UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2020

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____

  

Commission file number: 0-25466

 

CYCLO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

59-3029743

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 6714 NW 16th Street, Suite B, Gainesville, Florida

 

32653

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: 386-418-8060

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                   ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

 

Large accelerated filer

☐ 

Accelerated filer

☐ 

 

Non-accelerated filer

Smaller reporting company

 

 

 

Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

☐ Yes ☒ No

As of November 13, 2020 the Company had outstanding 169,982,602 shares of its common stock.

 

 

 

 

TABLE OF CONTENTS

 

 

Description

 

Page

 

 

 

 

PART I

FINANCIAL INFORMATION

 

1

Item 1.

Financial Statements.

 

1

 

Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019.

 

1

 

Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2020 and 2019.

 

2

 

Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2020

 

3

 

Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2019

 

4

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019.

 

5

 

Notes to Consolidated Financial Statements.

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

15

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

19

Item 4.

Controls and Procedures.

 

19

PART II

OTHER INFORMATION

 

20

Item 1A.

Risk Factors.

 

20

Item 6.

Exhibits.

 

20

 

 

 

 

SIGNATURES

 

21

  

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

September 30,

2020

   

December 31,

2019

 
   

(Unaudited)

         

ASSETS

 

CURRENT ASSETS

               

Cash and cash equivalents

  $ 2,237,624     $ 2,783,719  

Accounts receivable

    85,504       143,429  

Inventory, net

    421,324       242,630  

Current portion of mortgage note receivable

    39,061       39,061  

Prepaid insurance and services

    84,082       137,069  

Prepaid clinical expenses

    1,104,445       612,161  

Total current assets

    3,972,040       3,958,069  
                 

FURNITURE AND EQUIPMENT, NET

    57,320       13,546  
                 

RIGHT-TO-USE LEASE ASSET, NET

    38,348       51,017  
                 

MORTGAGE NOTE RECEIVABLE, LESS CURRENT PORTION

    64,728       90,596  
                 

TOTAL ASSETS

  $ 4,132,436     $ 4,113,228  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 
                 

CURRENT LIABILITIES

               

Current portion of lease liability

  $ 14,378     $ 16,385  

Current portion of long-term debt

    87,421       -  

Accounts payable and accrued expenses

    4,458,191       3,124,735  

Total current liabilities

    4,559,990       3,141,120  
                 

LONG-TERM LIABILITIES

               

Long-term lease liability, less current portion

    25,876       36,126  

Long-term debt, less current portion

    71,103       -  

Total long-term liabilities

    96,979       36,126  
                 

STOCKHOLDERS' EQUITY (DEFICIT)

               

Common stock, par value $.0001 per share, 500,000,000 shares authorized, 169,876,130 and 121,564,990 shares issued and outstanding, at September 30, 2020 and December 31, 2019

    16,987       12,155  

Preferred stock, par value $.0001 per share, 5,000,000 shares authorized

            -  

Additional paid-in capital

    30,840,706       26,044,060  

Accumulated deficit

    (31,382,226

)

    (25,120,233

)

Total stockholders' equity (deficit)

    (524,533

)

    935,982  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

  $ 4,132,436     $ 4,113,228  

 

 

 See accompanying Notes to Consolidated Financial Statements

 

1

 

 

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

REVENUES

                               

Product sales

  $ 222,462     $ 285,914     $ 757,790     $ 779,835  
                                 

EXPENSES

                               

Personnel

    424,823       520,666       1,328,156       1,241,742  

Cost of products sold (exclusive of direct and indirect overhead and handling costs)

    11,578       25,971       50,958       62,830  

Research and development

    1,086,753       941,539       4,859,794       3,071,113  

Repairs and maintenance

    1,408       1,232       4,521       4,215  

Professional fees

    72,319       151,749       435,282       613,000  

Office and other

    48,202       233,555       306,387       583,692  

Board of Director fees and costs

    9,718       37,008       38,434       101,704  

Depreciation

    3,117       1,292       9,353       4,261  

Freight and shipping

    543       1,527       3,575       3,977  

Bad debt expense

    -       -       1,272       -  

Total operating expenses

    1,658,461       1,914,539       7,037,732       5,686,534  
                                 

LOSS FROM OPERATIONS

    (1,435,999

)

    (1,628,625

)

    (6,279,942

)

    (4,906,699

)

                                 

OTHER INCOME

                               

Investment and other income

    390       3,284       17,949       9,181  
                                 

LOSS BEFORE INCOME TAXES

    (1,435,609

)

    (1,625,341

)

    (6,261,993

)

    (4,897,518

)

                                 

PROVISION FOR INCOME TAXES

    -       -       -       -  
                                 

NET LOSS

  $ (1,435,609

)

  $ (1,625,341

)

  $ (6,261,993

)

  $ (4,897,518

)

                                 

BASIC AND DILUTED NET LOSS PER COMMON SHARE

  $ (.01

)

  $ (.01

)

  $ (0.04 )   $ (.05

)

                                 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

    151,945,741       121,086,101       144,310,921       104,286,287  

 

 

See Accompanying Notes to Consolidated Financial Statements.

