NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The
following is a summary of the more significant accounting policies of CTD Holdings, Inc. and subsidiaries (the “Company”)
that affect the accompanying consolidated financial statements:
(a)
ORGANIZATION AND OPERATIONS––The Company was incorporated in August 1990, as a Florida corporation with operations
beginning in July 1992. We are a biotechnology company that develops cyclodextrin-based products for the treatment of disease.
In 2014 we 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”). The FDA recently approved our Investigational
New Drug application (IND) which describes our Phase I clinical plans in the US for Trappsol® Cyclo™. We have also filed
Clinical Trial Applications with the United Kingdom's Medicines and Healthcare Products Regulatory Agency and other European regulators,
and launched an International Clinical Program for Trappsol® Cyclo™.
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. However, 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.
(b)
BASIS OF PRESENTATION––The consolidated financial statements include the Company and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
(c)
CASH AND CASH EQUIVALENTS––Cash and cash equivalents consist of cash and any highly liquid investments with an original
maturity of three months or less.
(d)
ACCOUNTS RECEIVABLE––Accounts receivable are unsecured and non-interest bearing and stated at the amount we expect
to collect from outstanding balances. Customer account balances with invoices dated over 90 days old are considered past due.
The Company does not accrue interest on past due accounts. Customer payments are allocated to the specific invoices identified
on the customer’s remittance advice or, if unspecified, applied to the oldest unpaid invoices.
The
carrying amount of accounts receivable are reduced by an allowance for credit losses that reflects management’s best estimate
of the amounts that will not be collected. The Company reviews each customer balance where all or a portion of the balance exceeds
90 days from the invoice date. Based on the Company’s assessment of the customer's current creditworthiness, the Company
estimates the portion, if any, of the balance that will not be collected, and writes off receivables as a charge to the allowance
for credit losses when, in management’s estimation, it is probable that the receivable is worthless. Based on management’s
assessment of the credit history with customers having outstanding balances and current relationships with them, it has concluded
that realization losses on balances outstanding at year-end will be immaterial.
(e)
INVENTORY AND COST OF PRODUCTS SOLD––Inventory consists of our pharmaceutical drug Trappsol® Cyclo™, cyclodextrin
products and chemical complexes purchased for resale recorded at the lower of cost (first-in, first-out) or market. Cost of products
sold includes the acquisition cost of the 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.
(f)
MORTGAGE NOTE RECEIVABLE––The mortgage note receivable is stated at amortized value, which is the amount we expect
to collect.
(g)
PROPERTY AND EQUIPMENT––Property and equipment are recorded at cost. Depreciation on property and equipment is computed
using primarily the straight-line method over the estimated useful lives of the assets (generally three to five years for computers
and vehicles, seven to ten years for machinery and furniture, fifteen years for certain land improvements, and forty years for
buildings and building improvements). We periodically review our long-lived assets to determine if the carrying value of assets
may not be recoverable. If an impairment is identified, we recognize
a
loss for the difference between the carrying amount and the estimated fair value of the asset. The Company recorded
an impairment of $810,000 in 2016 with respect to property and equipment that was sold in 2016. No impairments were identified
or recorded in 2015.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
(h)
PROPERTY HELD FOR SALE–– In 2015, property held for sale consists of 40 acres of land and buildings located in High
Springs, Florida. This property was used for operations and our corporate offices through September 30, 2011, and was
sold in 2016. Property is classified as held for sale when management’s intent is to sell the property and the
applicable accounting criteria are satisfied. This determination requires management to make estimates and assumptions,
including assessing the probability that potential sales transactions may or may not occur. Actual results could differ
from those assumptions. Upon designation as held for sale, the carrying values of the assets are recorded at the lower
of the carrying value or the estimated fair value, less estimated selling costs. Assets held for sale are no longer
depreciated. We periodically review our property held for sale to determine if the carrying value of assets may not
be recoverable. If we identify impairment, a loss is recognized for the difference between the carrying amount and the estimated
market value of the assets. In 2015, an impairment loss of $125,000 was recorded on this property to adjust its carrying
value to $275,000. This property was sold in January 2016 for $275,000.
