NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 201
8
AND 201
7
(
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,” “we,” “our” or “us”) 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. 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”), a rare and fatal cholesterol metabolism disease that impacts the brain, lungs, liver, spleen, and other organs. The FDA approved our Investigational New Drug application (IND) which describes our Phase I clinical plans in the U.S. for Trappsol
®
Cyclo™ 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 commenced in
September 2017.
We have also filed Clinical Trial Applications with several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, and in Israel, all of which have approved our applications. The
first
patient was dosed in our European study in
July 2017.
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 purchased 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, an allowance for doubtful accounts was
not
deemed necessary at
December 31, 2018
and
2017.
(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 net realizable value. 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. The Company records a specific reserve for inventory items that are determined to be obsolete. The reserve for obsolete inventory was
$39,700
and
$27,500
at
December 31, 2018
and
2017,
respectively.
(f) MORTGAGE NOTE RECEIVABLE––The mortgage note receivable is stated at amortized value, which is the amount we expect to collect.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
1
) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
(g) FURNITURE AND EQUIPMENT––Furniture and equipment are recorded at cost, less accumulated depreciation. Depreciation 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 and
seven
to
ten
years for machinery, equipment and office furniture). 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.
(h) REVENUE RECOGNITION–– Effective
January 1, 2018,
the Company adopted the provisions of ASC
606
using the modified retrospective method. The adoption of the new revenue standards as of
January 1, 2018
did
not
change the Company’s revenue recognition as the majority of its revenues continues to be recognized when the customer takes control of the product. As the Company did
not
identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues,
no
adjustment to retained earnings was required upon adoption.
Under the new revenue standards, revenues are recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the
five
step model prescribed under ASU
No.
2014
-
09:
(i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Product revenues
In the U.S. we sell our products to the end user or wholesale distributors. In other countries, we sell our products primarily to wholesale distributors and other
third
-party distribution partners. These customers subsequently resell our products to health care providers and patients.
Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is
one
year or less or the amount is immaterial. We treat shipping and handling costs performed after a customer obtains control of the product as a fulfillment cost. We have identified
one
performance obligation in our contracts with customers which is the delivery of product to our customers. The transaction price is recognized in full when we deliver the product to our customer, which is the point at which we have satisfied our performance obligation.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, health care providers or payors, including those associated with the implementation of pricing actions in certain of the international markets in which we operate. Our process for estimating reserves established for these variable consideration components do
not
differ materially from our historical practices.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, contractual adjustments and returns.
These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). Our estimates of reserves established for variable consideration typically utilize the most likely method and reflect our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances,
may
be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will
not
occur in a future period. Actual amounts
may
ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
1
) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
For additional information on our revenues, please read Note
2,
Revenues, to these consolidated financial statements.
(i) 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.
(j) ADVERTISING––Advertising costs are charged to operations when incurred. We incur minimal advertising expenses.
(k) RESEARCH AND DEVELOPMENT COSTS––Research and development costs are expensed as incurred.
(l) 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.
The Tax Cut and Jobs Act (the “Tax Act”) was enacted on
December 22, 2017.
The Tax Act contains several key provisions including, among other things, reducing the U.S. federal corporate tax rate from
35%
to
21%.
Changes in tax law are accounted for in the period of enactment. In addition, federal net operating losses (“NOLs”) generated during future periods will be carried forward indefinitely, but will be subject to an
80%
utilization against taxable income. The carryback provision has been revoked for NOLs after
January 1, 2018.
(m) 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 convertible preferred stock and outstanding warrants to purchase
32,192,294
and
28,500,478
common shares were antidilutive for
2018
and
2017,
respectively.
(n) 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.
(o) 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.
|
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
1
) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
We have
no
assets or liabilities that are required to have their fair value measured on a recurring basis at
December
31,
2018
or
2017.
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.
For short-term classes of our financial instruments, which include cash, accounts receivable and accounts payable, and 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, 2018
and
2017,
the carrying value of the mortgage note receivable approximates fair value.
