Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information to explain our results of operations and financial condition. You should also read our unaudited consolidated interim financial statements and their notes included in this Form 10-Q, and our audited consolidated financial statements and their notes and other information included in our Annual Report on Form 10-K for the year ended December 31, 2019. This report may contain forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will” “plans” and other similar expressions; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to significant risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events, circumstances or developments occurring subsequent to the filing of this Form 10-Q with the U.S. Securities and Exchange Commission (the “SEC”) or for any other reason and you should not place undue reliance on these forward-looking statements. You should carefully review and consider the various disclosures the Company makes in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. All amounts presented herein are rounded to nearest $1,000.
Overview
We are a clinical stage biotechnology company that develops cyclodextrin-based products for the treatment of disease. We filed a Type II Drug Master File with the U.S. Food and Drug Administration (“FDA”) in 2014 for our lead drug candidate, Trappsol® Cyclo™ (hydroxypropyl beta cyclodextrin) as a treatment for Niemann-Pick Type C disease (“NPC”). NPC is a rare and fatal cholesterol metabolism disease that impacts the brain, lungs, liver, spleen, and other organs. In 2015, we launched an International Clinical Program for Trappsol® Cyclo™ as a treatment for NPC. In 2016, we filed an Investigational New Drug application (“IND”) with the FDA, which described our Phase I clinical plans for a randomized, double blind, parallel group study at a single clinical site in the U.S. The Phase I study evaluated the safety of Trappsol® Cyclo™ along with markers of cholesterol metabolism and markers of NPC during a 14-week treatment period of intravenous administration of Trappsol® Cyclo™ every two weeks to participants 18 years of age and older. The IND was approved by the FDA in September 2016, and in January 2017 the FDA granted Fast Track designation to Trappsol® Cyclo™ for the treatment of NPC. Initial patient enrollment in the U.S. Phase I study commenced in September 2017. Enrollment in this study was completed in October 2019, and in May 2020 we announced Top Line data showing a favorable safety and tolerability profile for Trappsol® Cyclo™ in this study.
We have also filed Clinical Trial Applications for a Phase I/II clinical study with several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, and in Israel, all of which have approved our applications. The Phase I/II study is evaluating the safety, tolerability and efficacy of Trappsol® Cyclo™ through a range of clinical outcomes, including neurologic, and respiratory, in addition to measurements of cholesterol metabolism and markers of NPC. The European/Israel study is similar to the U.S. study, providing for the administration of Trappsol® Cyclo™ intravenously to NPC patients every two weeks in a double-blind, randomized trial but it differs in that the study period is for 48 weeks (24 doses). The first patient was dosed in this study in July 2017, and in February 2020, we announced completion of enrollment of 12 patients in this study. In September 2020, we released positive data from the seven patients who completed the trial, supporting the efficacy of Trappsol® Cyclo™ in treating NPC patients.
Additionally, in February 2020 we had a face-to-face “Type C” meeting with the FDA with respect to the initiation of a Phase III clinical trial of Trappsol® Cyclo™ based on the clinical data obtained to date. At that meeting, we also discussed with the FDA submitting a New Drug Application (NDA) under Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act for the treatment of NPC in pediatric and adult patients with Trappsol® Cyclo™. A similar request was submitted to the European Medicines Agency (“EMA”) in February 2020, seeking scientific advice and protocol assistance from the EMA for proceeding with a Phase III clinical trial in Europe. In October 2020, the FDA notified us that we may proceed with our proposed Phase III clinical trial of Trappsol® Cyclo™.
Preliminary data from our clinical studies suggest that Trappsol® Cyclo™ releases cholesterol from cells, crosses the blood-brain-barrier in individuals suffering from NPC, and results in clinical improvements in NPC patients. The full significance of these findings will be determined as part of the final analysis of both clinical trials.
