Cyclo Therapeutics, Inc. - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2020

or

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

  

Commission file number: 0-25466

 

CYCLO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Florida		59-3029743
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

6714 NW 16th Street, Suite B, Gainesville, Florida		32653
(Address of principal executive offices)		(Zip Code)

 

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

  

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

 

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

 

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

 

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

 

	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☒
			Emerging growth company	☐

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

 

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

☐ Yes ☒ No

As of April 27, 2020 the Company had outstanding 141,671,462 shares of its common stock.

 

 

 

 

		March 31, 2020				December 31, 2019
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	933,457			$	2,783,719
Accounts receivable			168,823				143,429
Inventory, net			228,771				242,630
Current portion of mortgage note receivable			39,061				39,061
Prepaid insurance and services			174,082				137,069
Prepaid clinical expenses			553,065				612,161
Total current assets			2,097,259				3,958,069
FURNITURE AND EQUIPMENT, NET			61,055				13,546
RIGHT-TO-USE LEASE ASSET, NET			46,766				51,017
MORTGAGE NOTE RECEIVABLE, LESS CURRENT PORTION			80,981				90,596
TOTAL ASSETS		$	2,286,061			$	4,113,228
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of lease liability		$	16,716			$	16,385
Accounts payable and accrued expenses			3,935,585				3,124,735
Total current liabilities			3,952,301				3,141,120
LONG-TERM LEASE LIABILITY			31,770				36,126
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.0001 per share, 500,000,000 shares authorized, 121,564,990 shares issued and outstanding, at March 31, 2020 and December 31, 2019			12,155				12,155
Preferred stock, par value $.0001 per share, 5,000,000 shares authorized			-				-
Additional paid-in capital			26,044,060				26,044,060
Accumulated deficit			(27,754,225	)			(25,120,233	)
Total stockholders' equity (deficit)			(1,698,010	)			935,982
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	2,286,061			$	4,113,228

 

		Three Months Ended
		March 31,
		2020				2019
REVENUES
Product sales		$	325,734			$	220,826
EXPENSES
Personnel			469,705				409,999
Cost of products sold (exclusive of direct and indirect overhead and handling costs)			26,433				20,550
Research and development			2,059,606				1,342,763
Repairs and maintenance			1,802				1,684
Professional fees			219,536				214,975
Office and other			178,362				102,642
Board of Director fees and costs			7,349				33,085
Depreciation			3,118				1,484
Freight and shipping			1,863				1,434
Total operating expenses			2,967,774				2,128,616
LOSS FROM OPERATIONS			(2,642,040	)			(1,907,790	)
OTHER INCOME
Investment and other			8,048				3,624
LOSS BEFORE INCOME TAXES			(2,633,992	)			(1,904,166	)
PROVISION FOR INCOME TAXES			-				-
NET LOSS		$	(2,633,992	)		$	(1,904,166	)
BASIC AND DILUTED NET LOSS PER COMMON SHARE		$	(.02	)		$	(.02	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING			121,086,101				90,759,324

 

		Common Stock								Additional								Total
		Shares				Par Value				Paid-In Capital				Accumulated Deficit				Stockholders’ Equity
Balance, December 31, 2019			121,564,990			$	12,155			$	26,044,060			$	(25,120,233	)		$	935,982
Net loss			-				-				-				(2,633,992	)			(2,633,992	)
Balance, March 31, 2020		$	121,564,990			$	12,155			$	26,044,060			$	(27,754,225	)		$	(1,698,010	)

 

		Common Stock								Additional												Total
		Shares				Par Value				Paid-In Capital				Subscription Receivable				Accumulated Deficit				Stockholders’ Equity (Deficit)
Balance, December 31, 2018			90,759,324			$	9,075			$	18,701,211			$	(130,062	)		$	(17,587,700	)		$	992,524
Collection of subscription receivable			-				-				-				130,062				-				130,062
Net loss			-				-				-				-				(1,904,166	)			(1,904,166	)
Balance, March 31, 2019			90,759,324			$	9,075			$	18,701,211			$	-			$	(19,491,866	)		$	(781,580	)

 

