Cyclo Therapeutics, Inc. - Annual Report: 2014 (Form 10-K)

We maintain a $100,000 line of credit with an interest rate of the higher of prime plus 1.8% or 4.75%. There was no balance outstanding at December 31, 2014 and 2013, respectively.

Our High Springs property is currently offered for sale at $400,000.

In September 2010, we purchased a 7,200 sq. ft. building with a 36 foot ceiling on approximately two acres for $468,000.  The property is located in an established industrial park.  In 2011, we capitalized $1,151,000 in equipment and improvements for the new building and pulse drying operation.

In November 2011, we installed a solar electric renewable energy system on the rooftop of our pulse drying building.  The system is designed to generate 34 KWH of electric power and generate more electricity than we expect to consume under normal operations, giving our facility a zero-energy footprint.  We have an interconnect agreement and net metering agreement with the Alachua Municipal Electric Utility to take excess electricity generation, and we receive a rebate for the excess generation. The cost of the solar equipment and installation was $186,000 and we received $99,000 in Federal and other grants.

During 2013, we installed a new roof on a portion of our Alachua building at a cost of $19,000 paid out of cash from operations. The roof includes solar tubes to provide lighting in areas without windows and reduce electrical lighting.  In 2014, we completed the installation of a solar thermal collection system and supporting structures to harvest thermal energy from the sun and use it to produce domestic hot water, process hot water, space heating, and heat energy for an intake air system to supply the pulse dryer at a cost of $92,000. This project includes construction to allow roof access for maintenance of all of our solar collector arrays. It has a collection capacity estimated at 24,000 BTU/hour in full sun.  We also installed an intake air drying and filtration system to enhance our pulse dryer capability at a cost of $42,000.

We have no plans to materially increase our pulse drying capacity unless and until our existing dryer exceeds 70% utilization. If we do expand our capacity, our current plan for additional drying capacity includes the installation of an additional three pulse dryers, one at 500K btu/hr and two at 1MM btu/hr; adding these three additional drying units would increase our current drying capacity by a factor of 26.  We currently estimate that a 500K btu/hr drying unit would cost approximately $2.5 million to install.  We do not have current estimates for the cost of a 1MM btu/hr drying unit, but the cost is likely to exceed $2.5 million each. When and if we proceed with any capacity expansion, we intend to use operating revenues, debt financing, equity capital or some combination of those sources to fund the expansion. We can give no assurances that our existing drying unit will be utilized sufficiently to warrant such an expansion in capacity, or if it is that we would be able to arrange funding on acceptable terms in order to increase our drying capacity through the installation of additional dryers.

During 2014, we also completed our corporate boardroom at a cost of $26,000, and capitalized an additional $20,000 related to utility and other preliminary preparations for future infrastructure improvements.

At December 31, 2014, we have approximately $1,293,000 in net operating loss carryforwards that can be used to offset our current and future taxable net income and reduce our income tax liabilities. We recorded a deferred tax asset of $120,000 based on our expected future profitability and ability to utilize some of the net operating losses before they expire.

We have no off-balance sheet arrangements as of December 31, 2014.

Results of Operations

For 2014, we reported a net loss of $(593,000), compared to net income in 2013 of $205,000.

We raised approximately $3,000,000 of additional capital in 2014 and increased expenses approximately $600,000 compared to 2013 related to our strategy for development of drugs based on cyclodextrins. In addition, we expensed $160,200 in stock compensation to employees, directors and consultants. Our earnings before interest, income taxes, depreciation, amortization, noncash stock compensation, and expenses specifically paid from additional capital raised and not operations was $363,126 for 2014, compared to $368,316 for 2013. See “—Non-GAAP Performance Measures” below for a reconciliation of this measure to our net loss or income for 2014 and 2013, respectively.

Comparability of Cost of Products Sold and Gross Margin

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 and amortization expense. We have nine employees who provide receiving, inspection, warehousing and shipping operations for us. The cost of these employees, and our other employees, are included in personnel expense. Our other costs of warehousing and shipping functions are included in office and other expense.

2014 compared to 2013

Total revenues for 2014 were $1,567,000 compared to $1,693,000 for 2013.  Our 2013 product sales were the highest reported in our history, and 2014 represented our second highest product sales total.

Our change in the mix of our product sales for 2014 and 2013 follows:

Trappsol ® Cyclo™

Our sales of Trappsol® Cyclo™ increased 3% to $901,000 for 2014 from $875,000 for 2013.  Our sales to a customer who exports Trappsol® Cyclo™ to South America were $893,000 (99% of total sales of Trappsol® Cyclo™) for 2014. Our annual 2013 sales to this customer were $835,000 (95% of total 2013 sales of Trappsol® Cyclo™). This product is designated as an orphan drug; the population of patients is small and while we expect our future sales to increase, the timing of sales will be unpredictable and our ability to market the drug for use other than research is severely constrained by regulatory restrictions in the applicable jurisdictions. We developed a liquid form of Trappsol® Cyclo™, which eliminated the need for a compounding pharmacist to create a solution for infusion of Trappsol® Cyclo™ into NPC patients. In the second quarter of 2014, we began an accelerated stability study of the liquid form of Trappsol® Cyclo™ to extend the stability claim from six months to two years.

Trappsol® HPB

Our sales of Trappsol® HPB increased 4% to $515,000 for 2014 from $495,000 for 2013. We believe this increase was due to normal market factors..

Trappsol® other products

Our sales of other Trappsol® products decreased by 64%, to $107,000 from $301,000 for 2014 and 2013, respectively. This decrease was due primarily to normal fluctuations in the demands for these products and the “lumpiness” of sales events.

Aquaplex®

Our sales of Aquaplex® increased to $36,000 for 2014 compared to $8,000 for 2013. This increase is representative of the periodic purchasing pattern of our primary Aquaplex® customer.  Aquaplex® sales to this customer for last five years are 2014 - $34,000, 2013 - $2,907, 2012 - $77,569, 2011 - $139,861, 2010 - $97,578.

