NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the more significant accounting policies of Cyclo Therapeutics, Inc. (the “Company,” “we,” “our” or “us”) that affect the accompanying consolidated financial statements:
(a) ORGANIZATION AND OPERATIONS––The Company was incorporated in August 1990 as a Florida corporation, under the name Cyclodextrin Technologies Development, Inc. with operations beginning in July 1992. In conjunction with a restructuring in 2000, we changed our name to CTD Holdings, Inc. We changed our name to Cyclo Therapeutics, Inc. in September 2019 to better reflect our current business and on November 6, 2020, we reincorporated from the State of Florida to the State of Nevada.
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 completed a Phase I/II clinical study approved by several European regulatory bodies, including those in the United Kingdom, Sweden and Italy, and in Israel. The Phase I/II study is evaluated 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 was 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 March of 2021 we announced that 100% of patients who completed the trial improved or remained stable, and 89% met the efficacy outcome measure of improvement in at least two domains of the 17-domain NPC severity scale.
Additionally, in February 2020 we had a face-to-face “Type C” meeting with the FDA with respect to the initiation of our pivotal 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 we received a “Study May Proceed” notification from the FDA with respect to the proposed Phase III clinical trial, and in June of 2021 we commenced enrollment in TransportNPC, a pivotal Phase III study of Trappsol® Cyclo™ for the treatment of NPC.
We are also exploring the use of cyclodextrins in the treatment of Alzheimer’s disease. In December of 2021, the Company received IND clearance from the FDA to proceed with a Phase II study for the treatment of Alzheimer’s disease with Trappsol® Cyclo™. We expect to begin enrollment in this study during 2022.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
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.
(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.
(c) LIQUIDITY AND GOING CONCERN––For the years ended December 31, 2021 and 2020, the Company incurred net losses of $14,286,655 and $8,941,603, respectively. The Company has an accumulated deficit of $48,348,491 at December 31, 2021. 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 continue to conduct clinical trials and seek regulatory approval for the use of Trappsol® Cyclo™ in the treatment of NPC and Alzheimer’s disease.
For year ended December 31, 2021, the Company’s operations used $15,005,298 in cash, and at December 31, 2021, the Company had a cash balance of $16,612,711 and current assets less current liabilities of $15,605,000. We will need to raise additional capital for the foreseeable future to fund the development of our drug product candidates through clinical development, manufacturing and commercialization. We intend to continue to raise such capital through the sale of equity securities from time to time, the issuance of debt securities, the sale or licensing of existing assets or assets in development, or from other non-dilutive funding mechanisms. 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 years ended December 31, 2021 and 2020 were prepared on the basis of a going concern, which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon the availability of equity financing as noted above. 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.
(d) 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.
(e) 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. Accounts receivable at January 1, 2020 was approximately $143,000.
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. The Company has estimated an allowance for doubtful accounts of $21,800 at December 31, 2021. An allowance for doubtful accounts was not deemed necessary at December 31, 2020.
(f) 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 approximately $52,900 at December 31, 2021 and 2020.
The Company’s reserve for obsolete inventory is based on the Company’s best estimates of product sales and customer demands. It is reasonably possible that the estimates used by the Company to determine its provisions for inventory write-downs will be materially different from actual write-downs. These differences could result in materially higher than expected inventory provisions and related costs, which could have a materially adverse effect on the Company’s results of operations and financial condition in the near term.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(g) 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. Prepaid clinical expenses represent valid future economic benefits based on our contracts with our vendors, and will be realized in the ordinary course of business.
(h) MORTGAGE NOTE RECEIVABLE––The mortgage note receivable is stated at amortized value, which is the amount we expect to collect.
(i) 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.
(j) REVENUE RECOGNITION––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 Accounting Standards Codification (“ASC”) Topic 606: (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.
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.
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.
(k) 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.
(l) ADVERTISING––Advertising costs are charged to operations when incurred. We incur minimal advertising expenses.
(m) RESEARCH AND DEVELOPMENT COSTS––Research and development costs are expensed as incurred. Research and development expense primarily consists of product development, third-party contractors, and materials.