		Three Months Ended
		March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(2,633,992	)		$	(1,904,166	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			3,118				1,484
Accrued stock compensation to employees			2,470				7,300
Accrued stock compensation to non-employees			4,750				24,090
Increase or decrease in:
Accounts receivable			(25,394	)			5,248
Inventory			13,859				3,278
Prepaid clinical expenses			59,096				-
Prepaid insurance and services			(37,013	)			-
Other current assets			(9,615	)			(28,716	)
Other			226				460
Accounts payable and accrued expenses			803,630				665,789
Total adjustments			824,742				678,933
NET CASH USED IN OPERATING ACTIVITIES			(1,809,250	)			(1,225,233	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment			(50,627	)			(1,324	)
Proceeds from mortgage note receivable			9,615				9,216
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			(41,012	)			7,892
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of stock subscription receivable			-				130,062
Other			-				(15,000	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			-				115,062
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,850,262	)			(1,102,279	)
CASH AND CASH EQUIVALENTS, beginning of period			2,783,719				2,217,412
CASH AND CASH EQUIVALENTS, end of period		$	933,457			$	1,115,133
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capitalization of right-to-use asset and lease liability		$	-				64,231

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

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

 

(a) ORGANIZATION AND OPERATIONS–– The Company was incorporated in August 1990 as a Florida corporation, under the name Cyclodextrin Technologies Development, Inc. with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name to CTD Holdings, Inc. We changed our name to Cyclo Therapeutics, Inc. in September 2019 to better reflect our current business. We are a biotechnology company that develops cyclodextrin-based products for the treatment of disease. We have filed a Type II Drug Master File with the U.S. Food and Drug Administration (“FDA”) for our lead drug candidate, Trappsol® Cyclo™ as a treatment for Niemann-Pick Type C disease (“NPC”), a rare and fatal cholesterol metabolism disease that impacts the brain, lungs, liver, spleen, and other organs. The FDA approved our Investigational New Drug application (IND) which describes our Phase I clinical plans in the U.S. for Trappsol® Cyclo™ and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017. Enrollment in this study was completed in October 2019, with initial results expected in the second 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 first patient was dosed in this study in July 2017, and in February 2020, the Company announced completion of enrollment of 12 patients in this study. Additionally, in February 2020 the Company had a face-to-face “Type C” meeting with the FDA with respect to the initiation of a Phase III clinical trial of Trappsol^® Cyclo™ based on the clinical data obtained to date.

 

In addition, we are exploring the use of cyclodextrins in the treatment of Alzheimer's disease, and in October 2019 entered into an agreement with a Contract Research Organization to conduct a clinical trial to evaluate the safety and efficacy of Trappsol® Cyclo™ for the treatment of this disease.

 

We also sell cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. However, our core business has transitioned to a biotechnology company primarily focused on the development of cyclodextrin-based biopharmaceuticals for the treatment of disease from a business which had been primarily reselling basic cyclodextrin products. 

 

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

 

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

 

(d) ACCOUNTS RECEIVABLE––Accounts receivable are unsecured and non-interest bearing and stated at the amount we expect to collect from outstanding balances. Customer account balances with invoices dated over 90 days old are considered past due. The Company does not accrue interest on past due accounts. Customer payments are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, applied to the oldest unpaid invoices.

 

The carrying amount of accounts receivable are reduced by an allowance for credit losses that reflects management’s best estimate of the amounts that will not be collected. The Company reviews each customer balance where all or a portion of the balance exceeds 90 days from the invoice date. Based on the Company’s assessment of the customer's current creditworthiness, the Company estimates the portion, if any, of the balance that will not be collected, and writes off receivables as a charge to the allowance for credit losses when, in management’s estimation, it is probable that the receivable is worthless. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, an allowance for doubtful accounts was not deemed necessary at March 31, 2020 and December 31, 2019.