(i)
REVENUE RECOGNITION––We recognize revenue from product sales when the following four revenue recognition criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectability is reasonably assured. Product sales and shipping revenues, net of any discounts
or return allowances, are recorded when the products are shipped and title passes to customers. Sales to customers are made pursuant
to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances,
which reduce product revenue, have been historically infrequent, and are recorded when they become known. Amounts received in
advance are deferred and recognized as revenue when all four revenue recognition criteria have been met. At December 31, 2016
and 2015, there is no deferred revenue.
(j)
SHIPPING AND HANDLING FEES––Shipping and handling fees, if billed to customers, are included in product sales. Shipping
and handling costs associated with inbound and outbound freight are expensed as incurred and included in freight and shipping
expense.
(k)
ADVERTISING––Advertising costs are charged to operations when incurred. We incur minimal advertising expenses.
(l)
RESEARCH AND DEVELOPMENT COSTS––Research and development costs are expensed as incurred.
(m)
INCOME TAXES––Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income
tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. In addition, tax benefits related to positions considered
uncertain are recognized only when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts.
(n)
NET LOSS PER COMMON SHARE––Basic and fully diluted net loss per common share is computed using a simple weighted average
of common shares outstanding during the periods presented, as outstanding warrants to purchase 9,057,500 and 577,500 common shares
were antidilutive for 2016 and 2015, respectively.
(o)
STOCK BASED COMPENSATION––The Company periodically awards stock to employees, directors, and consultants. An
expense is recognized equal to the fair value of the stock determined using the closing trading price of the stock on the award
date.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
(p)
FAIR VALUE MEASUREMENTS AND DISCLOSURES–The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification
(“ASC”) requires companies to determine fair value based on the price that would be received to sell the asset or
paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair
value is a market-based measurement, not an entity-specific measurement.
The
guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
●
|
Level
1: Quoted market prices in active markets for identical assets or liabilities.
|
|
|
●
|
Level
2: Observable market based inputs or unobservable inputs that are corroborated by market data.
|
|
|
●
|
Level
3: Unobservable inputs that are not corroborated by market data.
|
We
have no assets or liabilities that are required to have their fair value measured on a recurring basis at December 31, 2016 or
2015. Long-lived assets are measured at fair value on a non-recurring basis and are subject to fair value adjustments
when there is evidence of impairment. As disclosed above, we recorded an impairment of $810,000 on property and equipment
in 2016, and an impairment of $125,000 in 2015. The impairment was determined based on actual transactions of similar
property, a Level 2 input.
For
short-term classes of our financial instruments which are not reported at fair value, the carrying amounts approximate fair value
due to their short-term nature. The fair value of the mortgage note receivable is estimated based on the present value
of the underlying cash flows discounted at current rates. At December 31, 2016, the carrying value of the mortgage note receivable
approximates fair value. The fair value of our long-term debt is estimated based on the present value of the underlying cash flows
discounted at current rates offered the Company for similar debt. At December 31, 2015, the carrying value of long-term
debt approximated fair value. We had no long-term debt at December 31, 2016.
(q) LIQUIDITY––For the year
ended December 31, 2016, the Company incurred a net loss of $4,224,000 and used $2,951,000 of cash flows in its operations. At
December 31, 2016, the Company had a cash balance of $960,000 and working capital of $1,293,000. On February 23, 2017, subsequent
to the year ended December 31, 2016, the Company generated additional net proceeds of $1,879,000 from the sale of equity securities
in a private placement. Regarding the aforementioned loss and the cash used from operating activities, the Company was able to
obtain equity financing, which it concluded represents the primary source of cash flows that will permit the Company to meet its
financial obligations as they come due through March 2018. The Company is actively seeking to raise capital through the sale of
its common stock. In the event that the Company cannot raise sufficient capital, management may be required to reduce expenditures
related to its operations.
(r)
USE OF ESTIMATES––The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Although management bases its estimates on historical experience
and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these
estimates.
(s)
RECLASSIFICATIONS––Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016
presentation. These reclassifications had no effect on previously reported net income or stockholders equity.