(p) LIQUIDITY AND GOING CONCERN–– For the year ended
December 31, 2018
and
2017,
the Company incurred net losses of
$4,255,000
and
$3,833,000,
respectively. The Company has an accumulated deficit of approximately
$17,588,000
at
December 31, 2018.
Our recent losses have predominantly resulted from research and development expenses for our Trappsol
®
Cyclo™ product and other general operating expenses, including board advisory fees. We believe our expenses will continue to increase as we conduct clinical trials and continue to seek regulatory approval for the use of Trappsol
®
Cyclo™ in the treatment of NPC.
For year ended
December 31, 2018,
our operations used approximately
$3,188,000
in cash. This cash was provided primarily by cash on hand and net proceeds of
$4,102,000
from equity issuances. At
December 31, 2018,
the Company had a cash balance of
$2,217,000
and current assets less current liabilities of
$844,000.
We will need additional capital to maintain our operations, continue our research and development programs, conduct clinical trials, seek regulatory approvals and manufacture and market our products.
The Company has incurred losses from operations in each of the last
five
years. We will need 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. If we cannot raise the additional funds required for our anticipated operations, we
may
be required to reduce the scope of or eliminate our research and development programs, delay our clinical trials and the ability to seek regulatory approvals, downsize our general and administrative infrastructure, or seek alternative measures to avoid insolvency. If we raise additional funds through future offerings of shares of our Common Stock or other securities, such offerings would cause dilution of current stockholders’ percentage ownership in the Company, which could be substantial. Future offerings also could have a material and adverse effect on the price of our Common Stock.
Our consolidated financial statements for the year ended
December 31, 2018
and
2017
were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. We have incurred losses from operations in each of our last
five
fiscal years. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above. We will need to raise additional capital to support our ongoing operations and continue our clinical trials. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do
not
include any adjustments that might result from the outcome of these uncertainties.
(q) 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.
(r) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS–– In
August 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016
-
15,
“Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” The amendments in this ASU relate to
eight
specific types of cash receipts and cash payments which current U.S. generally accepted accounting principles (“U.S. GAAP”) either is unclear or does
not
include specific guidance on the cash flow classification issues. The amendments in this ASU are effective for public business entities for fiscal years beginning after
December 15, 2017,
and interim periods within those fiscal years. The Company adopted this ASU effective
January 1, 2018
and there was
no
significant impact on its consolidated financial statements and disclosures.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
1
) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
In
February 2016,
the FASB issued ASU
2016
-
02,
Leases (Topic
842
), which requires that lessees recognize assets and liabilities for leases with lease terms greater than
12
months in the statement of financial position. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after
December 15, 2018,
including interim reporting periods within that reporting period. The Company will adopt this ASU effective
January 1, 2019
and does
not
expect a significant impact on its consolidated financial statements and disclosures.
Between
May 2014
and
December 2016,
the FASB issued several ASUs on Revenue from Contracts with Customers (Topic
606
). These updates will supersede nearly all existing revenue recognition guidance under current U.S. GAAP. The core principle is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. A
five
-step process has been defined to achieve this core principle, and, in doing so, more judgment and estimates
may
be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective for annual periods beginning after
December 15, 2017,
and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which includes additional footnote disclosures). Effective
January 1, 2018,
the Company adopted the provisions of ASC
606
using the modified retrospective method. The adoption of the new revenue standards as of
January 1, 2018
did
not
change the Company’s revenue recognition as the majority of its revenues continues to be recognized when the customer takes control of the product. As the Company did
not
identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues,
no
adjustment to retained earnings was required upon adoption.
(
2
) REVENUES:
The Company operates in
one
business segment, which primarily focuses on the development and commercialization of innovative cyclodextrin-based products for the treatment of people with serious and life threatening rare diseases and medical conditions. The Company considers there to be revenue concentration risks for regions where net product revenues exceed
10%
of consolidated net product revenues. The concentration of the Company’s net product revenues within the regions below
may
have a material adverse effect on the Company’s revenues and results of operations if sales in the respective regions experience difficulties. The Company adopted the requirements of ASC
606
on
January 1, 2018
using the modified retrospective method. See Note
1
(h) – Revenue Recognition for additional discussion.