Our largest customers continue to follow historical product ordering trends to place periodic large orders that represent a significant share of our annual revenue volume.  In 2014, our four largest customers (Sigma-Aldrich Fine Chemicals, Inc., Uno Healthcare, Inc., Thermofisher Scientific Diagnostics, Inc., and Qiagen) accounted for 80% of our revenues; the largest accounted for 57% of our revenues.   In 2013, our four largest customers (Sigma-Aldrich Fine Chemicals, Inc., Uno Healthcare, Inc., Thermofisher Scientific Diagnostics, Inc., and Siemens/Dade Behring) accounted for 70% of our revenues; the largest accounted for 49% of our revenues. 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. We have not experienced significant price resistance for our products. We believe that our sales will remain at historical levels due to continued customer demand for our products. In addition, we added additional inventory of our most frequently ordered products to better take advantage of sales opportunities as they arise, which also hedges our product costs against short-term price increases.

Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) decreased to $273,000 for 2014 compared to $426,000 for 2013. Our cost of products sold as a percentage of product sales decreased to 17% for 2014 from 25% for 2013.  This decrease was due to the increase in our product mix of Trappsol® Cyclo™ liquid sales in 2014, which have lower average product costs, and certain large orders which have a higher average product cost.  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 2014 or 2013.

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 does have an effect on our cost of inventory, and will continue to do so. We buy most of our products from outside the U.S. using U.S. dollars. 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. These products represent a significant portion of our revenues. 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 78% to $649,000 for 2014, from $364,000 for 2013.  The increase in personnel expense is due to increasing the number of employees from five to nine as well as $109,000 of stock and other bonus compensation in 2014 compared to $40,000 in 2013. We expect personnel costs to continue to increase in 2015 as the result our product development activities, and when we increase the operation time of the pulse dryer.

Research and development was $94,000 for 2014. We did not have significant research and development in 2013. Our research and development for 2014 was focused on manufacturing process development for our new products.

Repairs and maintenance expenses increased 60% to $65,000 for 2014 from $41,000 for 2013.  The increase is due to regular maintenance of the dryer and an increase in repairs and maintenance of our facility. We expect our 2015 repairs and maintenance costs to increase with the increased operation of the dryer.

Professional fees increased 203% to $433,000 for 2014 from $143,000 for 2013.  This increase is due to the additional of financial advisory, public relations, and other consulting services, and the legal costs of our capital raising activities. We expect our future recurring professional fees to be comparable to 2014 amounts. However, professional fees may further increase due to new initiatives in raising capital or compliance for developing new products.

Office and other expenses increased 243% to $453,000 for 2014 from $132,000 for 2013. This increase is due primarily to increased investor relations, travel and other administrative costs related to our capital raising, product and business development activities, compensation of our board members, and other board related expenses.

Amortization and depreciation increased 3% to $152,000 for 2014 from $148,000 for 2013.  The increase is due to continued capital improvements to our spray dryer and facility.

Freight and shipping increased 22% to $11,000 for 2014 from $9,000 for 2013. Freight and shipping is dependent on frequency of ordering products for inventory and frequency of shipping out products sold.

In 2013, we determined the fair value of our High Springs location is less than our carrying value and therefore recorded an impairment loss of $95,455 to adjust the carrying value to $400,000.

Interest expense decreased to $34,000 for 2014, from $54,000 for 2013.  We refinanced our mortgage and equipment notes payable in July 2013 reducing our interest rate, which previously ranged from 5.375% to 6.0%, to 3.99%.  We also refinanced our line of credit reducing the floor on our interest rate from 6.5% to 4.75%.

We increased the valuation allowance to reduce the increase in our deferred tax asset net loss and did not recognize an income benefit or provision for 2014, compared to an $80,000 provision for income taxes in 2013.  

Non-GAAP Performance Measures

We believe that EBITDA and Adjusted EBITDA are useful performance measures. They are used by our executive management team and board of directors to measure operating performance of the underlying business, even as we continue to raise capital for investment in our biopharmaceutical growth division. EBITDA and Adjusted EBITDA are non-GAAP financial measures.

We define EBITDA as follows: net income of CTD Holdings, Inc. before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets. We define Adjusted EBITDA as EBITDA plus non-cash compensation expense, plus expenses paid from additional capital. Expenses paid from additional capital include certain legal and professional fees, insurance, R&D equipment, travel and board expenses paid out of the additional capital raised and unrelated to operations.

The use of EBITDA and Adjusted EBITDA has limitations and these performance measures should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income. Our measurement of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies and may be different from the measurement of EBITDA used by our bank to calculate our debt service coverage ratio.

The following table provides a reconciliation of our net income, the most directly comparable financial measure presented in accordance with U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented:

Critical Accounting Policies and Estimates

The results of operations are based on the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to select accounting policies for critical accounting areas as well as make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. Significant changes in assumptions and/or conditions in our critical accounting policies could materially impact the operating results. We have identified the following accounting policies and related judgments as critical to understanding the results of our operations.

Long-Lived Assets

The recoverability of long-lived assets is evaluated annually or more frequently if impairment indicators exist. Indicators of impairment include historical financial performance, operating trends and our future operating plans. If impairment indicators exist, we evaluate the recoverability of long-lived assets on an operating unit basis based on undiscounted expected future cash flows before interest for the expected remaining useful life of the operating unit. Recorded values for long-lived assets that are not expected to be recovered through undiscounted future cash flows are written down to current fair value, which is generally determined from estimated discounted future net cash flows for assets held for use or net realizable value for assets held for sale.

Our corporate offices are currently located at our pulse dryer facility, which we acquired in September 2010 for $468,000.  The 7,200 sq. ft. building is located on two acres in an established industrial park located in Alachua, Florida.   In 2009, we acquired the pulse dryer for $250,000. During 2011, we installed the pulse dryer and constructed a manufacturing system at a cost of $1,151,000 to meet c-GMP standards.  We continue to make value added improvements to our properties. The Alachua building and surrounding land allows for future expansion beyond our current planned operations.

We own a 40 acre site that is zoned agricultural use in High Springs, Florida that is the site of our former corporate headquarters.  This property is currently idle and we are offering it for sale.  There is no mortgage on this property.  In 2013, we determined the fair value is less than our carrying value and therefore recorded an impairment loss of $95,455 to adjust the carrying value to $400,000.