(n) 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.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(o) 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 2,048,186 and 3,287,661 common shares were antidilutive for 2021 and 2020, respectively. Additionally, outstanding options to purchase 222,700 shares of common stock were antidilutive for the year ended December 31, 2021. There were no stock options outstanding for the year ended December 31, 2020.
(p) STOCK BASED COMPENSATION–– The Company periodically awards stock to employees, directors, and consultants. In the case of employees and consultants, an expense is recognized equal to the fair value of the stock determined using the closing trading price of the stock on the award date. With respect to directors, the Company accrues stock compensation expense on a quarterly basis based on the Company’s historical director compensation policies, and each quarter recognizes such expense based on the trading price of the common stock during such quarter. This expense is then trued up at the time the shares are issued to directors based on the trading price at the time of issuance.
The Company periodically issues stock options under its 2021 Equity Incentive Plan. The Company uses the Black-Scholes valuation method to estimate the fair value of stock options at grant date. Compensation expense is recognized on the straight-line basis over the requisite service period, which is generally the vesting period.
(q) FAIR VALUE MEASUREMENTS AND DISCLOSURES––The Fair Value Measurements and Disclosures topic of the Accounting Standards Codification (“ASC”) requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. The Fair Value Measurements and Disclosures topic emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
● | Level 1: Quoted market prices in active markets for identical assets or liabilities. |
| |
● | Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. |
| |
● | Level 3: Unobservable inputs that are not corroborated by market data. |
We have no assets or liabilities that are required to have their fair value measured on a recurring basis at December 31, 2021 or 2020. 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 and cash equivalents, 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 December 31, 2021 and 2020, the carrying value of the mortgage note receivable approximates fair value.
(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. The Company’s most significant estimate relates to inventory obsolescence and deferred tax valuation allowance. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could significantly differ from these estimates.
(s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS–– In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on how an entity should measure credit losses on financial instruments. The ASU is effective for smaller reporting company’s for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
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 Company adopted ASU 2019-12 as of January 1, 2021 and the adoption had no material impart to the Company’s consolidated financial statements.
(t) WARRANTS––The Company accounts for its warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants considering the authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and satisfy additional conditions for equity classification. Warrants that are liability-classified are measured at fair value at each reporting date in accordance with the guidance in ASC 820, Fair Value Measurement, with any subsequent changes in fair value recognized in the statement of operations in the period of change. The fair value of liability classified warrants was not material at December 31, 2021 and 2020.
(u) UNCERTAINTY––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 material 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. However, substantially all of the Company’s revenues are derived from the sale of cyclodextrins and related products to the pharmaceutical, nutritional, and other industries, primarily for use in diagnostics and specialty drugs. Currently, a small portion of the Company’s revenues is generated by sales of Trappsol® Cyclo™ to South America (Brazil) for the treatment of NPC patients.
The Company considers there to be revenue concentration risks for regions where net product revenues exceed 10% of consolidated net product revenues. The concentration of the Company’s net product revenues within the regions below may have a material adverse effect on the Company’s revenues and results of operations if sales in the respective regions experience difficulties.
Revenues by product are summarized as follows:
| | Year Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Trappsol® Cyclo™ | | $ | 2,245 | | | $ | 30,096 | |
Trappsol® HPB | | | 673,916 | | | | 527,488 | |
Trappsol® Fine Chemical | | | 714,662 | | | | 330,008 | |
Aquaplex® | | | 185,004 | | | | 7,018 | |
Other | | | 9,929 | | | | 8,766 | |
Total revenues | | $ | 1,585,756 | | | $ | 903,376 | |
Substantially all of our sales of Trappsol® Cyclo™ for the years ended December 31, 2021 and 2020 were to a single customer who exports the drug to South America. Substantially all of our Aquaplex® sales are to one customer.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(3) MAJOR CUSTOMERS AND SUPPLIERS:
Our revenues are derived primarily from chemical supply and pharmaceutical companies located primarily in the United States. In 2021, four major customers accounted for 73% of total revenues. Accounts receivable balances for these major customers represent 94% of total accounts receivable at December 31, 2021. In 2020, three major customers accounted for 69% of total revenues. Accounts receivable balances for these major customers represent 74% of total accounts receivable at December 31, 2020.
