CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
ANNUAL REPORT
Letter To Our Shareholders
It's time again for the annual shareholder's meeting; because of the
timing of the last shareholders' meeting, this letter will attempt to review
seven quarters of activity - January through December 31, 1995 and January
through September 30, 1996.
This period of time represents the post 504-D stabilizing period. In
those seven quarters CTD has put into operation and tested the revenue
generating machinery that can always be relied on to pay salaries, pay taxes,
buy inventory, pay rent and utilities, and pay all its SEC reporting costs -
no small accomplishment! Without your investment CTD would not have gotten
the chance to prove that it could create the stable business foundation on
which a multi-million dollar cyclodextrin business development company in
Gainesville, Florida could be based.
The reason management is so optimistic is that EPS numbers are moving in
the right direction, (0.19) at 12/31/95 and (.02) at 9/30/96; total assets
have stabilized and are starting to grow, $327,104 at 12/31/95 and $363,792 at
9/30/96. In fact, as of the date of the writing of this letter, CTD has
product orders in house that can produce its first positive annual EPS since
1993.
Review carefully the attached financial reports that make up this annual
report. Examine the components of total assets to separate the "hard" assets
from the "accounting" assets. Satisfy yourself that the improved EPS is due
to profitability enhancement and not the Generally Accepted Accounting
Principles (GAAP).
Obviously, management has made some good decisions, but we've made some
mistakes, too. Two of the most important ones that we've learned from are:
(1) Not having distribution channels set up before product
packaging is finalized and inventories established.
(2) Trying to do the job of well-trained, aggressive stock brokers.
To avoid the first mistake in the future, the Company has created an
alliance with a newly formed OTC pharmaceutical distribution company called
Amerpharm; it also is seeking out companies that have multi-level marketing
organizations already in place to distribute its new products exclusively -
one such company is National Petlover's Association (NPA), also headquartered
in Gainesville, Florida.
To correct the second mistake, the Company has retained Diversified
Corporate Consulting, Ltd. to keep the affairs of the Company in front of a
select group of market makers and brokers.
The immediate effects of increased sales are certainly welcomed and are
the result of timely and thorough customer service. The long term success of
the company, however, is being reinforced by creating alliances with
established companies worldwide to develop cyclodextrin (CD) applications.
These alliances consist of technical/consulting help by CTD that is reimbursed
by purchases of Aquaplex(registered) complexes or future payments of royalties
on sales, or both.
Below are a few of the most promising alliances that CTD is nurturing:
Company Country Product
Jurox Party, Ltd. Australia Veterinary Anesthesia
EVSCO USA Veterinary Euthanasia
Houston Biotechnology USA Patented Ophthalmics
Cyclops Co. Iceland Patented CD technology
Exxon Co. USA CD derivatives for special
applications
Nutraceutix Corp. USA CD's and herbal extracts
Ocumed Inc. USA Ophthalmics (OTC and ethical)
Finally, CTD continues to do an excellent job of staying in close,
personal contact with the most notable and productive researchers in the study
of cyclodextrins around the world; the company does this through:
(1) Its Internet Web Site (http://www.cyclodex.com)
(2) Participation in and sponsorship of CD symposiums:
-Budapest, Hungary - 1996, 8th International Symposium on
Cyclodextrins
-Santiago de Compostela, Spain, 1998, 9th International Symposium
on Cyclodextrins
-Lawrence, Kansas - 1997, Pharmaceutical Applications of
Cyclodextrins
(3) Sponsorship of institutional CD research through donations of
CD's and technical information
(4) Maintenance of a patent and technical information database on
CD's comparable to any in the world.
The contribution of CTD to CD applications development will become more
and more apparent as more CD-containing products become commercialized. The
company has already brought a one ton a month purchaser of Beta Cyclodextrin
to a manufacturer, so it's just a matter of time before the explosion that
will carry CTD to the top of the industry.
I hope you will continue to support CTD with your investment for the
obvious wealth enhancing reasons, but also because cyclodextrins offer real
and needed improvements to the ways the world uses chemicals.
Respectfully submitted,
C.E. Rick Strattan
President/CEO,
CTD Inc.
<PAGE>
The Company
Cyclodextrin Technologies Development, Inc. ("the Company") was organized
as a Florida corporation on August 9, 1990, with operations beginning in July
1992. The Company is engaged in the marketing and sale of cyclodextrins
("Cyclodextrins" or "CDs") and related products to the food, pharmaceutical
and other industries. The Company also provides consulting services related
to cyclodextrin technology.
Cyclodextrins are molecules that bring together oil and water and
have potential applications anywhere oil and water must be used together.
Successful applications have been made in the areas of agriculture, analytical
chemistry, biotechnology, cosmetics, diagnostics, electronics, foodstuffs,
pharmaceuticals and toxic waste treatment. Stabilization of food flavors and
fragrances is the largest current worldwide market for CD applications. The
Company and others are already developing CD-based applications in
stabilization of flavors for food products; elimination of undesirable tastes
and odors; preparation of antifungal complexes for foods and toiletries;
stabilization of fragrances and dyes; reduction of foaming in foods; cosmetics
and toiletries; and the improvement of quality, stability and storability of
foods.
CDs can improve the solubility and stability of a wide range of drugs.
Many promising drug compounds are unusable or have serious side effects
because they are either too unstable or too insoluble in water. Strategies for
administering currently approved compounds involve injection of formulations
requiring pH adjustment and/or the use of organic solvents. The result is
frequently painful, irritating, or damaging. These side effects can be
ameliorated by CDs. CDs also have many potential uses in drug delivery for
topical applications to the eyes and skin.
The Company believes that the application of CDs in both OTC and ethical
ophthalmic products provides the greatest opportunity for the successful and
timely introduction of CD containing preparations for topical drug use. To
pursue this opportunity the Company has entered into a joint venture with a
small ophthalmic manufacturing company.
The Company provides consulting services for the commercial development
of new products containing CDs. The Company's revenues are derived from
consulting, the distribution of CDs, the manufacturing of selected CD
complexes, and sales of its own manufactured and licensed products containing
CDs.
Product Background
CDs are donut shaped circles of glucose (sugar) molecules. CDs are
formed naturally by the action of bacterial enzymes on starch. They were
first noticed and isolated in 1891 by a French scientist, Villiers, as he
studied rotting potatoes. The bacterial enzyme naturally creates a mixture of
at least three different CDs depending on how many glucose units are included
in the molecular circle; six glucose units yield Alpha CD ("ACD"); seven
units, beta CD ("BCD"); eight units, gamma CD ("GCD"). The more glucose units
in the circle, the bigger the circle, or donut. The inside of this "donut"
provides an excellent resting place for "oily" molecules while the outside of
the donut is significantly compatible with water enabling clear stable
solutions of CDs to exist in aqueous environments even when an "oily" molecule
is carried within the donut hole. The net result is a molecular carrier that
comes in small, medium, and large sizes with the ability to transport and
deliver "oily" materials using water as the primary vehicle.
Research has established how to produce these natural CDs in large
quantities by mixing appropriate enzymes with starch solutions, thereby
reproducing the natural process. ACD, BCD and GCD can be manufactured by an
entirely natural process and therefore are considered to be natural products.
Additional processing is required to isolate and separate the CDs. The
purified ACD, BCD, and GCD are referred to collectively as natural CDs
(NCD's).
The chemical groups on each glucose unit in a CD molecule provide
chemists with ways to modify the properties of the CDs, i.e. to make them more
water soluble or less water soluble, thereby making them better carriers for a
specific chemical. The CDs that result from chemical modifications are no
longer considered "natural" and are referred to as chemically modified CDs
("CMCD's"). Since the property modifications achieved are often so
advantageous to a specific application, the Company does not believe the loss
of the "natural" product categorization will prevent its ultimate commercial
use. It does, however, create a greater regulatory burden.
The Company's strategy is to introduce products with little or no
regulatory burden in order to minimize product expenses and create
profitable revenue. The attached Table 1 illustrates the Company's approach
to the introduction of regulated products.
Development
Priority CD's Product Description/Name Regulatory Burden<f*>
1 Natural Dietary Suppl/Garlessence(trademark) 0
1 Natural Contact Lens Soak Solution/Prohibit(trademark) 0
1 Natural OTC Antiseptic/Eye-O-Dine(trademark) 0
1 Derivatized dermal patch/OTC benzocaine/The Bite 0
Patch(trademark)
3 Derivatized Vet euthanasia/Euthacaine(trademark) 1
2 Derivatized Water soluble garlic herbicide/N/A 0
3 Derivatized Chewing gum for removing plaque/N/A 2
[FN]
<f*>0-5, with 5 being greatest burden
While its current applications are concentrated very heavily in the
pharmaceutical area, the Company intends to develop applications in other
markets, namely with food ingredients and industrial chemicals. A market the
Company has had success penetrating already with CD containing products is
natural health. The Company intends to provide many more products for this
market.
The Company's business plan projects it to become a manufacturer of CD
complexes for the research and development market in the short term, a
manufacturer of commercial products by 1996 and a fully integrated CD
applications company with research and development capability by the year
2000.
Industry
The food additive industry has been experimenting with CDs for many
years. Now that commercial supply of these materials can be assured, the
Company believes that the food additive industry will significantly increase
its use of CDs.
CDs have been used in a variety of food products in Japan for over 10
years. The market for the use of CDs in food products in 1990 in Japan was
estimated at $100 million. Within the last five years, many European countries
have approved the use of CDs in food products. In the United States, major
starch companies are renewing their earlier interest in CDs as food additives
and oral arguments for regulatory approval by the United States Food and Drug
Administration ("FDA") were resumed in December 1990. In December of 1990,
American-Maize Products, Inc. of Hammond, Indiana and Roquette Freres of Le
Strem, France jointly presented oral arguments to the FDA for the addition of
the natural CD's to the GRAS (Generally Recognized As Safe) list of
excipients. American-Maize has proceeded alone with a request for a GRAS
confirmation letter from the FDA and/or a request for level 3 approval for the
use of BCD in foods. The Company is not aware of the status of these actions
at this time.
Applications of CDs in personal products and for industrial uses have
appeared in many patents and patent applications. Proctor & Gamble uses CDs
in Bounce(registered), a popular fabric softener. Avon uses CDs in its dermal
preparations using its Age Protective System APS(registered). These uses will
grow as the price of the manufactured CDs decrease or are perceived as
acceptable in view of the value added to the products.
In Japan at least nine pharmaceutical preparations are now marketed which
contain CDs. The CDs permit the use of all routes of administration. Ease of
delivery and improved bioavailability of such well-known drugs as
nitroglycerin, dexamethasone, PGE(1&2), and cephalosporin permit these "old"
drugs to command new market share and sometimes new patent lives. Based on
the estimates of Dr. Hitoshi Hashimoto of Ensuiko Sugar Refining Co., Ltd. and
its own independent research, the Company believes the annual worldwide market
for CDs is $150 million, which is expected to increase to $800 million by the
year 2000. Because of the value added, the dollar value of the worldwide
market for products containing CDs and for complexes of CDs should be 2 to
3 1/2 times that of the CD itself.