Valuation Allowance on Deferred Tax Assets

At December 31, 2014 and 2013, we had a $120,000 net deferred tax asset calculated at the effective income tax rate of our temporary deductible timing differences and net operating loss carryforwards.  We have provided a valuation allowance in the amount of $101,000 and $7,000 at December 31, 2014 and 2013, respectively.

For 2014, we reported a net loss before income taxes of $(593,000).  Our gross net tax asset increased $110,000 from 2013 to 2014, which is primarily the result of an additional net operating loss for 2014, less the expiration of prior unused net operating losses.  Our valuation allowance percentage of the gross tax asset increased to 28% at December 31, 2014, from 3% at December 31, 2013.

For 2013, we reported net income before income taxes of $285,000.  Our deferred net tax asset decreased by $80,000, which is the result of recording a $80,000 income tax provision.  Our valuation allowance percentage was 3% at December 31, 2013.

Current accounting standards require that deferred tax assets be evaluated for future realization and reduced by the extent to which we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets including our recent cumulative earnings experience, expectations of future expenses from research and development and product development, expectations of future taxable income, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.  The range of possible judgments relating to the valuation of our deferred tax asset is very wide.  Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever, our assessment may conclude our deferred tax assets are realizable.

We have determined it is more likely than not that we will realize our temporary deductible differences and at least some of our net operating loss carryforwards prior to their expiration, and we have recorded a deferred tax asset for the amount expected to be realized.  We have provided a valuation allowance on the portion of the estimated deferred tax asset not expected to be fully realized before it expires.  Although we have incurred financial reporting net losses for six of the prior ten years, we have also recognized taxable income for five of the prior ten years utilizing a total of $485,000 of our net operating losses.  We believe we will continue to realize taxable income in greater amounts in future periods sufficient to utilize a portion of our tax loss carryforwards before they expire.  At December 31, 2014, we would need to generate approximately $788,000 of taxable income to fully utilize our $120,000 net deferred tax asset.

Positive evidence we evaluated in the order of significance and weighting in our evaluation includes the amount of net operating loss carryforward utilized against current income tax liabilities in five of the prior eight years, the trend of increased revenues from 2006 through 2013, and the length of time the net operating loss carryforwards are available before they expire.  Negative evidence we considered in the order of significance and weighting in its evaluation includes the timing of expiration of the net operating loss carryforwards prior to being utilized, prior expiration of net operating losses before being utilized, our increase in 2014 expenses over our historical levels without a current increase in revenue resulting in a net loss, the unpredictability of future sales and profitability, our future plans for research and development and product development using recently raised capital, the future effect of the costs to maintain a pulse drying facility, competition from others, and new government regulations.  We determined greatest weight should be given to our prior use of net operating losses in recent years and our expected future sales and taxable income from operations in our evaluation.

Forward-looking Statements

This Annual Report on Form 10-K contains forward-looking statements that reflect our current expectations about our future results, performance, prospects and opportunities. These forward-looking statements are subject to significant risks, uncertainties, and other factors, including those identified in "Risk Factors" above, which may cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements. The forward-looking statements within this Form 10-K may be identified by words such as "believes," "anticipates," "expects," "intends," "may," "would," "will" and other similar expressions. However, these words are not the exclusive means of identifying these statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are 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 or circumstances occurring subsequent to the filing of this Form 10-K with the SEC or for any other reason. You should carefully review and consider the various disclosures we make 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.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8.  Financial Statements and Supplementary Data.

CTD HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

CTD Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of CTD Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTD Holdings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ Averett Warmus Durkee, P.A.

Orlando, Florida

March 25, 2015

CTD HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

See accompanying Notes to Consolidated Financial Statements.

CTD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.

CTD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

See accompanying Notes to Consolidated Financial Statements.

CTD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of the more significant accounting policies of CTD Holdings, Inc. and subsidiaries (the “Company”) that affect the accompanying consolidated financial statements:

(a) ORGANIZATION AND OPERATIONS––The Company was incorporated in August 1990, as a Florida corporation with operations beginning in July 1992. We are engaged in the marketing and sale of cyclodextrins and related products to food, pharmaceutical and other industries. In 2012, we began offering pulse drying services to dry products containing cyclodextrins.

(b) BASIS OF PRESENTATION––The consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

(c) CASH AND CASH EQUIVALENTS––Cash and cash equivalents consist of cash and any highly liquid investments with an original maturity of three months or less.

(d) ACCOUNTS RECEIVABLE––Accounts receivable are stated at the amount we expect to collect from outstanding balances. Based on our assessment of the credit history with customers having outstanding balances and current relationships with them, we have concluded that losses on balances outstanding at December 31, 2014 and 2013 will be immaterial.

(e) INVENTORY AND COST OF PRODUCTS SOLD––Inventory consists of cyclodextrin products and chemical complexes purchased for resale recorded at the lower of cost (first-in, first-out) or market. Cost of products sold includes the acquisition cost of the products sold and does not include any allocation of inbound or outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation and amortization expense.  Inventory includes $137,000 of work-in-process inventory at December 31, 2013. We did not have work-in-process inventory at December 31, 2014.

(f) PROPERTY AND EQUIPMENT––Property and equipment are recorded at cost. Depreciation on property and equipment is computed using primarily the straight-line method over the estimated useful lives of the assets (generally three to five years for computers, software and vehicles, seven to ten years for machinery and furniture, fifteen years for certain land improvements, and forty years for buildings and building improvements). 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.  No impairments were identified or recorded in 2014 or 2013.

(g) PROPERTY HELD FOR SALE–– Property held for sale consists of 40 acres of land and buildings located in High Springs, Florida.  This property was used for operations and our corporate offices through September 30, 2011, and is currently vacant.  Property is classified as held for sale when management’s intent is to sell the property and the applicable accounting criteria are satisfied.  This determination requires management to make estimates and assumptions, including assessing the probability that potential sales transactions may or may not occur.  Actual results could differ from those assumptions.  Upon designation as held for sale, the carrying values of the assets are recorded at the lower of the carrying value or the estimated fair value, less estimated selling costs.  Assets held for sale are no longer depreciated.  We periodically review our property held for sale to determine if the carrying value of assets may not be recoverable. If we identify impairment, a loss is recognized for the difference between the carrying amount and the estimated market value of the assets.  In 2013, we determined the fair value of our High Springs location was less than our carrying value and therefore recorded an impairment loss of $95,455 to adjust the carrying value to $400,000.  No impairments were identified or recorded in 2014.