On May 17, 2010, the FDA designated Trappsol® Cyclo™ as an orphan drug for the treatment of NPC, which would provide us with the exclusive right to sell Trappsol® Cyclo™ for the treatment of NPC for seven years following FDA drug approval. In April 2015, we also obtained Orphan Drug Designation for Trappsol® Cyclo™ in Europe, which will provide us with 10 years of market exclusivity following regulatory approval, which period will be extended to 12 years upon acceptance by the EMA’s Pediatric Committee of our pediatric investigation plan (PIP) demonstrating that Trappsol® Cyclo™ addresses the pediatric population. On January 12, 2017, we received Fast Track Designation from the FDA, and on December 1, 2017, the FDA designated NPC a Rare Pediatric Disease and issued us a Priority Review Voucher with respect to the treatment of NPC with Trappsol® Cyclo™.
We are also exploring the use of cyclodextrins in the treatment of Alzheimer’s disease. In January 2018, the FDA authorized a single patient IND expanded access program using Trappsol® Cyclo™ for the treatment of this disease. After 18 months of treatment in this geriatric patient with late-onset disease, the disease was stabilized and the drug was well tolerated. The patient also exhibited signs of improvement with less volatility and shorter latency in word-finding. In October 2019, we entered into an agreement with Worldwide Clinical Trials, a Contract Research Organization, to conduct a clinical trial to evaluate the safety and efficacy of Trappsol® Cyclo™ for the treatment of Alzheimer’s disease. We prepared a synopsis for an early stage protocol using Trappsol® Cyclo™ intravenously to treat Alzheimer’s Disease, and we plan to present this synopsis to the FDA in early 2021.
We filed a provisional patent application for the treatment of Alzheimer’s disease with cyclodextrins with the U.S. Patent and Trademark Office in October 2018, which was amended based on additional clinical data in August 2019; and we filed a similar international patent application in October 2019 under the Patent Cooperation Treaty.
We also continue to operate our legacy fine chemical business, consisting of the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. However, our core business has transitioned to a biotechnology company primarily focused on the development of cyclodextrin-based biopharmaceuticals for the treatment of disease from a business that had been primarily reselling basic cyclodextrin products.
Liquidity and Capital Resources
Our cash decreased to approximately $2,238,000 as of September 30, 2020, compared to $2,784,000 as of December 31, 2019. Our current assets less current liabilities were $(588,000) as of September 30, 2020, compared to $817,000 at December 31, 2019. Cash used in operations was $5,479,000 for the nine months ended September 30, 2020, compared to $4,368,000 for the same period in 2019. The increase in cash used in operations is due primarily to our net loss and increasing expenses for our drug development and expansion strategy, which we intend to continue funding with the capital we raise.
We raised $2,000,000 in April 2020, and an additional $2,831,000 in August 2020, from the sale of securities in two private placements. We plan to use the proceeds of the sale of our securities primarily for the development of our Trappsol® Cyclo™ orphan drug product, including in connection with our continuing International Clinical Program and U.S. clinical trials, and other general corporate purposes. We also borrowed $158,524 under the Paycheck Protection Program in May 2020, and plan to use the loan proceeds for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. While we currently believe our use of the loan proceeds met or will meet the conditions for forgiveness of the loan, there can be no assurance in that regard.
On September 29, 2020, we filed a Registration Statement on Form S-1 with the Securities and Exchange Commission to raise capital through the offer and sale of units consisting of shares of our common stock and warrants to purchase additional shares of common stock in a firm commitment underwriting to be conducted by Maxim Capital Group, Inc. However, there can be no assurance that we will be successful in completing the offering. The securities to be sold in the offering may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.
The Company has continued to realize losses from operations. We will need to raise additional capital to support our ongoing operations and continue our clinical trials. While we presently lack sufficient cash to meet our anticipated operating costs and capital expenditure requirements through July 2021, we expect to continue to raise additional capital through the sale of our securities from time to time for the foreseeable future to fund the development of our drug product candidates through clinical development, manufacturing and commercialization. Our ability to obtain such additional capital will likely be subject to various factors, including our overall business performance and market conditions. There can be no guarantee that the Company will be successful in its ability to raise capital to fund future operational and development initiatives. Our need for additional capital as described above raises substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Our consolidated financial statements for the three and nine months ended September 30, 2020 and year ended December 31, 2019 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. We have incurred losses from operations in each of our last six fiscal years. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above.