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

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

 

(e) INVENTORY AND COST OF PRODUCTS SOLD––Inventory consists of our pharmaceutical drug Trappsol^® Cyclo™, cyclodextrin products and chemical complexes purchased for resale recorded at the lower of cost (first-in, first-out) or net realizable value. Cost of products sold includes the acquisition cost of the products sold and does not include any allocation of inbound or outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation and amortization expense. The Company records a specific reserve for inventory items that are determined to be obsolete. The reserve for obsolete inventory was $52,900 at March 31, 2020 and December 31, 2019, respectively. The Company’s reserve for obsolete inventory is based on the Company’s best estimates of product sales and customer demands. It is reasonably possible that the estimates used by the Company to determine its provisions for inventory write-downs will be material different from actual write-downs. These differences could result in materially higher than expected inventory provisions and related costs, which could have a materially adverse effect on the Company’s results of operations and financial condition in the near term.

 

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

 

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

 

(h) FURNITURE AND EQUIPMENT––Furniture and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using primarily the straight-line method over the estimated useful lives of the assets (generally three to five years for computers and vehicles and seven to ten years for machinery, equipment and office furniture). We periodically review our long-lived assets to determine if the carrying value of assets may not be recoverable. If an impairment is identified, we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. 

 

(i) REVENUE RECOGNITION––Under the revenue standards of ASC 606, revenues are recognized when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

Product revenues
In the U.S. we sell our products to the end user or wholesale distributors. In other countries, we sell our products primarily to wholesale distributors and other third-party distribution partners. These customers subsequently resell our products to health care providers and patients. All sales are denominated in U.S. Dollars.

 

Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.  We treat shipping and handling costs performed after a customer obtains control of the product as a fulfillment cost. We have identified one performance obligation in our contracts with customers which is the delivery of product to our customers.  The transaction price is recognized in full when we deliver the product to our customer, which is the point at which we have satisfied our performance obligation.

 

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, health care providers or payors, including those associated with the implementation of pricing actions in certain of the international markets in which we operate. Our process for estimating reserves established for these variable consideration components do not differ materially from our historical practices.

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

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

 

Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, contractual adjustments and returns. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). Our estimates of reserves established for variable consideration typically utilize the most likely method and reflect our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. For additional information on our revenues, please read Note 2, Revenues, to these consolidated financial statements.

 

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

 

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

 

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

 

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

 

(n) NET LOSS PER COMMON SHARE––Basic and fully diluted net loss per common share is computed using a simple weighted average of common shares outstanding during the periods presented, as outstanding warrants to purchase 63,321,294 common shares and 32,192,294 common shares were antidilutive for the three months ended March 31, 2020 and 2019, respectively.

 

(o) STOCK BASED COMPENSATION––The Company periodically awards stock to employees, directors, and consultants.  In the case of employees and consultants, an expense is recognized equal to the fair value of the stock determined using the closing trading price of the stock on the award date. With respect to directors, the Company accrues stock compensation expense on a quarterly basis based on the Company’s historical director compensation policies, and each quarter recognizes such expense based on the trading price of the common stock during such quarter.

 

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

 

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

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

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

 

●	Level 1: Quoted market prices in active markets for identical assets or liabilities.
●	Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
●	Level 3: Unobservable inputs that are not corroborated by market data.

 

We have no assets or liabilities that are required to have their fair value measured on a recurring basis at March 31, 2020 or December 31, 2019.  Long-lived assets are measured at fair value on a non-recurring basis and are subject to fair value adjustments when there is evidence of impairment.

 

For short-term classes of our financial instruments, which include cash, accounts receivable and accounts payable, and which are not reported at fair value, the carrying amounts approximate fair value due to their short-term nature.  The fair value of the mortgage note receivable is estimated based on the present value of the underlying cash flows discounted at current rates. At March 31, 2020 and December 31, 2019, the carrying value of the mortgage note receivable approximates fair value.

 

(q) LIQUIDITY AND GOING CONCERN––For the three months ended March 31, 2020 and the year ended December 31, 2019, the Company incurred net losses of $2,634,000 and $7,533,000, respectively. The Company has an accumulated deficit of approximately $27,754,000 at March 31, 2020. Our recent losses have predominantly resulted from research and development expenses for our Trappsol^® Cyclo™ product and other general operating expenses, including personnel expenses and board advisory fees. We believe our expenses will continue to increase as we conduct clinical trials and continue to seek regulatory approval for the use of Trappsol^® Cyclo™ in the treatment of NPC.

