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 that develops cyclodextrin-based products for the treatment of disease. We have filed a Type II Drug
Master File with the U.S. Food and Drug Administration (“FDA”) for our lead drug candidate, Trappsol® Cyclo™
as a treatment for Niemann-Pick Type C disease (“NPC”), and recently filed an Investigational New Drug application
(“IND”) with the FDA which describes our Phase I clinical plans for a randomized, double blind, parallel group study
at a single clinical site in the US. We have also filed a Clinical Trial Application with the United Kingdom's Medicines and Healthcare
Products Regulatory Agency, and launched an International Clinical Program for Trappsol® Cyclo™.
While
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. On August 5, 2016, we listed
for sale our real property (which includes our pulse dryer) located in Alachua, Florida. In the event we are able to complete
the sale of this property, we expect to repay our secured loans. Although we expect to continue to operate our cyclodextrin distribution
business following such sale, our strategy going forward is to focus on biopharmaceutical opportunities in healthcare where we
believe cyclodextrin applications have maximum value.
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.
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 $21,000 and $401,000 for the three and nine months ended September 30, 2016, 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 obtained regulatory approval of both the IND we filed with the FDA for Trappsol® Cyclo™ as a treatment
for NPC, and the Clinical Trial Application we filed with the United Kingdom's Medicines and Healthcare Products Regulatory Agency.
As a result, we expect to conduct multiple U.S. and international clinical studies in which we will provide Trappsol® Cyclo™
intravenously to NPC patients in order to track biochemical markers of cholesterol metabolism and to measure effects on neurologic,
lung and liver symptoms.
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.
Liquidity
and Capital Resources
Our cash decreased to $1,270,000 as of September 30,
2016, compared to $1,842,000 as of December 31, 2015. Our current assets and current liabilities were $2,018,552 and $875,948,
respectively, as of September 30, 2016, compared to current assets of $2,522,886 and current liabilities of $945,146 at December
31, 2015. All of our term debt is classified as current at both September 30, 2016 and December 31, 2015 due to our non-compliance
with a loan covenant as described below. We owed $500,667 at September 30, 2016 on a secured mortgage note and $172,366 under an
equipment loan, with a bank that has a debt service covenant. We are not in compliance with this debt service coverage covenant.
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.
On
August 5, 2016, the Company listed for sale its real property located in Alachua, Florida. In the event we are able to complete
the sale of this property on terms acceptable to us, we expect to repay our secured loans in full.
The
Company presently believes that it will require additional cash to meet its anticipated operating costs and capital expenditure
requirements for the next twelve months, including, without limitation, to commence and continue its approved U.S. and U.K. clinical
trials. To date, the Company has been able to generate sufficient cash to fund its drug development activities from private offerings
of its equity securities, together with cash generated from operations and asset sales. While we expect to continue to be successful
in obtaining additional funds to meet our cash requirements, no assurance can be given that adequate additional funding will be
available to us on acceptable terms, if at all. Additional capital will also 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 the results of our clinical trials, our progress in obtaining regulatory approval
for our drug candidates 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 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 U.S. and international clinical trials and designs, and other general corporate purposes.
We
have no off-balance sheet arrangements at September 30, 2016.
Results
of Operations - Three and Nine Months Ended September 30, 2016 Compared to Three and Nine Months Ended September 30, 2015
We
reported a net loss of $(1,615,000) and $(3,392,000) for the three and nine months ended September 30, 2016, respectively, compared
to a net loss of $(748,000) and $(1,496,000) for the three and nine months ended September 30, 2015, respectively.
Total
revenues for the three-month period ended September 30, 2016 increased 18% to $278,000 compared to $235,000 for the same period
in 2015. Total revenues for the nine-month period ended September 30, 2016 increased 24% to $975,000 compared to $788,000 for
the same period in 2015.
Our
change in the mix of our product sales for the three and nine months ended September 30, 2016 and 2015 is as follows:
Trappsol®
Cyclo
Our
sales of Trappsol® Cyclo™ increased 11% for the three-month period ended September 30, 2016, to $21,000, from $19,000
for the three-month period ended September 30, 2015. Our sales of Trappsol® Cyclo™ increased by 22% for the
nine-month period ended September 30, 2016, to $401,000 from $329,000 for the nine-month period ended September 30, 2015. Our
sales to a particular customer who exports Trappsol® Cyclo™ to South America were $21,000 (100% of total sales of Trappsol®
Cyclo™) for the three months ended September 30, 2016, compared to no sales for the three months ended September 30, 2015;
and our sales to that same customer who exports Trappsol® Cyclo™ to South America were $386,000 (96% of total sales
of Trappsol® Cyclo™) for the nine-month period ended September 30, 2016, compared to $270,000 (82% of total sales of
Trappsol® Cyclo™) for the nine-month period ended September 30, 2015. Our 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 31% for the three-month period ended September 30, 2016, to $163,000 from $124,000 for
the three months ended September 30, 2015. Our sales of Trappsol® HPB increased by 43% for the nine-month period ended September
30, 2016, to $397,000 from $278,000 for the nine-month period ended September 30, 2015.