Revenues by product are summarized as follows:
|
|
Year
Ended
|
|
|
|
December 31
,
|
|
|
|
2018
|
|
|
2017
|
|
Trappsol
®
Cyclo™
|
|
$
|
166,596
|
|
|
$
|
342,231
|
|
Trappsol
®
HPB
|
|
|
484,101
|
|
|
|
710,939
|
|
Trappsol
®
Fine Chemical
|
|
|
233,910
|
|
|
|
130,982
|
|
Aquaplex
®
|
|
|
116,806
|
|
|
|
17,760
|
|
Other
|
|
|
10,064
|
|
|
|
35,844
|
|
Total revenues
|
|
$
|
1,011,477
|
|
|
$
|
1,237,756
|
|
All of our sales of Trappsol
®
Cyclo™ for the year ended
December 31, 2018
and
84%
of our sales of Trappsol
®
Cyclo™ for the year ended
December 31, 2017
were to a single customer who exports the drug to South America. Substantially all of our Aquaplex
®
sales are to
one
customer.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
3
) MAJOR CUSTOMERS AND SUPPLIERS:
Our revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. In
2018,
four
major customers accounted for
57%
of total revenues. Accounts receivable balances for these major customers represent
31%
of total accounts receivable at
December 31, 2018.
In
2017,
three
major customers accounted for
59%
of total revenues. Accounts receivable balances for these major customers represent
27%
of total accounts receivable at
December 31, 2017.
Substantially all inventory purchases were from
three
vendors in
2018
and
2017.
These vendors are located primarily outside the United States.
We have
three
sources for our Aquaplex® products. There are multiple sources for our Trappsol
®
products.
For the year ended
December 31, 2018,
the product mix of our revenues consisted of
17%
biopharmaceuticals,
71%
basic natural and chemically modified cyclodextrins, and
12%
cyclodextrin complexes. For the year ended
December 31, 2017,
the product mix of our revenues consisted of
28%
biopharmaceuticals,
71%
basic natural and chemically modified cyclodextrins, and
1%
cyclodextrin complexes.
(
4
) MORTGAGE NOTE RECEIVABLE
:
On
January 21, 2016,
the Company sold its real property located in High Springs, Florida to an unrelated party. 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
|
|
2019
|
|
$
|
37,439
|
|
2020
|
|
|
39,061
|
|
2021
|
|
|
40,754
|
|
2022
|
|
|
42,520
|
|
2023
|
|
|
7,339
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
167,113
|
|
(
5
) CONCENTRATIONS OF CREDIT RISK:
Significant concentrations of credit risk for all financial instruments owned by the Company are as follows:
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.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
6
)
FURNITURE AND
EQUIPMENT:
Furniture and equipment consists of the following as of
December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
16,089
|
|
|
$
|
14,764
|
|
Office furniture
|
|
|
52,820
|
|
|
|
51,186
|
|
|
|
|
68,909
|
|
|
|
65,950
|
|
Less: accumulated depreciation
|
|
|
50,338
|
|
|
|
40,214
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
$
|
18,571
|
|
|
$
|
25,736
|
|
(
7
)
EQUITY
TRANSACTIONS:
The Company expensed
$83,420
and
$118,680
in employee and board member stock compensation in
2018
and
2017,
respectively. These shares were valued using quoted market values. The Company accrues stock compensation expense over the period earned for employees and board members. In
2018,
the Company did
not
issue shares of Common Stock as a bonus. In
2017,
the Company issued
292,000
shares of Common Stock to
eight
board members, the Company’s secretary, and to employees as a bonus.