 

For the three months ended March 31, 2020, our operations used approximately $1,809,000 in cash. This cash was provided primarily by cash on hand. At March 31, 2020, the Company had a cash balance of approximately $933,000 and current liabilities exceeded current liabilities by $1,855,000. The Company received $2,000,000 in April, 2020 from a private placement of its securities. We will need additional capital to maintain our operations, continue our research and development programs, conduct clinical trials, seek regulatory approvals and manufacture and market our products.

 

The Company has incurred losses from operations in each of the last six years. We will need to raise additional capital through the sale of our securities from time to time for the foreseeable future to fund the development of our drug product candidates through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital will likely be subject to various factors, including our overall business performance and market conditions. If we cannot raise the additional funds required for our anticipated operations, we may be required to reduce the scope of or eliminate our research and development programs, delay our clinical trials and the ability to seek regulatory approvals, downsize our general and administrative infrastructure, or seek alternative measures to avoid insolvency. If we raise additional funds through future offerings of shares of our Common Stock or other securities, such offerings would cause dilution of current stockholders’ percentage ownership in the Company, which could be substantial. Future offerings also could have a material and adverse effect on the price of our Common Stock.

 

Our consolidated financial statements for the three months ended March 31, 2020 and year ended December 31, 2019 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. We have incurred losses from operations in each of our last five fiscal years. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above. We will need to raise additional capital to support our ongoing operations and continue our clinical trials. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

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

 

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

 

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

 

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

 

(2) REVENUES:

 

The Company operates in one business segment, which primarily focuses on the development and commercialization of innovative cyclodextrin-based products for the treatment of people with serious and life threatening rare diseases and medical conditions. The Company considers there to be revenue concentration risks for regions where net product revenues exceed 10% of consolidated net product revenues. The concentration of the Company’s net product revenues within the regions below may have a material adverse effect on the Company’s revenues and results of operations if sales in the respective regions experience difficulties.

 

Revenues by product are summarized as follows:

 

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

(2) REVENUES: (CONTINUED)

 

Substantially all of our sales of Trappsol^® Cyclo™ for the three months ended March 31, 2020 and year ended December 31, 2019 were to a single customer who exports the drug to South America. Substantially all of our Aquaplex^® sales are to one customer.

 

(3) MAJOR CUSTOMERS AND SUPPLIERS:

 

Our revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. For the three months ended March 31, 2020 and 2019, four major customers accounted for 70% and 76% of total revenues, respectively.

 

Substantially all inventory purchases were from three vendors in 2020 and 2019. These vendors are located primarily outside the United States.

 

We have three sources for our Aquaplex® products. There are multiple sources for our Trappsol^® products.

 

For the three months ended March 31, 2020, the product mix of our revenues consisted of 9% biopharmaceutical and 91% basic natural and chemically modified cyclodextrins. For the three months ended March 31, 2019 the product mix of our revenues consisted of 14% biopharmaceuticals, 62% basic natural and chemically modified cyclodextrins, and 24% cyclodextrin complexes.

 

(4) MORTGAGE NOTE RECEIVABLE

 

On January 21, 2016, we sold our real property located in High Springs, Florida to an unrelated party. Pursuant to the terms of the sale, at the closing, the buyer paid $10,000 in cash, less selling costs and settlement charges, and delivered to us a promissory note in the principal amount of $265,000, and a mortgage in our favor securing the buyer’s obligations under the promissory note. The promissory note provides for monthly payments of $3,653, including principal and interest at 4.25%, over a seven-year period that commenced March 1, 2016, with the unpaid balance due in February 2023.

 

(5) EQUITY TRANSACTIONS:

 

The Company expensed $7,220 and $31,390 in employee and board member stock compensation for the three months ended March 31, 2020 and 2019, respectively. These shares were valued using quoted market values. The Company accrues stock compensation expense over the period earned for employees and board members. Stock compensation expense for board members is included in “Board of Directors fees and costs” on our statement of operations, and stock compensation expense for officers and employees that are not board members is included in “Personnel” on our statement of operations.

