Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis provides information to explain our results of operations and financial condition. You
should also read our unaudited consolidated interim financial statements and their notes included in this Form 10-Q, and our audited
consolidated financial statements and their notes and other information included in our Annual Report on Form 10-K for the year
ended December 31, 2015. This report may contain forward-looking statements. Forward-looking statements within this
Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,”
“may,” “will” “plans” and other similar expressions; however, these words are not the exclusive
means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. These forward-looking statements are subject to significant
risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed in, or implied
by, these forward-looking statements. Except as expressly required by the federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements to reflect events, circumstances or developments occurring
subsequent to the filing of this Form 10-Q with the U.S. Securities and Exchange Commission (the “SEC”) or for any
other reason and you should not place undue reliance on these forward-looking statements. You should carefully review
and consider the various disclosures the Company makes in this report and our other reports filed with the SEC that attempt to
advise interested parties of the risks, uncertainties and other factors that may affect our business.
Overview
CTD
Holdings, Inc. (“we” “our” “us” or “the Company”) was organized as a Florida corporation
on August 9, 1990, with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name from
Cyclodextrin Technologies Development, Inc., or CTDI, to CTD Holdings, Inc.; CTDI was then incorporated as a Florida corporation
and became a wholly owned subsidiary of CTD Holdings, Inc.
We
are a biotechnology company focused on the use of cyclodextrins in drug development. We recently filed a Type II Drug Master File
with the U.S. Food and Drug Administration (“FDA”) for our lead drug candidate, Trappsol® Cyclo™. The Company
has launched an International Clinical Program for its Trappsol® Cyclo™ as a treatment for Niemann-Pick Type C disease
(“NPC”). We also sell cyclodextrins and related products to the pharmaceutical, nutritional, and other industries,
primarily for use in diagnostics and specialty drugs with continuing growth in research and new product development.
Our
core business has transitioned to a biotechnology company primarily focused on the development of cyclodextrin-based biopharmaceuticals
for the treatment of disease from a business which had been primarily reselling basic cyclodextrin products. Our strategy
going forward is to pursue biopharmaceutical opportunities in healthcare where we believe cyclodextrin applications have maximum
value, while continuing to sell our cyclodextrin products and services.
Substantially
all of our revenues are derived from the sale of cyclodextrins, including bio-pharmaceuticals containing cyclodextrins, cyclodextrin
complexes, resale of cyclodextrins manufactured by others for our clients to their specifications, and our own licensed cyclodextrin
products. We have trademarked certain products under our Trappsol®, Aquaplex®, and AP™-Flavor product
lines. We currently sell our products directly to customers in the diagnostics, pharmaceutical, and industrial chemical
industries, and to chemical supply distributors. In addition, in 2012, we began offering pulse drying services for
the production of raw materials used primarily in industrial and consumer products.
Trappsol®
Cyclo™
At
the end of 2008, we provided Trappsol® Cyclo™ to a customer for compassionate use as an Investigational New Drug to
treat a set of twins in the U.S. who were diagnosed with NPC, also known as Childhood Alzheimer’s. NPC is a fatal disease
caused by a genetic defect that prevents proper handling of cholesterol in the body’s cells. The patient’s treatment
with our Trappsol® Cyclo™ product proved to provide an ameliorative benefit. On May 17, 2010, the FDA granted orphan
drug status to our customer for Trappsol® Cyclo™ for the treatment of NPC. To date, Trappsol® Cyclo™ has been
administered to approximately 20 NPC patients in compassionate use programs around the world, including in the U.S., Brazil and
Spain. Our annual sales of Trappsol® Cyclo™ decreased to $352,000 for 2015 from $901,000 for 2014. Sales of Trappsol®
Cyclo™ were $140,000 and $70,000 for the three months ended March 31, 2016 and 2015, respectively. In 2012, we began to
offer 100ml vials of Trappsol® Cyclo™ in a liquid form from a contract manufacturer. In 2014, we completed validation
of the Trappsol® Cyclo™ manufacturing process and submitted a Type II Drug Master File to the FDA. In 2015 we established
an International Clinical Program that includes a team of experienced drug development companies and individuals. We have also
obtained Orphan Drug Designation for Trappsol® Cyclo™ in both the U.S. and Europe.
