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 that impacts the brain, lung, liver, spleen, and other organs. 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 U.S. The Phase I study will evaluate the safety of Trappsol® Cyclo™ along with markers of cholesterol metabolism and markers of NPC during a 14-week treatment period of intravenous administration of Trappsol ® Cyclo ™ every two weeks to participants 18 years of age and older. 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. Initial patient enrollment in the U.S. Phase I study is expected to occur in September 2017.
We have also filed Clinical Trial Applications for a Phase I/II clinical study with several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, all of which have approved our applications. The European Phase I/II study will evaluate the safety of Trappsol® Cyclo™ along with a range of clinical outcomes, including neurologic, hepatic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The European study is similar to the U.S. study, providing for the administration of Trappsol® Cyclo™ intravenously to NPC patients every two weeks in a double-blind, randomized trial. The first patient was dosed in this study in July 2017.
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, Spain and Norway. Our annual sales of Trappsol® Cyclo™ increased to $697,000 for 2016 from $352,000 for 2015. Sales of Trappsol® Cyclo™ were $314,000 and $386,000 for the six months ended June 30, 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.
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 $1,331,000 as of June 30, 2017, compared to $960,000 as of December 31, 2016. Our current assets less current liabilities were $1,417,000 as of June 30, 2017, compared to $1,293,000 at December 31, 2016. We used $1,498,000 in operations for the six months ended June 30, 2017, compared to $1,530,000 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 June 30, 2017.
Results of Operations - Three and Six Months Ended June 30, 2017 Compared to Three and Six Months Ended June 30, 2016
We reported a net loss of $(828,000) and $(1,815,000) for the three and six months ended June 30, 2017, respectively, compared to a net loss of $(1,071,000) and $(1,777,000) for the three and six months ended June 30, 2016, respectively.
Total revenues for the three month period ended June 30, 2017 increased 36% to $523,000 compared to $384,000 for the same period in 2016. Total revenues for the six month period ended June 30, 2017 increased 19% to $828,000 compared to $697,000 for the same period in 2016.
Our change in the mix of our product sales for the three and six months ended June 30, 2017 and 2016 is as follows:
Trappsol® Cyclo
Our sales of Trappsol® Cyclo™ increased by 19% for the three month period ended June 30, 2017, to $287,000 from $241,000 for the three month period ended June 30, 2016. Our sales of Trappsol® Cyclo™ decreased by 19% for the six month period ended June 30, 2017, to $314,000 from $386,000 for the six month period ended June 30, 2016. Our sales to a particular customer who exports Trappsol® Cyclo™ to South America were $287,000 (100% of total sales of Trappsol® Cyclo™) for the three months ended June 30, 2017, compared to $231,000 (96% of total sales of Trappsol® Cyclo™) for the three months ended June 30, 2016; and our sales to that same customer who exports Trappsol® Cyclo™ to South America were $287,000 (91% of total sales of Trappsol® Cyclo™) for the six month period ended June 30, 2017, compared to $365,000 (95% of total sales of Trappsol® Cyclo™) for the six month period ended June 30, 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 102% for the three month period ended June 30, 2017, to $182,000 from $90,000 for the three months ended June 30, 2016. Our sales of Trappsol® HPB increased by 85% for the six month period ended June 30, 2017, to $422,000 from $228,000 for the six month period ended June 30, 2016.
Trappsol® other products
Our sales of other Trappsol® products increased by 104% for the three month period ended June 30, 2017, to $51,000 from $25,000 for the three month period ended June 30, 2016.
Our sales of other Trappsol® products increased by 75% for the six month period ended June 30, 2017, to $70,000 from $40,000 for the six month period ended June 30, 2016.
Aquaplex®
There were negligible sales of Aquaplex® for the three month period ended June 30, 2017 compared to $21,000 for the three month period ended June 30, 2016. Our sales of Aquaplex® were $17,000 for the six month period ended June 30, 2017 compared to $21,000 for the six month period ended June 30, 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 six months ended June 30, 2017, our two largest customers accounted for 66% of our sales; the largest accounted for 34% of sales. During the six months ended June 30, 2016, our three largest customers accounted for 73% of our sales; the largest accounted for 54% 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) as a percentage of sales for the six month period ended June 30, 2017 was 12% ($98,000) compared to 13% ($93,000) 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 15% ($79,000) for the three months ended June 30, 2017 compared to 15% ($56,000) for the same period in 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 2015, or the first six months 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.
Personnel expenses decreased to $305,000 for the three months ended June 30, 2017 from $381,000 for the three months ended June 30, 2016. Personnel expenses decreased to $639,000 for the six months ended June 30, 2017 from $682,000 for the six months ended June 30, 2016. The decrease in personnel expense is due to the sale of our office and manufacturing facility in December 2016.
Research and development expenses decreased to $527,000 for the three months ended June 30, 2017, from $661,000 for the three months ended June 30, 2016. Research and development expenses increased to $1,171,000 for the six months ended June 30, 2017, from $944,000 for the six months ended June 30, 2016. Research and development expenses as a percentage of our total operating expenses increased to 44% for the six months ended June 30, 2017 from 39% for the six months ended June 30, 2016. The increase in research and development expense is due to the International Clinical Program. We expect future research and development costs to increase as we continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC.
Repairs and maintenance expenses decreased to $1,000 for the three months ended June 30, 2017 from $10,000 for the three months ended June 30, 2016. Repairs and maintenance expenses decreased to $4,000 for the six months ended June 30, 2017 from $16,000 for the six months ended June 30, 2016.
Professional fees increased to $302,000 for the three months ended June 30, 2017, compared to $77,000 for the three months ended June 30, 2016. Professional fees increased to $426,000 for the six months ended June 30, 2017, compared to $279,000 for the six months ended June 30, 2016. Professional fees may further increase as we increase our capital raising initiatives and seek to develop new products.
Office and other expenses decreased to $94,000 for the three months ended June 30, 2017 compared to $195,000 for the three months ended June 30, 2016. Office and other expenses decreased to $227,000 for the six months ended June 30, 2017 compared to $307,000 for the six months ended June 30, 2016.
Board of Directors fees and costs increased to $40,000 for the three months ended June 30, 2017, compared to $22,000 for the three months ended June 30, 2016. Board of Directors fee and costs increased to $77,000 for the six months ended June 30, 2017, compared to $46,000 for the six months ended June 30, 2016.
Depreciation was $2,000 for the three months ended June 30, 2017, compared to $47,000 for the three months ended June 30, 2016. Depreciation was $4,000 for the six months ended June 30, 2017, compared to $88,000 for the six months ended June 30, 2016. This decrease is due to the sale of our office and manufacturing facility in December 2016. Our depreciation expense for future periods will be consistent with the current expense.
We had no interest expense in the three and six months ended June 30, 2017, compared to $7,000 and $15,000 for the three and six months ended June 30, 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 and six months ended June 30, 2017, and 2016, respectively.