  

2

 

 

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

(Unaudited)

 

 

    Common Stock     Additional           Total  
   

Shares

   

Par
Value

   

Paid-In
Capital

   

Accumulated
Deficit

   

Stockholders’ Equity (Deficit)

 
                                         

Balance, December 31, 2019

    121,564,990     $ 12,155     $ 26,044,060     $ (25,120,233

)

  $ 935,982  
                                         

Net loss

    -       -       -       (2,633,992

)

    (2,633,992

)

                                         

Balance, March 31, 2020

    121,564,990       12,155       26,044,060       (27,754,225

)

    (1,698,010

)

                                         

Sale of common stock, net of issuance fees

    20,000,000       2,000       1,968,363       -       1,970,363  
                                         

Net loss

    -       -       -       (2,192,392

)

    (2,192,392

)

                                         

Balance, June 30, 2020

    141,564,990       14,155       28,012,423       (29,946,617

)

    (1,920,039

)

                                         

Sale of common stock, net of issuance fees

    28,311,140       2,832       2,828,283       -       2,831,115  
                                         

Net loss

    -       -       -       (1,435,609

)

    (1,435,609

)

                                         

Balance, September 30, 2020

    169,876,130     $ 16,987     $ 30,840,706     $ (31,382,226

)

  $ (524,533

)

 

 

See accompanying Notes to Consolidated Financial Statements.

  

3

 

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

 

 

   

Common Stock

   

Additional

                   

Total

 
   

Shares

   

Par
Value

   

Paid-In
Capital

   

Subscription
Receivable

   

Accumulated
Deficit

   

Stockholders’ Equity (Deficit)

 
                                                 

Balance, December 31, 2018

    90,759,324     $ 9,075     $ 18,701,211     $ (130,062

)

  $ (17,587,700

)

  $ 992,524  
                                                 

Collection of subscription receivable

    -       -       -       130,062       -       130,062  
                                                 

Net loss

    -       -       -       -       (1,904,166

)

    (1,904,166

)

                                                 

Balance, March 31, 2019

    90,759,324       9,075       18,701,211       -       (19,491,866

)

    (781,580

)

                                                 

Sale of common stock, net of issuance fees

    29,770,000       2,977       6,986,623       -       -       6,989,600  
                                                 

Net loss

    -       -       -       -       (1,368,011

)

    (1,368,011

)

                                                 

Balance, June 30, 2019

    120,529,324       12,052       25,687,834       -       (20,859,877

)

    4,840,009  
                                                 

Issuance of shares of stock based compensation

    585,666       58       268,521       -       -       268,579  
                                                 

Net loss

    -       -       -       -       (1,625,341

)

    (1,625,341

)

                                                 

Balance, September 30, 2019

    121,114,990     $ 12,110     $ 25,956,355     $ -     $ (22,485,218

)

  $ 3,483,247  

 

 

See accompanying Notes to Consolidated Financial Statements.

  

4

 

 

CYCLO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

         

Net loss

  $ (6,261,993

)

  $ (4,897,518

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

    9,353       4,261  

Accrued stock compensation to employees

    6,630       104,100  

Accrued stock compensation to non-employees

    12,750       55,280  

Increase or decrease in:

               

Accounts receivable

    57,925       44,302  

Inventory

    (178,694

)

    32,420  

Prepaid clinical expenses

    (492,284

)

    (217,395

)

Prepaid insurance and services

    52,987       (2,519

)

Other

    412       1,208  

Accounts payable and accrued expenses

    1,314,076       506,383  

Total adjustments

    783,155       528,040  
                 

NET CASH USED IN OPERATING ACTIVITIES

    (5,478,838

)

    (4,369,478

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchases of furniture and equipment

    (53,127

)

    (1,324

)

Proceeds from mortgage note receivable

    25,868       27,943  
                 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

    (27,259

)

    26,619  
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from PPP loan

    158,524       -  

Collection of stock subscription receivable

    -       130,062  

Net proceeds from sale of common stock and warrants, net of issue costs

    4,801,478       6,989,600  
                 

NET CASH PROVIDED BY FINANCING ACTIVITIES

    4,960,002       7,119,662  
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (546,095

)

    2,776,803  
                 

CASH AND CASH EQUIVALENTS, beginning of period

    2,783,719       2,217,412  
                 

CASH AND CASH EQUIVALENTS, end of period

  $ 2,237,624     $ 4,994,215  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash paid for interest

  $ 224     $ -  

Cash paid for income taxes

  $ -     $ -  
                 

NON-CASH INVESTING AND FINANCING ACTIVITIES

               

Capitalization of right-to-use asset and lease liability

  $ -     $ 56,476  

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

5

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

The information presented herein as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019 is unaudited.