Most
recently, we were advised by the FDA that we have sufficient pre-clinical data to support a clinical trial of Trappsol® Cyclo™
in the United States, and we are preparing an Investigational New Drug (IND) application for Trappsol® Cyclo™ as a treatment
for NPC. Following approval of the IND, we expect to conduct a U.S. clinical study in which we will provide Trappsol® Cyclo™
intravenously to NPC patients two years of age and older in order to track biochemical markers of cholesterol metabolism and to
measure effects on neurologic, lung and liver symptoms.
Other
Sterile Liquid Products
We
have utilized the manufacturing processes developed as part of our Trappsol® Cyclo™ product development to create new
sterile liquid solutions of selected Trappsol® and Aquaplex® products for the life science research market. We contract
manufactured 250 sterile reagent bottles of our best-selling research grade Trappsol® product in liquid form in 2014. For
the foreseeable future, we expect that our sterile liquid products, including our Trappsol® Cyclo™ product, will be
manufactured at Contract Manufacturing Organizations (CMOs) that have this specialty manufacturing technology in place. The work
will be done using our raw materials with standard operation procedures for the manufacturing approved by us.
Pulse
Drying Services
In
2011, we installed a pulse dryer system on our premises to manufacture cyclodextrin complexes. We started operating the pulse
dryer in January 2012 through our wholly owned subsidiary, NanoSonic Products, Inc. We intend to use our pulse dryer as a proprietary
purification technology to develop our UltraPure™ line of cyclodextrin material. We have prospective clients for this material
and potential additional customers for other UltraPure™ grades of other cyclodextrins that include cell culture supply producers,
medical diagnostic test kit manufacturers and pharmaceutical formulation developers. This technology can be easily modified to
include other cyclodextrins in our product catalog. We also offer third parties the use of our pulse dryer for the manufacture
of products to their specification but have not generated any revenues to date from this service.
Resale
of Cyclodextrin and Cyclodextrin Complexes
Our
sales of cyclodextrins and cyclodextrin complexes are primarily to chemical supply houses around the world, to pharmaceutical
companies, to food companies for research and development and to diagnostics companies.
We
acquire our products principally from outside the United States, including from Wacker Biosolutions, a division of Wacker Chemie
AG (Germany), with a production facility located in Adrian, Michigan and Hangzhou Pharma and Chem Co. (China), Quian Hui (China),
and Cyclodextrin Research & Development Laboratory (Hungary), but are gradually finding satisfactory supply sources in the
United States. We make patent information about cyclodextrins available to our customers. We also offer our customers our knowledge
of the properties and potential new uses of cyclodextrins and complexes.
As
most of our customers use our cyclodextrin products in their research and development activities, the timing, product mix, and
volume of their orders from us are unpredictable. We also have four large customers (each of whom has historically purchased from
us annually and, depending upon the year, may account for greater than 10% of our annual revenues) who have a significant effect
on our revenues when they increase or decrease their research and development activities that use cyclodextrins. We keep in constant
contact with these customers as to their cyclodextrin needs so we can maintain the proper inventory composition and quantity in
anticipation of their needs. The sales to large customers and the product mix and volume of products sold has a significant effect
on our revenues and product margins. These factors contribute to our revenue volatility from quarter to quarter and year to year.