There is little published data relating to the production or dollar sales
of CDs worldwide. The following estimates are based on the investigation and
estimates made by Mr. Strattan, which have included discussions with Dr.
Hitoshi Hashimoto of Ensuiko Sugar Refining Co., Ltd. Mr. Strattan's
estimates have been used by others including "April 1993 Food Processing," CDs
and Foods by Dean Ducksbury, and in "Food in Canada" edited by Ron Waske in an
article entitled "CDs for the Food Industry." The Company believes the annual
worldwide market for CDs is $150 million, which is expected to increase to
$800 million by the year 2000. Because of the value added, the dollar value
of the worldwide market for products containing CDs and for complexes of CDs
should be 2 to 3 1/4 times that of the CD itself.
Products
The Company's products include its Trappsol(trademark) and
Aquaplex(trademark) product lines. The Trappsol product line consists of
approximately 15 different varieties of CDs and the Aquaplex product line
includes more than three dozen different complexes of active ingredients with
various CDs. In addition to these product lines, the Company introduced
Garlessence(trademark) in the fourth quarter of 1995. Garlessence is the
first ingestible product containing CDs to be marketed in the U.S. The
Company believes that by marketing Garlessence it has demonstrated industry
leadership. The Company also provides consulting services, research
coordination, and the use of CD Infobase(trademark), a comprehensive database
of CD related information. The Company has protected its service and trade
marks by registering them with the U.S. Patent and Trademark office. The
following U.S. trademarks and service marks are pending since May, 1995.:
Garlessence(trademark), CTDSM ,CD InfobaseSM, CTD ring design(trademark),
Trappsol(trademark), Appromote(trademark), Aquaplex(trademark). There is no
assurance that any of these marks will be approved. These properties add to
the intangible asset value of the Company.
CTD purchases CD's from commercial manufacturers around the world including:
Wacker Chemie - Munich, Germany; Ensuiko Sugar Refining Co., Ltd. - Yokohama,
Japan; Nihon Shokuhin Kako - Tokyo, Japan; Roquette Freres - Le Strem, France;
American-Maize Products - Hammond IN, USA. CTD purchases specialty CD's on
occasion from Cyclolab R&D Company in Budapest, Hungary. The Company does not
manufacture cyclodextrins.
The Company's first new product, Garlessence, is manufactured by the
Company by Herbe Wirkstoffe (GmbH) of Berlin-Zehlendorf, Germany. Under the
terms of its agreement with Herbe-Wirkstoffe, CTD has exclusive rights to sell
the CD/garlic oil complex within the U.S., its territories and possessions
until December 31, 1997. After December 31, 1997, the Company expects to
negotiate for an extension of the original license, but Herbe-Wirkstoffe has
the right to license the use of the complex to others. At least two other new
products will be manufactured by the Company's joint venture partner, Ocumed,
and sold by the joint venture company, Ocudex. The CDs and CD complexes used
in these products will be purchased from the Company.
The Company has also introduced new products into its basic line of CDs
and CD complexes--liquid preparations of CDs; relatively unprocessed, less
expensive mixtures of the natural CDs; naturally modified CDs (glucosyl and
maltosyl); and finally, excess production of custom complexes when those items
are not proprietary or restricted by the customer.
The Company has funded research to establish the efficacy of one of its
CD complexes as the first non-barbiturate veterinary euthanizing agent. This
research may result in a patented formulation and one of the Company's first
proprietary commercial products. Research monies have been provided to the
University of Florida Research Foundation, Inc., a direct support organization
of the University of Florida in the amounts and for the unrestricted use of
the scientists below:
Amount Scientist Activity
$10,000 Dr. James Simpkins Extravasation Study
$12,000 Dr. Alistair Webb Benzocaine Complex
Business Strategy
The Company's strategy has been and will continue to be to generate
profitable revenue through sales of CD related goods and services. The long
term success of this strategy depends on the smooth and continuous transition
into CD-related products with increasing value-added attributes.
From inception through the end of 1992, sales of CDs and CD derivatives
were enough to provide the necessary profitability to sustain the Company.
Since these materials were simply purchased and resold, they had the least
value-added attributes. Up until 1990 almost 100% of the revenue was
generated by these products with the least value-added attributes. During the
early 90's sales of complexes increased until they contributed approximately
30% of the revenue.
Presently, sales of CD complexes represent 60 to 75% of the Company's
revenues. This transition to the more value-added complexes has been planned
and is desirable for increased profitability since higher margins can be
maintained for these products. However, it appears that the base business of
CD sales has eroded. Combined with price reductions dictated by the market,
the revenues from the sales of these products have decreased as much as the
revenue from CD complexes has increased. The result is an apparent stalling
of growth. The Company is also becoming dependent on just a few customers for
the majority of its revenue. In response to this situation the Company has
expanded its original business strategy of parlaying its leadership position
in the presently quite small CD industry as a supplier of CDs, CD derivatives,
CD complexes to include:
(1) Marketing and launching a dozen OTC and naturaceutical products
(e.g., dietary supplements) utilizing CD delivery benefits. For example, by
extracting specific ingredients from the garlic clove and complexing these
ingredients with Trappsol(trademark) B (beta cyclodextrin)
Garlessence(trademark) was created. Similar products can be created with any
of the other herbal ingredients such as ginseng, echinacea, ginkgo, cat's
claw, and melatonin.
(2) Licensing the use of the Trappsol(trademark) symbol for use by others
wishing to use CD delivery technology. This strategy is reflected in the
Garlessence package which, in addition to the Garlessence trademark, carries a
Trapposol trademark. This symbol will be promoted as an indication that a
Trappsol(trademark) cyclodextrin is used with the product within and thereby
assures the user of the quality of the aqueous delivery system. This symbol
will be licensed in the same way as the MLB (Major League Baseball) symbol is
for baseball related products and the Nutrasweet(registered) symbol is for
artificially sweetened products containing Nutrasweet(registered).
(3) Creating independent pharmaceutical organizations by merging basic
manufacturing capability with the Company's technical product development and
marketing expertise; these stand alone organizations will be captive
purchasers of CD complexes. CTD has already created one such Joint Venture
(JV) between itself and Ocumed (an ophthalmic manufacturing company located in
Roseland, NJ and Bradenton, FL) called Ocudex Inc. In the case of Ocudex, CTD
is bringing to it licensing rights and technology for the manufacture of water
soluble anti-inflammatory (hydrocortisone and dexamethasone) and drugs for
reducing intra-ocular pressure (glaucoma). These products are complexes of
the drug with a cyclodextrin. CTD will manufacture and sell these complexes to
the JV. Another JV that currently is being discussed is in the treatment of
waste water; this is being done with a small company also in Bradenton, FL.
Other JV's are being sought with manufacturing companies that have a line of
oncology products and/or anti-epileptic drugs. The drugs to be complexed are
mitomycin, busulfan, doxorubicin in the oncology area and carbamazepine and
phenytoin in the anti-epileptic area. There is no assurance that the Company
will be able to reach other JV agreements.
(4) In-licensing and out-licensing basic CD applications technology. CTD
is currently negotiating for licensing rights (in-licensing) with Cyclops (an
Icelandic company) for rights to ophthalmic products and with Cyclolab (a
Hungarian company) for rights to an antiseptic/antibacterial product based on
iodine. CTD is currently preparing a patent of its own for a veterinary
euthanasia product based on benzocaine. The euthanasia product is an example
of technology resulting from the Company's research and development which the
Company will seek to out-license.
The Company continues to market its comprehensive selection of CDs, CD
derivatives, and CD complexes to scientists and researchers around the world
through print media advertising, trade show participation, and direct mail.
The Company projects $1,000,000 revenue from product sales by 1997. In order
to achieve this goal the Company intends to hire a dedicated product manager
and acquire or merge with a qualified technical support laboratory.
The Company also intends to increase its business development efforts in
the food additive and personal products industries while continuing to build
on its successes in the pharmaceutical industry.
Business development on behalf of the Company's clients will include the
following: (i) negotiation of rights and/or licenses to CD-related
inventions; (ii) consultation with manufacturers to establish customized
manufacturing specifications; (iii) patentability assessments and strategic
planning of patent activities; (iv) trade secret strategies; (v) regulatory
interface; and (vi) strategic marketing planning.
Prior to the creation of CTD, Mr. Strattan had negotiated several sub-
licenses to current CD technology (US Patent 4,727,064), owned by the U.S.
Government. Most recently, in July of 1992, Mr. Strattan completed a major CD
licensing arrangement on behalf of Pharmatec, Inc. with Wyeth-Ayerst
Laboratories -- a division of American Home Products. The Company believes
these are the first sub-licenses granting use of the inventions in the above
cited U.S. government patent. While U.S. government ownership of US Patent
4,727,064 is available for licensing to all applicants on a non-exclusive
basis, the Company does not believe that this access to the basic CD
technology presents a competitive risk to the Company because the Company
believes its competitive advantage lies in its experience and know how in the
use and application of CDs, areas in which it believes it has a significant
lead.
In addition to in-licensing and out-licensing efforts, the Company will
coordinate research studies in which it will retain a portion of the rights
created as a result of the research work supported.
Assuming the availability of funds, the Company will negotiate licensing
rights to its own selected inventions. Because of its comprehensive technical
and patent database for CD-related inventions, the Company believes it is
uniquely positioned to take advantage of various licensing situations.
Marketing Plan
While at Pharmatec, Inc. in the late 1980's, Mr. Strattan pioneered the
marketing of derivatized CDs and their drug complexes. Mr. Strattan contended
that commercial use and development of CDs could only begin in earnest as
individuals and organizations became familiar with the truly unique
solubilizing and stabilizing properties of these starch molecules. Mr.
Strattan set about publicizing the benefits of CDs while other companies
continued to hoard new information in hopes of protecting imagined
exclusivity. The Company has continued this effort to market CDs. The
Company believes that the failure of businesses to exchange information about
these exciting molecules has hindered a more rapid commercialization of CDs as
safe excipients. The Company believes that its philosophy of partnering and
sharing will act as a catalyst to create momentum overcoming the inertia
created by the previous conservatism and secrecy.
The Company's sales have always been direct, highly cyclical and driven
by advertising and participation in trade shows. Arrangements with large
laboratory supply companies and several diagnostic companies have provided a
more stable sales base, but at the price of dependency on a few customers.