At December 31, 2019, we had approximately $18,335,000 in net state and federal operating loss carryforwards expiring from 2020 through 2037, including $9,692,000 that will not expire, that can be used to offset our current and future taxable net income and reduce our income tax liabilities. We have provided a 100% valuation allowance on our deferred tax asset based on our expected future expenses related to our clinical trials and other development initiatives.
We have no off-balance sheet arrangements at September 30, 2020.
Results of Operations - Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019
We reported net losses of $(1,436,000) and $(6,262,000) for the three and nine months ended September 30, 2020, respectively, compared to net losses of $(1,625,000) and $(4,898,000) for the three and nine months ended September 30, 2019, respectively.
Total revenues for the three month period ended September 30, 2020 decreased 23% to $222,000 compared to $286,000 for the same period in 2019. Total revenues for the nine month period ended September 30, 2020 decreased 3% to $758,000 compared to $780,000 for the same period in 2019. Our change in the mix of our product sales for the three and nine months ended September 30, 2020 and 2019 is as follows:
Trappsol® Cyclo
There were no sales of Trappsol® Cyclo™ for the three month period ended September 30, 2020 and $74,000 for the three month period ended September 30, 2019. Our sales of Trappsol® Cyclo™ decreased by 71% for the nine month period ended September 30, 2020, to $30,000 from $104,000 for the nine month period ended September 30, 2019. Substantially all of our sales of Trappsol® Cyclo™ for the nine months ended September 30, 2020 and 2019 were to a particular customer who exports the drug to South America. Our annual 2019 sales to this customer were $104,000 (100% of total 2019 sales of Trappsol® Cyclo™). This product is designated as an orphan drug; the population of patients who use the product on a compassionate basis is small.
Trappsol® HPB
Our sales of Trappsol® HPB decreased by 40% for the three month period ended September 30, 2020, to $92,000 from $153,000 for the three months ended September 30, 2019. Our sales of Trappsol® HPB increased by 28% for the nine month period ended September 30, 2020, to $459,000 from $360,000 for the nine months ended September 30, 2019.
Trappsol® other products
Our sales of other Trappsol® products increased for the three month period ended September 30, 2020, to $128,000 from $58,000 for the three months ended September 30, 2019. Our sales of other Trappsol® products increased for the nine month period ended September 30, 2020, to $261,000 from $163,000 for the nine months ended September 30, 2019.
Aquaplex®
There were no sales of Aquaplex® for the three month periods ended September 30, 2020 and 2019. Our sales of Aquaplex® were $1,000 for the nine month period ended September 30, 2020 compared to $150,000 for the nine month period ended September 30, 2019.
The largest customers for our legacy fine chemical business continue to follow historical product ordering trends by placing periodic large orders that represent a significant share of our annual sales volume. During the nine months ended September 30, 2020, our three largest customers accounted for 66% of our sales; the largest accounted for 31% of sales. During the nine months ended September 30, 2019, our five largest customers accounted for 75% of our sales; the largest accounted for 18% of sales. Historically, our usual smaller sales of HPB occur more frequently throughout the year compared to our large sales that we receive periodically. The timing of when we receive and are able to complete these two kinds of sales has a significant effect on our quarterly revenues and operating results and makes period to period comparisons difficult.
Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the nine month period ended September 30, 2020 decreased 19% to $51,000 from $63,000 for the same period in 2019. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) for the three month period ended September 30, 2020 decreased 54% to $12,000 from $26,000 for the same period in 2019. Our cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) as a percentage of sales was 7% for the nine months ended September 30, 2020 and 9% for the nine months ended September 30, 2019. Historically, the timing and product mix of sales to our large customers has had a significant effect on our sales, cost of products sold (excluding any allocation of direct and indirect overhead and handling costs) and the related margin. We did not experience any significant increases in material costs during 2019, or the first nine months of 2020.