(t)
NEW ACCOUNTING PRONOUNCEMENTS––The Financial Accounting Standards Board (FASB) has issued various Accounting Standards
Updates (ASUs), including ASU 2014-09, Revenue from Contracts with Customers, as subsequently amended; ASU 2014-15, Presentation
of Financial Statements-Going Concern; ASU No. 2015-11, Simplifying the Measurement of Inventory, ASU 2015-17, Balance Sheet
Classification of Deferred Taxes; and ASU 2016-02, Leases, which are effective in future fiscal years. We do not expect the adoption
of these standards to have a material effect on our financial position or results of operations.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(2)
MAJOR CUSTOMERS AND SUPPLIERS:
Our
revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. In 2016,
two major customers accounted for 54% of total revenues. In 2015, one major customer accounted for 31% of total revenues.
Substantially
all inventory purchases were from three vendors in 2016 and 2015. These vendors are located primarily outside the United States.
We
have two sources for our Aquaplex® products. There are multiple sources for our Trappsol® products.
For
the year ended December 31, 2016, our revenues consisted of 48% biopharmaceuticals, 43% basic natural and chemically modified
cyclodexterins, and 9% cyclodexterin complexes. For the year ended December 31, 2015, our revenues consisted of 38% biopharmaceuticals,
34% basic natural and chemically modified cyclodexterins, and 8% cyclodexterin complexes.
(3)
MORTGAGE NOTE RECEIVABLE
On
January 21, 2016, the Company sold its real property located in High Springs, Florida to an unrelated party. This property was
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 $10,000 in cash, less selling costs and settlement charges, and delivered to the Company
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 that commenced March 1, 2016, with the unpaid balance due in February 2023. Scheduled debt principal collections
on this mortgage for the next five years and thereafter are as follows:
Year Ending
|
|
|
|
December 31,
|
|
Principal
|
|
2017
|
|
$
|
34,393
|
|
2018
|
|
|
35,884
|
|
2019
|
|
|
37,439
|
|
2020
|
|
|
39,061
|
|
2021
|
|
|
40,772
|
|
Thereafter
|
|
|
49,872
|
|
|
|
$
|
237,241
|
|
(4)
CONCENTRATIONS OF CREDIT RISK:
Significant
concentrations of credit risk for all financial instruments owned by the Company are as follows:
(a)
DEMAND DEPOSITS––We maintain bank accounts in Federal credit unions and other financial institutions, which are insured
up to the Federal Deposit Insurance Corporation limits. The bank accounts may exceed federally insured levels; however, we have
not experienced any losses in such accounts.
(b)
ACCOUNTS RECEIVABLE––Our accounts receivable consist of amounts due primarily from chemical supply and pharmaceutical
companies located primarily in the United States. Two customers accounted for 81% of the accounts receivable balance at December
31, 2016. Five customers accounted for 89% of the accounts receivable balance at December 31, 2015. We have no policy requiring
collateral or other security to support our accounts receivable.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
(5)
PROPERTY AND EQUIPMENT:
Property
and equipment consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
92,181
|
|
Building and improvements
|
|
|
-
|
|
|
|
656,835
|
|
Machinery and equipment
|
|
|
21,861
|
|
|
|
1,455,010
|
|
Office Furniture and equipment
|
|
|
49,409
|
|
|
|
49,409
|
|
|
|
|
71,270
|
|
|
|
2,253,435
|
|
Less: accumulated depreciation
|
|
|
41,286
|
|
|
|
632,279
|
|
|
|
|
29,984
|
|
|
|
1,621,156
|
|
|
|
|
|
|
|
|
|
|
Building improvements not in service
|
|
|
-
|
|
|
|
271,787
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
29,984
|
|
|
$
|
1,892,943
|
|
(6)
NOTES PAYABLE:
In
connection with the December 16, 2016 sale of the Company’s office and manufacturing facility, the mortgage and equipment
bank loans described below were repaid in full. As a result, at December 31, 2016 the Company did not have any outstanding notes
payable.