Substantially all inventory purchases were from three vendors in 2021 and 2020. 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 year ended December 31, 2021, the product mix of our revenues consisted of 88% basic natural and chemically modified cyclodextrins and 12% cyclodextrin complexes. For the year ended December 31, 2020, the product mix of our revenues consisted of 3% biopharmaceuticals, 96% basic natural and chemically modified cyclodextrins, and 1% cyclodextrin complexes.
(4) MORTGAGE NOTE RECEIVABLE:
On January 21, 2016, the Company sold its 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 the Company 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. Scheduled debt principal collections remaining on this mortgage are as follows:
Year Ending |
|
|
|
|
December 31, |
|
Principal |
|
2022 |
|
$ |
45,977 |
|
2023 |
|
|
7,279 |
|
|
|
$ |
53,256 |
|
(5) CONCENTRATIONS OF CREDIT RISK:
Significant concentrations of credit risk for all financial instruments owned by the Company are as follows:
DEMAND DEPOSITS––We maintain bank accounts in Federal credit unions and other financial institutions, which are insured up to the Federal Deposit Insurance Corporation limits. The bank accounts may exceed federally insured levels; however, we have not experienced any losses in such accounts.
(6) FURNITURE AND EQUIPMENT:
Furniture and equipment consists of the following as of December 31:
| | 2021 | | | 2020 | |
Machinery and equipment | | $ | 67,151 | | | $ | 67,151 | |
Office furniture | | | 74,490 | | | | 51,990 | |
| | | 141,641 | | | | 119,141 | |
Less: accumulated depreciation | | | 82,058 | | | | 65,231 | |
| | | | | | | | |
Furniture and equipment, net | | $ | 59,583 | | | $ | 53,910 | |
Depreciation expense for the years ended December 31, 2021 and 2020 was $16,827 and $12,763, respectively.
F-
13
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(7) LEASES:
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.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in operating costs or general and administrative expense. Variable lease payments are expensed as incurred. The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-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. 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 for a two-year term ending on January 31, 2023, 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 $50,385 as of December 31, 2021. Lease expense for lease payments are recognized on a straight-line basis over the lease term. Lease expense for the years ended December 31, 2021 and 2020 was $17,636 and $17,006, respectively.
The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of December 31, 2021:
Year ending December 31, |
|
Amount |
|
2022 |
|
$ |
19,245 |
|
Total |
|
$ |
19,245 |
|
(8) NOTE PAYABLE:
On May 4, 2020, the Company’s wholly-owned subsidiary Cyclodextrin Technologies Development, Inc., borrowed $158,524 (the "PPP Loan") from BBVA USA (which was acquired by PNC Bank in June 2021), under the Paycheck Protection Program which was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan matures on May 4, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on September 5, 2021. Under the Paycheck Protection Program, the loan may be partially or wholly forgiven if the loan is used to fund certain qualifying expenses as described in the CARES Act. The Company believes it has used all of the loan proceeds for qualifying expenses, and has applied for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. In the event the PPP Loan is not forgiven, maturities of this note payable over the term of this note and in the aggregate are as follows:
Year Ending December 31, | | Amount | |
2022 | | $ | 133,712 | |
2023 | | | 18,034 | |
Total | | $ | 151,746 | |
F-
14
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(9) EQUITY TRANSACTIONS:
On December 8, 2020, the Company effected a 1-for-100 reverse split of its authorized and issued and outstanding shares of common stock. All share references have been restated for this reverse split to the earliest period presented. As a result of the split, the authorized shares of the Company’s common stock decreased to 10,000,000 shares. Thereafter, on June 24, 2021, following the approval of the Company’s stockholders at its annual meeting, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of common stock from 10,000,000 to 20,000,000.