The objective in this unregulated target market of life science research is to
increase annual sales to $1,000,000 by 1997. This growth is forecasted to
occur as a result of the Company's expansion of its product line to include
value-added complexes of chemicals and CDs, increasing promotional efforts and
widespread acceptance of CDs by laboratories through word-of-mouth, white
paper circulation, and hiring of a dedicated product manager and acquisition
or merger with a qualified technical laboratory.
The Company has taken advantage of the propensity of researchers to use
the Internet to gather information about new products by establishing a WEB
Page and "site" on the world-wide web and obtaining a unique and descriptive
domain name: "cyclodex.com".
Historical Analysis
Research Markets
Historically the Company's revenues have been derived from sales to
individuals and companies which use the products in connection with research.
In 1995 those sales averaged approximately $20,000 per month; in 1994 those
sales averaged just $13,000 per month. In 1995 the Company looked more
closely at the "research" business and found that only 28.6% ($72,867) of
total sales could be attributed to the market the Company had originally
called its primary market. Sales to this market are driven by trade shows and
advertisements in trade journals. Customers typically purchase small amounts
of CDs and complexes at premium prices. The remainder of 1995 sales were
divided between diagnostics (30.0%) and complexes for resale (41.4%). The
Company expects sales to increase as a result of anticipated sales to related
joint venture organizations.
The Company believes the research market will continue to grow accounting for
25-30% of the total revenues of the Company. The Company expects that such
growth will be stimulated by the effect of word-of-mouth within and the
availability of information electronically as national advertising reaches
more and more of these difficult to reach end users. The Company believes
current promotional efforts have reached less than 5% of the potential end
users.
Diagnostic Test Kits
CDs have proven useful in suspending the various immunochemical
components and extending the shelf life of many types of test kits. Initial
sales of $100,000 in 1993 were obtained by business development contacts with
research directors and formulation scientists. The Company had no sales in
this market in 1994 and 1995. Sales to this market are especially volatile
with single orders ranging between $100 and $50,000. The Company expects more
diagnostic manufacturers to use these materials to remain competitive,
providing more reliable sales projections.
Pharmaceutical Companies
The objective in this target market has been to promote the adoption of
CMCDs for those human health care compounds that are either too insoluble or
unstable in aqueous solutions for use in ethical, over-the-counter and generic
pharmaceutical preparations. There are a number of generic and proprietary
"problem" drugs where solubility has been improved in the lab by CMCD
complexing. All pharmaceutical companies have many problem drugs but cannot
generate enough solid pharmacological data (due to poor solubility and
stability) to justify extensive in-house formulation work. Many companies are
quite willing to contract out such work on their most promising prospects.
Without a qualified technical laboratory of its own, the Company has not
been able to create a revenue stream from this important component of its
marketing plan. By merger with or acquisition of a suitable laboratory the
Company feels that this component will significantly contribute to the
projected $1,000,000 revenue goal in 1997.
Issues of regulatory requirements, clinical testing, and patent
restrictions have made this area of revenue generation very difficult for the
Company to break into.
Current and Near-Term Activity
1996-1997
The Company intends to show by example that products containing CDs may
be introduced into the U.S. market. Rather than trying to push companies to
introduce CD products, the Company intends to pull them into the market by
launching approximately seven new CD containing products of its own into the
U.S. market over this time period. These products will address needs in the
relatively unregulated areas of natural medicine, topical OTC preparations,
veterinary products, and home gardening.
The Company intends to work with clients in countries whose current
regulatory views do not exclude CDs as natural products acting as excipients
to introduce beneficial pharmaceuticals improved by CDs. The terms for the
joint development of CD containing drugs with several medium-sized
pharmaceutical companies in South America, Australia and South Africa are
currently being negotiated.
Along with the new products themselves, the Company is creating a
legitimate, licensable mark that may be used by other manufacturers wishing to
take advantage of the improved aqueous delivery afforded by Trappsol CDs.
This protected mark has the capability of generating revenues in a manner
similar to the Nutrasweet(registered) (artificial sweetener) and
MLB(registered) (major league baseball) logos.
The Company intends to generate additional revenue through obtaining
rights to certain patents that it will sublicense to appropriate organizations
or that it will use to develop its own proprietary products. Revenue will
result from sub-licensing royalties, sales of CD complexes to be used in the
newly developed pharmaceuticals, and finally from the sales of the products to
end users.
Assuming an ongoing process of development, approval and adoption of CDs
and CMCDs for pharmaceutical applications, the Company's objective is to
initiate dialogue and be well prepared for partnerships with major food
companies. Price is a primary concern in this market, but unlike
pharmaceuticals where FDA permission for clinical testing may be obtained
before actual FDA product approval, food companies cannot feed experimental
formulations to test panels of consumers until the ingredients, i.e., the CDs,
receive approval for human consumption. Therefore, the Company will work with
the food companies and key university food research groups to initially
evaluate non-taste applications; e.g., "will CD complexes allow microwave
baked casseroles to brown? Will it provide crispness to certain microwave
foods?" These questions will initially be explored using NCDs since
commercial adoption will depend heavily upon the price of the CD selected and
NCDs will always be the least expensive. However, the benefits derived from
the use of other CDs with expensive ingredients (e.g., flavors, fragrances)
may justify the use of CMCDs and/or NMCDs.
There exist opportunities for CD applications in industrial applications
not associated with pharmaceuticals or foods. The Company believes that
developers of these other industrial applications will approach CTD because of
its leadership and partnering philosophy to help them commercialize their
products. Applications for which the Company has already received such
inquiries are:
(1) Cleaning agent ingredients
(2) Adhesive ingredients
(3) Paint surface finishing product ingredients
(4) Extrusion additives
(5) LED dye ingredients
Long Term View (1998-2000)
The Company believes that the sales of CDs, CD derivatives, and CD
complexes will always provide sufficient revenue to support a business of the
Company's present size. The Company intends to test its strategy of
augmenting these R&D derived revenues through the introduction of its own
products, e.g. Garlessence. Further, by allying itself with appropriate
manufacturing capabilities, the Company intends to introduce products which it
manufactures. Thus, the long-term goals of the Company are to:
(1) Sell CDs and related products and services to the R&D industry
(2) Produce a line of its own products utilizing CDs for unregulated uses;
e.g. - naturaceuticals, geriatric nutriceuticals, naturacides. These products
will carry a licensable trade mark that will provide revenue when used on
other products.
(3) Own a portion of companies for which it guarantees a significant
portion of that JV's business; e.g., a marketing/package design company, a CD
applications R&D/pilot plant manufacturing company.
(4) Form and operate joint ventures with companies to jointly develop
specific pharmaceutical applications of CDs.
The Company anticipates that revenues from direct sales of its products
and services along with its portion of the profits of jointly owned businesses
will create sufficient net worth to permit the Company to move from the NASDAQ
Bulletin Board up to the NASDAQ Small Cap Market. With such a structure CD
technology will be introduced from the inside. It is anticipated that the
Company will provide the CDs, CD complexes, and CD technology to its joint
venture companies at a profit.
Competition
The Company is currently a leading consultant in determining what the
manufacturing standards and costs for CDs and CMCDs are, and believes, at the
current time, no organization is manufacturing commercial quantities of any CD
complex for resale. However, there will always exist the potential for
competition in this area since no patent protection can be comprehensive and
forever exclusive. Nevertheless, there is a perceived barrier to entry into
the CD industry because of the lack of general experience with CD complexation
procedures. The Company has established a strong business relationship with
one of the experts in this field -- Cyclolab in Hungary -- and has utilized
the services and expertise of this laboratory. The Company believes this
relationship provides a significant marketing lead time, and combined with a
strong marketing presence, will give the Company a two to three year lead time
advantage over its competitors.
The Company intends to form a more formal business relationship with
Cyclolab in Hungary by creating a Cyclolab-USA laboratory facility and thereby
strengthen its competitive advantage. Discussions between the principals of
Cyclolab and CTD have been ongoing for more than 5 years. The current foreign
ownership of Cyclolab increases the difficulty of reaching a formal
arrangement. Potential relationships which have been discussed include joint
venture arrangements, the Company's outright acquisition of Cyclolab and the
employment of Cyclolab personnel to create Cyclolab-USA. There is no
assurance that the Company will be able to reach a formal business
relationship with Cyclolab.
By copyrighting and registering its own name brands, CD logos, etc. the
Company intends to create licensable icons much like Nutrasweet and Major
League Baseball have. Such a strategy allows the Company to benefit
financially through licensing royalties from the efforts of its competition.
The Company intends to also benefit from competitors' efforts by having
ownership in the graphic design agency that is currently setting the standard
for the promotion and packaging of CD containing products. Because this
agency would also have access to the licensable CTD logos and icons, it should
enjoy a competitive advantage as well.
Government Regulation
Under the Federal Food, Drug and Cosmetic Act ("Food and Drug Act"), the
Food and Drug Administration ("FDA") is given comprehensive authority to
regulate the development, production, distribution, labeling and promotion of
food and drugs. The FDA's authority includes the regulation of the labeling
and purity of the Company's food and drug products. In the event the FDA
believes that the Company is not in compliance with the law, the FDA can
institute proceedings to detain or seize products, enjoin future violations or
assess civil and/or criminal penalties against the Company.
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of therapeutic drug products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted.
Under present FDA regulations, FDA defines drugs as "articles intended
for use in the diagnosis, cure, mitigation, treatment or prevention of disease
in man." The Company's product development strategy is at first to introduce
products that will not be regulated by the FDA as drugs because all of its
ingredients are natural products or are generally regarded as safe (GRAS) by
the FDA. The Company is continually updated by counsel as to changes in FDA
regulations that might affect the use of and claims for these products. There
is no assurance that the FDA will not take the position that the Company's
food and nutritional supplement products are subject to requirements relating
to drug development and sale. The effect of such determination could be to
limit or prohibit distribution of such products.
Employees
In 1995 the Company employed 5 persons on a full time basis. None of the
Company's employees belong to a union. The Company believes relations with
its employees are good.
Property
The Company occupies a 3,000 sq. ft. building at 3713 S.W. 42nd Ave.,
Suite 3, Gainesville, Florida 32608, pursuant to a 5-year lease beginning
November 1, 1994. The lease provides for annual increases in rent ($18,000
for the first year, $18,900 for the second year, $19,848 for the third year,
$20,844 for the fourth year and $21,888 for the fifth year). The Company also
has an option to lease an additional 3,000 sq. ft. of space. The Company
houses its administrative offices in approximately 1,100 sq. ft. of this
space; an additional 550 sq. ft. is dedicated to laboratory/manufacturing
functions. The remaining 1,350 sq. ft. has been prepared for additional
laboratory and pilot plant manufacturing use. This prepared space is suitable
for housing Cyclolab-USA and the optioned 3,000 sq. ft. of space can be used
to house graphic design functions and provide space for future expansion of
Cyclolab USA.
