(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The following is a summary of the more significant accounting policies of Cyclo Therapeutics, Inc. and subsidiaries (“we”, “our”, “us” or the “Company”) that affect the accompanying consolidated financial statements.

 

(a) ORGANIZATION AND OPERATIONS––The Company was incorporated in August 1990 as a Florida corporation, under the name Cyclodextrin Technologies Development, Inc. with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name to CTD Holdings, Inc. We changed our name to Cyclo Therapeutics, Inc. in September 2019 to better reflect our current business. 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. More recently, we began exploring the use of cyclodextrins in the treatment of Alzheimer's disease, and in October 2019 entered into an agreement with a Contract Research Organization to conduct a clinical trial to evaluate the safety and efficacy of Trappsol® Cyclo™ for the treatment of this disease.

 

We also sell cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. 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 accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

Operating results for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 15, 2019.

 

(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 are stated at the amount we expect to collect from outstanding balances. Based on our assessment of the credit history with customers having outstanding balances and current relationships with them, an allowance for uncollectible accounts was not deemed necessary at September 30, 2019 and December 31, 2018.

 

(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 at September 30, 2019 and December 31, 2018.

 

 

CYCLO THERAPEUTICS, INC.

(Formerly CTD Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

 

(f) PREPAID EXPENSES––Prepaid expenses consist of our pharmaceutical drug Trappsol® Cyclo™ expected to be used in our clinical trial program recorded at cost.

 

(g) EQUIPMENT––Equipment is recorded at cost, less accumulated depreciation. Depreciation on 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 seven to ten years for equipment and office furniture).

 

(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 our revenue recognition as the majority of our revenues continue to be recognized when the customer takes control of our product. As we did not identify any accounting changes that impacted the amount of reported revenues with respect to our 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.

 

For additional information on our revenues, please read Note 6, Revenues, to these condensed consolidated financial statements.

 

(i) RESEARCH AND DEVELOPMENT COSTS––Research and development costs are expensed as incurred.

 

 

CYCLO THERAPEUTICS, INC.

(Formerly CTD Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

  

(j) 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.

 

(k) 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; outstanding warrants to purchase 63,321,294 and 30,440,478 common shares were antidilutive for the three and nine months ended September 30, 2019 and 2018, respectively, and 1,768,147 common shares that may be issued under warrants to purchase units sold in the Company’s private placements, were antidilutive for the three and nine months ended September 30, 2019 and 2018, and have been excluded from the calculation of loss per common share

 

(l) 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.

 

(m) LIQUIDITY––For the nine month period ended September 30, 2019, the Company had a net loss of $(4,898,000) and utilized cash from operating activities of approximately $4.4 million, and at September 30, 2019,  the Company had an accumulated deficit of approximately $22.5 million.  The Company will need to raise additional capital to support ongoing operations and continue its clinical trials.. While the Company presently believes it has sufficient cash to meet its anticipated operating costs and capital expenditure requirements through November 2020, the Company will continue its efforts to raise additional capital through the sale of securities from time to time for the foreseeable future to fund the development of its drug product candidates through clinical development, manufacturing and commercialization. The Company’s ability to obtain such capital will likely be subject to various factors, including its overall business performance and market conditions. There can be no guarantee that the Company will be successful in its ability to raise capital to fund future operational and development initiatives when needed.

 

(n) 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.

 

(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.

 

We have no assets or liabilities that are required to have their fair value measured on a recurring basis at September 30, 2019 or December 31, 2018.  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 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 September 30, 2019 and December 31, 2018, the carrying value of the mortgage note receivable approximates fair value. 

 

 

CYCLO THERAPEUTICS, INC.

(Formerly CTD Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

 

(p) ACCOUNTING STANDARDS ADOPTED––

 

●

Leases – In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which amends leasing guidance by requiring companies to recognize a right-of-use asset and a lease liability for all operating and financing leases with lease terms greater than twelve months.  The lease liability is equal to the present value of lease payments. The lease asset is based on the lease liability, subject to adjustment for prepaid and deferred rent and tenant incentives.  For income statement purposes, leases will continue to be classified as operating or financing with lease expense in both cases calculated substantially the same as under the prior leasing guidance. The Company adopted Topic 842 as of January 1, 2019 (the first day of fiscal 2019).  See Note 7.

 

(q) ACCOUNTING STANDARDS TO BE ADOPTED IN FUTURE PERIODS––There are no outstanding accounting standards to be adopted that will have a material effect on the Company’s financial position and operations.

 

(2) MORTGAGE NOTE RECEIVABLE

 

On January 21, 2016, we sold our 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 us 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.

 

(3) EQUITY TRANSACTIONS:

 

The Company expensed $97,250 and $159,380 in employee and board member stock compensation for the three and nine months ended September 30, 2019, respectively, which included $87,750 in compensation expense related to 450,000 shares of common stock awarded to employees in September 2019 that will be issued in November 2019 and fully vested at time of issuance. The Company expensed $22,360 and $50,310 in employee and board member stock compensation for the three and nine months ended September 30, 2018, respectively. The Company accrues stock compensation expense over the period earned for employees and board members. During the quarter ended September 30, 2019, the Company issued 585,666 shares of common stock to service providers for which it had accrued compensation expense of $268,579 in prior periods.