 

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The following is a summary of the more significant accounting policies of Cyclo Therapeutics, Inc. (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, 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, and in November 2020 we reincorporated from the State of Florida to the State of Nevada. (See also Note 10.) We are a clinical stage 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. Enrollment in this study was completed in October 2019, and in May 2020 the Company announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study.

 

We 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 this study in July 2017, and in February 2020, the Company announced completion of enrollment of 12 patients in this study. In May of 2020 the Company announced interim results of this study showing a favorable safety and tolerability profile for Trappsol® Cyclo™ as well as encouraging signals in efficacy for all dose groups (1500 mg/kg, 2000 mg/kg and 2500 mg/kg) evaluated in this study. Additionally, in February 2020 the Company had a face-to-face “Type C” meeting with the FDA with respect to the initiation of a Phase III clinical trial of Trappsol® Cyclo™ based on the clinical data obtained to date, and in October 2020, the FDA notified us that we may proceed with the Phase III clinical trial.

 

In addition, we are 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 consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements of the Company included in this Quarterly Report on Form 10-Q, including these notes, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The consolidated financial statements, and these notes, have been prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

 

(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.

 

6

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

 

(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 September 30, 2020 and December 31, 2019.

 

(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 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 $52,922 at September 30, 2020 and December 31, 2019, respectively. The Company’s reserve for obsolete inventory is based on the Company’s best estimates of product sales and customer demands. It is reasonably possible that the estimates used by the Company to determine its provisions for inventory write-downs will be materially different from actual write-downs. These differences could result in materially higher than expected inventory provisions and related costs, which could have a materially adverse effect on the Company’s results of operations and financial condition in the near term.

 

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

 

(g) MORTGAGE NOTE RECEIVABLE––The mortgage note receivable is stated at amortized value, which is the amount we expect to collect. 

 

(h) 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. 

 

(i) REVENUE RECOGNITION––Under the revenue standards of ASC 606, 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. and selected countries we sell our products to the end user or wholesale distributors. In other countries, we also sell our products to wholesale distributors and other third-party distribution partners. These customers subsequently resell our products to health care providers and patients.

 

7

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

 

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 carrier. 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 2, Revenues, to these consolidated financial statements.

 

(j) SHIPPING AND HANDLING FEES––Shipping and handling fees, if billed to customers, are included in product sales. Shipping and handling costs associated with inbound and outbound freight are expensed as incurred and included in freight and shipping expense.

 

(k) ADVERTISING––Advertising costs are charged to operations when incurred. We incur minimal advertising expenses.

 

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

 

(m) INCOME TAXES––Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition, tax benefits related to positions considered uncertain are recognized only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

(n) NET LOSS PER COMMON SHARE––Basic and fully diluted net loss per common share is computed using a simple weighted average of common shares outstanding during the periods presented, as outstanding warrants to purchase 93,622,864 common shares were antidilutive for the three and nine months ended September 30, 2020 and 2019.

 

(o) STOCK BASED COMPENSATION–– The Company periodically awards stock to employees, directors, and consultants. In the case of employees 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. With respect to directors, the Company accrues stock compensation expense on a quarterly basis based on the Company’s historical director compensation policies, and each quarter recognizes such expense based on the trading price of the common stock during such quarter. This expense is then trued up at the time the shares are issued to directors based on the trading price at the time of issuance.

 

8

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

 

(p) FAIR VALUE MEASUREMENTS AND DISCLOSURES––The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification (“ASC”) requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

 

The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

We have no assets or liabilities that are required to have their fair value measured on a recurring basis at September 30, 2020 or December 31, 2019.  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 September 30, 2020 and December 31, 2019, the carrying value of the mortgage note receivable approximates fair value.

 

(q) LIQUIDITY AND GOING CONCERN––For the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company incurred net losses of approximately $6,262,000 and $7,533,000, respectively. The Company has an accumulated deficit of approximately $31,382,000 at September 30, 2020. Our recent losses have predominantly resulted from research and development expenses for our Trappsol® Cyclo™ product and other general operating expenses, including personnel expenses and 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 the nine months ended September 30, 2020, our operations used approximately $5,479,000 in cash. This cash was provided primarily by cash on hand and two private placements of our securities. At September 30, 2020, the Company had a cash balance of approximately $2,238,000 and current liabilities exceeded current assets by approximately $588,000. 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 six 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 three and nine months ended September 30, 2020 and year ended December 31, 2019 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. 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.