The current marketing and sales activities are implemented from that
site. The entire 6,000 sq. ft. could support a total of 12 - 15 people and
therefore is expected to be adequate for the foreseeable future. Current
total office and laboratory operating expenses excluding salaries have
stabilized at about $10,000 per month.
Market for Common Equity and Related Stockholder Matters
In October 1994, the Company's securities began trading on the OTC
Bulletin Board and in the over-the-counter market "pink sheets" under the
symbol CTDI. Since the commencement of trading of the Company's securities,
there has been an extremely limited market for its securities. During the
fourth quarter of 1995, one of the Company's market makers ceased business.
The following table sets forth high and low bid quotations for the quarters
indicated as reported by the OTC Bulletin Board. At March 1, 1995, the average
per share bid and ask price of the Company's common stock was $4.50 and $7.50,
The following table set forth the high and low sales prices for the periods
since October, 1994
High Low
1994 Fourth Quarter $ 6.00 $ 3.00
1995 First Quarter $ 7.50 $ 3.00
Second Quarter $ 8.50 $ 4.25
Third Quarter $ 9.00 $ 4.00
Fourth Quarter $ 8.00 $ .50
1996 First Quarter $ 2.25 $ .50
Second Quarter $ 1.0625 $ .75
Third Quarter $ 2.25 $ .25
Fourth Quarter $ 1.00 $ .625
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
Holders
As of December 20, 1996, the number of holders of record of shares of
common stock, excluding the number of beneficial owners whose securities are
held in street name was approximately 1,225,110.
Dividend Policy
The Company does not anticipate paying any cash dividends on its common
stock in the foreseeable future because it intends to retain its earnings to
finance the expansion of its business. Thereafter, declaration of dividends
will be determined by the Board of Directors in light of conditions then
existing, including without limitation the Company's financial condition,
capital requirements and business condition.
Directors and Executive Officers
C.E. Rick Strattan President, Chief, Executive Officer, Chief Operating
Officer, Secretary and Director has been employed by the Company since 1992.
David L. Southworth, Treasurer and Chief Financial Officer has been
employed by the Company since 1994.
Management's Discussion and Analysis of Operations and Financial Condition
Liquidity and Capital Resources
As of September 30, 1996 the Company's liquidity as measured by its total
current assets leveled off at $125,100; down by 7% from the previous quarter
and 32% for the same 9 month period in 1995. The difference from the same
period in 1995 is clearly attributable to the reduction in cash and cash
equivalents while the reduction from the second quarter to the third quarter
of 1996 is simply part of the volatility of the company's accounts receivable.
Two-thirds of current assets is in inventory; while this inventory is quite
stable in terms of shelf-life, the Company has not been successful in
establishing distribution channels for its sale. It is the movement of this
inventory that will determine whether the company is profitable for the year.
Cash available was $14,560, compared to $6,602 at the end of the second
quarter, 1996.
The sources of liquidity at December 31, 1995 were $46,773 in cash and
$36,652 in accounts receivable which represented 26% of total assets. The
change in the source of liquidity is expected since the Company has been
active in the marketing of Garlessence and other products. In anticipation of
sales it has been necessary to build up Garlessence inventory using cash.
The Company's main source of liquidity in 1994 and 1995 was a private
offering of the Company's common stock in March and April of 1994. The
Company received net proceeds of $814,595 (after offering costs of $151,405)
from this offering.
The primary reason for the private offering completed in 1994 was to fund
the expansion of the Company. Prior to 1994, the Company was profitable and
provided liquidity through operations. However, due mainly to the
extraordinary costs of becoming a public company and the expansion of its
operations, the Company incurred a net loss in 1994 and 1995, and therefore
used cash for operations.
Expansion has significantly increased the Company's outflow for salaries,
advertising, research and development, consulting fees, professional fees,
capital improvements, licenses and inventory. These costs have been incurred
to allow the Company to expand its sales and production capabilities and
search for new products. The Company has begun to realize increases in sales
as a result of those efforts. Sales in the last quarter of 1995 met
expectations at more than $54,000, bringing sales for the year to almost
$254,000, more than 1.6 times 1994 sales. Sales are expected to increase in
1996 due to the introduction of a new product, Garlessence(trademark). The
Company anticipates that cash will continue to be used for operations in the
immediate short-term due to the continued costs of the Company's expansion and
due to the cost of promoting its new products. However, the Company expects
that the rate at which cash is used for operations will decline now that the
bulk of the launch expenses for its new product have been incurred, and sales
of the new product have begun.
On November 11, 1993, the Company entered into a business consulting
agreement with Garrison Enterprises, Inc. ("Garrison") for various marketing
and management related services. The Company issued 300,000 shares of its
previously unissued common stock to the consultant as a prepayment for future
services valued at $750,000. In addition, upon successful completion of the
stock offering described above, the Company agreed to pay the consultant
$7,000 per month for three years and $10,000 per month for the following two
years. In addition, the shareholders of the Company entered into an agreement
that called for an annual salary to the President of the Company of $7,000 per
month for the three years after the closing of the stock offering, increasing
to $10,000 per month for the following two years. These payments began in
April, 1994. At the Company's urging, the business consulting agreement with
Garrison and the agreement related to the President's salary were terminated
September 1, 1994. In consideration of the cancellation of the business
consulting agreement, and as payment in full satisfaction of the rights of
Garrison, the Company paid Garrison $180,000. In addition, the Company agreed
that Garrison had earned and would retain the 300,000 shares received as part
of the agreement. The Company expensed the $222,000 in cash payments and
$750,000 of deferred compensation in 1994 as a result of this agreement and
its termination. See "Transactions with Management and Others."
On July 7, 1994, the Company entered into a five-year lease for 3,000
square feet of space for an office, laboratory and manufacturing plant. The
Company moved into the building during October 1994. Rent payments are
$18,000 in year one, $18,900 in year two, $19,848 in year three, $20,844 in
year four and $21,888 in year five. Additionally, the lease called for an
initial deposit of $18,000. This deposit earns interest at 9% and is being
used to reduce rent payments beginning November, 1995 until fully utilized.
The Company also has a purchase option on this space in which ten percent of
the lease payments may be applied to the purchase price. The Company may
exercise an option to lease an additional 3,000 square feet of adjoining
space. The Company houses its administrative offices, laboratory and
manufacturing facility in this complex utilizing an aggregate of approximately
1,650 sq. ft. This plant has been built and can be expanded according to
"GMP" (good manufacturing practices) specifications anticipating the
commercial needs of the markets the Company serves. During 1994 and 1995,
the Company expended significant effort and $65,000 in capital improvements to
complete the facility. The remaining 1,350 sq. ft. of space is for larger
scale manufacturing in the future. However, this expansion will require
additional funds and there is no assurance that any additional funding will be
available. Management has no immediate plans for this expansion.
On August 1, 1994, the Company entered into a five-year consulting
agreement (renewable annually by mutual agreement) with Yellen Associates
("Yellen"), an unrelated company. Yellen agreed to provide ideas for new
products in the nutritional, geriatric, and related health fields; to find
companies and/or products suitable for acquisition; to find products suitable
for manufacture and/or distribution; and to secure customers for Company
products. All products offered by Yellen and accepted by the Company will
belong exclusively to the Company with all related rights. The conditions of
that agreement remaining at this time are that the Company will pay Yellen
royalties of up to 5% of sales for products acquired through Yellen, or
cyclodextrin sales made by Yellen. The Company also agreed to sell to Yellen
over a period of three years from August 1, 1994, up to 30,000 shares of
Company stock at a discount of 50% of the market price quoted at the time of
purchases, contingent upon the amount of commissions and royalties. The
conditions were not met, therefore the company is no longer obligated to sell
shares to Yellen at the agreed upon discount.
Effective January 1, 1995, the Company obtained an exclusive right to
market a dietary supplement in the United States for three years. The Company
agreed to pay approximately $60,000 for this right. The agreement allows the
Company to recover this fee through discounts on inventory purchased through
December 31, 1997. Prior to December 31, 1995, the amortization of this
license fee was recognized as discounts were received. However, the license
fee is now being amortized on a straight-line basis over the three-year period
of the contract. The total accumulated amortization expense under the
straight-line method since the inception of the contract is $35,000. Since
$7,200 has been recorded as of December 31, 1995, the remaining $27,800 has
been recognized as amortization expense in the first nine months of 1996.
On May 1, 1995 the Company entered into a joint venture operating as Ocudex,
Inc. The Company and Ocumed, Inc., an unrelated company, each own 50% of
Ocudex. The Company has agreed to fund on a best efforts basis up to $10,000
per month for not more than 12 months. CTD had advanced Ocudex $34,000 in
1995 on which it realized an operating loss of $1,505, but a taxable profit of
$63. As of September 30, 1996, the Company advanced Ocudex an additional
$17,000 and has realized a loss of $9,134 for the first nine months of 1996.
The Company intends to apply additional funds during 1996 to be used for
inventory and production costs and also to defray the costs of raising equity
capital that will allow Ocudex to obtain FDA approval for proprietary
cyclodextrin-improved generic ophthalmic drugs using cyclodextrin complexes
brought to it by CTD. The initial and immediate benefit of successfully
obtaining such funding will be to allow CTD to book a net asset value that
will qualify it for NASDAQ small cap listing. As of September 30, 1996 there
have been no sales recorded by Ocudex of these products.
In 1995, the Company sponsored validation testing at the University of Florida
on a new cyclodextrin-based veterinary euthanasia product; approximately
$12,500 has been spent in the initial studies required to test this new
product. No additional expenses were incurred for the new cyclodextrin-based
veterinary euthanasia product in the first quarter. Additional formulation
work and efficacy validation will be done along with the writing and
submission of the patent protecting the invention. The Company spent $1,375
on this work in the second quarter of 1996. No expenses were incurred during
the third quarter for this work.
In January 1996, the Company entered into an agreement with Geller
International Associates (Geller), an unrelated company, to provide various
public relation services. In return, the Company agreed to pay Geller $2,000
per month plus out-of-pocket expenses with the first three months being
guaranteed. In addition, the Company agreed to secure funding for the current
public offering. The total amount paid to Geller for the six months ending
June 30, 1996 was $10,461. The agreement was canceled in May 1996, with no
further amounts paid or due to Geller.
The Company purchased 10,000 shares of its own common stock for $25,000 from a
former employee on May 3, 1995 payable over the following 12 months. As of
June 30, 1996, that obligation has been paid in full.
The Company entered into an agreement with Cyclops h.f. (Cyclops), a company
located in Reykjavik, Iceland, in May 1996 to secure limited exclusivity to
certain inventions embodied in patents owned by Cyclops for the purpose of
creating an organization that will commercialize products using those
inventions. In consideration, the Company agrees to share equally with
Cyclops the net profits derived from products commercialized by CTD or
affiliates of the Company that use the inventions. Further, contingent on the
successful completion of equity financing in the amount of at least
$5,000,000, the Company agrees to pay Cyclops $30,000 per month. This
agreement may be canceled by Cyclops at any time after September 1, 1996 with
30 day notification. No notification of cancellation has been received as of
September 30, 1996.
