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, 2018. 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
Cyclo Therapeutics, Inc. (“we” “our” “us” or “the Company”) was organized as a Florida corporation on August 9, 1990 under the name Cyclodextrin Technologies Development, Inc., with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name from Cyclodextrin Technologies Development, Inc., 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 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 describes our Phase I clinical plans for a randomized, double blind, parallel group study in the U.S. The Phase I study will evaluate the safety of Trappsol® Cyclo™ along with markers of cholesterol metabolism and markers of NPC during a 14-week treatment period of intravenous administration of Trappsol ® Cyclo ™ every two weeks to participants 18 years of age and older. The IND was approved by the FDA in September 2016, and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017. Enrollment in this study was completed in October 2019, with initial results expected in the first quarter of 2020.
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 European Phase I/II study will evaluate the safety of Trappsol® Cyclo™ along with a range of clinical outcomes, including neurologic, hepatic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The European study is similar to the U.S. study, providing for the administration of Trappsol® Cyclo™ intravenously to NPC patients every two weeks in a double-blind, randomized trial. The first patient was dosed in this study in July 2017, with patient enrollment still in progress.
Preliminary data from our clinical studies suggests that Trappsol® Cyclo™ crosses the blood-brain-barrier in individuals suffering from NPC. Following intravenous administration of Trappsol® Cyclo™ to study subjects, it was detected in subjects’ cerebrospinal fluid. The clinical significance of these findings will be determined as part of the final analysis of both clinical trials.
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, and in October 2018, we filed a patent application with respect to the use of hydroxypropyl beta cyclodextrins in the treatment of Alzheimer’s disease. 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 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.
Trappsol® Cyclo™
At the end of 2009, we provided Trappsol® Cyclo™ (our first generation product) to a customer for compassionate use as an Investigational New Drug to treat a set of twins in the U.S. who were diagnosed with NPC, also known as Childhood Alzheimer’s. NPC is a fatal disease caused by a genetic defect that prevents proper handling of cholesterol in the body’s cells. The patient’s treatment with our Trappsol® Cyclo™ product proved to provide an ameliorative benefit. On May 17, 2010, the FDA granted orphan drug status to our customer for Trappsol® Cyclo™ for the treatment of NPC. Trappsol® Cyclo™ (first and second generation product) has been administered to more than 20 NPC patients in compassionate use programs around the world, including in the U.S., Brazil, and Spain. In 2012, we began to offer 100ml vials of Trappsol® Cyclo™ in a liquid form from a contract manufacturer (second generation product). In 2014, we completed validation of our proprietary Trappsol® Cyclo™ manufacturing process and submitted a Type II Drug Master File to the FDA. In 2015 we established an International Clinical Program that includes a team of experienced drug development companies and individuals. Our third generation product of Trappsol® Cyclo™ in liquid form is in clinical trials. We hold Orphan Drug Designation for Trappsol® Cyclo™ in both the U.S. and Europe.
Resale of Cyclodextrin and Cyclodextrin Complexes
Our sales of cyclodextrins and cyclodextrin complexes are primarily to chemical supply houses around the world, to pharmaceutical companies, to food companies for research and development, and to diagnostics companies.
We acquire our products principally from outside the United States, including from Wacker Biosolutions, a division of Wacker Chemie AG (Germany), with a production facility located in Adrian, Michigan and Hangzhou Pharma and Chem Co. (China), Quian Hui (China), and Cyclodextrin Research & Development Laboratory (Hungary), but are gradually finding supply sources in the United States. While we enjoy lower supply prices from outside the United States, changes in shipping costs and currency exchange rates are making domestic sources more competitively priced. We make patent information about cyclodextrins available to our customers. We also offer our customers our knowledge of the properties and potential new uses of cyclodextrins and complexes.
As most of our customers use our cyclodextrin products in their research and development activities, the timing, product mix, and volume of their orders from us are unpredictable. We have five large customers (each of whom has historically purchased from us annually and, depending upon the year, may account for greater than 10% of our annual revenues) who have a significant effect on our revenues when they increase or decrease their research and development activities that use cyclodextrins. We keep in constant contact with these customers as to their cyclodextrin needs so we can maintain the proper inventory composition and quantity in anticipation of their needs. The sales to large customers and the product mix and volume of products sold has a significant effect on our revenues and product margins. These factors contribute to our revenue volatility from quarter to quarter and year to year.
Liquidity and Capital Resources
Our cash increased to $4,994,000 as of September 30, 2019, compared to $2,217,000 as of December 31, 2018, primarily as the result of net proceeds of approximately $6,990,000 generated by the sale of our equity securities in the private placement we closed in May 2019. Our current assets less current liabilities were $3,353,000 as of September 30, 2019, compared to $844,000 as of December 31, 2018. Cash used in operations was $4,638,000 for the nine months ended September 30, 2019, compared to $2,134,000 for the same period in 2018.
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.
While we presently believe we have sufficient cash to meet our anticipated operating costs and capital expenditure requirements through November 2020, we expect to continue to raise additional capital through the sale of our securities from time to time for the foreseeable future to fund the development of our drug product candidates through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital will likely be subject to various factors, including our overall business performance and market conditions.
We have no off-balance sheet arrangements at September 30, 2019.