 

On May 31, 2019, the Company completed a private placement of its securities to a group of accredited investors that included several directors of the Company and members of management. Investors in the private placement purchased a total of 29,770,000 units at a price per unit of $0.25, each unit consisting of one share of common stock and one warrant to purchase a share of common stock, resulting in gross proceeds to the Company of $7,442,500, before deducting placement agent fees and offering expenses of $452,900 resulting in cash proceeds of $6,989,600. The warrants are exercisable immediately upon issuance at an exercise price of $0.30 per share and expire on the 66^th month anniversary of the issuance date.  The Company paid a cash fee to its placement agent of $452,900 and issued warrants to the placement agent and its designees to purchase an aggregate of 1,359,000 shares of common stock with the same terms as the warrants issued to the investors.  The Company filed a registration statement with the Securities and Exchange Commission to register the resale of the outstanding common stock and the shares of common stock underlying the warrants and the warrants issued to the placement agent, which was declared effective on July 12, 2019. In addition, the Company’s directors and officers entered into Lock-Up Agreements at the closing under which they have agreed not to sell any of their securities of the Company until the earliest of (i) 270 days after the effective date of the Registration Statement, (ii) 365 days after the closing, and (iii) 120 days after the listing of Company’s common stock on a national securities exchange. 

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

(5) EQUITY TRANSACTIONS: (CONTINUED)

 

As of March 31, 2020, the Company had warrants outstanding to purchase 63,321,294 shares of common stock at exercise prices of $0.25 - $1.00 per share that expire at various dates through 2025. In addition, there are seven-year warrants outstanding at March 31, 2020 to purchase 480,000 Units sold in our May 2016 private placement at an exercise price of $0.25 per Unit, 164,074 Units sold in our February 2017 private placement at an exercise price of $0.35 per Unit, and 600 Units sold in our October 2017 private placement at an exercise price of $100 per Unit. 

In April 2020, the Company completed a private placement of its securities to a group of accredited investors that included several directors of the Company and members of management. Investors purchased a total of 20 million shares of common stock at a price per share of $0.10.

 

(6) INCOME TAXES:

 

The Company reported a net loss for the three months ended March 31, 2020 and 2019, respectively. The Company increased its deferred tax asset valuation allowance rather than recognize an income tax benefit.

 

(7) EQUITY INCENTIVE PLAN:

 

On August 29, 2019, the Company’s stockholders approved the Company’s  2019 Omnibus Equity Incentive Plan at a special meeting of stockholders (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 6,843,750 shares of common stock pursuant to the grant of shares of common stock, stock options or other awards, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the Incentive Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant. As of March 31, 2020, we had awarded 450,000 shares of common stock as awards under the Incentive Plan, with 6,393,750 shares of common stock remaining available for future awards under the Incentive Plan.

 

(8) LEASES:

 

The Company adopted ASU 2016-02 “Leases (Topic 842)” along with related clarifications and improvements effective at the beginning of fiscal 2019, using the modified retrospective transition method.   Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods, as the Company has elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward our prior lease classifications under ASC 840, “Leases.”

 

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

 

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

 

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

 

 

CYCLO THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

 

(8) LEASES: (CONTINUED)

 

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

 

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

 

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

 

Operating lease assets are recorded net of accumulated amortization of $21,256 as of March 31, 2020. Lease expense for lease payments are recognized on a straight-line basis over the lease term.   Lease expense for the three months ended March 31, 2020 and 2019 was $4,251.

 

(9) SUBSEQUENT EVENTS:

 

$2 Million Private Placement of Common Stock

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

 

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

 

PPP Loan

On May 4, 2020, the Company’s wholly-owned subsidiary Cyclodextrin Technologies Development, Inc., borrowed $158,524 from BBVA USA under the Paycheck Protection Program which was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  The loan matures on May 4, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 4, 2020. Under the Paycheck Protection Program, the loan may be partially or wholly forgiven if the loan is used to fund certain qualifying expenses as described in the CARES Act.  In connection with the loan, the Company has certified that it will use the loan proceeds for qualifying expenses in accordance with the terms of the CARES Act. The Company intends to apply for forgiveness of the loan in accordance with the Act, although there can be no guarantee that the Company will be successful in obtaining such loan forgiveness.