(h) DEFERRED COSTS––Deferred costs consist primarily of loan costs. Deferred costs are amortized using the straight-line method over their respective estimated useful lives, which approximates the effective interest method.

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

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

(i) REVENUE RECOGNITION––We recognize revenue from product sales and drying services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Product sales and shipping revenues, net of any discounts or return allowances, are recorded when the products are shipped and title passes to customers. Sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue, have been historically infrequent, and are recorded when they become known. Amounts received in advance are deferred and recognized as revenue when all four revenue recognition criteria have been met.

(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) 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.

(m) NET INCOME PER COMMON SHARE––Net income (loss) per common share is computed using a simple weighted average of common shares outstanding during the periods presented, as outstanding warrants to purchase common shares were antidilutive for 2014 and 2013.

(n) STOCK BASED COMPENSATION––The Company periodically awards stock to employees.  For stock issued under annual employment contracts, an expense is recognized equal to the fair value of the stock determined using the average stock closing trading price for the month multiplied by number of shares awarded for that month, less a 20% discount if the stock is restricted for at least six months. The Company periodically awards stock bonuses to employees. The Company records an expense equal to the fair value of the stock at the closing trading price of the stock on the award date, less a 20% discount if the stock is restricted for at least six months. The Company periodically issues stock to consultants. The Company records an expense equal to the fair value of the stock at the closing trading price of the stock on the day awarded, less a 20% discount if the stock is restricted for at least six months.

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

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

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

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

We have no assets or liabilities that are required to have their fair value measured on a recurring basis at December 31, 2014 or 2013.  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.  As previously disclosed, we recorded an impairment of $95,455 on property held for sale in 2013.  The impairment was determined based on actual transactions of similar property, a Level 2 input.

For short-term classes of our financial instruments which are not reported at fair value, the carrying amounts approximate fair value due to their short-term nature.  The fair value of our long-term debt is estimated based on the present value of the underlying cash flows discounted at current rates offered the Company for similar debt.  At December 31, 2014 and 2013, the carrying value of long-term debt approximated fair value.

(p) USE OF ESTIMATES––The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.

(q) RECLASSIFICATIONS––Certain amounts in the 2013 financial statements have been reclassified to conform to the 2014 presentation. These reclassifications had no effect on previously reported net income or stockholders equity.

(2) MAJOR CUSTOMERS AND SUPPLIERS:

In 2014, one major customer accounted for 57% of total revenues. In 2013, two major customers accounted for 60% of total revenues.

Substantially all inventory purchases were from three vendors in 2014 and 2013.

We have two sources for our Aquaplex® products. However, we have manufactured these products in the past and could do so again, if necessary. There are multiple sources for our Trappsol® products.

(3) CONCENTRATIONS OF CREDIT RISK:

Significant concentrations of credit risk for all financial instruments owned by the Company are as follows:

(a) DEMAND AND CERTIFICATE OF DEPOSITS––We maintain bank accounts in Federal credit unions and other financial institutions, which are insured up to the Federal Deposit Insurance Corporation limits.

(b) ACCOUNTS RECEIVABLE––Our accounts receivable consist of amounts due primarily from chemical supply and pharmaceutical companies located primarily in the United States and Hungary. Two customers accounted for 77% of the accounts receivable balance at December 31, 2014. Four customers accounted for 84% of the accounts receivable balance at December 31, 2013. We have no policy requiring collateral or other security to support our accounts receivable.

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(4) PROPERTY AND EQUIPMENT:

Property and equipment consists of the following as of December 31:

(5) DEBT: 

We owed $551,913 and $571,227, at December 31, 2014 and 2013, respectively, on a mortgage note payable, collateralized by land and a building we acquired in September 2010.  We refinanced our mortgage in July 2013.  Monthly payments of $3,506, including principal and interest at 3.99%, are due, with a final balloon payment of approximately $350,000 due in July 2023. The note is secured by a mortgage on our Alachua property. The note has a prepayment penalty that starts at 5% within the first year and decreases 1% annually thereafter. There is no prepayment penalty if the loan is repaid with cash on hand.  The loan has a covenant requiring our ratio of EBITDA to interest expense and prior period current maturities of long-term debt to not be less than 1.3. We were not in compliance with this debt coverage ratio covenant for the year ending December 31, 2014. As a result, we have reclassified $736,572 of principal due in 2016 and beyond as current in the accompanying balance sheet. While we do not expect any immediate adverse financial effects from this noncompliance due to our current cash position in excess of the outstanding principal balance, we have not determined the impact of our debt covenant non-compliance, but it may include modification of the debt covenants, refinancing our debt, providing additional collateral, or paying off the outstanding balance..

We owed $242,583 and $280,548 at December 31, 2014 and 2013, respectively, under an equipment loan related to the installation of the pulse dryer and related building renovations.  We refinanced our equipment note in July 2013, in conjunction with our mortgage refinancing. Monthly payments of $4,051, including principal and interest at 3.99%, are due beginning August 2013 through and including July 2020. The note is collateralized by all of our equipment. The mortgage on our High Springs property was released in connection with the refinancing. There is a prepayment penalty of 2% of the outstanding balance if we refinance the loan with another financial institution within five years. There is no prepayment penalty if the loan is repaid with cash on hand.

Scheduled long-term debt obligations for the next five years and thereafter are as follows, assuming the bank does not call the loan due to the debt covenant non-compliance:

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(5) DEBT:   (CONTINUED)

In July 2013, we refinanced our $100,000 line of credit, with interest due monthly at prime plus 1.45%, with a minimum rate of 4.75% (4.75% at December 31, 2013), due in full July 2015, unless further extended. The line of credit is collateralized by our inventory, accounts receivable, equipment, general intangibles and fixtures.  The credit line is also cross collateralized with our mortgage and equipment loans.  There was no balance outstanding at December 31, 2014 and 2013.