The Company expensed $124,998 in employee stock compensation in 2021 relating to the issuance of 17,053 shares to an officer upon her hiring in September 2021. 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 consolidated 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. In 2020, the Company did not issue shares of common stock for compensation. The Company issued 53,938 shares to employees in January 2021 with a value of $271,308 at the time of issuance, with respect to which compensation expense in that amount had been accrued as of December 31, 2020.
On April 24, 2020, the Company completed a private placement of common stock to a group of accredited investors that included several directors of the Company and members of management. Investors in the private placement purchased a total of 200,000 shares of common stock at a price of $10 per share, resulting in gross proceeds to the Company of $2,000,000.
On August 27, 2020, the Company completed a private placement of its securities to a group of accredited investors that included several directors of the Company and members of management. Investors in the private placement purchased a total of 283,111 units at a price of $10 per unit, resulting in gross proceeds to the Company of $2,831,114. Each unit consisted of one share of common stock and a seven-year warrant to purchase one share of common stock at an exercise price of $15 per share.
On December 11, 2020, the Company sold an aggregate of 2,500,000 units at a price to the public of $5.00 per unit (the “Public Offering”), each unit consisting of one share of common stock, and a warrant to purchase one share of common stock at an exercise price of $5.00 per share (the “Warrants”), pursuant to an Underwriting Agreement we entered into with Maxim Group LLC (“Maxim”). In addition, pursuant to the Underwriting Agreement, the Company granted Maxim a 45-day option to purchase up to 375,000 additional shares of common stock, and/or 375,000 additional Warrants, to cover over-allotments in connection with the Offering, which Maxim partially exercised to purchase 375,000 Warrants on the closing date.
The Company received gross proceeds of $12,503,750 upon the initial closing of the Public Offering, before deducting underwriting discounts and commissions of eight percent (8%), and expenses. On December 22, 2020, the Company sold an additional 375,000 shares of common stock to Maxim upon its exercise of the balance of its over-allotment option, and received additional gross proceeds of $1,871,250 from such sale, bringing the total gross proceeds of the Public Offering to $14,375,000. The total expenses of the Public Offering were approximately $1,703,000 which included Maxim’s expenses relating to the offering.
Pursuant to the Underwriting Agreement, we issued warrants (the “Underwriter’s Warrants”) to Maxim to purchase 57,500 shares of common stock (2% of the shares of common stock sold in the Public Offering). The Underwriter’s Warrants are exercisable at $6.25 per share of common stock and have a term of five years.
Subsequent to the closing of the Public Offering through December 31 2020, Warrants to purchase an aggregate of 197,000 shares of common stock were exercised, resulting in gross proceeds to the Company of $985,000.
In January 2021, the Company issued 10,000 shares of common stock with a value of $50,300 to a consultant for services.
During 2021, warrants issued in our December 2020 Public Offering to purchase an aggregate of 1,599,204 shares of common stock were exercised, resulting in gross proceeds to the Company of $7,991,101.
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15
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(9) EQUITY TRANSACTIONS: (CONTINUED)
In March 2021, warrants to purchase an aggregate of 9,436 shares of common stock were exercised on a cashless basis, resulting in the issuance of 2,913 shares of common stock.
On November 19, 2021 the Company sold 1,950,000 shares of common stock in a public offering underwritten by Maxim, at a price to the public of $6.00 per share, resulting in gross proceeds of $11,700,000, before deducting underwriting discounts and commissions of seven percent (7%), and expenses. The total expenses of this offering were approximately $927,000, which included Maxim’s expenses relating to the offering.