In the second quarter of 1996, the Company amended its Articles of
Incorporation whereby the number of voting shares authorized was increased
from 5,000,000 to 10,000,000. In addition, non-voting common shares were
created. The total amount of non-voting common shares authorized is
10,000,000.
The Company has established substantial inventory of Garlessence and does not
expect to expend more than an additional $10,000 in incidental costs to
distribute the product before substantial distributor sales are realized. In
the first nine months of 1996 the company sold directly less than $1,000 of
Garlessence. Before the end of the year the Company is looking to move the
Garlessence in bulk to overseas bulk purchasers or in a U.S. promotion with a
local start-up multi-level marketing organization. The Company has postponed
purchasing additional inventory of Garlessence until sales reach levels to
support such purchases. Therefore, no new expenditures are anticipated for
Garlessencetm or Appromotetm until sales revenue is generated to cover such
expenditures.
However, should the rate of expansion and volume of sales increase
substantially, the Company would require additional funds to finance inventory
and accounts receivable and to fund increased costs of advertising and
marketing, among other things. To meet the financial needs of expected future
growth, the Company has registered with the SEC to sell in a public offering
in 1996 and 1997. $1.25 million worth of common shares and warrants of the
company. In addition, in June of 1995, the Company obtained a $75,000 line of
credit from a commercial bank. As of September 30, 1996, there is a $52,200
outstanding balance on this line of credit.
On January 1, 1996, the Company resolved to issue 48,000 shares of its common
stock to various unrelated parties for services performed in connection with
the Company's anticipated self-underwritten stock offering as noted above.
Furthermore, two of these parties acknowledge that in the event the gross
proceeds of the offering are less than $500,000, then one-half of their shares
(20,000) shall be returned to the Company. The shares issued will bear a
restrictive legend. The Company valued the 48,000 shares at $12,000 which is
approximately 50% less than the bid price at the date of issuance. The quoted
market price was not used to value the stock since the stock does not trade
freely in an established market. Of these shares, 47,000 were issued on
August 15, 1996. The other 1,000 will not be issued.
The future sales of Garlessence at a gross profit of approximately 25% will
contribute to overall profitability, but at a substantial reduction in gross
profit percentage for the year.
The Company continues to explore the acquisition and development of new
products through licensing and joint ventures with and without cyclodextrins
to increase sales. In an agreement with Cyclops h.f. of Reykjavik, Iceland,
effective May 22, 1996 and continuing for not more than 12 continuous months,
the Company has obtained a Right of First Refusal (ROFR) to the ophthalmic
inventions in U.S. Patent 5,472,959. CTD intends to secure the rights to such
products for Ocudex, Inc. - its first joint venture company. However, the
acquisition and development of these new products may require additional funds
and there is no assurance that any additional funding will be available.
Results of Operations
Sales of cyclodextrins and related products have historically been
volatile. Sales are primarily to large pharmaceutical and food companies for
research and development purposes. Sales have also been concentrated among a
few large customers. Despite the dependence on a small number of customers,
the Company's largest customer has increased its ordering frequency and
doubled its total purchases in 1995. Product sales were $253,634 and $154,842
for the years ended December 31, 1995 and 1994, respectively. Product sales
were $54,317 and $16,082 for the three months ended September 30, 1996 and
1995, respectively and were $200,340 and $199,580 for the nine months ended
September 30, 1996 and 1995. The 64% increase in sales during 1995 is due
primarily to sales to the largest customer. Annualized sales for 1996 appear
to be headed for an increase over 1995 sales, continuing the upward trend.
The Company is making consistent progress to moderate its sales volatility by
expanding its product line to more routinely purchased products. Although
sales have been much slower developing than anticipated, as they grow, they
will provide not only a substantial increase in sales revenues but stability
as well. The fact that these cyclodextrin complexes were produced in the new
laboratory, rather than contracted out as was done in the past for this
complexation work improved the gross profit margin substantially. The Company
expects to increase sales of Garlessence. Although sales of Garlessence have
been much slower developing than anticipated, as they grow, they will provide
not only a substantial increase in sales revenues but stability as well.
The Company was able to increase its gross profit margin for the first
nine months of 1996 to 89%, compared to 81% for the same period in 1995.
Profit margins on four large sales were higher than the average sales margins
in 1995. Costs of products sold as a percentage of sales decreased to 17% in
1995 from 31% in 1994 and continued to drop in 1996 due to a number of
factors. The Company is now able to produce cyclodextrin complexes internally
in its new lab/manufacturing facility rather then contracting to outsiders,
thereby reducing costs. Also, the Company was able to reduce product costs by
expanding its supplier base for its primary CD-derivatives (specifically
hydroxypropyl beta cyclodextrin, HPBCD and randomly methylated beta
cyclodextrin, RAMEB) that comprised about 80% of the Company's CD-derivative
sales.
Expenses increased in 1995 over 1994 due to personnel and operational
expansion of the Company and the change in the Company's strategic plan. The
Company intends to show other industries how sales of CD containing products
can produce revenue. The Company also increased legal and accounting expenses
in connection with becoming a reporting company, as a result of opinions
solicited about the regulatory status of its Garlessence product, and the
Company's expansion described above. Consulting fees were $978,100 for the
year ended December 31, 1994, and $6,000 for the year ended December 31, 1995;
as of September 30, 1996, those fees were less than $5,000. This decrease was
a result of the Company canceling the financial consulting agreement with
Garrison at the end of 1994 as described above. Expansion has significantly
increased the Company's outflow for these expenses. These costs have been
incurred to allow the Company to expand its sales, develop new products and
implement its strategy of creating operational affiliates that will use
cyclodextrins in herbal medicines and water treatment. The Company expects
the small increases already seen in sales of these new products to accelerate
as these expansion efforts begin to coalesce.
During the first nine months of 1996, the Company achieved an overall decrease
in expenses of 27% from the comparable first nine month period of 1995. This
reduction was achieved by reducing salary expenses, office expenses,
professional fees, and advertising expenses across the board. These expense
reductions were implemented while still expanding our sales base, developing
new products, and implementing our strategy of creating operational affiliates
that will use cyclodextrins in herbal medicines and wastewater remediation.
In addition to its Trappsol(R) and Aquaplex(R) products, the Company is
currently promoting two new products. The first one promoted was
"Appromote(R)" a food flavor enhancement product to be marketed to nursing
homes and similar institutions. The product enhances the flavor of food to
increase enjoyment by persons with diminished tasting abilities, primarily the
elderly. Response to this product has been poor; hence no additional
marketing support for this product is planned. The most important commercial
combination of the Company's CDs is a dietary supplement containing specific
garlic-derived ingredients reported by the licensor to attain and maintain
naturally, levels of serum cholesterol associated with good cardiovascular
health. The advantages and benefits of this product are made possible by the
incorporation of cyclodextrins in a proprietary formulation belonging to the
German manufacturer. The Company calls its new product
"Garlessence(trademark)" and is currently securing distribution according to
its marketing plan. Garlessence(trademark) is the first cyclodextrin-
containing food-related product to be sold in the U.S. It represents the
first effort in the implementation of the Company's strategic business plan to
introduce cyclodextrin containing products to the broad U.S. market.
Investment and other income was $2,871 through September 30, 1996,
$12,465 in 1995 and $24,254 for 1994. In 1994, the Company realized a gain of
$5,287 from the sale of marketable equity securities. There were no such
gains in 1995 or through September 30, 1996. The decrease in other income in
1995 is also due to less funds available to be invested in interest bearing
accounts in 1995 than in 1994. The Company has recorded a $1,506 loss on its
investment in the Ocudex joint venture in 1995 and an additional $7,628 as of
September 30, 1996.
Financial Statements
The Company's audited financial statements for the years ended December
31, 1994 and 1995, and the Company's unaudited statement for the nine months
ended September 30, 1996, begin on page F-1.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-1
Balance Sheet F-2
Statements of Operations F-3
Statement of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 to F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cyclodextrin Technologies Development, Inc.:
We have audited the accompanying balance sheet of Cyclodextrin Technologies
Development, Inc. as of December 31, 1995, and the related statements of
operations, stockholders' equity and cash flows for the years ended
December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cyclodextrin
Technologies Development, Inc. as of December 31, 1995, and the results of
its operations and its cash flows for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
Gainesville, Florida
February 5, 1996
F-1
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,449 $ 46,773
Accounts receivable 10,300 36,652
Inventory 76,469 78,281
Deposits and prepaid expenses 8,991 4,443
Note receivable - employee 4,326 4,251
Total current assets 108,535 170,400
Property and equipment
Furniture and equipment 48,528 48,398
Leasehold improvements 24,800 24,800
73,328 73,198
Less: Accumulated depreciation 28,722 24,519
Total property and equipment 44,606 48,679
Other assets
Note receivable - employee, less current
portion 4,639 5,749
Deposits 12,317 17,015
Advances to and investment in joint
venture 37,008 32,495
License fee, net of accumulated
amortization of $7,234 and $25,034 at
December 31, 1995 and March 31, 1996
respectively 34,966 52,766
Deferred charges 5,000 -
Total other assets 93,930 108,025
Total Assets $ 247,071 $ 327,104
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 28,619 $ 45,620
Note payable on line of credit 5,000 5,000
Payable to former stockholder 6,421 6,421
Total current liabilities 40,040 57,041
Common stock subject to repurchase, par
value $.0001 per share, 100,000 shares
authorized, 25,000 shares issued and
outstanding 6,250 6,250
Stockholders' equity
Common stock, par value $.0001 per share,
4,900,000 shares authorized, 993,700
shares issued and outstanding, 29,600
shares subscribed as of December 31,
1995 and 81,400 shares subscribed as of
March 31, 1996 $ 108 $ 102
Additional paid-in capital 1,586,940 1,571,921
Common stock issued for future services (22,813) (24,250)
Accumulated deficit (1,363,454) (1,283,960)
Total stockholders' equity 200,781 263,813
Total Liabilities and Stockholders' Equity $ 247,071 $ 327,104
</TABLE
The accompanying notes to financial statements
are an integral part of these statements.