 

9

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

 

On September 29, 2020, we filed a Registration Statement on Form S-1 with the Securities and Exchange Commission to raise capital through the offer and sale of units consisting of shares of our common stock and warrants to purchase additional shares of common stock in a firm commitment underwriting to be conducted by Maxim Capital Group, Inc. However, there can be no assurance that we will be successful in completing the offering. The securities to be sold in the offering may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.

 

(r) USE OF ESTIMATES––The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including regarding contingencies, that affect the amounts reported in the consolidated financial statements and accompanying notes.

 

The Company’s most significant estimate relates to inventory obsolescence. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

 

(s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS––In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on how an entity should measure credit losses on financial instruments. The ASU is effective for smaller reporting company’s for fiscal years beginning after December 15, 2022, including interim periods with those fiscal years. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles and clarifying a handful of narrow issues within the broad topic of income tax accounting. The amendments in ASU 2019-12 are effective for years beginning after December 15, 2020. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

 

(t) UNCERTAINTY––The recent outbreak of the COVID-19 coronavirus is impacting worldwide economic activity. COVID-19 poses the risk that we or our employees, CROs, suppliers, manufacturers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns that may be requested or mandated by governmental authorities.  While it is not possible at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 could disrupt our clinical trials, supply chain and the manufacture or shipment of our cyclodextrin products, and other related activities, which could have a material adverse effect on our business, financial condition and results of operations. While we have not yet experienced any disruptions in our business or other negative consequences relating to COVID-19, the extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted. See also Note 9.

 

 

(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. However, substantially all of the Company’s revenues are derived from the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. Currently, a small portion of the Company’s revenues are also generated by sales of Trappsol® Cyclo™ to South America (Brazil) for the treatment of NPC patients.

 

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.

 

10

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(2) REVENUES: (CONTINUED)

 

Revenues by product are summarized as follows:

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Trappsol® Cyclo™

  $ -     $ 73,500     $ 30,096     $ 103,596  

Trappsol® HPB

    92,384       152,784       458,934       359,530  

Trappsol® Fine Chemical

    127,963       57,620       261,300       162,572  

Aquaplex®

    -       -       928       149,690  

Other

    2,115       2,010       6,532       4,447  

Total revenues

  $ 222,462     $ 285,914     $ 757,790     $ 779,835  

 

Substantially all of our sales of Trappsol® Cyclo™ for the nine months ended September 30, 2020 and year ended December 31, 2019 were to a single customer who exports the drug to South America. All of our Aquaplex® sales for the nine months ended September 30, 2020 and year ended December 31, 2019 were to three customers.

 

 

(3) MAJOR CUSTOMERS AND SUPPLIERS:

 

Our revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. For the nine months ended September 30, 2020 three major customers accounted for 66% of total revenues. For the nine months ended September 30, 2019, five major customers accounted for 75% of total revenues.

 

Substantially all inventory purchases were from three vendors in 2020 and 2019. 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 nine months ended September 30, 2020, the product mix of our revenues consisted of 4% biopharmaceuticals, 96% basic natural and chemically modified cyclodextrins. For the nine months ended September 30, 2019 the product mix of our revenues consisted of 6% biopharmaceuticals, 63% basic natural and chemically modified cyclodextrins, and 30% cyclodextrin complexes.

 

 

(4) 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.

 

 

(5) EQUITY TRANSACTIONS:

 

The Company expensed $5,320 and $19,380 in employee and board member stock compensation for the three and nine months ended September 30, 2020. 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. These shares were valued using quoted market values. The Company accrues stock compensation expense over the period earned for employees and board members. This expense is then trued up at the time the shares are issued based on the trading price at the time of issuance. Stock compensation expense for board members is included in “Board of Directors fees and costs” on our statement of operations, and stock compensation expense for officers and employees that are not board members is included in “Personnel” on our statement of operations. 

 

11

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

(5) EQUITY TRANSACTIONS: (CONTINUED)

 

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. 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 of $452,900 resulting in net cash proceeds of $6,989,600. The warrants are exercisable immediately upon issuance at an exercise price of $0.30 per share and expire on the 66th month anniversary of the issuance date.  The Company paid a cash fee to its placement agent of $452,900 and issued warrants to the 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. 

 

Pursuant to terms of the Placement Agency Agreement between the Company and ThinkEquity, a division of Fordham Financial Management, Inc. (“ThinkEquity”), entered into in connection with Company’s May 2019 private placement (the “May Placement”), the Company paid ThinkEquity (i) a cash fee in the amount of $29,637, representing 8% of the gross proceeds in the Private Placement received from investors that were first introduced to the Company by ThinkEquity in connection with the May Placement, and (ii) a warrant to purchase 222,282 shares of Common Stock, representing 6% of the shares of Common Stock purchased by such investors in the Private Placement, at an exercise price of $0.11 per share (110% of the price per share paid by investors in the Private Placement).

