the treatment of sepsis (for reference on the DARPA proposal see our initiation report here,%202012_CTSO_Initiating%20Coverage_Marckx_v001_d9enrx.pdf).  The negotiations centered around the scope of work and contract value.   The milestone-based contract is expected to pay $1.5 million in the first year and the remainder over the next four years, assuming all milestones are hit.

As DLT is a collaboration with several different companies and universities being awarded contracts related to the project, CytoSorbents is one piece of this puzzle.  CytoSorbents contribution is developing their next-generation porous polymers which have already demonstrated efficacy in removing cytokines from the blood with targeted applications in sepsis as well as a variety of other acute care illnesses.  Under the DLT program CytoSorb expects to broaden the scope of targeted substances to include a wide range of toxins in addition to cytokines.  In addition, as the DARPA DLT Broad Agency Announcement strongly encourages technologies that do not require anticoagulation, CytoSorbents expects to incorporate that capability into its polymer technology.

We view the DARPA award as a significant positive not only from a near-to-mid term revenue perspective but perhaps more importantly as additional validation of CytoSorbent's technology and expanded opportunity in the commercial marketplace.  Advanced development of CytoSorbent's polymer beads under this contract to include the targeting of a wider menu of toxins could potentially expand the targeted applications beyond what is already a very significant potential market for CytoSorbents.  

We think CTSO could begin generating revenue under the awarded contract in Q3 of this year.  CytoSorbents also indicates in the press release that they could be eligible for a separately funded DARPA DLT proposal -  which we have yet to model and could provide some upside to our current revenue estimates.              

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