Trappsol®
other products
Our
sales of other Trappsol® products decreased by 36% for the three-month period ended September 30, 2016, to $35,000 from $55,000
for the three-month period ended September 30, 2015. Our sales of other Trappsol® products decreased by 32% for the nine-month
period ended September 30, 2016, to $74,000 from $109,000 for the nine-month period ended September 30, 2015.
Aquaplex®
Our
sales of Aquaplex® were $57,000 for the three-month period ended September 30, 2016 compared to $32,000 for the three-month
period ended September 30, 2015. Our sales of Aquaplex® were $78,000 for the nine-month period ended September 30, 2016 compared
to $63,000 for the nine-month period ended September 30, 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 nine months ended September 30, 2016, our two largest customers accounted for 52%
of our sales; the largest accounted for 41% of sales. During the nine months ended September 30, 2015, our three largest customers
accounted for 50% of our sales; the largest accounted for 34% 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 nine-month period
ended September 30, 2016 was 13% ($124,000) compared to 13% ($105,000) 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 11% ($31,000) for the
three months ended September 30, 2016 compared to 11% ($25,000) for the same period in 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 nine months 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 to $328,000 for the three months ended September 30, 2016 from $223,000 for the three months ended September
30, 2015. Personnel expenses increased to $1,010,000 for the nine months ended September 30, 2016 from $551,000 for the nine months
ended September 30, 2015. The increase in personnel expense is due to an increase in the number of employees and employee 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 $311,000 for the three months ended September 30, 2016, from $221,000 for the three months
ended September 30, 2015. Research and development expenses increased to $1,255,000 for the nine months ended September 30, 2016,
from $399,000 for the nine months ended September 30, 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 $3,000 for the three months ended September 30, 2016 from $7,000 for the three months ended
September 30, 2015. Repairs and maintenance expenses decreased to $19,000 for the nine months ended September 30, 2016 from $24,000
for the nine months ended September 30, 2015.
Professional
fees increased to $176,000 for the three months ended September 30, 2016, compared to $101,000 for the three months ended September
30, 2015. Professional fees increased to $455,000 for the nine months ended September 30, 2016, compared to $324,000 for the nine
months ended September 30, 2015. Professional fees may further increase due to new initiatives in raising capital or compliance
for developing new products.
Office
and other expenses increased to $171,000 for the three months ended September 30, 2016 compared to $85,000 for the three months
ended September 30, 2015. Office and other expenses increased to $479,000 for the nine months ended September 30, 2016 compared
to $213,000 for the nine months ended September 30, 2015.
Board
of Directors fees and costs decreased to $53,000 for the three months ended September 30, 2016, compared to $140,000 for the three
months ended September 30, 2015. Board of Directors fee and costs decreased to $100,000 for the nine months ended September 30,
2016, compared to $392,000 for the nine months ended September 30, 2015.
Amortization
and depreciation was $4,000 for the three months ended September 30, 2016, compared to $44,000 for the three months ended September
30, 2015. Amortization and depreciation was $92,000 for the nine months ended September 30, 2016, compared to $125,000 for the
nine months ended September 30, 2015.
Freight
and shipping was $1,000 for the three months ended September 30, 2016, compared to $3,000 for the three months ended September
30, 2015. Freight and shipping was $5,000 for the nine months ended September 30, 2016, compared to $6,000 for the nine months
ended September 30, 2015.
Interest
expense was $7,000 for the three months ended September 30, 2016, compared to $8,000 for the three months ended September 30,
2015. Interest expense was $22,000 for the nine months ended September 30, 2016, compared to $24,000 for the nine months ended
September 30, 2015.
We
recorded a $810,000 impairment loss on our office and pulse dryer for the three and nine months ended September 30, 2016. We recorded
a $125,000 impairment loss on our High Springs property (which was subsequently sold) for the three and nine months ended September
30, 2015.
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 and nine months ended September 30, 2016, and 2015, respectively.