(6) STOCK TRANSACTIONS:

On February 19, 2014, the Company received $500,000 for the issuance of 10,000,000 shares of its common stock, less $37,640 in direct legal expenses, in connection with a securities purchase agreement with certain investors.

In connection with the closing of the February 2014 common stock transaction, the Company’s Chief Executive Officer, C.E. Rick Strattan, converted his share of Series A Preferred Stock into 1,000,000 shares of the Company’s common stock. The share of Series A Preferred Stock was the only share of Series A Preferred Stock outstanding. Initially issued in 2004 to Mr. Strattan in exchange for the surrender of 1,029,412 shares of common stock then owned by him, the Series A Preferred Stock carried certain voting rights that entitled its holder to cast a number of votes representing a majority of the votes entitled to be cast by all of the Company’s capital stock. It was convertible by its terms into a number of shares of common stock to be agreed mutually by the Company and the holder at the time of conversion. The conversion was effected through a Conversion Agreement, dated as of February 19, 2014, between the Company and Mr. Strattan. The conversion of the Series A Preferred Stock was a condition to the closing of the February 2014 transaction.

On April 9, 2014, the Company entered into a Securities Purchase and Collaboration Agreement with Novit, L.P., a Delaware limited partnership and an investment arm of U.S. Pharmacia, and issued 4,000,000 shares of its common stock to Novit for gross proceeds to the Company of $1,000,000.

Pursuant to the terms of the Agreement, the Company also agreed to give USP Zdrowie Sp. z o.o. (“USP”), a company organized under the laws of Poland and an affiliated entity of Novit, a “first look” for 60 days from the date of notice to USP by the Company, at any new products involving cyclodextrin technology developed or formulated by the Company for potential use by USP in its own product portfolio in certain Eastern European markets, prior to the Company marketing or selling such products in the same region for use in the over-the-counter pharmaceutical markets, and to explore other ways in which the Company’s cyclodextrin products may offer improvements to USP’s product portfolio.

The Company entered into an agreement with Scarsdale Equities, LLC (“Scarsdale”) to act as financial advisor and exclusive placement agent. The Company will pay a fee to Scarsdale with respect to any private placement of debt or equity securities of the Company in an amount equal to 6% of the proceeds of any such financing, for a period of one year from April 1, 2014. In addition, Scarsdale will be entitled to receive warrants to purchase 6% of the securities issued as a part of such a financing, with a warrant price equal to 100% of the offering price of the securities sold. The warrants will have a seven (7) year term. N. Scott Fine, a director of the Company, was a principal at Scarsdale at the time. In connection with the April 9, 2014 equity financing, the Company paid $60,000 and issued warrants for 240,000 shares of common stock at an exercise price of $0.25 per share expiring April 2021 to Scarsdale.

On July 22, 2014, the Company entered into a Securities Purchase Agreement with a group of qualified private investors led by Novit L.P. The Company issued 1,725,000 shares of common stock and received gross proceeds of $1,725,000. The Company paid $103,500 and issued warrants for 103,500 shares of common stock at $1.00 per share expiring July 2021 to Scarsdale in connection with the offering.

In August 2014, the Company granted 100,000 shares of common stock to Jeff Tate (our President). The common stock was valued at 80% of the closing price of our stock on July 31, 2014. The Company expensed $66,400 for the year ended December 31, 2014. In July 2013, we granted 555,556 shares of common stock to certain of our officers and employees as discretionary bonuses. Each of Rick Strattan (our Chief Executive Officer at the time), Jeff Tate (our President), George Fails (our Operations Manager) and Kevin Strattan (Director of Operations at our subsidiary, CTD, Inc.) was granted 138,889 shares. Each award was valued at $10,000 based upon 80% of the closing price on July 3, 2013.  The Company expensed $40,000 for the year ended December 31, 2013.  

On November 7, 2014, the Company awarded 10,000 shares of common stock to employees as a bonus. The Company also issued 10,000 shares of common stock to a scientific consultant, and 120,000 shares of common stock to its board directors. The Company expensed $77,280, which represents 80% of the closing price on November 7, 2014.

On January 21, 2015, the Company awarded 35,000 shares of common stock to a consultant for past services. The Company accrued and expensed $16,520 in 2014, which represents 80% of the closing price on January 21, 2015.

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

At December 31, 2014, the Company also has other common stock warrants outstanding for 314,465 shares of common stock at an exercise price of $0.25 per share that expire in September 2015.

In August 2013, the Company issued 10,791 shares of common stock to a construction subcontractor for work performed and capitalized $1,501 as a building improvement.

(7) PREFERRED STOCK:

See Note 6 regarding the redemption of the Company’s preferred stock in 2014.

In 2004, we amended our Articles of Incorporation authorizing a class of “blank check” preferred stock consisting of 5,000,000 shares and created a Series A Preferred Stock consisting of one share and set forth its designations, rights and preferences. The more significant right is the Series A share votes together with the holders of the Common Stock on all matters submitted to a vote of company holders of Common Stock, with the share of Series A Preferred Stock being entitled to one vote more than one-half of all votes entitled to be cast by all holders of voting capital stock of the company on any matter submitted to common shareholders so as to ensure that the votes entitled to be cast by the holder of the Series A Preferred Stock are equal to at least a majority of the total of all votes entitled to be cast by all shareholders. Each share of Series A Preferred Stock has a liquidation preference of $.0001. In 2004, we issued one share of the Series A Preferred Stock to our majority common shareholder in exchange for 1,029,412 shares of Common Stock held by the majority common shareholder, which were surrendered to the Company and cancelled.

(8) INCOME TAXES:

Differences between accounting rules and tax laws cause differences between the basis of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effect of these differences, to the extent they are temporary, is recorded as deferred tax assets and liabilities. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred assets and liabilities. Temporary differences which give rise to deferred tax assets and liabilities consist of net operating loss carryforwards, stock compensation expense not deducted for tax purposes until trading restrictions are removed and declared as compensation by the recipient, and accelerated depreciation methods for income tax purposes.