Results of Operations – Three and Nine Months Ended September 30, 2019 Compared to Three and Nine Months Ended September 30, 2018
We reported net losses of $(1,625,000) and $(4,898,000) for the three and nine months ended September 30, 2019, respectively, compared to net losses of $(787,000) and $(2,889,000) for the three and nine months ended September 30, 2018, respectively.
Total revenues for the three month period ended September 30, 2019 increased 27% to $286,000 compared to $224,000 for the same period in 2018. Total revenues for the nine month period ended September 30, 2019 increased 1% to $780,000 compared to $772,000 for the same period in 2018.
Our change in the mix of our product sales for the three and nine months ended September 30, 2019 and 2018 is as follows:
Trappsol® Cyclo
Sales of Trappsol® Cyclo™ for the three month period ended September 30, 2019 were $74,000. There were no sales of this product for the three month period ended September 30, 2018. Our sales of Trappsol® Cyclo™ decreased by 38% for the nine month period ended September 30, 2019, to $104,000 from $167,000 for the nine month period ended September 30, 2018. Substantially all of our sales of Trappsol® Cyclo™ for the three and nine months ended September 30, 2019 and 2018 were to a particular customer who exports the drug to South America. Our annual 2018 sales to this customer were $167,000 (100% of total 2018 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 increased by 21% for the three month period ended September 30, 2019, to $153,000 from $126,000 for the three months ended September 30, 2018. Our sales of Trappsol® HPB increased by 18% for the nine month period ended September 30, 2019, to $360,000 from $306,000 for the nine month period ended September 30, 2018.
Trappsol® other products
Our sales of other Trappsol® products remained consistent at $58,000 for the three month periods ended September 30, 2019 and 2018. Our sales of other Trappsol® products decreased by 7% for the nine month period ended September 30, 2019, to $163,000 from $175,000 for the nine month period ended September 30, 2018.
Aquaplex®
There were no sales of Aquaplex® for the three month period ended September 30, 2019, compared to $37,000 for the three month period ended September 30, 2018. Our sales of Aquaplex® were $150,000 for the nine month period ended September 30, 2019 compared to $116,000 for the nine month period ended September 30, 2018.
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, 2019, our five largest customers accounted for 75% of our sales; the largest accounted for 18% of sales. During the nine months ended September 30, 2018, our four largest customers accounted for 66% of our sales; the largest accounted for 21% of sales. Historically, our usual smaller sales of HPB occur more frequently throughout the year compared to our large sales that we receive periodically. The timing of when we receive and are able to complete these two kinds of sales has a significant effect on our quarterly revenues and operating results and makes period to period comparisons difficult.
Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) as a percentage of sales for the nine month period ended September 30, 2019 was 8% ($63,000) compared to 12% ($91,000) for the same period in 2018. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) as a percentage of sales was 9% ($26,000) for the three months ended September 30, 2019 compared to 6% ($13,000) for the same period in 2018. 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 2018 or the first nine months of 2019.
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, Yen and Yuan has 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. The cost of shipping from outside the U.S. also has a significant effect on our inventory acquisition costs. When we experience short-term increases in currency fluctuation 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 increased 77% to $521,000 for the three months ended September 30, 2019 from $295,000 for the three months ended September 30, 2018. Personnel expenses increased 44% to $1,242,000 for the nine months ended September 30, 2019 from $860,000 for the nine months ended September 30, 2018. During the quarter ended June 30, 2019 we hired a Chief Financial Officer on a part-time basis, and during the quarter ended September 30, 2019, we hired a Global Head of Regulatory Affairs. Increased personnel expenses in the three and nine month periods ended September 30, 2019 reflect compensation expense related to stock awards during such periods.
Research and development expenses increased 94% to $942,000 for the three months ended September 30, 2019, from $486,000 for the three months ended September 30, 2018. Research and development expenses increased 77% to $3,071,000 for the nine months ended September 30, 2019, from $1,739,000 for the nine months ended September 30, 2018. Research and development expenses as a percentage of our total operating expenses increased to 54% for the nine months ended September 30, 2019 from 47% for the nine months ended September 30, 2018. 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 continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC and Alzheimer’s disease.
Professional fees increased 15% to $152,000 for the three months ended September 30, 2019, compared to $132,000 for the three months ended September 30, 2018. Professional fees decreased 8% to $613,000 for the nine months ended September 30, 2019, compared to $664,000 for the nine months ended September 30, 2018. Professional fees may increase in the future due to new initiatives in raising capital and the continuation of product development.
Office and other expenses increased 308% to $234,000 for the three months ended September 30, 2019 compared to $57,000 for the three months ended September 30, 2018. Office and other expenses increased 150% to $584,000 for the nine months ended September 30, 2019 compared to $233,000 for the nine months ended September 30, 2018. Office and other expenses include costs for travel to, and participation in, industry conferences and similar events, which vary from period to period. The increase in office and other expense in the three and nine month periods ended September 30, 2019 reflect $160,000 in stock promotion and travel expenses incurred during such periods.
Board of Directors fees and costs increased to $37,000 for the three months ended September 30, 2019, compared to $27,000 for the three months ended September 30, 2018. Board of Directors fee and costs increased to $102,000 for the nine months ended September 30, 2019, compared to $70,000 for the nine months ended September 30, 2018. 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.
We increased our valuation allowance to offset the increase in our deferred tax asset from our net operating loss and did not recognize an income benefit or provision for the three and nine months ended September 30, 2019, and 2018, respectively.