The following table presents the number of common stock warrants outstanding:
Warrants outstanding, December 31, 2019 | | | 633,213 | |
Issued | | | 3,226,448 | |
Exercised | | | (197,000 | ) |
Expired | | | - | |
Warrants outstanding, December 31, 2020 | | | 3,662,661 | |
Issued | | | - | |
Exercised | | | (1,599,204 | ) |
Expired | | | (15,271 | ) |
Warrants outstanding, December 31, 2021 | | | 2,048,186 | |
The following table presents the number of common stock warrants outstanding, their exercise price, and expiration dates at December 31, 2021:
Warrants Issued | | | Exercise Price | | Expiration Date |
| | | | | | |
1,560 | | | $ | 50 | | July 2022 |
780 | | | $ | 50 | | August 2022 |
1,000 | | | $ | 55 | | June 2023 |
84,800 | | | $ | 25 | | June 2023 |
60,837 | | | $ | 35 | | February 2024 |
2,400 | | | $ | 25 | | October 2024 |
57,600 | | | $ | 25 | | October 2024 |
302,379 | | | $ | 9.37 | | November 2024 |
80,000 | | | $ | 25 | | April 2025 |
35,200 | | | $ | 65 | | December 2025 |
2,223 | | | $ | 11 | | September 2025 |
283,111 | | | $ | 15 | | September 2027 |
1,078,796 | | | $ | 5 | | December 2025 |
57,500 | | | $ | 6.25 | | December 2025 |
2,048,186 | | | | | | |
In addition, there are currently outstanding seven-year warrants to purchase (i) 4,800 Units sold in our May 2016 private placement at an exercise price of $25.00 per Unit, (ii) 1,641 Units sold in our February 2017 private placement at an exercise price of $35.00 per Unit, and (iii) 2,400 Units sold in our October 2017 private placement at an exercise price of $25.00 per Unit. The exercise in full of these warrants to purchase units (including exercise of the warrants underlying these warrants) would result in the issuance of 17,681 additional shares of our common stock at an aggregate exercise price of $474,852.
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CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(10) PREFERRED STOCK:
The Company’s Articles of Incorporation provide for 5,000,000 shares of “blank check” preferred stock. At December 31, 2021 and 2020, no shares of preferred stock were outstanding or designated.
(11) INCOME TAXES:
If all of our net operating loss carryforwards and temporary deductible differences were used, we would realize a net deferred tax asset of approximately $17,703,000 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. At December 31, 2021, we have determined it is more likely than not that we will not realize our temporary deductible differences and net operating loss carryforwards, and have provided a 100% valuation allowance on our 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 ten years, 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 our recent net losses, our plans for continued clinical trial and product development expenses, the timing of expiration of the net operating loss carryforwards prior to being utilized, unpredictability of future sales and profitability, competition from others, and new government
regulations. We determined greatest weight should be given to our plans for continued clinical trial and product development expenses, trend of increasing expenses, and recent net operating losses in our evaluation. We re-measure
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.
We have available at December 31, 2021, unused federal and state net operating loss carryforwards totaling approximately $37,510,000 that may be applied against future taxable income.
If not used, the net operating loss carryforwards will expire as follows:
Year Ending December 31, | | Amount | |
| | | | |
2024 | | $ | 66,000 | |
2028 | | | 7,000 | |
2030 | | | 160,000 | |
2031 | | | 73,000 | |
2032 | | | 48,000 | |
2034 | | | 727,000 | |
2035 | | | 1,969,000 | |
2036 | | | 2,867,000 | |
2037 | | | 2,481,000 | |
Indefinite | | | 29,112,000 | |
Total | | $ | 37,510,000 | |
A change in ownership pursuant to Section 382 of the Internal Revenue Code occurred during 2014. As a result, net operating losses in existence as of the date of the ownership change are subject to an annual Section 382 limitation. At December 31, 2021, the amount of net operating losses subject to an annual Section 382 limitation has not been determined.
The Company has expenses that qualify for the Orphan Drug Credit. The Orphan Drug Credit may be used to offset any current tax liabilities. Unused credits may be carried forward for 20 years. If the credit has not been used by the end of the 20 year carryforward period, it can be deducted as an expense for federal income tax purposes. The cumulative unused credit carryforward was $8,104,000 at December 31, 2021.
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CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(11) INCOME TAXES: (CONTINUED)
For 2021 we did not recognize a benefit or provision for income taxes. The net deferred tax asset before the valuation allowance increased $5,500,000 from 2020 to 2021, which is primarily the result of an additional net operating loss for 2021. We increased our valuation allowance to offset this increase in our deferred tax asset.