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(8) INCOME TAXES:  (CONTINUED)

If all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax asset of approximately $237,000 based upon expected income tax rates. Under ASC 740, deferred tax assets must be reduced by a valuation allowance if it is likely that all or a portion of it will not be realized.  We have determined it is more likely than not that we will realize our temporary deductible differences and at least some of our net operating loss carryforwards prior to their expiration, and we have recorded a deferred tax asset for the amount expected to be realized.  We have provided a valuation allowance on the portion of the estimated deferred tax asset not expected to be fully realized before it expires.  Although we have incurred financial reporting net losses for six of the prior ten years, we have also recognized taxable income for five of the prior ten years utilizing a total of $485,000 of our net operating losses.  We believe we will continue to realize taxable income in greater amounts in future periods sufficient to utilize a portion of our tax loss carryforwards before they expire.  At December 31, 2014, we would need to generate approximately $788,000 of taxable income to fully utilize our $120,000 net deferred tax asset.

Positive evidence we evaluated in the order of significance and weighting in our evaluation includes the amount of net operating loss carryforward utilized against current income tax liabilities in four of the prior nine years, the trend of increased revenues from 2006 through 2013, and the length of time the net operating loss carryforwards are available before they expire.  Negative evidence we considered in the order of significance and weighting in our evaluation include the timing of expiration of the net operating loss carryforwards prior to being utilized, increased expenses for research and development and product development, unpredictability of future sales and profitability, the unknown future operating results from our pulse drying facility, competition from others, and new government regulations.  We determined greatest weight should be given to our prior use of net operating losses in recent years and our expected future sales, trend of increasing expense, and taxable income from operations in our evaluation.

We calculated our deferred tax asset using the temporary deductible timing differences plus the net operating loss carryforward multiplied by our expected effective income tax rate.  Our taxable operating income is expected to be of the same character as our temporary deductible timing differences and net operating loss carryforwards.  We estimated our future taxable income based on historical results and expected future trends in sales and margins.  We estimated the timing of deducting our temporary deductible differences.  We estimated the amount of our net operating loss carryforward we would be able to utilize prior to expiration.  The difference between our gross deferred tax asset and the amount expected to be utilized was recorded as a valuation allowance.  We remeasure our valuation allowance each quarter based on changes in our current and expected future sales and margins, and changes in the other factors of both positive and negative evidence.

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(8) INCOME TAXES:  (CONTINUED)

We have available at December 31, 2014, unused net operating loss carryforwards totaling approximately $1,293,000 that may be applied against future taxable income. If not used, the net operating loss carryforwards will expire as follows:

For 2014, we did not recognize a benefit or provision for income taxes.  Our net deferred tax asset before the valuation allowance increased $110,000 from 2013 to 2014, which is primarily the result of an additional net operating loss for 2014, less the expiration of prior unused net operating losses. We increased our valuation allowance to offset this increase in our deferred tax asset. Our valuation allowance percentage is 28% at December 31, 2014. For 2013, we recognized an $80,000 provision for income taxes.  Our valuation allowance percentage is 3% at December 31, 2013. 

Because of the inherent uncertainties in estimating the valuation allowance on the deferred tax asset, it is at least reasonably possible that our estimated deferred tax asset will change in the near term and be material to the financial statements.

The components of our provision for income taxes are as follows for the years ended December 31:

Significant components of our deferred Federal income taxes were as follows:

CTD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014 AND 2013

(8) INCOME TAXES:  (CONTINUED)

The differences between the effective income tax rate reflected in the benefit (provision) for income taxes and the amounts, which would be determined by applying statutory income tax rate of 28% is summarized as follows:

We file income tax returns in the U.S. Federal jurisdiction, and in various state jurisdictions. We are no longer subject to U.S. Federal or state income tax examinations by tax authorities for years before 2011, except for net operating loss carryforwards from periods prior to 2009.

We have reviewed and evaluated the relevant technical merits of each of our tax positions in accordance with accounting principles generally accepted in the United States of America for accounting for uncertainty in income taxes, and determined that there are no uncertain tax positions that would have a material impact on the financial statements of the Company.

(9) EMPLOYEE BENEFIT PLAN:

We maintain a 401(k) plan available to all employees who have satisfied certain eligibility requirements. Employee contributions are discretionary. We may match employee contributions and may also make discretionary contributions for all eligible employees based upon their total compensation. For 2014 and 2013, we elected to match the employee’s contribution, not to exceed 4% of compensation. Our 401(k) contribution was $10,118 and $11,745 for 2014 and 2013, respectively.

Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the possible controls and procedures.

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, our management, including our principal executive officer and principal financial officer, has concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective at the reasonable assurance level because of the material weakness in our internal control over financial reporting discussed below.

Management’s Annual Report on Internal Control over Financial Reporting

Company management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.   Based on our assessment, we have concluded that our internal control over financial reporting was not effective as of December 31, 2014 due to a material weakness.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As of December 31, 2014, we have determined that a material weakness exists relating to the inability of the Company to reliably estimate its manufacturing costs and saleable units produced for certain inventory products that were produced by a contract manufacturer. This deficiency resulted in certain adjustments to cost of products sold and inventory.

Remediation of Material Weakness in Internal Control

We have developed and are implementing remediation plans to address the material weakness identified. Specifically, since December 31, 2014, we have increased the awareness of our accounting staff and provided additional guidance regarding accounting for manufactured products, estimating manufacturing costs and determining unit costs. We will continue to monitor the effectiveness of these remedial actions and make any further changes as management determines to be appropriate.

This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report is not subject to attestation by our independent public accountants in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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 control over financial reporting.

Item 9B.  Other Information.

None.

PART III

Item 10.  Directors, Executive Officers, Promoters, Control Persons and Corporate Governance.

The following table contains information regarding the current members of the Board of Directors and executive officers. The ages of individuals are provided as of March 25, 2015:

The six (6) directors serve until the next Annual Meeting of Shareholders, or until a successor shall be elected and qualified.