 

On April 24, 2020, the Company completed a private placement of common stock to a group of accredited investors that included several directors of the Company and members of management. Investors in the private placement purchased a total of 20 million shares of common stock at a price of $0.10 per share, resulting in gross proceeds to the Company of $2,000,000.

 

On August 27, 2020, 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. Investors in the private placement purchased a total of 28,311,140 units at a price of $0.10 per unit, resulting in gross proceeds to the Company of $2,831,114. 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 $0.15 per share.

 

As of September 30, 2020, the Company had warrants outstanding to purchase 91,854,716 shares of common stock at exercise prices of $0.11 - $1.00 per share that expire at various dates through 2027. In addition, there are seven-year warrants outstanding at September 30, 2020 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. 

 

 

(6) INCOME TAXES:

 

The Company reported a net loss for the three and nine months ended September 30, 2020 and 2019, respectively. The Company increased its deferred tax asset valuation allowance rather than recognize an income tax benefit.

 

 

(7) EQUITY INCENTIVE PLAN:

 

On August 29, 2019, the Company’s stockholders approved the Company’s 2019 Omnibus Equity Incentive Plan at a special meeting of stockholders (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 6,843,750 shares of common stock pursuant to the grant of shares of common stock, stock options or other awards, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the Incentive Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant. As of September 30, 2020, we had awarded 450,000 shares of common stock as awards under the Incentive Plan, with 6,393,750 shares of common stock remaining available for future awards under the Incentive Plan.

 

12

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

 

(8) LEASES:

 

The Company adopted ASU 2016-02 “Leases (Topic 842)” along with related clarifications and improvements effective as of January 1, 2019, using the modified retrospective transition method. 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.”

 

Under the new guidance, right-to-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 Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-to-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-to-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-to-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 $29,759 as of September 30, 2020. Lease expense for lease payments are recognized on a straight-line basis over the lease term.   Lease expense for the nine months ended September 30, 2020 and 2019 was $12,754 and $16,842.

 

13

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

 

 

(9) NOTE PAYABLE:

 

On May 4, 2020, the Company’s wholly-owned subsidiary Cyclodextrin Technologies Development, Inc., borrowed $158,524 from BBVA USA under the Paycheck Protection Program which was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The loan matures on May 4, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 4, 2020. Under the Paycheck Protection Program, the loan may be partially or wholly forgiven if the loan is used to fund certain qualifying expenses as described in the CARES Act. The Company intends to use all of the loan proceeds for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. Maturities of this note payable over the term of this note and in the aggregate are as follows:

 

 

Year Ending December 31,

 
 

Amount

 

2020

  $ 7,994  

2021

    106,035  

2022

    44,495  

Total

  $ 158,524  

 

 

(10) SUBSEQUENT EVENTS:

 

The Company has evaluated subsequent events through the date these financial statements were issued and filed with the Securities and Exchange Commission, and has determined that except as set forth below, there were no such events that warrant disclosure or recognition in the financial statements.

 

On October 22, 2020, the Company held a special meeting of shareholders at which the Company’s shareholders approved: (i) an Agreement and Plan of Merger pursuant to which the Company would merge with and into Cyclo Therapeutics, Inc., a Nevada corporation and a wholly-owned subsidiary of the Company, resulting in the reincorporation of the Company from the State of Florida to the State of Nevada (the “Reincorporation”); and (ii) the adoption of Nevada articles of incorporation which would authorize the issuance of additional shares of common stock, and Nevada bylaws.

 

The Company effected the Reincorporation pursuant to the Agreement and Plan of Merger on November 6, 2020 by filing Articles of Merger with the Secretary of State of the State of Nevada and the Department of State of the State of Florida.

 

As a result of the Reincorporation, the rights of the Company’s shareholders previously governed by the Florida Business Corporation Act and the Company’s Articles of Incorporation and Bylaws in effect prior to the Reincorporation, are now governed by Chapter 78 of the Nevada Revised Statutes and the Articles of Incorporation and Bylaws filed and adopted by the Company under Nevada law.

 

The Reincorporation resulted in a change in the state of the Company’s incorporation from Florida to Nevada but did not result in any change in the name, business, directors, officers, management, fiscal year, accounting, location of the principal executive offices, assets or liabilities of the Company.

 

14

 

 

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, 2019.  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

 

We are a clinical stage 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, lungs, 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 described 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 evaluated 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 commenced in September 2017. Enrollment in this study was completed in October 2019, and in May 2020 we announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study.