For 2020 we did not recognize a benefit or provision for income taxes. The net deferred tax asset before the valuation allowance increased $3,302,000 from 2019 to 2020, which is primarily the result of an additional net operating loss for 2020. We increased our valuation allowance to offset this increase in our deferred tax asset.
Significant components of our deferred Federal income taxes were as follows:
| | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 9,570,000 | | | $ | 6,214,000 | |
Tax credits | | | 8,104,000 | | | | 5,816,000 | |
Impairment allowances | | | 13,000 | | | | 13,000 | |
Stock-based compensation | | | - | | | | 67,000 | |
Other | | | 99,000 | | | | 75,000 | |
Less valuation allowance | | | (17,703,000 | ) | | | (12,183,000 | ) |
Deferred tax asset, net of valuation | | | 83,000 | | | | 2,000 | |
Deferred tax liabilities: | | | | | | | | |
Property and equipment | | | (8,000 | ) | | | (2,000 | ) |
Stock-based compensation | | | (75,000 | ) | | | - | |
Deferred tax liabilities | | | (83,000 | ) | | | (2,000 | ) |
Net tax assets | | $ | - | | | $ | - | |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Effective January 1, 2021, the Florida corporate state income tax rate was reduced from 4.458% to 3.535%. Effective January 1, 2022, the Florida corporate state income tax rate will increase to 5.50%. The impact of these rate changes in 2021 was an increase in the Company’s deferred tax asset and the corresponding valuation allowance of approximately $399,000.
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 federal statutory income tax rate of 21% at December 31, 2021 and 2020, is summarized as follows:
| | 2021 | | | 2020 | |
| | | | | | | | |
Tax benefit (expense) at Federal statutory rate | | | 21 | % | | | 21 | % |
Effect of State taxes | | | 2 | % | | | 3 | % |
Effect of tax rate change | | | 3 | % | | | - | |
Tax credits | | | 16 | % | | | 17 | % |
Nondeductible expenses | | | (3 | )% | | | (4 | )% |
Valuation allowance – deferred tax assets | | | (39 | )% | | | (37 | )% |
Total tax benefit (provision) | | $ | - | | | $ | - | |
The Company files income tax returns in the U.S. Federal jurisdiction, and in the State of Florida. The Company is no longer subject to U.S. Federal or state income tax examinations by tax authorities for years before 2017.
The Company has reviewed and evaluated the relevant technical merits of each of its 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 consolidated financial statements of the Company. When applicable, interest and penalties will be reflected as a component of income tax expense.
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(12) EMPLOYEE BENEFIT PLAN:
The Company’s employees who have satisfied certain eligibility requirements are entitled to participate in a 401(k) plan through the Company’s professional employer organization (PEO). Employee contributions are discretionary. The Company may match employee contributions and may also make discretionary contributions for all eligible employees based upon their total compensation. For 2021 and 2020, the Company elected to match the employee’s contribution, not to exceed 4% of compensation. The Company’s 401(k) contributions were $49,165 and $41,031 for 2021 and 2020, respectively.
(13) EQUITY INCENTIVE PLANS:
On August 29, 2019, the Company’s stockholders approved the Company’s 2019 Omnibus Equity Incentive Plan at a special meeting of stockholders (the “2019 Plan”). The 2019 Plan provides for the issuance of up to 68,437 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 2019 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 December 31, 2021, we had awarded 68,437 shares of common stock as awards under the 2019 Plan, with no shares of common stock remaining available for future awards under the 2019 Plan.
On June 24, 2021, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan at its annual meeting of stockholders (the “2021 Plan”). The 2021 Plan provides for the issuance of up to 3,000,000 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 2021 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. During the year ended December 31, 2021, we awarded 17,053 shares of common stock and granted options to purchase 222,700 shares of common stock under the 2021 Plan, with 2,760,247 shares of common stock remaining available for future awards.