C.E. Rick Strattan has served as Director of the Company since 1990.  Mr. Strattan served as Chairman & CEO from 1990 to 2014, and as treasurer of the Company from August 1990, to May 1995.  From November 1987 through July 1989, Mr. Strattan was with Pharmatec, Inc., where he served as Director of Marketing and Business Development for cyclodextrins. Mr. Strattan was responsible for cyclodextrin sales and related business development efforts. From November, 1985 through May, 1987, Mr. Strattan served as Chief Technical Officer for Boots-Celltech Diagnostics, Inc. He also served as Product sales Manager for American Bio-Science Laboratories, a Division of American Hospital Supply Corporation. Mr. Strattan is a graduate of the University of Florida receiving a B.S. degree in chemistry and mathematics, and has also received an MS degree in pharmacology, and an MBA degree in Marketing/Computer Information Sciences, from the same institution. Mr. Strattan has written and published numerous articles and a book chapter on the subject of cyclodextrins.

Mr. Strattan was selected to serve as a member of our Board of Directors because of his extensive experience with cyclodextrins, his years of executive level experience, and his advanced degrees in pharmacology and marketing/computer information sciences.

Dr. Jeffrey L. Tate has served as President and Director of the Company since August 2010, and in July of 2014, he was appointed CEO.  Dr. Tate has been President and CEO of NanoSonic Products, Inc., and Sphingo Biotechnology, Inc., wholly-owned subsidiaries of the Company since 2010.  From January 2007 to February 2010, he was president of J-Jireh Products, Incorporated, a company that develops and markets products manufactured using pulse drying technology.  From January 1995 to December 2006, Dr. Tate served as a principal of J. Benson Tate Consultants LLC, a management consulting company.  From July 1999 to January 2005, Dr. Tate served as Vice President of Scientific and Regulatory Affairs of Natural Biologics, LLC, a pharmaceutical company.  Dr. Tate received his B.Sc. from the University of Minnesota Department of Botany and his M.Sc. and Ph.D. from the University of Minnesota Graduate School in Management of Technology and Plant Physiology, respectively.

Dr. Tate was selected to serve as a member of our Board of Directors because of his position with NanoSonic Products, Inc. and his experience with pulse drying technology.

George L. Fails has served as Executive Vice President, Operations Manager and a Director of the Company since 2001.  He served as President of Cyclodextrin Technologies Development, Inc. (CTD, Inc.), a wholly-owned subsidiary of the Company, and Operations Manager of CTD, Inc. from 2000 to 2014. Prior to joining the Company, Mr. Fails served as a Detective Sergeant with the Veterans Administration Hospital in Gainesville, Florida, with special duties as a Predator officer with the U.S. Marshall’s service. From 1965 until his retirement in 1986, Mr. Fails served with the U.S. Army Special Forces, including several tours in Vietnam, Salvador, and Angola. Mr. Fails also served two years with a United States intelligence arm. Mr. Fails received his B.A. from the University of the Philippines, and has also received degrees from 43 Military schools, as well as the Federal Police Academy in Little Rock, Arkansas.

Mr. Fails was selected to serve as a member of our Board of Directors because of his position with CTD, Inc.

N. Scott Fine has been a Director of the Company since February 2014.  From 2004 until 2014, he was a principal at Scarsdale Equities, an investment banking firm located in New York City. He has been involved in investment banking for over 35 years working on a multitude of debt and equity financings, buy and sell side M&A, strategic advisory work and corporate restructurings. The majority of his time has been focused on transactions in the healthcare and consumer products area, including time with The Tempo Group of Jakarta, Indonesia when Mr. Fine and his family resided in Jakarta for a period of two years.

Mr. Fine was a director of Central European Distribution Corporation, a multi-billion dollar alcohol company, from 1996 until 2014, during which time he led the CEDC Board's successful efforts in 2013 to restructure the company through a pre-packaged Chapter 11 process whereby CEDC was acquired by the Russian Standard alcohol group.

Mr. Fine is also the sole director of Better Place, Inc. Recently, Mr. Fine has become a member of the board of directors of Kenon Holdings Ltd, a spin-off from the Israel Corporation Ltd. as well as Chairman of the Global Virus Network (GVN). Mr. Fine has also joined the board of directors for Forward Industries, where he serves as a director as well as chairman of the audit committee.

Mr. Fine’s relationships within the financial community in New York and around the world, as well as his significant experience with equity and debt financing, make him a valuable contributor as a Director.  Mr. Fine was appointed to the Board of Directors in connection with a private placement of common stock by the Company in February 2014, and has the right to be nominated to our Board (or to have a representative nominated to our Board) for up to seven years from the date of that offering.

Markus W. Sieger has been a Director of the Company since February 2014. Mr. Sieger holds a degree in Economics from the University of Applied Sciences for Business and Administration Zurich. He started his career in 1981 with Zurich Insurance Group where he specialized in information systems and organizational projects. In 1994, he joined fincoord where he built a track record of negotiating and closing complex merger and acquisition transactions and building up, strategically repositioning and reorganizing companies in both emerging and Western markets. Since 2013, Mr. Sieger is an investor and principal at Sieger & Sieger Ltd. and Consiglio AG, focusing on strategic advisory mandates and his own investments. He is a director of various companies such as Z.F. Polpharma S.A., Z.T. Kruszwica S.A. and others. He was a director of Central European Distribution Corporation through June 2013.

Mr. Sieger’s extensive experience in strategic advisory roles and investment opportunities make him a valuable member of our Board of Directors.  Mr. Sieger was appointed to the Board of Directors in connection with a private placement of common stock by the Company in February 2014, and has the right to be nominated to our Board (or to have a representative nominated to our Board) for up to seven years from the date of that offering.

F. Patrick Ostronic has been a director since April 2014. Mr. Ostronic is an officer of US Pharmacia International, Inc., a subsidiary of USP, and also serves as the Chief Financial Officer of The USP Group. Mr. Ostronic is also a director of Novit US, Inc., the general partner of Novit.

Mr. Ostronic’s extensive experience in finance and the pharmaceutical industry make him a valuable member of the Board of Directors. Mr. Ostronic was appointed to the Board in connection with a private placement of common stock by the Company in April 2014.

Directors, including directors also serving the Company in another capacity and receiving separate compensation therefor, shall be entitled to receive from the Company as compensation for their services as directors such reasonable compensation as the board may from time to time determine, and shall also be entitled to reimbursements for any reasonable expenses incurred in attending meetings of directors.