Proposed
Sale of Cyclodextrin Distribution Business
In
January 2016 we entered into a non-binding Letter of Intent with C.E. Rick Strattan, a significant stockholder and one of our
directors, to sell our cyclodextrin manufacturing and distribution business in order to focus exclusively on the development of
cyclodextrin-based biopharmaceuticals for the treatment of disease. Under the Letter of Intent, Mr. Strattan (or his designee)
would acquire the purchased assets in exchange for 7.5 million shares of our common stock that Mr. Strattan holds, and the assumption
by Mr. Strattan of certain liabilities related to that business. The purchased assets will not include our real property or our
Trappsol® Cyclo™ assets. However, as part of the transaction, Mr. Strattan will lease CTD's office and manufacturing
facilities in Alachua, Florida, with an option to buy the facilities, including our pulse dryer. There can be no assurance that
we will close the transaction.
Liquidity
and Capital Resources
Our
cash decreased to $1,079,000 as of March 31, 2016, compared to $1,842,000 as of December 31, 2015. Our working capital was $882,000
as of March 31, 2016, compared to $1,511,000 at December 31, 2015. All of our debt has been classified as current at both March
31, 2016 and December 31, 2015 due to our non-compliance with a loan covenant as described below. We owed $511,362 at March 31,
2016 on a secured mortgage note and $192,913 under an equipment loan, with a bank that has a covenant requiring our ratio of EBITDA
to interest expense and prior period current maturities of long term debt to be not less than 1.3, measured annually. We were
not in compliance with this debt service coverage covenant for the year ending December 31, 2015. If we are unable to have the
debt covenant modified, or we are unable to refinance the indebtedness, we may be required to use our cash on hand to repay the
indebtedness, which will have a material adverse effect on our financial condition by diverting cash intended for use in our development
of a clinical trial program or for other business development efforts.
The
Company presently believes that it has sufficient cash to meet its anticipated operating costs and capital expenditure requirements
for at least the next twelve months. Additional capital will be required in the future to develop our drug product candidates
through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital will likely be
subject to various factors, including our overall business performance and market conditions.
On
January 21, 2016, we closed on the sale of our real property located in High Springs, Florida, which had been previously classified
on the our balance sheet as property held for sale, with a carrying value of $275,000. Pursuant to the terms of the sale, at the
closing, the buyer paid us $10,000 in cash, less selling costs and settlement charges, and we received a promissory note in the
principal amount of $265,000, and a mortgage in our favor securing the buyer’s obligations under the promissory note. The
promissory note provides for monthly payments of $3,653, including principal and interest at 4.25%, over a seven-year period commencing
March 1, 2016.
We
plan to use our available cash primarily for the development of our Trappsol® Cyclo™ orphan drug product, including
implementation of our International Clinical Program and U.S. clinical trials and designs, and other general corporate purposes.
We
have no off-balance sheet arrangements at March 31, 2016.
Results
of Operations - Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
We
reported a net loss of $(706,000) for the three months ended March 31, 2016, compared to net loss of $(388,000) for the three
months ended March 31, 2015.
Total revenues for the three month period ended March 31, 2016 increased 81% to $313,000 compared to $173,000 for the same period
in 2015. Our change in the mix of our product sales for the three months ended March 31, 2016 and 2015 is as follows:
Trappsol®
Cyclo
Our
sales of Trappsol® Cyclo™ increased by 100% for the three month period ended March 31, 2016, to $140,000 from $70,000
for the three months ended March 31, 2015. Our sales to a particular customer who exports Trappsol® Cyclo™
to South America were $134,000 (96% of total sales of Trappsol® Cyclo™) for the three months ended March 31, 2016, compared
to $57,000 (82% of total sales of Trappsol® Cyclo™) for the three months ended March 31, 2015. Our annual
2015 sales to this customer were $296,000 (84% of total 2015 sales of Trappsol® Cyclo™). This product is
designated as an orphan drug; the population of patients is small and while we expect our future sales to increase, the timing
of sales will be unpredictable and our ability to market the drug for use other than research is severely constrained by regulatory
restrictions in the applicable jurisdictions.
Trappsol®
HPB
Our
sales of Trappsol® HPB increased by 98% for the three month period ended March 31, 2016, to $138,000 from $70,000 for the
three months ended March 31 2015.
