My main speculative play over the past two years has been in a company called Cytosorbents Inc ($CTSO). The video above gives a great 3 minute overview of the company’s technology and business model. However, the main problem for the stock throughout 2012 was a pretty hefty dilutive financing deal. Thankfully, the CEO – Dr. Phillip Chan – has promised to avoid any dilutive deals going forward and has mainly focused on obtaining grants from DARPA and other US Defense/Medical groups. Last week, the company announced they had obtained $400,000 in non-dilutive financing, but the stock price still dropped 8%. While the stock is thinly traded and has a small float, I still believe this was very positive news for the company – so I did some digging.
$CTSO released a press release on Monday stating they had sold their net operating losses (NOL) in order to acquire extra cash. In all honesty, I had never heard of selling NOL’s or what that actually meant. Turns out, there’s more to New Jersey than Ed Hardy and beach clubs. In an effort to further promote the technology and biotech communities in NJ, the state has allowed any unprofitable company in the biotech/tech sector with less than 225 employees to sell their net operating losses. All it takes is a $2,500 application fee and the state of New Jersey will allocate a portion of their $60M cap to your business and purchase your NOL’s.
But to figure out how NOL’s can be bought and sold I had to turn to an expert CFO (a.k.a my dad) – so bear with me for a bit of a “bean counter” explanation. A net operating loss is the result of losses incurred over the years – i.e cumulative losses of a business. According to Federal and State tax laws you’re allowed to “carry back” the losses you paid in the past if you are profitable or to “store up” the losses for when you eventually start becoming profitable and can offset the profits using the net operating losses. Therefore, you don’t need to pay taxes until you’ve obtained a cumulative profit for your business. For businesses that have already obtained a cumulative profit, there is an incentive to “buy” an unprofitable company’s NOL and write it off as a loss. From a federal standpoint, NOL’s are not transferrable and can’t be bought/sold. However, in order to spark investment and performance in certain industries, New Jersey has made this legal.
As for $CTSO, this is a sweet deal and in no way, shape, or form is it dilutive. After watching the stock trade over the last two years, especially around news events, my hunch is that it’s mainly held by doctors – not financial types. The company has a plethora of catalysts coming in 2013 and hopefully expectations will become more reasonable going forward.