In
April 2014,
we 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 raised by Scarsdale, and a
seven
-year warrant to purchase
6%
of the securities issued as a part of such financing raised by Scarsdale, with an exercise price equal to
100%
of the offering price of the securities sold during the term of the agreement. The foregoing compensation terms were modified for private placements effected in
2017,
resulting in the compensation described in more detail below. 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, the Company’s Chief Executive Officer and Chairman of the Board, 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
February 23, 2017,
the Company issued
5,754,832
“Units” at a purchase price of
$0.35
per Unit in a private placement, each Unit consisting of
one
share of 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 approximately
$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
164,074
Units at an exercise price of
$0.35
per Unit. A
$10,000
cash fee was also paid to another party with respect to this private placement.
In
October 2017,
the Company completed a private placement of
15,500
preferred stock “Units” at a purchase price of
$100
per Unit, each Unit consisting of
one
share of Series B Convertible Preferred Stock (“Series B Preferred Stock”) convertible into
400
shares of Common Stock, and
seven
-year warrants to purchase
400
shares of Common Stock at an exercise price of
$0.25
per share. The Series B Preferred Stock was automatically converted into Common Stock on
May 23, 2018,
when the Company increased its authorized shares of Common Stock, which resulted in the Company having a sufficient number of authorized and unissued shares of Common Stock to permit the conversion or exercise, as applicable, of all outstanding shares of preferred stock, warrants and other convertible securities. The Series B Preferred Stock had a liquidation preference of
$100
per share, was
not
redeemable, and did
not
entitle the holder to special dividends. Scarsdale acted as financial advisor to the Company in connection with the private placement and was paid a cash fee of
$60,000,
and it and its designees were issued
seven
-year warrants to purchase
600
Units at an exercise price of
$100
per Unit.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
7
)
EQUITY
TRANSACTIONS:
(CONTINUED)
In
April 2018,
the Company completed a private placement of
20,100
“Units”, at a price of
$100
per Unit, resulting in gross proceeds to the Company of
$2,010,000.
Each Unit consisted of
one
share of Series B Preferred Stock convertible into
400
shares of Common Stock, and
seven
-year warrants to purchase
400
shares of Common Stock at an exercise price of
$0.25
per share. Prior to
March 31, 2018,
the Company received
$74,983
in advance from these investors. Scarsdale acted as financial advisor to the Company in connection with the private placement and was paid a cash fee of
$50,000.
On
May 23, 2018,
at a special meeting of shareholders, the Company’s shareholders approved amendments to the Company’s Articles of Incorporation increasing the number of authorized shares of Common Stock from
100,000,000
shares to
500,000,000
shares, and deleting references to the Series A Preferred Stock, which was
no
longer outstanding. Following the meeting, the Company filed Articles of Amendment to its Article of Incorporation which resulted in the automatic conversion of each outstanding share of Series B Preferred Stock into
400
shares of Common Stock, increasing the number of outstanding shares of Common Stock by
14,240,000.
In
December 2018,
the Company completed a private placement of
3,519,963
common stock “Units” at a price of
$0.65
per Unit, resulting in gross proceeds to the Company of
$2,342,034,
of which
$130,063
was received in
January 2019
and is reflected in the accompanying balance sheet as a stock subscription receivable. Each Unit consisted of
one
share of common stock and a
seven
-year warrant to purchase
one
share of common stock at an exercise price of
$0.65
per share.