At
December 31, 2015, The Company owed $516,685, on a mortgage note payable, collateralized by land and a building acquired in September
2010. Monthly payments of $3,506, including principal and interest at 3.99%, were due, with a final balloon payment
of approximately $350,000 due in July 2023. The note was secured by a mortgage on our Alachua property. We were not in compliance
with a debt coverage ratio covenant for the year ending December 31, 2015. As a result, the principal due beyond one year was
classified as current in the accompanying 2015 balance sheet.
The
Company also owed this lender $203,052 at December 31, 2015, under an equipment loan. Monthly payments of $4,051,
including principal and interest at 3.99%, were due through and including July 2020. The note was collateralized by all of our
equipment. The principal due under this loan was also reclassified as current in the accompanying 2015 balance sheet due to our
non-compliance with the loan covenant referred to above.
The
Company had a $100,000 line of credit which was collateralized by our inventory, accounts receivable, equipment, general intangibles
and fixtures. The credit line was also cross collateralized with our mortgage and equipment loans. There
was a $34,296 balance outstanding at December 31, 2015.
The
notes payable balance was reduced by unamortized deferred financing costs of $16,424 at December 31, 2015.
(7)
EQUITY TRANSACTIONS:
The
Company expensed $121,460 and $74,600 in employee and board member stock compensation in 2016 and 2015, respectively. The Company
accrues stock compensation expense over the period earned for employees and board members. The Company issued 264,000 shares of
common stock due to an employee, seven board members, and the Company’s secretary on July 22, 2016. On January 21, 2015,
the Company awarded 35,000 shares of Common Stock to a consultant for past services.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(7)
EQUITY TRANSACTIONS:
(CONTINUED)
In
April 2014, we entered into entered into a one-year agreement with Scarsdale Equities, LLC (“Scarsdale”), which was
subsequently extended, to act as our financial advisor and exclusive placement agent. Under the agreement, Scarsdale is entitled
to a fee with respect to each private placement of debt or equity securities of the Company in an amount equal to 6% of the proceeds
of such financing, and a seven-year warrant to purchase 6% of the securities issued as a part of such financing, with an exercise
price equal to 100% of the offering price of the securities sold during the term of the agreement. The agreement also provides
for payment of the above fees for any financing within one year of the expiration of the term, with investors identified by Scarsdale
during the term. N. Scott Fine, a director of the Company, was a principal of Scarsdale at the time we initially retained Scarsdale
as our financial adviser, and his son is currently employed by Scarsdale, is active on our account and serves as our Secretary.
On
July 10, 2015, the Company entered into a Securities Purchase Agreement under which it issued 2.6 million shares of its Common
Stock in a private placement, at a purchase price of $0.50 per share, for aggregate gross proceeds to the Company of $1.3 million.
Scarsdale acted as financial advisor to the Company in connection with the private placement and was paid a cash fee in an amount
equal to 6% of the gross proceeds of the private placement and was issued seven-year warrants to purchase 156,000 shares of Common
Stock at an exercise price of $0.50 per share.
On
July 28, 2015, the Company received $78,616 from the exercise of previously outstanding warrants for 314,465 shares of Common
Stock at an exercise price of $0.25 per share.
On
August 20, 2015, the Company issued 1.3 million shares of its Common Stock in a private placement, at a purchase price of $0.50
per share, for aggregate gross proceeds to the company of $650,000. Scarsdale acted as financial advisor to the company in connection
with the private placement and was paid a cash fee in an amount equal to 6% of the gross proceeds of the private placement and
it and its was designees were issued seven-year warrants to purchase 78,000 shares of Common Stock at an exercise price of $0.50
per share.
On
June 6, 2016, the Company issued 8 million units (“Units”) at a purchase price of $0.25 per Unit in a private placement,
each Unit consisting of one share of its common stock, and a seven-year warrant to purchase an additional share of common stock
at an exercise price of $0.25, for aggregate gross proceeds to the Company of $2 million. Scarsdale acted as financial advisor
to the Company in connection with the private placement and was paid a cash fee in an amount equal to 6% of the gross proceeds
of the private placement, and it and its designees were issued seven-year warrants to purchase 480,000 Units at an exercise price
of $0.25 per Unit.