The Company uses the Black-Scholes valuation model to estimate the fair value of stock options at grant date. This valuation model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of the Company’s stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for the Company’s common stock to estimate the fair value of a stock option at the date of grant. The valuation assumptions were determined as follows:
| ● | Expected stock price volatility: There is a limited market for the Company’s common stock providing a basis to estimate the expected volatility of the Company’s stock prices for the purpose of valuing stock options granted. Alternatively, the Company uses the historical volatility of certain publicly traded companies that represents the primary industry sector within which the Company operates. |
| ● | Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term. |
| ● | Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. |
| ● | Expected annual dividends: The estimate for annual dividends is $0 because the Company has not historically paid and does not intend to pay dividends in the foreseeable future. |
Share-based compensation expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period.
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CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(13) EQUITY INCENTIVE PLANS: (CONTINUED)
The following table summarizes weighted-average assumptions used in our calculations of fair value for the years ended December 31, 2021 and 2020:
| | 2021 | | | 2020 | |
Dividend yield | | | -% | | | | | N/A | |
Expected volatility | | 91.5 | – | 92.7% | | | | N/A | |
Risk-free interest rate | | | 0.43% | | | | | N/A | |
Expected lives (years) | | 5 | - | 6.25 | | | | N/A | |
The weighted-average fair value of options granted during the year ended December 31, 2021, as determined under the Black-Scholes valuation model, was $5.28 and $5.64 per share. We did not have any options outstanding prior to January 1, 2021.
The following is a summary of the stock option activity for the year ended December 31, 2021:
| | | | | | | | | | | Weighted | |
| | | | | Weighted | | | | | | Average | |
| | | | | Average | | | Aggregate | | | Remaining | |
| | | | | Exercise | | | Intrinsic | | | Contractual Life | |
| | Shares | | | Price | | | Value | | | (years) | |
Stock options outstanding at December 31, 2020 | | | - | | | $ | - | | | $ | - | | | | |
Granted | | | 222,700 | | | | 7.45 | | | 3,094 | | | | |
Exercised | | | (- | ) | | | - | | | $ | - | | | | |
Forfeited/Expired | | | (- | ) | | | - | | | | | | | | |
Stock options outstanding at December 31, 2021 | | | 222,700 | | | $ | 7.45 | | | $ | 3,094 | | | | 9.7 | |
Stock options exercisable at December 31, 2021 | | | 54,349 | | | $ | 7.44 | | | $ | 3,094 | | | | 9.7 | |
Unrecognized compensation expense related to unvested stock options was $945,166 as of December 31, 2021, which is expected to be recognized over a weighted-average period of 9.7 years and will be adjusted for forfeitures as they occur.
(14) COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and records an expense for potential losses on such litigation if it is possible to estimate the amount of loss and if the amount of the loss is probable.
In December 2016, we entered into a lease with respect to 2,500 square feet of office and warehouse space located in Gainesville, Florida for $1,600 per month. On December 16, 2020, we entered a new two-year lease for this space for $1,650 per month, with a two-year renewal option that may be exercised by us only with the landlord’s approval.
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CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(15) RELATED PARTY TRANSACTIONS:
Since October 2016, we have paid a monthly fee of $5,000 to a non-profit organization of which C.E. Rick Strattan is the Executive Director, in consideration of consulting services provided to us by Mr. Strattan. Mr. Strattan is our founder, former Chief Executive Officer and one of our directors.
In June 2019, we engaged Joshua M. Fine, the son of our Chief Executive Officer, to serve as our Chief Financial Officer. Mr. Fine receives an annual salary of $275,333. In addition, he was awarded a cash bonus of $75,000 and $15,000 in 2021 and 2020, respectively. Also in 2021, Joshua Fine was awarded stock options with a value of $184,588 that vest over 4 years.
Rebecca A. Fine, the daughter of our Chief Executive Officer, provides executive assistant services. In 2021, Ms. Fine received a salary of $90,000 and a cash bonus of $15,000. In 2021 Ms. Fine was also awarded stock options with a value of $5,030 that vest over 4 years. In 2020, Ms. Fine received a salary of $72,933 and a cash bonus of $6,250.