 

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, and in Israel, all of which have approved our applications. The Phase I/II study is evaluating the safety, tolerability and efficacy of Trappsol® Cyclo™ through a range of clinical outcomes, including neurologic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The European/Israel 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 but it differs in that the study period is for 48 weeks (24 doses). The first patient was dosed in this study in July 2017, and in February 2020, we announced completion of enrollment of 12 patients in this study. In September 2020, we released positive data from the seven patients who completed the trial, supporting the efficacy of Trappsol® Cyclo™ in treating NPC patients.

 

Additionally, in February 2020 we had a face-to-face “Type C” meeting with the FDA with respect to the initiation of a Phase III clinical trial of Trappsol® Cyclo™ based on the clinical data obtained to date. At that meeting, we also discussed with the FDA submitting a New Drug Application (NDA) under Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act for the treatment of NPC in pediatric and adult patients with Trappsol® Cyclo™. A similar request was submitted to the European Medicines Agency (“EMA”) in February 2020, seeking scientific advice and protocol assistance from the EMA for proceeding with a Phase III clinical trial in Europe. In October 2020, the FDA notified us that we may proceed with our proposed Phase III clinical trial of Trappsol® Cyclo™.

 

Preliminary data from our clinical studies suggest that Trappsol® Cyclo™ releases cholesterol from cells, crosses the blood-brain-barrier in individuals suffering from NPC, and results in clinical improvements in NPC patients. The full significance of these findings will be determined as part of the final analysis of both clinical trials.

 

15

 

On May 17, 2010, the FDA designated Trappsol® Cyclo™ as an orphan drug for the treatment of NPC, which would provide us with the exclusive right to sell Trappsol® Cyclo™ for the treatment of NPC for seven years following FDA drug approval. In April 2015, we also obtained Orphan Drug Designation for Trappsol® Cyclo™ in Europe, which will provide us with 10 years of market exclusivity following regulatory approval, which period will be extended to 12 years upon acceptance by the EMA’s Pediatric Committee of our pediatric investigation plan (PIP) demonstrating that Trappsol® Cyclo™ addresses the pediatric population. On January 12, 2017, we received Fast Track Designation from the FDA, and on December 1, 2017, the FDA designated NPC a Rare Pediatric Disease and issued us a Priority Review Voucher with respect to the treatment of NPC with Trappsol® Cyclo™.

 

We are also exploring the use of cyclodextrins in the treatment of Alzheimer’s disease. In January 2018, the FDA authorized a single patient IND expanded access program using Trappsol® Cyclo™ for the treatment of this disease. After 18 months of treatment in this geriatric patient with late-onset disease, the disease was stabilized and the drug was well tolerated. The patient also exhibited signs of improvement with less volatility and shorter latency in word-finding. In October 2019, we entered into an agreement with Worldwide Clinical Trials, a Contract Research Organization, to conduct a clinical trial to evaluate the safety and efficacy of Trappsol® Cyclo™ for the treatment of Alzheimer’s disease. We prepared a synopsis for an early stage protocol using Trappsol® Cyclo™ intravenously to treat Alzheimer’s Disease, and we plan to present this synopsis to the FDA in early 2021.

 

We filed a provisional patent application for the treatment of Alzheimer’s disease with cyclodextrins with the U.S. Patent and Trademark Office in October 2018, which was amended based on additional clinical data in August 2019; and we filed a similar international patent application in October 2019 under the Patent Cooperation Treaty.

 

We also continue to operate our legacy fine chemical business, consisting of the sale of 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 that had been primarily reselling basic cyclodextrin products.

 

Liquidity and Capital Resources

 

Our cash decreased to approximately $2,238,000 as of September 30, 2020, compared to $2,784,000 as of December 31, 2019. Our current assets less current liabilities were $(588,000) as of September 30, 2020, compared to $817,000 at December 31, 2019. Cash used in operations was $5,479,000 for the nine months ended September 30, 2020, compared to $4,368,000 for the same period in 2019. The increase in cash used in operations is due primarily to our net loss and increasing expenses for our drug development and expansion strategy, which we intend to continue funding with the capital we raise. 

 

We raised $2,000,000 in April 2020, and an additional $2,831,000 in August 2020, from the sale of securities in two private placements. We plan to use the proceeds of the sale of our securities primarily for the development of our Trappsol® Cyclo™ orphan drug product, including in connection with our continuing International Clinical Program and U.S. clinical trials, and other general corporate purposes.  We also borrowed $158,524 under the Paycheck Protection Program in May 2020, and plan to use the loan proceeds for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. While we currently believe our use of the loan proceeds met or will meet the conditions for forgiveness of the loan, there can be no assurance in that regard.