 

On May 31, 2019, the Company completed a private placement of its securities to a group of accredited investors that included several directors of the Company and members of management, pursuant to a Securities Purchase Agreement between the Company and the investors, dated as of May 30, 2019. Investors in the private placement purchased a total of 29,770,000 units at a price per unit of $0.25, each unit consisting of one share of common stock and one warrant to purchase a share of common stock, resulting in gross proceeds to the Company of $7,442,500, before deducting placement agent fees and offering expenses. The warrants are exercisable immediately upon issuance at an exercise price of $0.30 per share and expire on the 66^th month anniversary of the issuance date.  The Company paid a cash fee to its placement agent of $452,900 and issued warrants to its placement agent and its designees to purchase an aggregate of 1,359,000 shares of common stock with the same terms as the warrants issued to the investors.  The Company filed a registration statement with the Securities and Exchange Commission to register the resale of the outstanding common stock and the shares of common stock underlying the warrants and the warrants issued to the placement agent which was declared effective on July 12, 2019. In addition, the Company’s directors and officers entered into Lock-Up Agreements at the closing under which they have agreed not to sell any of their securities of the Company until the earliest of (i) 270 days after the effective date of the Registration Statement, (ii) 365 days after the closing, and (iii) 120 days after the listing of Company’s common stock on a national securities exchange.

 

In April 2018, the Company completed a private placement resulting in gross proceeds to the Company of $2,010,000. Prior to March 31, 2018, the Company received $74,983 in advance from these investors, which has been recorded as an advance -- private placement in the accompanying statement of cash flows.

 

As of September 30, 2019, the Company had warrants outstanding to purchase 63,321,294 shares of common stock at exercise prices of $0.25 - $1.00 per share that expire in various years until 2025.  In addition, at September 30, 2019, there are warrants outstanding to purchase 480,000 Units sold in the Company’s May 2016 private placement at an exercise price of $0.25 per Unit, 164,074 Units sold in the Company’s February 2017 private placement at an exercise price of $0.35 per Unit, and 600 Units sold in the Company’s October 2017 private placement at an exercise price of $100 per Unit. 

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(4) INCOME TAXES:

 

The Company reported a net loss for the three and nine months ended September 30, 2019 and 2018, respectively. The Company increased its deferred tax asset valuation allowance rather than recognize an income tax benefit.

 

(5) SALES CONCENTRATIONS:

 

Sales to five major customers accounted for 75% of total sales for the nine months ended September 30, 2019. Sales to four major customers accounted for 66% of total sales for the nine months ended September 30, 2018. A loss of one of these customers could have a significant adverse effect on the Company’s financial condition, results of operations and cash flows.

 

(6) 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:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Trappsol Cyclo		$	73,500			$	-			$	103,596			$	166,596
Trappsol HPB			152,784				125,944				359,530				305,706
Trappsol research			57,620				57,798				162,572				175,200
Aquaplex			-				37,486				149,690				116,081
Other			2,010				3,252				4,447				8,381
Total revenues		$	285,914			$	224,480			$	779,835			$	771,964

 

Substantially all of our sales of Trappsol® Cyclo™ for the nine months ended September 30, 2019 and September 30, 2018 were to a particular customer who exports the drug to South America. Substantially all of our Aquaplex sales are also to one customer.

 

(7) LEASES:

 

The Company adopted ASU 2016-02 “Leases (Topic 842)” along with related clarifications and improvements effective at the beginning of fiscal 2019, using the modified retrospective transition method.  There was no cumulative-effect adjustment to the Company's consolidated balance sheet as of December 31, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods, as the Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward our prior lease classifications under ASC 840, “Leases.”

 

 

CYCLO THERAPEUTICS, INC.

(Formerly CTD Holdings, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

 

Under the new guidance, right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease terms at the commencement dates.  The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The incremental borrowing rate for all existing leases as of the opening balance sheet date was based upon the remaining terms of the leases; the incremental borrowing rate for all new or amended leases is based upon the lease terms.  The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by a Company options to extend the leases that the Company is reasonably certain to exercise

 

The Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward our prior lease classifications under ASC 840, “Leases.”

 

Adoption of Topic 842 did not have a material impact on our annual operating results or cash flows. Operating lease expense is recognized on a straight-line basis over the lease term and is included in operating costs or General and administrative expense.  Variable lease payments are expensed as incurred.

 

The effects of the changes made to the Company’s consolidated balance sheet as of December 31, 2018 for the adoption of Topic 842 are as follows:

 

The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-of-use asset and a lease liability at the lease commencement date.  Leases with an initial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes.  The lease liability is measured at the present value of future lease payments as of the lease commencement date, or the opening balance sheet date for leases existing at adoption of Topic 842.  The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives. 

 

Certain leases provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index.  Future base rent escalations that are not contractually quantifiable as of the lease commencement date are not included in our lease liability. 

 

The Company has one office lease, which is as an operating lease and included in the right-of-use asset, current portion of lease liability, and long-term lease liability captions on the Company’s consolidated balance sheet.

 

Operating lease assets are recorded net of accumulated amortization of $12,754 as of September 30, 2019.

 

Lease expense for lease payments are recognized on a straight-line basis over the lease term.   Lease expense for the three and nine months ending September 30, 2019 was $5,466 and $16,842 respectively.

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