Kevin J. Strattan, the son of C.E. Rick Strattan, has been employed by us since 2008, and since 2014 has been our Vice President, Finance – Compensation. His annual salary was $149,800 and $107,200 in 2021 and 2020, respectively. In addition, he received cash bonuses of $30,000 and $12,250 in 2021 and 2020, respectively. In 2021 Mr. Strattan was also awarded stock options with a value of $82,535 that vest over 4 years.
Corey E. Strattan, the daughter-in-law of C.E. Rick Strattan, has been employed by us since 2011 as a documentation specialist and logistics coordinator, at an annual salary of $90,000 in 2021. In addition, she received a cash bonus of $15,000 in 2021. In 2021 Ms. Strattan was also awarded stock options with a value of $5,030 that vest over 4 years. In 2020, Ms. Strattan received an annual salary of $78,000 and a cash bonus of $7,896.
(16) SUBSEQUENT EVENTS:
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the consolidated financial statements were issued. Based upon this review, other than as describe below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
Executive Employment Agreements
On February 28, 2022, the Company entered into written Employments Agreements (the “Employment Agreements”) with N. Scott Fine, the Company’s Chief Executive Officer; Michael Lisjak, the Company’s Chief Regulatory Officer; Joshua Fine, the Company’s Chief Financial Officer; and Jeffrey Tate, the Company’s Chief Operating & Quality Officer (together, the “Executives”). The Employment Agreements include the following material terms:
| ● | The Executives will be paid initial base salaries of $540,750 for Mr. Scott Fine, $342,990 for Mr. Lisjak, $335,780 for Mr. Josh Fine and $309,000 for Mr. Tate, representing a 3% increase in the base salaries of the Executives in effect prior to the execution of the Employment Agreements. |
| ● | Each Executive is eligible to receive an annual raise in his base salary targeted at 3%, in addition to any additional increase approved by the Company. |
| ● | Each Employment Agreement is for a two year term, subject to automatic renewal for successive one-year periods unless either party provides notice of non-renewal prior to the then end of the term. |
| ● | Each Executive is entitled to an annual cash bonus targeted at a percentage of his base salary as set forth below: |
Officer | | Percentage of Base Salary | |
N. Scott Fine | | 50% | |
Michael Lisjak | | 35% | |
Joshua Fine | | 40% | |
Jeffrey Tate | | 35% | |
CYCLO THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
(16) SUBSEQUENT EVENTS: (CONTINUED)
| ● | Each Executive was awarded an option to purchase a number of shares of the Company’s common stock upon execution of the Employment Agreement, and is entitled to be awarded annually an option to purchase a number of shares of common stock of the Company targeted at a percentage of the Company’s outstanding shares of common stock on the date of grant, in each case, as set forth below: |
Officer | | Initial Option Grant | | | Annual Option Grant | |
N. Scott Fine | | 74,907 | | | 0.89% | |
Michael Lisjak | | 31,141 | | | 0.37% | |
Joshua Fine | | 31,141 | | | 0.37% | |
Jeffrey Tate | | 31,141 | | | 0.37% | |
| ● | In the event of the termination of the Executive’s employment by the Company other than for Cause (as defined in the Employment Agreements), the Executive will be entitled to continued payment of base salary for one year; and if such termination occurs within 12 months following a “Change of Control,” all unvested stock options of the terminated Executive shall immediately vest in full. |
| ● | Upon the termination Mr. Scott Fine’s employment by the Company other than for Cause absent a Change of Control, all unvested stock options that would have vested within 12 months following such termination will immediately vest. |
| ● | Each Executive is subject to confidentiality, non-compete, non-solicitation and work-for-hire provisions. |
Extension of PPP Loan
On February 25, 2022, the maturity date of the PPP Loan was extended by three years, from May 4, 2022 to May 4, 2025. The Company believes that it has used all of the proceeds of the PPP Loan for qualifying expenses, and that the PPP Loan will be forgiven in accordance with the terms of the CARES Act.