The
following table presents the number common stock warrants outstanding at year end December 31, 2016 and 2015.
Warrants outstanding, December 31, 2014
|
|
|
657,965
|
|
Issued
|
|
|
234,000
|
|
Exercised
|
|
|
(314,465
|
)
|
Expired
|
|
|
-
|
|
Warrants outstanding, December 31, 2015
|
|
|
577,500
|
|
Issued
|
|
|
8,000,000
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Warrants outstanding, December 31, 2016
|
|
|
8,577,500
|
|
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(7)
EQUITY TRANSACTIONS:
(CONTINUED)
The
following table presents the number of common stock warrants outstanding, their exercise price, and expiration dates at December
31, 2016:
Warrants Issued
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
240,000
|
|
|
$
|
0.25
|
|
|
April 2021
|
103,500
|
|
|
$
|
1.00
|
|
|
July 2021
|
156,000
|
|
|
$
|
0.50
|
|
|
July 2022
|
78,000
|
|
|
$
|
0.50
|
|
|
August 2022
|
8,000,000
|
|
|
$
|
0.25
|
|
|
June 2023
|
8,577,500
|
|
|
|
|
|
|
|
In
addition, there are seven-year warrants outstanding at December 31, 2016 to purchase 480,000 Units at an exercise price of $0.25
per Unit.
(8)
PREFERRED STOCK:
In
2004, the Company amended its Articles of Incorporation authorizing a class of “blank check” preferred stock consisting
of 5,000,000 shares and created a Series A Preferred Stock consisting of one share and set forth its designations, rights and
preferences. The more significant right is the Series A share votes together with the holders of the Common Stock on all matters
submitted to a vote of company holders of Common Stock, with the share of Series A Preferred Stock being entitled to one vote
more than one-half of all votes entitled to be cast by all holders of voting capital stock of the Company on any matter submitted
to common shareholders so as to ensure that the votes entitled to be cast by the holder of the Series A Preferred Stock are equal
to at least a majority of the total of all votes entitled to be cast by all shareholders. Each share of Series A Preferred Stock
has a par value and liquidation preference of $.0001. There was no preferred stock outstanding in 2015 or 2016.
(9)
INCOME TAXES:
Differences
between accounting rules and tax laws cause differences between the basis of certain assets and liabilities for financial reporting
purposes and tax purposes. The tax effect of these differences, to the extent they are temporary, is recorded as deferred tax
assets and liabilities. Income tax expense is the tax payable or refundable for the period plus or minus the change during the
period in deferred assets and liabilities. Temporary differences which give rise to deferred tax assets and liabilities consist
of net operating loss carryforwards, stock compensation expense not deducted for tax purposes until trading restrictions
are removed and declared as compensation by the recipient, and accelerated depreciation methods for income tax purposes.
If
all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax
asset of approximately $3,616,000 based upon expected income tax rates. Under ASC 740, deferred tax assets must be reduced by
a valuation allowance if it is likely that all or a portion of it will not be realized. At December 31, 2016, we have
determined it is more likely than not that we will not realize our temporary deductible differences and net operating loss carryforwards,
and have provided a 100% valuation allowance on our net deferred tax asset.
Positive
evidence we evaluated in the order of significance and weighting in our evaluation includes the amount of net operating loss carryforward
utilized against current income tax liabilities in four of the prior ten years, and the length of time the net operating loss
carryforwards are available before they expire. Negative evidence we considered in the order of significance and weighting
in our evaluation include our recent net losses, our plans for continued clinical trial and product development expenses, the
timing of expiration of the net operating loss carryforwards prior to being utilized, unpredictability of future sales and profitability,
competition from others, and new government regulations. We determined greatest weight should be given to our plans
for continued clinical trial and product
development
expenses, trend of increasing expenses, and recent net operating losses in our evaluation.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
(9)
INCOME TAXES:
(CONTINUED)
The income tax disclosures for the year
ended December 31, 2015 have been revised to reflect the inclusion of tax credits that were not included in the prior year financial
statement disclosures. This correction had no effect on assets, liabilities, stockholder’s equity and net income as originally
reported for the year ended December 31, 2015. The Company has determined that the impact of these revisions on its previously
filed consolidated financial statements was not material.