F-2
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
Three Months Years Ended
Ended March 31, December 31,
1996 1995 1995 1994
(Unaudited) (Unaudited)
<S > <C> <C> <C> <C>
Product sales $ 30,776 $ 135,128 $ 253,634 $ 154,842
Cost of products sold 4,526 21,617 43,560 48,493
Gross profit 26,250 113,511 210,074 106,349
Operating expenses
Advertising 3,523 2,723 73,396 38,133
Depreciation and
amortization 22,002 3,557 17,220 7,067
Consulting fees 4,660 7,875 6,000 978,100
Office expenses 7,379 14,869 39,777 33,250
Professional fees 18,651 41,585 87,951 48,027
Travel and entertainment 4,002 2,916 8,596 15,928
Rent 5,373 5,478 21,087 20,467
Research and development costs 1,950 - 17,988 -
Personnel costs 28,495 31,759 137,994 112,418
Taxes and licenses 4,571 4,804 16,690 10,730
Bad debts - - 304 -
Total operating expenses 100,606 115,566 427,003 1,264,120
Loss from operations (74,356) (2,055) (216,929) (1,157,771)
Other income (expense)
Investment and other
income 606 3,389 12,465 24,254
Gain due to change in
redemption price on
common stock subject to
repurchase - - 12,500 -
Equity in loss from
unconsolidated joint
venture (5,487) - (1,506) -
Loss on disposal of equipment - - - (453)
Interest expense (257) - (139) -
Total other income
(expense) (5,138) 3,389 23,320 23,801
Net income (loss) $ (79,494) $ 1,334 $ (193,609) $ (1,133,970)
Net income (loss) per common
share $ (.07) $ - $ (0.19) $ (1.19)
Weighted average number of
common shares outstanding 1,099,008 1,018,700 1,020,957 50,908
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-3
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Issued Total
Additional Issued for Retained Stock-
Common Stock Paid-in Future Earnings holders'
Shares Amount Capital Services (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1993 800,000 $ 80 $ 750,420 $(750,000) $ 43,619 $ 44,119
Shares issued
for cash, net
of offering
costs 193,700 19 814,576 - - 814,595
Compensation
earned - - - 750,000 - 750,000
Shares issued
under employee
stock plan - - - (37,500) - (37,500)
Net loss - - - - (1,133,970) (1,133,970)
Balance,
December
31, 1994 993,700 99 1,564,996 (37,500) (1,090,351) 437,244
Shares
subscribed 29,600 3 6,925 - - 6,928
Compensation
earned - - - 19,500 - 19,500
Shares issued
under employee
stock plan - - - (6,250) - (6,250)
Net loss - - - - (193,609) (193,609)
Balance,
December
31, 1995 1,023,300 102 1,571,921 (24,250) (1,283,960) 263,813
Shares
subscribed
(unaudited) 51,800 6 15,019 - - 15,025
Compensation
earned
(unaudited) - - - 1,437 - 1,437
Net loss
(unaudited) - - - - (79,494) (79,494)
Balance, March
31, 1996
(unaudited) 1,075,100 $108 $ 1,586,940 $ (22,813) $ (1,363,454) $ 200,781
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
F-4
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Years Ended
Ended March 31, December 31,
1996 1995 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss) $ (79,494) $ 1,334 $ (193,609) $ (1,133,970)
Adjustments to reconcile
net income (loss) to net
cash used for operating
activities:
Depreciation and
amortization 22,002 3,557 17,220 7,067
Decrease (increase) in
accounts receivable 26,185 (66,885) (27,746) 8,704
Decrease (increase) in
inventory 1,812 7,917 (42,176) (8,618)
Increase (decrease) in
accounts payable and
accrued expenses (17,001) 10,675 18,216 (7,072)
Loss on disposal of
equipment - - - 453
Gain based on redemption
price of common stock
subject to repurchase - - (12,500) -
Decrease (increase) in
deposits and prepaid
expenses 150 (1,304) 3,057 (19,439)
Gain on sale of investments - - - (5,287)
Stock issued for services 7,000 1,875 - -
Deferred compensation
earned 1,437 - 19,500 750,000
Equity in loss of
unconsolidated joint
venture 5,487 - 1,505 -
Total adjustments 47,072 (44,165) (22,924) 725,808
Net cash used for
operating activities (32,422) (42,831) (216,533) (408,162)
Cash flows from investing
activities
Proceeds from sale of
marketable securities - - - 12,268
Purchase of equipment and
leasehold improvements (130) (10,652) (28,017) (45,164)
Proceeds from sale of
equipment - - 1,180 -
Advances to joint venture (10,000) - (34,000) -
Cash paid for license - (38,742) (49,602) -
Cash loan to employee - (13,000) (13,000) -
Repayment of employee loan 1,203 - 3,000 -
Net cash used in
investing activities (8,927) (62,394) (120,439) (32,896)
Cash flows from financing
activities
Cash paid for common stock
redeemed - - (18,579) -
Proceeds from line of credit - - 5,000 -
Proceeds from issuance of
common stock, net of
offering costs 3,025 - 6,928 814,595
Net cash provided by (used
in) financing activities 3,025 - (6,651) 814,595
Net increase (decrease) in
cash and cash equivalents (38,324) (105,225) (343,623) 373,537
Cash and cash equivalents,
beginning of period 46,773 390,396 390,396 16,859
Cash and cash equivalents,
end of period $ 8,449 $ 285,171 $ 46,773 $ 390,396
Supplemental disclosure of
cash flow information
Cash paid during the
year for:
Interest $ 257 $ - $ 139 $ -
Supplemental schedule of
noncash investing and
financing activities
Common stock issued
for services $ 5,000 $ - $ 6,250 $ 37,500
Distribution of
marketable equity
securities - - - 50,000
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-5
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
The information presented herein as of March 31, 1996, and for the three month
periods ended March 31, 1996 and 1995, is unaudited.
(1) Summary of Significant Accounting Policies:
The following is a summary of the more significant accounting policies of
Cyclodextrin Technologies Development, Inc. (the Company) which affect the
accompanying financial statements:
(a) Organization and operations--The Company was incorporated in August
1990, as a Florida corporation with operations beginning in July 1992. The
Company is engaged in the marketing and sale of cyclodextrins and related
products to pharmaceutical, food, and other industries located in the United
States. The Company also provides consulting services related to cyclodextrin
technology to U.S. based food and pharmaceutical manufacturing companies.
(b) Cash and cash equivalents--For the purposes of reporting cash flows,
the Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
(c) Property and equipment-Property and equipment are recorded at cost.
Depreciation on equipment is computed using accelerated methods over the
estimated useful lives of the assets, which is approximately seven years.
Depreciation on leasehold improvements is computed on the straight-line method
over the lesser of the term of the related lease or the estimated useful lives
of the assets.
(d) Inventory--Inventory consists of products purchased for resale and is
recorded at the lower of cost (first-in, first-out) or market.
(e) License fee--License fee is recorded at cost. Amortization expense is
computed using the straight-line method over the term of the license, which is
three years. Periodically, management evaluates the estimated useful life of
the license to determine whether intervening economic events and circumstances
have affected the remaining useful life. Amortization expense was $7,243 and
$0 for the years ended December 31, 1995 and 1994, respectively, and $17,800
and $0 for the three months ended March 31, 1996 and 1995, respectively.
(f) Net loss per common share--Net loss per common share is computed based
on the weighted average number of common shares outstanding during the period.
Common shares include common stock subject to repurchase.
(g) Revenue recognition--Revenues are recorded when products are shipped.
(h) Advertising--The Company expenses the production costs of advertising
the first time the advertising takes place.
(i) Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
(j) Management representations--In the opinion of management, all
adjustments necessary for a fair presentation of the financial position at
March 31, 1996, and the results of operations, cash flows and related note
disclosures for the three months ended March 31, 1996 and 1995, have been
made.
(2) Marketable Equity Securities:
In 1994, the Company sold its investment in common stock and recorded a gain
of $5,287 included in investment and other income in the accompanying
financial statements.
In 1994, the Company transferred its investment in preferred stock to a
shareholder in satisfaction of a $50,000 liability owed to the shareholder.
The recorded cost of the investment was $50,000 which approximated its fair
market value at the time of transfer. Therefore, no gain or loss was recorded
from this transaction in the accompanying financial statements.
(3) Commitments:
On November 11, 1993, the Company entered into a business consulting agreement
with an unrelated corporation for various marketing and management related
services. The Company issued 300,000 shares of its previously unissued common
stock to the consultant as a prepayment for future services valued at
$750,000. In addition, upon successful completion of the stock offering
described below, the Company had agreed to pay the consultant $7,000 per month
for three years and $10,000 per month for the following two years. In
addition, the shareholders of the Company entered into an agreement that
called for an annual salary to the President of the Company of $7,000 per
month for the three years after the closing of the stock offering, increasing
to $10,000 per month for the following two years. On September 1, 1994, the
business consulting agreement discussed above, and the agreement related to
the President's salary, was terminated. In consideration of the cancellation
of the business consulting agreement, and as payment in full satisfaction of
the rights of the consultant, the Company paid $180,000 to the consultant. In
addition, the Company agreed that the consultant had earned and would retain
the 300,000 shares received as part of the agreement. The remaining deferred
compensation of $500,000 as of September 1, 1994, has been expensed in the
year ended December 31, 1994.
On July 7, 1994, the Company entered into a five year noncancelable
operating lease for office space, commencing October 1994. The Company has
an option to rent additional space and a purchase option in which ten percent
of the lease payments may be applied to the purchase price. The future
minimum lease payments under operating leases as of December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
<S> <C>
1996 $ 1,575
1997 20,014
1998 21,018
1999 18,240
2000 -
Total $60,847
</TABLE>
Rent expense under the foregoing lease and all other operating leases was
$18,150 and $18,062 for the years ended December 31, 1995 and 1994,
respectively, and $5,373 and $5,478 for the three months ended March 31, 1996
and 1995, respectively.
On August 1, 1994, the Company entered into a five year consulting agreement
(renewable annually by mutual agreement) with Yellen Associates (Yellen), an
unrelated company. Yellen agreed to provide ideas for new products in the
nutritional, geriatric, and related health fields; to find companies and/or
products suitable for acquisition; to find products suitable for manufacture
and/or distribution; and to secure customers for Company products. All
products offered by Yellen and accepted by the Company will belong exclusively
to the Company with all related rights. In return, the Company agreed to pay
Yellen $2,000 per month for nine months. If sales of Yellen products are at
least $200,000 per year, this monthly payment would automatically continue
for one year. Any other continuance of the payment would be negotiated. In
May, 1995, the Company discontinued its monthly payment to Yellen in
accordance with the agreement. Additionally, the Company agreed to pay
Yellen royalties of up to 5% of sales for products acquired through Yellen, or
cyclodextrin sales made by Yellen for three to five years. The Company also
agreed to sell to Yellen over a period of three years from August 1, 1994, up
to 30,000 shares of Company stock at a discount of 50% of the market price
quoted at the time of purchase, decreasing to 20,000 shares in year two and to
10,000 shares in year three. Consulting expense will be recognized during
the period in which Yellen elects to acquire shares of the Company's common
stock based on the difference between market price and the sales price of the
Company's common stock.