Our gross margins may not be comparable to those of other entities, since some entities include all the costs related to their distribution network in cost of goods sold. Our cost of goods sold includes only the cost of products sold and does not include any allocation of inbound or outbound freight charges, indirect overhead expenses, warehouse and distribution expenses, or depreciation expense. Our employees provide receiving, inspection, warehousing and shipping operations for us. The cost of our employees is included in personnel expense. Our other costs of warehousing and shipping functions are included in office and other expense.
As we buy inventory from foreign suppliers, the change in the value of the U.S. dollar in relation to the Euro and Yuan may from time to time have an effect on our cost of inventory. Our main supplier of specialty cyclodextrins and complexes, Cyclodextrin Research & Development Laboratory, is located in Hungary and its prices are set in Euros. The cost of our bulk inventory often changes due to fluctuations in the U.S. dollar. There were no purchases of inventory from Hungary during the nine months ended June 30, 2020. The cost of shipping from outside the U.S. also has a significant effect on our inventory acquisition costs. In addition, unpredictable changes in United States import tariffs also impacts our costs for raw materials. When we experience short-term increases in currency fluctuation, tariff increases, or supplier price increases, we are often not able to raise our prices sufficiently to maintain our historical margins. Therefore, our margins on these sales may decline.
Personnel expenses decreased by 19%, to $425,000 for the three months ended September 30, 2020 from $521,000 for the three months ended September 30, 2019. Personnel expenses increased by 7%, to $1,328,000 for the nine months ended September 30, 2020 from $1,242,000 for the nine months ended September 30, 2019. The increase in personnel expense is due to additional personnel added during the middle of 2019. We expect to maintain our level of employees and related costs in the near term.
Research and development expenses increased 15% to $1,087,000 for the three months ended September 30, 2020, from $942,000 for the three months ended September 30, 2019. Research and development expenses increased 58% to $4,860,000 for the nine months ended September 30, 2020, from $3,071,000 for the nine months ended September 30, 2019. Research and development expenses as a percentage of our total operating expenses increased to 69% for the nine months ended September 30, 2020 from 54% for the nine months ended September 30, 2019. The increase in research and development expense is due to increased activity in our International Clinical Program and U.S. clinical trials. We expect future research and development costs to further increase as we commence our Phase III clinical trial of Trappsol® Cyclo™ and continue to seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC and Alzheimer’s disease.
Professional fees decreased 53% to $72,000 for the three months ended September 30, 2020, compared to $152,000 for the three months ended September 30, 2019. Professional fees decreased 29% to $435,000 for the nine months ended September 30, 2020, compared to $613,000 for the nine months ended September 30, 2019. Professional fees may increase in the future due to new initiatives in raising capital and the continuation of product development.
Office and other expenses decreased 80% to $48,000 for the three months ended September 30, 2020, compared to $234,000 for the three months ended September 30, 2019. Office and other expenses decreased 48% to $306,000 for the nine months ended September 30, 2020, compared to $584,000 for the nine months ended September 30, 2019. Office and other expenses include costs for travel to, and participation in, industry conferences and similar events, which vary from period to period.
Board of Directors fees and costs decreased to $10,000 for the three months ended September 30, 2020, compared to $37,000 for the three months ended September 30, 2019. Board of Directors fees and costs decreased to $38,000 for the nine months ended September 30, 2020, compared to $102,000 for the nine months ended September 30, 2019. Board of Directors fees and costs include fees (generally in the form of stock compensation) paid to our non-employee directors and scientific advisory board members, reimbursement of expenses of our board members, and related expenses. The reduction in Board of Directors fees and costs for the three and nine months ended September 30, 2020 compared to the same periods in the prior year was due to a decrease in the market price of the Company’s common stock.
We increased our valuation allowance to offset the increase in our deferred tax asset from our net operating loss and did not recognize an income benefit or provision for the nine months ended September 30, 2020, and 2019, respectively.