For
2015, we calculated our deferred tax asset using the temporary deductible timing differences plus the net operating loss carryforward
multiplied by our expected effective income tax rate. We estimated our future taxable income based on historical results
and expected future trends in sales and margins. We estimated the timing of deducting our temporary deductible differences.
We estimated the amount of our net operating loss carryforward we would be able to utilize prior to expiration. We
increased our valuation allowance to 100% and recorded income tax expense of $120,000. We re-measure our valuation
allowance each quarter based on changes in our current and expected future sales and margins, and changes in the other factors
of both positive and negative evidence.
We
have available at December 31, 2016, unused federal and state net operating loss carryforwards totaling approximately $6,166,000
that may be applied against future taxable income.
If
not used, the net operating loss carryforwards will expire as follows:
Year Ending
December 31,
|
|
Amount
|
|
|
|
|
|
2020
|
|
$
|
174,000
|
|
2021
|
|
|
71,000
|
|
2024
|
|
|
66,000
|
|
2028
|
|
|
7,000
|
|
2030
|
|
|
160,000
|
|
2031
|
|
|
73,000
|
|
2032
|
|
|
48,000
|
|
2034
|
|
|
727,000
|
|
2035
|
|
|
1,969,000
|
|
2036
|
|
|
2,871,000
|
|
Total
|
|
$
|
6,166,000
|
|
The
Company believes a change in ownership pursuant to Section 382 of the Internal Revenue Code occurred during 2014. As a result,
net operating losses in existence as of the date of the ownership change are subject to an annual Section 382 limitation. At December
31, 2016, the amount of net operating losses subject to an annual Section 382 limitation has not been determined.
In
2015 and 2016, the Company had expenses that qualified for the Orphan Drug Credit. The Orphan Drug Credit may be used to offset
any current tax liabilities. Unused credits may be carried forward for 20 years. If the credit has not been used by the end of
the 20 year carryforward period, it can be deducted for federal income tax purposes. The unused credit carryforwards were $329,663
and $1,262,026 for 2015 and 2016 respectively.
For
2016, the Company did not recognize a benefit or provision for income taxes. The net deferred tax asset before the
valuation allowance increased $2,164,000 from 2015 to 2016, which is primarily the result of an additional net operating loss
for 2016. We increased our valuation allowance to offset this increase in our deferred tax asset. For 2015, we recognized a $120,000
provision for income taxes, which was due to the increase in our valuation allowance
to
100% of net deferred tax assets. Our net deferred tax asset before the valuation allowance increased $1,242,000 from 2014 to 2015,
which is primarily the result of an additional net operating loss for 2015. We increased our valuation allowance to offset this
increase in our deferred tax asset as well as our previously recognized deferred tax assets.
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
(9)
INCOME TAXES:
(CONTINUED)
The
components of our (provision) for income taxes are as follows for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(102,460
|
)
|
State
|
|
|
-
|
|
|
|
(17,540
|
)
|
Total Deferred
|
|
|
-
|
|
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
-
|
|
|
$
|
(120,000
|
)
|
Significant
components of our deferred Federal income taxes were as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,321,000
|
|
|
$
|
1,240,000
|
|
Tax credits
|
|
|
1,262,000
|
|
|
|
330,000
|
|
Impairment allowances
|
|
|
8,000
|
|
|
|
89,000
|
|
Stock compensation
|
|
|
27,000
|
|
|
|
28,000
|
|
Other
|
|
|
6,000
|
|
|
|
-
|
|
Less valuation allowance
|
|
|
(3,616,000
|
)
|
|
|
(1,452,000
|
)
|
Deferred tax assets, net of valuation
|
|
|
8,000
|
|
|
|
235,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(8,000
|
)
|
|
|
(235,000
|
)
|
Deferred tax liabilities
|
|
|
(8,000
|
)
|
|
|
(235,000
|
)
|
Net tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
differences between the effective income tax rate reflected in the benefit (provision) for income taxes and the amounts, which
would be determined by applying federal statutory income tax rate of 34% is summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Tax benefit (expense) at Federal statutory rate
|
|
$
|
1,436,000
|
|
|
$
|
827,000
|
|
Effect of State taxes
|
|
|
153,000
|
|
|
|
88,000
|
|
Tax credits
|
|
|
932,000
|
|
|
|
330,000
|
|
Nondeductible expenses
|
|
|
(357,000
|
)
|
|
|
(123,000
|
)
|
Other
|
|
|
215,000
|
|
|
|
-
|
|
Valuation allowance – deferred tax assets
|
|
|
(2,164,000
|
)
|
|
|
(1,242,000
|
)
|
Total tax benefit (provision)
|
|
$
|
-
|
|
|
$
|
(120,000
|
)
|
CTD
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
(9)
INCOME TAXES:
(CONTINUED)
The
Company files income tax returns in the U.S. Federal jurisdiction, and in the State of Florida. The Company is no longer subject
to U.S. Federal or state income tax examinations by tax authorities for years before 2013.
