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, 2016. 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. All amounts presented herein are rounded to nearest
$1,000.
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 filed a Type II Drug Master File with the U.S. Food and Drug
Administration (“FDA”) in 2014 for our lead drug candidate, Trappsol® Cyclo™ (hydroxypropyl beta cyclodextrin)
as a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal cholesterol metabolism disease found
primarily in children and young adults. In 2015, we launched an International Clinical Program for Trappsol® Cyclo™ as
a treatment for NPC. In 2016, we 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. The IND was
approved by the FDA in September 2016, and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™
for the treatment of NPC. We have also filed Clinical Trial Applications with several European regulators, including the United
Kingdom's Medicines and Healthcare Products Regulatory Agency, which approved our application. We expect to commence a U.S. clinical
study in 2017 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, with similar
studies to be conducted in Europe.
We also continue to 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
that had been primarily reselling basic cyclodextrin products.
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™ increased
to $697,000 for 2016 from $352,000 for 2015. Sales of Trappsol® Cyclo™ were $27,000 and $140,000 for the three ended
March 31, 2017 and 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. While we enjoy lower supply prices
from outside the United States, changes in shipping costs and currency exchange rates are making domestic sources more competitively
priced. 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 increased to $1,638,000 as of March 31,
2017, compared to $960,000 as of December 31, 2016. Our current assets less current liabilities were $2,236,000 as of March 31,
2017, compared to $1,293,000 at December 31, 2016. We used $1,185,000 in operations for the three months ended March 31, 2017,
compared to $717,000 for the same period in 2016. We repaid all of our bank debt in December 2016 with proceeds from the sales
of our real property and manufacturing facility.
On February 23, 2017, we generated additional
net proceeds of $1,851,000 from the sale of our equity securities in a private placement.
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 presently believe the Company
has sufficient cash to meet its anticipated operating costs and capital expenditure requirements for at least the next twelve months.
We expect to continue to raise additional capital through the sale of our securities from time to time for the foreseeable future
to fund the development of 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.
We have no off-balance sheet arrangements
at March 31, 2017.
Results of Operations - Three
Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
We reported a net loss of $987,000
for the three months ended March 31, 2017, compared to net loss of $706,000 for the three months ended March 31, 2016.
Total revenues for the three month
period ended March 31, 2017 decreased 2% to $305,000 compared to $313,000 for the same period in 2016. Our change in the mix of
our product sales for the three months ended March 31, 2017 and 2016 is as follows:
Trappsol® Cyclo
Our sales of Trappsol® Cyclo™
decreased by 81% for the three month period ended March 31, 2017, to $27,000 from $140,000 for the three months ended March 31,
2016. We had no sales to a particular customer who exports Trappsol® Cyclo™ to South America in the three
months ended March 31, 2017, compared to sales of $134,000 (96% of total sales of Trappsol® Cyclo™) to this customer
for the three months ended March 31, 2016. Our annual 2016 sales to this customer were $669,000 (96% of total 2016
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 74% for the three month period ended March 31, 2017, to $241,000 from $138,000 for the three months ended March 31
2016.
Trappsol® other products
Our sales of other Trappsol®
products decreased by 15% for the three month period ended March 31, 2017, to $18,000 from $21,000 for the three months ended
March 31, 2016.
Aquaplex®
Our sales of Aquaplex® were
$17,000 for the three months ended March 31, 2017 compared to $1,000 for the three months ended March 31, 2016.
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, 2017, our four largest customers accounted for 75% of our sales; the largest accounted
for 52% of sales. 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. 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, 2017 decreased 47%
to $19,000 from $37,000 for the same period in 2016. Our cost of products sold (excluding any allocation of direct and indirect
overhead and handling costs) as a percentage of sales was 6% for the three months ended March 31, 2017 compared to 12% for the
three months ended March 31, 2016. 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 2016, or the first quarter
of 2017.
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 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.
Research and development expenses increased to
$644,000 for the three months ended March 31, 2017, from $283,000 for the three months ended March 31, 2016. Research and development
as a percentage of our total operating expenses increased to 50% for the three months ended March 31, 2017 from 27% for the three
months ended March 31, 2016. The increase in research and development expense is due to the International Clinical Program. We
expect research and development costs to increase in 2017 as we continue to seek regulatory approval for the use of Trappsol®
Cyclo™ in the treatment of NPC.
Operating expenses excluding research and development
decreased to $652,000 for the three months ended March 31, 2017 from $763,000 for the three months ended March 31, 2016. Operating
expenses excluding research and development as a percentage of total operating expenses decreased to 50% for the three months ended
March 31, 2017 from 73% for the three months ended March 31, 2016.
Personnel expenses increased by 11%, to $335,000
for the three months ended March 31, 2017 from $301,000 for the three months ended March 31, 2016. We expect personnel costs to
continue to increase in 2017 as the result of additional employees and our International Clinical Program product development activities.
Repairs and maintenance expenses decreased to $3,000
for the three months ended March 31, 2017 from $6,000 for 2015.
Professional fees decreased 39% to $124,000 for
the three months ended March 31, 2017, compared to $202,000 for the three months ended March 31, 2016. Professional fees may increase
in the future as we increase our capital raising initiatives and seek to develop new products.
Office and other expenses decreased 9% to $132,000
for the three months ended March 31, 2017, compared to $145,000 for the three months ended March 31, 2016.
Board of Directors fees and costs increased to
$37,000 for the three months ended March 31, 2017, compared to $25,000 for the three months ended March 31, 2016.
Depreciation decreased to $2,000 for the three
months ended March 31, 2017, compared to $41,000 for the three months ended March 31, 2016. Depreciation decreased due to the sale
of our real property and manufacturing facility in December 2016.
We had no interest expense in the three months
ended March 31, 2017, compared to $8,000 for the three months ended March 31, 2016, due to the repayment of our bank debt
in December 2016.
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, 2017, and 2016, respectively.