 

On September 29, 2020, we filed a Registration Statement on Form S-1 with the Securities and Exchange Commission to raise capital through the offer and sale of units consisting of shares of our common stock and warrants to purchase additional shares of common stock in a firm commitment underwriting to be conducted by Maxim Capital Group, Inc. However, there can be no assurance that we will be successful in completing the offering. The securities to be sold in the offering may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.

 

16

 

The Company has continued to realize losses from operations. We will need to raise additional capital to support our ongoing operations and continue our clinical trials. While we presently lack sufficient cash to meet our anticipated operating costs and capital expenditure requirements through July 2021, 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. There can be no guarantee that the Company will be successful in its ability to raise capital to fund future operational and development initiatives. Our need for additional capital as described above raises 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.

 

Our consolidated financial statements for the three and nine months ended September 30, 2020 and year ended December 31, 2019 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 six fiscal years. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above.

 

At December 31, 2019, we had approximately $18,335,000 in net state and federal operating loss carryforwards expiring from 2020 through 2037, including $9,692,000 that will not expire, that can be used to offset our current and future taxable net income and reduce our income tax liabilities. We have provided a 100% valuation allowance on our deferred tax asset based on our expected future expenses related to our clinical trials and other development initiatives.

 

We have no off-balance sheet arrangements at September 30, 2020.

 

Results of Operations - Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019

 

We reported net losses of $(1,436,000) and $(6,262,000) for the three and nine months ended September 30, 2020, respectively, compared to net losses of $(1,625,000) and $(4,898,000) for the three and nine months ended September 30, 2019, respectively.

  

Total revenues for the three month period ended September 30, 2020 decreased 23% to $222,000 compared to $286,000 for the same period in 2019. Total revenues for the nine month period ended September 30, 2020 decreased 3% to $758,000 compared to $780,000 for the same period in 2019. Our change in the mix of our product sales for the three and nine months ended September 30, 2020 and 2019 is as follows:

 

Trappsol® Cyclo

There were no sales of Trappsol® Cyclo™ for the three month period ended September 30, 2020 and $74,000 for the three month period ended September 30, 2019. Our sales of Trappsol® Cyclo™ decreased by 71% for the nine month period ended September 30, 2020, to $30,000 from $104,000 for the nine month period ended September 30, 2019.  Substantially all of our sales of Trappsol® Cyclo™ for the nine months ended September 30, 2020 and 2019 were to a particular customer who exports the drug to South America. Our annual 2019 sales to this customer were $104,000 (100% of total 2019 sales of Trappsol® Cyclo™).  This product is designated as an orphan drug; the population of patients who use the product on a compassionate basis is small.  

 

Trappsol® HPB

Our sales of Trappsol® HPB decreased by 40% for the three month period ended September 30, 2020, to $92,000 from $153,000 for the three months ended September 30, 2019. Our sales of Trappsol® HPB increased by 28% for the nine month period ended September 30, 2020, to $459,000 from $360,000 for the nine months ended September 30, 2019.

 

Trappsol® other products

Our sales of other Trappsol® products increased for the three month period ended September 30, 2020, to $128,000 from $58,000 for the three months ended September 30, 2019. Our sales of other Trappsol® products increased for the nine month period ended September 30, 2020, to $261,000 from $163,000 for the nine months ended September 30, 2019.

 

17

 

Aquaplex®

There were no sales of Aquaplex® for the three month periods ended September 30, 2020 and 2019. Our sales of Aquaplex® were $1,000 for the nine month period ended September 30, 2020 compared to $150,000 for the nine month period ended September 30, 2019.

 

The largest customers for our legacy fine chemical business continue to follow historical product ordering trends by placing periodic large orders that represent a significant share of our annual sales volume. During the nine months ended September 30, 2020, our three largest customers accounted for 66% of our sales; the largest accounted for 31% of sales. During the nine months ended September 30, 2019, our five largest customers accounted for 75% of our sales; the largest accounted for 18% 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 nine month period ended September 30, 2020 decreased 19% to $51,000 from $63,000 for the same period in 2019. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the three month period ended September 30, 2020 decreased 54% to $12,000 from $26,000 for the same period in 2019. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) as a percentage of sales was 7% for the nine months ended September 30, 2020 and 9% for the nine months ended September 30, 2019. 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 2019, or the first nine months of 2020.

 

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. Our employees provide receiving, inspection, warehousing and shipping operations for us. The cost of our employees is included in personnel expense. Our other costs of warehousing and shipping functions are included in office and other expense.