The
Company has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with accounting principles
generally accepted in the United States of America for accounting for uncertainty in income taxes, and determined that there are
no uncertain tax positions that would have a material impact on the financial statements of the Company. When applicable, interest
and penalties will be reflected as a component of income tax expense.
(10)
EMPLOYEE BENEFIT PLAN:
The
Company maintains a 401(k) plan available to all employees who have satisfied certain eligibility requirements. Employee contributions
are discretionary. The Company may match employee contributions and may also make discretionary contributions for all eligible
employees based upon their total compensation. For 2016 and 2015, the Company elected to match the employee’s contribution,
not to exceed 4% of compensation. The Company’s 401(k) contributions were $16,294 and $16,597 for 2016 and 2015, respectively.
(11)
SALE OF PROPERTY AND EQUIPMENT:
On
January 21, 2016, the Company closed on the sale of its real property located in High Springs, Florida, which had been previously
classified on the Company’s balance sheets 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 $10,000 in cash and delivered to the Company a promissory note in the principal
amount of $265,000, and a mortgage in favor of the Company 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 that
commenced March 1, 2016, with the unpaid balance due in February 2023. The Company previously recorded valuation allowances on
this property in the amount of $220,455, and recorded a loss of $4,489 in 2016 on the sale.
On
December 16, 2016, the Company completed the sale of its office and manufacturing facility located in Alachua, Florida for an
aggregate purchase price of $980,000. The assets sold consisted of the Company’s real property, sold for a purchase price
of $800,000, and substantially all of the Company’s manufacturing equipment at such location, including the Company’s
pulse dryer, sold for a purchase price of $180,000. The Company previously recorded valuation allowances on these properties in
the amount of $810,000 in 2016, and recorded a loss of $44,179 in 2016 on the sale. The Company used $664,800 of the proceeds
of the sale to repay in full all of its outstanding indebtedness to Regions Bank, which consisted of a mortgage loan secured by
the real property sold to the buyer, and an equipment loan secured by the equipment sold to the buyer, thereby terminating the
Company’s loan agreements with Regions Bank. Net cash proceeds to the Company from the sale, after giving effect to repayment
of the indebtedness to Regions Bank as described above and the payment of transaction expenses, amounted to $255,690.
(12)
SUBSEQUENT EVENTS:
On January 27, 2017, the Company entered into a two-year
lease for approximately 2,500 square feet of office and distribution warehouse space located in Gainesville, Florida for $1,500
per month, with a two-year renewal option.
On
February 23, 2017, the Company issued 5,754,832 units (“Units”) at a purchase price of $0.35 per Unit in a private
placement, each Unit consisting of one share of its common stock, and a seven-year warrant to purchase an additional share of
common stock at an exercise price of $0.35, for aggregate gross proceeds to the Company of $2 million. Scarsdale acted as financial
advisor to the Company in connection with the private placement and was paid a cash fee of approximately $153,000, and it and
its designees were issued seven-year warrants to purchase 272,455 Units at an exercise price of $0.35 per Unit.