Board Committee Structure

On February 28, 2014, our Board of Directors constituted Audit, Compensation and Governance Committees as three new standing committees. Currently, N. Scott Fine, F. Patrick Ostronic and Jeffrey L. Tate serve as the members of our Audit Committee; Markus W. Sieger, F. Patrick Ostronic and C.E. Rick Strattan serve as the members of our Compensation Committee; and Markus W. Sieger, N. Scott Fine and George L. Fails serve as the members of our Governance Committee. Prior to February 2014, the full board (then consisting of three executive officers) fulfilled the functions of these committees. 

Audit Committee Financial Expert

The Board of Directors has determined that no member of the Company’s Audit Committee qualifies as an audit committee financial expert within the meaning of SEC regulations.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of ethics will be provided to any person without charge, upon request. Requests should be addressed to Investor Relations Department, c/o CTD Holdings, Inc., 14120 NW 126th Terrace, Alachua, Florida 32615.

Section 16(a) Beneficial Ownership Reporting Compliance

We are required to identify each person who was an officer, director or beneficial owner of more than 10% of our registered equity securities during our most recent fiscal year and who failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934.

On November 7, 2014, our Board of Directors approved a grant of 20,000 shares of our common stock to the six members of our Board of Directors as compensation for board service, for which Form 4s were filed late on February 17, 2015. C.E. Rick Strattan, a director and large shareholder and our former chief executive officer, has donated an aggregate of 5,953,229 shares of common stock to TFBU, Inc., a tax-exempt organization, which has not yet filed a Form 3 and for which Mr. Strattan has not yet filed a Form 5. To our knowledge, based solely on review of these filings and representations from the current reporting persons, we believe that during the year ended December 31, 2014, other than as noted above, our officers, directors and significant stockholders have timely filed the appropriate forms under Section 16(a) of the Exchange Act required of them during the year.

Item 11.  Executive Compensation.

Executive Compensation

The following table contains information concerning the compensation paid during our fiscal years ended December 31, 2014 and 2013 to the persons who served as our Chief Executive Officer, and each of the two other most highly compensated executive officers.

SUMMARY COMPENSATION TABLE

Outstanding Equity Awards at Fiscal Year End

As of December 31, 2014, our named executive officers had no outstanding unexercised options, unvested stock or other unvested equity incentive plan awards.

Employment Agreements

We currently have no employment agreements with our officers or employees.

Compensation of Directors

The following table contains information concerning the compensation paid during our fiscal year ended December 31, 2014 and 2013 to the persons who served on our board of directors and are not executives of the Company as disclosed above. 

From May through September 2014 ,we paid Mr. Fine a sum of $15,000 per month for his services as Lead Director. Beginning in October 2014 we paid Mr. Fine a sum of $25,000 per month for his services as Chairman and Lead Director. Beginning in February 2015, Mr. Fine became our Executive Chairman. In consideration of his service to the Company in this role, including for various consulting and financial advisory roles he provides, our Board of Directors has agreed to pay Mr. Fine an amount equal to $27,500 per month, or $330,000 on an annualized basis.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table shows the ownership of the Common Stock of the Company on March 3, 2014, by each person who, to the knowledge of the Company, owned beneficially more than five percent (5%) of such stock, the ownership of each executive officer and each director, and the ownership of all directors and officers as a group. Unless otherwise noted, shares are subject to the sole voting and investment power of the indicated person.  Beneficial ownership is determined in accordance with the rules of the SEC. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days of March 3, 2014 are deemed outstanding for computing the percentage ownership of the stockholder holding the options or warrants, but are not deemed outstanding for computing the percentage ownership of any other stockholder. No such options or warrants are currently held by the persons in the table below. Percentage of ownership is based on 54,562,355 shares of Common Stock outstanding as of March 25, 2015.

* Less than one percent.

Equity Compensation Plan Information

Note to Equity Compensation Plan Table:

In 2014, 100,000 shares of common stock were issued to Mr. Tate as a one-time bonus. In addition, 20,000 shares were awarded to each member of our Board of Directors (including executive officers who serve on the board) as board compensation. In 2013, 138,889 shares of common stock were issued each to Mr. Strattan, Mr. Tate and Mr. Fails, respectively as one-time bonuses.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Related Party Transactions

For a discussion of our compensation paid to our officers and directors, including the compensation arrangements relating to our Executive Chairman, see “Item 11. Executive Compensation.” Except as described therein, we have not engaged in any transactions with related parties since January 1, 2014.

Director Independence

Our Board of Directors is comprised of six individuals, three of whom are employed by the Company. Two members, N. Scott Fine and Markus Sieger, were appointed in connection with our private placement of common stock completed in February 2014. One member, F. Patrick Ostronic, was appointed in connection with a private placement of stock in April 2014. We have determined that Mr. Sieger and Mr. Ostronic are “independent” using the definition set forth in the NYSE MKT Company Guide, which we have chosen to use for purposes of evaluating board independence as if we were listed on such exchange.  We also do not have an independent audit committee, compensation committee or governance committee, since members of the Board who do not qualify as “independent” under the standards of the NYSE MKT Company Guide serve on each of those committees.  Although our directors are subject to the fiduciary duties imposed on Board members pursuant to Florida law, our shareholders do not have the protection afforded by independent directors and an independent audit committee which are some of the traditional procedural safeguards that protects the interests of minority shareholders.  Our lack of independent directors on our Board of Directors may also make decisions of our Board of Directors more prone to legal claims or shareholder criticism than if made by a Board of Directors with a majority of independent board members. 

Item 14.  Principal Accounting Fees and Services.

Audit Fees

The aggregate fees billed in 2014 and 2013 for professional services rendered by the principal accountant, Averett Warmus Durkee, P.A. for the audit of the Company’s annual financial statements, the review of financial statements included in the Company’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements was $36,750 and $35,000, respectively.

Audit-Related Fees

No fees were billed during either of the last two fiscal years for any assurance and related services by Averett Warmus Durkee, P.A. that are not reported under the caption “Audit Fees”.

Tax Fees

No fees were billed during either of the last two fiscal years for professional services rendered by Averett Warmus Durkee, P.A. for tax compliance, tax advice, or tax planning.

All Other Fees

No other fees were billed during either of the last two fiscal years for professional services provided by Averett Warmus Durkee, P.A.

PART IV

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: March 27, 2015

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