Effective January 1, 1995, the Company entered into a license agreement with a
manufacturer whereby the Company obtained an exclusive right to market a
dietary supplement in the United States for three years. The license fee of
$60,000 is nonrefundable, but recoverable through discounted purchases from
the manufacturer made before December 31, 1997. The Company made purchases
under the agreement at a discount of $7,273 for the year ended December 31,
1995. The Company has paid $49,602 of the license fee through December 31,
1995. The remaining amount is payable by April 30, 1996.
In June 1995, the Company entered into a $75,000 line of credit with a bank.
Interest is due monthly at prime plus 2%. Any outstanding principal and
interest is due in June 1996. The line is collateralized by accounts
receivable and inventory. As of December 31, 1995 and March 31, 1996, there
is an outstanding balance on this line of credit of $5,000.
(4) Concentrations of Credit Risk:
Significant concentrations of credit risk for all financial instruments owned
by the Company as of December 31, 1995 are as follows:
(a) Demand deposits--The Company has demand deposits in a local bank which
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1995, the bank balance was $46,797, and at March 31, 1996 the
bank balance was $11,327. The Company has no policy of requiring collateral
or other security to support its deposits.
(b) Accounts receivable--The Company's accounts receivable consist of
amounts due primarily from food and pharmaceutical companies located primarily
in the United States. The Company has no policy requiring collateral or other
security to support its accounts receivable.
(c) Note receivable-employee--The Company's note receivable from employee
is uncollateralized. The Company's policy of requiring collateral on loans
made to employees is determined on a case-by-case basis.
(5) Income Taxes:
At December 31, 1995, the Company has a net operating loss carryforward
totaling approximately $1,331,000 that may be offset against future taxable
income through 2010. No tax benefit has been reported in the 1994 or 1995
financial statements, however, because the Company believes there is at least
a 50% chance that the carryforward will expire unused. Accordingly, the
$450,000 tax benefit of the loss carryforward has been offset by a valuation
allowance of the same amount. The expected tax benefit of $450,000 that would
result from applying federal statutory tax rates to the pre-tax loss differs
from amounts reported in the financial statements because of the increase in
the valuation allowance.
(6) Employee Stock Plans:
During 1994, the Company adopted a nonqualified employee stock issuance plan
to provide incentives to employees. Stock issued under this plan is at the
discretion of the Board of Directors of the Company and bears a restrictive
legend. All shares issued pursuant to this Plan must be held for a minimum of
two years and become fully vested after five years. During the period
beginning on the first day of the third year after issuance and ending five
years after issuance, the Company shall purchase all or any part of the shares
from the employee upon the employee's written request; the purchase price of
the shares shall be 50% of the then current market value of the shares.
Under extreme circumstances, the Company may choose to purchase the
employee's shares during the first two years.
In December, 1994, the Company issued 25,000 shares to employees for future
services under this plan. The Company valued the 25,000 shares at $37,500,
which was approximately 50% less than the bid price at the date of issuance.
The stock's quoted market price was not used because the Company's stock does
not trade freely in an established market. The Company recorded $37,500 as
stock issued for future services, which is classified as a reduction to
stockholders' equity in the accompanying financial statements. The Company is
amortizing this amount to expense over five years on the straight-line basis,
the estimated benefit period of the future services. The Company issued
10,000 shares held in treasury to employees under this plan in 1995. The
Company recorded $6,250 as stock issued for future services, which was
approximately 50% less than the bid price at the date of issuance, which will
be amortized over five years on a straight-line basis. The stock's quoted
market price was not used because the Company's stock does not trade freely in
an established market. Any unamortized amount will be charged to expense if
an employee terminates their employment with the Company. The Company
recognized $19,500 in compensation expense in 1995 under this Plan. There was
no expense recorded in 1994. The Company recognized $1,437 and $1,875 in
compensation expense under this plan for the three months ended March 31, 1996
and 1995, respectively.
In June 1995, the Company purchased 10,000 shares of its own common stock for
$25,000 from a former employee, payable over the next twelve months. This
stock was held in treasury and re-issued under the employee stock plan as
noted above.
Effective November 15, 1995, the Company adopted an employee stock purchase
plan. Under this plan, employees may purchase shares of Company stock up to
the amount of their gross pay for the period. These shares will be restricted
from sale for two years. The stock's quoted market price was not used because
the Company's stock does not trade freely in an established market. They will
be sold to employees at 50% of the most recent trading price at the date of
purchase. This plan will expire at the next private/public offering of
Company stock. As of December 31, 1995 and March 31, 1996, employees had
purchased 29,600 shares for $6,928 and 3,800 shares for $3,025, respectively
under this plan. These shares, totaling 33,400, had not been issued as of
December 31, 1995 and March 31, 1996 and are reflected as common stock
subscribed in the accompanying financial statements.
(7) Common Stock Subject to Repurchase:
As detailed in Note 6 above, the Company established a nonqualified employee
stock plan in 1994, and issued shares under this plan in December, 1994.
Also, as noted above, the stock issued under this Plan is redeemable by the
Company at the option of the employee, at 50% of the then current market
value. The employee can demand redemption at any time beginning on the first
day of the third year after issuance ending five years after issuance.
The Company has reserved 100,000 of its common shares authorized of 5,000,000
to be used under this Plan.
The common stock subject to repurchase is reflected on the balance sheet at
50% of the market value as of the balance sheet date. Changes in the
redemption amount are recognized in the accompanying statement of operations
as "Gain due to change in redemption price on common stock subject to
repurchase."
Common stock subject to repurchase activity comprises the following:
<TABLE>
<CAPTION>
Three Months Years Ended
Ended March 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of period $ 6,250 $ 37,500 $ -
Common stock issued - 6,250 37,500
Common stock redeemed - (25,000) -
Market changes in redemption price - (12,500) -
Balance, end of period $ 6,250 $ 6,250 $ 37,500
</TABLE>
Common stock subject to repurchase are redeemable by the holder
as follows:
<TABLE>
<CAPTION>
Year Ending Shares Amount
<S> <C> <C>
1996 - $ -
1997 15,000 3,750
1998 10,000 2,500
25,000 $ 6,250
</TABLE>
(8) Common Stock Transactions:
During March and April 1994, the Company completed a private offering of its
previously unissued common stock. The Company received net proceeds of
$814,595 (after offering costs of $153,905) from the issuance of 193,700
shares of its common stock.
(9) Major Customers and Suppliers:
Sales to four customers in 1995 consisted of approximately 84% of total sales.
The aggregate accounts receivable balances at December 31, 1995 for the major
customers were $33,700. Sales to three customers in 1994 consisted of
approximately 61% of total sales. The aggregate accounts receivable balances
at December 31, 1994 for the major customers were $1,500.
Sales to three customers for the three months ended March 31, 1996, consisted
of approximately 56% of total sales. Sales to these three customers were 84%
of total sales for the three months ended March 31, 1995.
The Company currently purchases all its inventory of Garlessence, a dietary
supplement, from one supplier.
(10) Investment in Joint Venture:
Effective May 1, 1995, the company entered into a joint venture agreement with
Ocumed, Inc. (Ocumed), an unrelated company. The joint venture is organized
as Ocudex, Inc. (Ocudex) with the Company and Ocumed each owning 50% of
Ocudex. The Company has committed to funding Ocudex up to $120,000. The
Company has advanced Ocudex $34,000 as of December 31, 1995, and $44,000 as of
March 31, 1996.
Following is a summary of the financial position and results of operations of
Ocudex which is included in the accompanying financial statements as of and
for the eight months ended December 31, 1995.
<TABLE>
<S> <C>
Cash $ 1,777
Equipment 28,000
Other assets 1,212
Total assets $ 30,989
Advances from stockholder $ 34,000
Stockholders' deficit (3,011)
Total liabilities and stockholders' deficit $ 30,989
Sales $ -
Net loss $ 3,011
Company's proportionate share of loss $ 1,506
</TABLE>
(11) Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 requires disclosure of
fair value to the extent practicable for financial instruments which are
recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of
the amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following
table summarizes financial instruments by individual balance sheet account as
of December 31, 1995:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 46,773 $ 46,773
Accounts receivable 36,652 36,652
Note receivable - employee 10,000 10,000
Total financial assets $ 93,425 $ 93,425
Financial liabilities:
Note payable on line of credit $ 5,000 $ 5,000
Accounts payable and accrued expenses 45,620 45,620
Treasury stock payable 6,421 6,421
Total financial liabilities $ 57,041 $ 57,041
</TABLE>
The fair value of financial instruments classified as current assets or
liabilities approximates carrying value due to the short-term maturity of the
instruments. The fair value of the note receivable-employee was estimated
using current interest rates.
(12) Subsequent Events:
On January 1, 1996, the Company resolved to issue 48,000 shares of its common
stock to various unrelated parties for services performed in connection with
the Company's anticipated self-underwritten stock offering as noted below.
Furthermore, two of these parties acknowledge that in the event the gross
proceeds of the offering are less than $500,000, then one-half of their shares
(20,000) shall be returned to the Company. The shares issued will bear a
restrictive legend. The Company valued these shares at $12,000, which is
approximately 50% less than the bid price at the date of issuance. The
stock's quoted market price was not used because the Company's stock does not
trade freely in an established market. These shares have not been issued as
of March 31, 1996, and are reflected as subscribed in the accompanying
financial statements.
Effective February 5, 1996, the Company filed Form SB-2 Registration
Statements with the Securities and Exchange Commission for a proposed
securities offering of 250,000 shares of common stock and 125,000 common stock
purchase warrants with a combined proposed maximum aggregate offering price of
$1,250,000.
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
QUARTERLY STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
CONTENTS PAGE
BALANCE SHEET 1-2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CASH FLOWS 4-5
NOTES TO FINANCIAL STATEMENTS 6-12
<PAGE>
<TABLE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
SEPTEMBER 30, 1996
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 14,560
Accounts Receivable 28,486
Inventory 78,687
Deposits and Prepaid Expenses 3,367
Note Receivable - Employee, Current Portion 4,633
________
TOTAL CURRENT ASSETS 129,733
________
PROPERTY AND EQUIPMENT
Furniture and Equipment 48,928
Leasehold Improvements 24,800
________
73,728
Less: Accumulated Depreciation 37,206
________
TOTAL PROPERTY AND EQUIPMENT 36,522
________
OTHER ASSETS
Note Receivable - Employee, Less Current Portion 2,207
Deposits and Other 2,599
Advances to and Investment in Joint Venture 40,360
License Fee 25,000
Deferred Offering Costs 127,371
________
TOTAL OTHER ASSETS 197,537
________
TOTAL ASSETS $363,792
========
</TABLE>
(CONTINUED)
-1-
<PAGE>
<TABLE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
BALANCE SHEET
SEPTEMBER 30, 1996
(Unaudited)
(CONCLUDED)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 7,422
Note Payable on Line-of-Credit 52,200
Payable to Officer 1,465
___________
TOTAL CURRENT LIABILITIES 61,087
COMMON STOCK SUBJECT TO REPURCHASE
Common Stock, Par Value $.0001 Per Share,
100,000 Shares Authorized, 25,000 Shares
Issued and Outstanding, 6,250
___________
STOCKHOLDERS' EQUITY
Voting Common Stock, Par Value $.0001 Per Share,
10,000,000 Shares Authorized, 1,225,110 Shares
Issued and Outstanding, Non-Voting Common Stock,
Par Value $.0001 Per Share, 10,000,000 Shares
Authorized, 0 Shares Issued 122
Additional Paid-In Capital 1,670,682
Common Stock Issued for Future Services (19,937)
Accumulated Deficit (1,354,412)
___________
TOTAL STOCKHOLDERS' EQUITY 296,455
___________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 363,792
===========
</TABLE>
See Accompanying Notes to Financial Statements.