The following table presents the number of Common Stock warrants outstanding:
Warrants outstanding, December 31, 2016
|
|
|
8,677,500
|
|
Issued
|
|
|
11,954,831
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Warrants outstanding, December 31, 2017
|
|
|
20,632,331
|
|
Issued
|
|
|
11,559,963
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Warrants outstanding, December 31, 2018
|
|
|
32,192,294
|
|
The following table presents the number of Common Stock warrants outstanding, their exercise price, and expiration dates at
December 31, 2018:
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
|
8,100,000
|
|
|
$
|
0.25
|
|
June 2023
|
5,754,831
|
|
|
$
|
0.35
|
|
February 2024
|
6,200,000
|
|
|
$
|
0.25
|
|
October 2024
|
8,040,000
|
|
|
$
|
0.25
|
|
April 23, 2025
|
3,519,963
|
|
|
$
|
0.65
|
|
December 2025
|
32,192,294
|
|
|
|
|
|
|
In addition, there are
seven
-year warrants outstanding at
December 31, 2018
to purchase
480,000
Units sold in our
May 2016
private placement at an exercise price of
$0.25
per Unit,
164,074
Units sold in our
February 2017
private placement at an exercise price of
$0.35
per Unit, and
600
Units sold in our
October 2017
private placement at an exercise price of
$100
per Unit.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
8
) PREFERRED STOCK:
The Company’s Articles of Incorporation provide for
5,000,000
shares of “blank check” preferred stock. At
December 31, 2018,
no
shares of preferred stock were outstanding or designated.
In
October 2017,
the Company designated
50,000
shares of preferred stock as Series B Convertible Preferred Stock and issued an aggregate of
35,600
of such shares in connection with the private placements described in Note
7
above. Each share of Series B Preferred Stock was convertible into
400
shares of Common Stock, had a liquidation preference of
$100
per share, and did
not
entitle the holder to special dividends. The Series B Preferred Stock automatically converted into common stock in
2018.
Please read Note
7,
Equity Transactions, to these consolidated financial statements.
(
9
) INCOME TAXES:
If all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax asset of approximately
$6,235,000
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, 2018,
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. 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, 2018,
unused federal and state net operating loss carryforwards totaling approximately
$11,903,000
that
may
be applied against future taxable income.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
9
) INCOME TAXES:
(CONTINUED)
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
|
|
|
2,867,000
|
|
2037
|
|
|
2,481,000
|
|
Indefinite
|
|
|
3,260,000
|
|
Total
|
|
$
|
11,903,000
|
|
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, 2018,
the amount of net operating losses subject to an annual Section
382
limitation has
not
been determined.
The Company has expenses that qualify 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 as an expense for federal income tax purposes. The cumulative unused credit carryforward was
$3,085,000
at
December 31, 2018.
For
2018,
we did
not
recognize a benefit or provision for income taxes. The net deferred tax asset before the valuation allowance increased
$1,575,000
from
2017
to
2018,
which is primarily the result of an additional net operating loss for
2018.
We increased our valuation allowance to offset this increase in our deferred tax asset.
For
2017,
we did
not
recognize a benefit or provision for income taxes. The net deferred tax asset before the valuation allowance increased
$1,044,000
from
2016
to
2017,
which is primarily the result of an additional net operating loss for
2017.
We increased our valuation allowance to offset this increase in our deferred tax asset.
Significant components of our deferred Federal income taxes were as follows:
|
|
2018
|
|
|
201
7
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,017,000
|
|
|
$
|
2,206,000
|
|
Tax credits
|
|
|
3,085,000
|
|
|
|
2,397,000
|
|
Impairment allowances
|
|
|
10,000
|
|
|
|
7,000
|
|
Stock compensation
|
|
|
64,000
|
|
|
|
20,000
|
|
Other
|
|
|
62,000
|
|
|
|
35,000
|
|
Less valuation allowance
|
|
|
(6,235,000
|
)
|
|
|
(4,660,000
|
)
|
Deferred tax asset, net of valuation
|
|
|
3,000
|
|
|
|
5,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(3,000
|
)
|
|
|
(5,000
|
)
|
Deferred tax liabilities
|
|
|
(3,000
|
)
|
|
|
(5,000
|
)
|
Net tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
9
) INCOME TAXES:
(CONTINUED)
On
December 22, 2017,
the President of the United States signed into law the Tax Cuts and Jobs Act (H.R.
1
) (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from
34%
to
21%,
effective
January 1, 2018.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company’s net tax asset as of
December 31, 2018
was determined based on the current enacted federal tax rate of
34%
prior to the passage of the Act. As a result of the reduction in the corporate income tax rate to
21%
from
34%
under the Act, the Company revalued its net deferred tax assets and liabilities as of
January
1,
2018.