 

As we buy inventory from foreign suppliers, the change in the value of the U.S. dollar in relation to the Euro and Yuan may from time to time 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. The cost of our bulk inventory often changes due to fluctuations in the U.S. dollar. There were no purchases of inventory from Hungary during the nine months ended June 30, 2020. The cost of shipping from outside the U.S. also has a significant effect on our inventory acquisition costs. In addition, unpredictable changes in United States import tariffs also impacts our costs for raw materials. When we experience short-term increases in currency fluctuation, tariff increases, or supplier price increases, we are often not able to raise our prices sufficiently to maintain our historical margins. Therefore, our margins on these sales may decline.

 

Personnel expenses decreased by 19%, to $425,000 for the three months ended September 30, 2020 from $521,000 for the three months ended September 30, 2019. Personnel expenses increased by 7%, to $1,328,000 for the nine months ended September 30, 2020 from $1,242,000 for the nine months ended September 30, 2019. The increase in personnel expense is due to additional personnel added during the middle of 2019. We expect to maintain our level of employees and related costs in the near term.

 

Research and development expenses increased 15% to $1,087,000 for the three months ended September 30, 2020, from $942,000 for the three months ended September 30, 2019. Research and development expenses increased 58% to $4,860,000 for the nine months ended September 30, 2020, from $3,071,000 for the nine months ended September 30, 2019. Research and development expenses as a percentage of our total operating expenses increased to 69% for the nine months ended September 30, 2020 from 54% for the nine months ended September 30, 2019. The increase in research and development expense is due to increased activity in our International Clinical Program and U.S. clinical trials. We expect future research and development costs to further increase as we commence our Phase III clinical trial of Trappsol® Cyclo™ and continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC and Alzheimer’s disease.

  

18

 

Professional fees decreased 53% to $72,000 for the three months ended September 30, 2020, compared to $152,000 for the three months ended September 30, 2019. Professional fees decreased 29% to $435,000 for the nine months ended September 30, 2020, compared to $613,000 for the nine months ended September 30, 2019. Professional fees may increase in the future due to new initiatives in raising capital and the continuation of product development.

 

Office and other expenses decreased 80% to $48,000 for the three months ended September 30, 2020, compared to $234,000 for the three months ended September 30, 2019. Office and other expenses decreased 48% to $306,000 for the nine months ended September 30, 2020, compared to $584,000 for the nine months ended September 30, 2019. Office and other expenses include costs for travel to, and participation in, industry conferences and similar events, which vary from period to period.

 

Board of Directors fees and costs decreased to $10,000 for the three months ended September 30, 2020, compared to $37,000 for the three months ended September 30, 2019. Board of Directors fees and costs decreased to $38,000 for the nine months ended September 30, 2020, compared to $102,000 for the nine months ended September 30, 2019. Board of Directors fees and costs include fees (generally in the form of stock compensation) paid to our non-employee directors and scientific advisory board members, reimbursement of expenses of our board members, and related expenses. The reduction in Board of Directors fees and costs for the three and nine months ended September 30, 2020 compared to the same periods in the prior year was due to a decrease in the market price of the Company’s common stock.

 

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 nine months ended September 30, 2020, and 2019, respectively.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

a.  Evaluation of Disclosure Controls and Procedures.

 

Our management, with the participation of our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020.

 

b. Changes in Internal Control.

  

We made no changes in our internal control over financial reporting (as defined in Rules 13a-15(f)) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls that occurred during our last fiscal quarter that has materially affected, or which is reasonably likely to materially affect, our internal controls over financial reporting.

 

19

 

PART II. OTHER INFORMATION

 

Item 1A. Risk Factors.

 

We have identified no additional risk factors other than those included in our Registration Statement on Form S-1 that we filed with the Securities and Exchange Commission on September 29, 2020.  Readers are urged to carefully review our risk factors because they may cause our results to differ from the "forward-looking" statements made in this report. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business, financial condition and results of operations.  We do not undertake to update any of the "forward-looking" statements or to announce the results of any revisions to these "forward-looking" statements except as required by law.

 

Item 6. Exhibits.

 

EXHIBIT

NO. 

 

DESCRIPTION

 

 

 

3.1

 

Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2020).

     

3.2

 

By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2020).

     

31.1

 

Rule 13a-14(a)/15d-14a(a) Certification of Chief Executive Officer

     

31.2

Rule 13a-14(a)/15d-14a(a) Certification of Chief Financial Officer

 

 

 

 

32.1

 

Section 1350 Certification of Chief Executive Officer

     

32.2

 

Section 1350 Certification of Chief Financial Officer

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

20

 

SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CYCLO THERAPEUTICS, INC.

 

 

 

Date:  November 12, 2020

By:

/s/ N. Scott Fine 

 

 

N. Scott Fine

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

 

 

Date:  November 12, 2020

By:

/s/ Joshua M. Fine 

 

 

Joshua M. Fine

 

 

Chief Financial Officer

 

 

(principal financial and accounting

officer)

 

21
 
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