Trappsol®
other products
Our
sales of other Trappsol® products decreased by 11% for the three month period ended March 31, 2016, to $21,000 from $23,000
for the three months ended March 31, 2015.
Aquaplex®
Our
sales of Aquaplex® were $1,000 for the three months ended March 31, 2016 compared to $8,000 for the three months ended March
31, 2015.
Our
largest customers continue to follow historical product ordering trends by placing periodic large orders that represent a significant
share of our annual sales volume. During the three months ended March 31, 2016, our three largest customers accounted for 80%
of our sales; the largest accounted for 45% of sales. During the three months ended March 31, 2015, our four largest customers
accounted for 68% of our sales; the largest accounted for 33% of sales. Historically, our usual smaller sales of HPB occur more
frequently throughout the year compared to our large sales that we receive periodically. The timing of when we receive and are
able to complete these two kinds of sales has a significant effect on our quarterly revenues and operating results and makes period
to period comparisons difficult.
Our
cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the three month period
ended March 31, 2016 increased 64% to $37,000 from $22,000 for the same period in 2015. Our cost of products sold (excluding any
allocation of direct and indirect overhead and handling costs) as a percentage of sales was 12% for the three months ended March
31, 2016 compared to 13% for the three months ended March 31, 2015. Historically, the timing and product mix of sales
to our large customers has had a significant effect on our sales, cost of products sold (excluding any allocation of direct and
indirect overhead and handling costs) and the related margin. We did not experience any significant increases in material costs
during 2015 or 2014, or the first quarter of 2016.
Our
gross margins may not be comparable to those of other entities, since some entities include all the costs related to their distribution
network in cost of goods sold. Our cost of goods sold includes only the cost of products sold and does not include any allocation
of inbound or outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation and amortization
expense. We have six employees who provide receiving, inspection, warehousing and shipping operations for us. The cost of these
employees, and our other employees, are included in personnel expense. Our other costs of warehousing and shipping functions are
included in office and other expense.
As
we buy most of our
inventory from foreign suppliers, the change in the value of the U.S. dollar in relation to the Euro,
Yen and Yuan has had and will continue to have an effect on our cost of inventory. Our main supplier of specialty cyclodextrins
and complexes, Cyclodextrin Research & Development Laboratory, is located in Hungary and its prices are set in Euros.
Personnel
expenses increased by 25%, to $301,000 for the three months ended March 31, 2016 from $242,000 for the three months ended March
31, 2015. The increase in personnel expense is due to an increase in the number of employees and employee healthcare benefits.
We expect personnel costs to continue to increase in 2016 as the result of additional employees and our International Clinical
Program product development activities.
Research
and development expenses increased to $283,000 for the three months ended March 31, 2016, from $67,000 for the three months ended
March 31, 2015. The increase in research and development expense is due to the International Clinical Program. We expect research
and development costs to increase in 2016 as we continue to seek regulatory approval for the use of Trappsol® Cyclo™
in the treatment of NPC.
Repairs
and maintenance expenses decreased to $6,000 for the three months ended March 31, 2016 from $9,000 for 2015.
Professional
fees increased 119% to $202,000 for the three months ended March 31, 2016, compared to $92,000 for the three months ended March
31, 2015. Professional fees may further increase due to new initiatives in raising capital or compliance for developing new products.
Office
and other expenses increased 240% to $145,000 for the three months ended March 31, 2016 compared to $43,000 for the three months
ended March 31, 2015.
Board
of Directors fee and costs decreased to $25,000 for the three months ended March 31, 2016, compared to $38,000 for the three months
ended March 31, 2015.
Amortization
and depreciation was $41,000 for the three months ended March 31, 2016 and 2015, respectively.
Freight
and shipping was $2,000 for the three months ended March 31, 2016 and 2015, respectively.
Interest
expense was $8,000 for the three months ended March 31, 2016, and 2015, respectively.
We
increased our valuation allowance to offset the increase in our deferred tax asset from our net operating loss and did not recognize
an income benefit or provision for the three months ended March 31, 2016, and 2015, respectively.