The impact of the reduction of the income tax rate was a reduction of deferred tax asset and the corresponding valuation allowance of approximately
$768,000.
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
21%
at
December 31, 2018
and
34%
at
December 31, 2017,
is summarized as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Tax benefit (expense) at Federal statutory rate
|
|
$
|
894,000
|
|
|
$
|
1,303,000
|
|
Effect of State taxes
|
|
|
185,000
|
|
|
|
139,000
|
|
Tax credits
|
|
|
676,000
|
|
|
|
1,135,000
|
|
Nondeductible expenses
|
|
|
(180,000
|
)
|
|
|
(435,000
|
)
|
Tax Cuts and Jobs Act rate decrease
|
|
|
-
|
|
|
|
(1,098,000
|
)
|
Valuation allowance – deferred tax assets
|
|
|
(1,575,000
|
)
|
|
|
(1,044,000
|
)
|
Total tax benefit (provision)
|
|
$
|
-
|
|
|
$
|
-
|
|
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
2015.
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
2018
and
2017,
the Company elected to match the employee’s contribution,
not
to exceed
4%
of compensation. The Company’s
401
(k) contributions were
$24,765
and
$14,235
for
2018
and
2017,
respectively.
(
1
1
)
COMMITMENTS AND CONTINGENCIES:
During
2017,
the Company filed a Complaint against the National Institutes of Health (the “NIH”) in the United States District Court for the Northern District of Florida, Gainesville Division. Pursuant to the Complaint, the Company is seeking an order requiring the NIH to provide the Company with records responsive to a request originally made by the Company to the NIH under the Freedom of Information Act on
October 19, 2016.
Subsequent to the filing of the Complaint, the Company received documents from the NIH with substantial redactions. Legal counsel is currently reviewing those documents and our options in connection with this proceeding.
CTD HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
201
8
AND
201
7
(
11
)
COMMITMENTS AND CONTINGENCIES:
(CONTINUED)
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and records an expense for potential losses on such litigation if it is possible to estimate the amount of loss and if the amount of the loss is probable.
On
November 26, 2018,
we entered a new
two
-year lease for approximately
2,500
square feet of office and distribution warehouse space located in Gainesville, Florida for
$1,600
per month, with a
two
-year renewal option.
(
1
2
)
RELATED PARTY
TRANSACTIONS:
As discussed in Note
7
above, N. Scott Fine, our Chief Executive Officer and Chairman of the Board, 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 Corporate Secretary.
Since
October 2016,
we have paid a monthly fee of
$5,000
to a non-profit organization of which C.E. Rick Strattan is the Executive Director, in consideration of consulting services provided to us by Mr. Strattan. Mr. Strattan is our founder, former Chief Executive Officer and
one
of our directors.
During
2017,
Rebecca A. Fine, Mr. Fine’s daughter, was employed by us as an Executive Assistant and was paid an annual salary of
$60,000.
During
2018,
she was engaged by us as a contractor to provide those services at the rate of
$5,000
per month and received a bonus of
$5,000.
She is currently engaged by us as a contractor at the rate of
$5,800
per month.
Kevin J. Strattan, the son of C.E. Rick Strattan, has been employed by us since
2008,
and since
2014
has been our Vice President, Finance – Compensation. His annual salary increased from
$90,000
to
$100,000
in
November 2017
and to his current salary of
$107,200
in
October 2018.
In addition, he received a bonus of
$10,000
in
2018.
Corey E. Strattan, the daughter-in-law of C.E. Rick Strattan, has been employed by us since
2011
as a documentation specialist and logistics coordinator. During
2017
she was paid an annual salary of
$48,000.
In
January 2018,
her annual salary increased to
$72,000.
In
January 2019
her annual salary increased to
$78,000
her current salary. In addition, she received a bonus of
$5,000
in
2018.