-2-
<PAGE>
<TABLE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Product Sales $ 53,527 $ 16,082 $ 200,340 $199,580
Cost of Products Sold 7,712 8,940 22,252 38,045
_________ _________ _________ ________
GROSS PROFIT 45,815 7,142 178,088 161,535
_________ _________ _________ ________
OPERATING EXPENSES
Advertising 1,275 16,050 8,107 37,449
Depreciation and Amortization 9,229 4,350 40,278 13,051
Consulting Fees -- -- 1,501 6,000
Office Expenses 8,396 8,822 25,803 31,486
Professional Fees 4,763 23,810 25,146 76,725
Travel and Entertainment 1,637 1,566 10,748 6,291
Rent 5,373 5,148 16,119 15,789
Research and Development Costs 2,050 1,850 5,983 15,430
Salaries and Benefits 37,024 27,690 94,177 109,977
Taxes and Licenses 3,477 2,722 11,019 11,096
Bad Debts -- -- -- 48
_________ _________ _________ ________
TOTAL OPERATING EXPENSES 73,224 92,008 238,881 323,342
_________ _________ _________ ________
INCOME (LOSS) FROM OPERATIONS (27,409) (84,866) (60,793) (161,807)
_________ _________ _________ ________
OTHER INCOME (EXPENSE)
Investment and Other Income 1,024 2,285 1,991 9,104
Gain Due to Change in
Redemption Price on Common
Stock Subject to Repurchase 3,125 -- -- --
Equity in Loss from
Unconsolidated Subsidiary (35) (5,046) (9,134) (15,014)
Interest Expense (1,243) (44) (2,515) (44)
_________ _________ _________ ________
TOTAL OTHER INCOME (EXPENSE) 2,871 (2,805) (9,658) (5,954)
_________ _________ _________ ________
NET INCOME (LOSS) $ (24,538) $ (87,671) $ (70,451) $(167,761)
========= ========= ========= =========
NET INCOME (LOSS) PER
COMMON SHARE $ (.02) $ (.09) $ (.06) $ (.17)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,183,803 1,008,700 1,127,178 1,013,096
========= ========= ========= =========
</TABLE>
See Accompanying Notes to Financial Statements.
-3-
<PAGE>
<TABLE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
<CAPTION>
Nine Months
Ended September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(70,451) $(167,761)
________ _________
Adjustments to Reconcile Net Loss to Net
Cash Used for Operating Activities:
Depreciation and Amortization 40,278 13,051
Deferred Compensation Earned 4,312 --
Equity in Loss of Unconsolidated
Joint Venture 9,134 15,014
Stock Issued for Services 9,000 18,375
Decrease in Accounts Receivable 8,342 115
Increase in Inventory (406) (9,003)
Decrease in Deposits and Prepaid
Expenses 15,492 1,863
Increase in Deferred Costs (40,615) --
Decrease in Accounts Payable and
Accrued Expenses (38,198) (8,300)
________ _________
Total Adjustments 7,339 31,115
________ _________
NET CASH USED FOR OPERATING ACTIVITIES (63,112) (136,646)
________ _________
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to Joint Venture (17,000) (32,000)
Repayment of Employee Loan 5,302 --
Purchase of Equipment and Leasehold
Improvements (530) (26,837)
Cash Paid for License -- (47,976)
Cash Loan to Employee (2,142) (11,018)
________ _________
NET CASH USED IN INVESTING ACTIVITIES (14,370) (117,831)
________ _________
</TABLE>
(CONTINUED)
-4-
<PAGE>
<TABLE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(CONCLUDED)
<CAPTION>
Nine Months
Ended September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds From Issuance of Common Stock,
Net of Offering Costs 3,025 --
Cash Paid for Treasury Stock -- (10,417)
Proceeds from Line-of-Credit 49,700 2,000
Proceeds from Loan Payable to Officer 1,465 --
Payments on Line-of-Credit (2,500) --
Payment to Stockholder on Loan (6,421) --
________ _________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 45,269 (8,417)
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,213) (262,894)
CASH AND CASH EQUIVALENTS, Beginning of Period 46,773 390,396
________ _________
CASH AND CASH EQUIVALENTS, End of Period $ 14,560 $ 127,502
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid During the Period For:
Interest $ 2,515 $ 44
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITY
Common Stock Issued for Services $ 21,000 $ --
Contribution by Stockholder $ 6,000 $ --
</TABLE>
See Accompanying Notes to Financial Statements.
-5-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The information presented herein as of September 30, 1996, and for the
three and nine months ended September 30, 1996 and 1995, is unaudited.
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal required adjustments)
considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1996,
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to the
financial statements and footnotes thereto included in the Company's
annual report on Form 10-KSB for the year ended December 31, 1995.
NOTE 2 - COMMITMENTS
Effective January 1, 1995, the Company obtained an exclusive right to
market a dietary supplement in the United States for three years. The
Company agreed to pay approximately $60,000 for this right. The
agreement allows the Company to recover this fee through discounts on
inventory purchased through December 31, 1997. Prior to December 31,
1995, the amortization of this license fee was recognized as discounts
were received. However, after consultation with the Securities and
Exchange Commission, the license fee is now being amortized on a
straight-line basis over the three year period of the contract. The
total accumulated amortization expense under the straight line method
since the inception of the contract is $35,000. Since $7,200 had been
recorded as of December 31, 1995, the remaining $27,800 has been
recognized as amortization expense for the nine month period ended
September 30, 1996.
On August 1, 1994, the Company entered into a five year consulting
agreement (renewable annually by mutual agreement) with Yellen
Associates (Yellen), an unrelated company. Yellen agreed to provide
ideas for new products in the nutritional, geriatric, and related
health fields; to find companies and/or products suitable for
acquisition; to find products suitable for manufacture and/or
-6-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONTINUED)
NOTE 2 - COMMITMENTS (continued)
distribution; and to secure customers for Company products. All
products offered by Yellen and accepted by the Company will belong
exclusively to the Company with all related rights. In return, the
Company agreed to pay Yellen $2,000 per month for nine months. In May
1995, the Company discontinued its monthly payment to Yellen in
accordance with the agreement. Additionally, the Company will pay
Yellen royalties of up to 5% of sales for products acquired through
Yellen, or Cyclodextrin sales made by Yellen for three to five years.
The Company also agreed to sell to Yellen over a period of three years
from August 1, 1994, up to 30,000 shares of Company stock at a
discount of 50% of the market price quoted at the time of purchase,
contingent upon the amount of commissions and royalties. The conditions
were not met, therefore, the Company is not obligated to sell shares to
Yellen at the agreed upon discount.
On July 7, 1994, the Company entered into a five year noncancelable
operating lease for office space, commencing October 1994. The Company
has an option to rent additional space and a purchase option in which
ten percent of the lease payments may be applied to the purchase price.
Rent expense under the foregoing lease and all other operating leases
was $5,373 and $5,148 for the three months ended September 30, 1996 and
1995, respectively, and was $16,119 and $15,789 for the nine months
ended September 30, 1996 and 1995, respectively.
In July of 1996, the Company registered Form SB-2 with the Securities and
Exchange Commission for a proposed securities offering of 250,000 shares of
common stock and 125,000 common stock purchase warrants with a combined
proposed maximum aggregate offering price of $1,250,500.
On January 1, 1996, the Company resolved to issued 48,000 shares of its
common stock to various unrelated parties for services performed in
connection with the Company's anticipated self-underwritten stock
offering as noted above. Furthermore, two of these parties acknowledge
that in the event the gross proceeds of the offering are less than
$500,000, then one-half of their shares (20,000) shall be returned to
the Company. The shares issued will bear a restrictive legend. The Company
valued the 48,000 shares at $12,000 which is approximately 50%
-7-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONTINUED)
NOTE 2 - COMMITMENTS (continued)
less than the bid price at the date of issuance. The quoted market price was
not used to value the stock since the stock does not trade freely in an
established market. Of these shares, $47,000 were issued on August 19, 1996.
The other 1,000 shares will not be issued.
For the three month period ended March 31, 1996, which was previously
reported, only $5,000 of the total cost of these professional fees was
deferred. Since all the costs associated with these shares are directly
attributable to the proposed offering, the remaining $7,000 was reclassified
as a deferred charge in the three month period ended September 30, 1996. In
addition, all other specific incremental professional fees incurred in the
second and third quarters of 1996 which are clearly and directly attributable
to the Company's effort to obtain equity financing have been deferred. Of
these additional fees, $5,135 was reported as an expense for the three months
ended March 31, 1996. This amount was reclassed as a deferred charge in the
second quarter. The total amount of professional fees deferred for the three
months ended September 30, 1996 is $16,104. The total amount deferred for the
nine months ended September 30, 1996 is $42,153. These deferred professional
costs will be offset against the net proceeds of the offering.
The Company entered into an agreement with Cyclop h.f. (Cyclops), a company
located in Reykjavik, Iceland, in May 1996 to secure limited exclusivity to
certain inventions embodied in patents owned by Cyclops for the purpose of
creating an organization that will commercialize products using those
inventions. In consideration, the Company agrees to share equally with
Cyclops the net profits derived from products commercialized by CTD or
affiliates of the Company that use the inventions. Further, contingent on the
successful completion of equity financing in the amount of at least
$5,000,000, the Company agrees to pay Cyclops $30,000 per month. This
agreement may be cancelled by Cyclops at any time after September 1, 1996 with
30 day notification. As of September 30, 1996, no cancellation notice was
received by CTD.
In January 1996, the Company entered into an agreement with Geller
International Associates (Geller), an unrelated company, to provide various
public relation services. In return, the Company agreed to pay Geller $2,000
per month plus out-of-pocket expenses with the first three months being
guaranteed. In addition, the Company agreed to pay Geller
-8-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONTINUED)
NOTE 2 - COMMITMENTS (concluded)
1% of net moneys received as a result of Geller's efforts to secure funding
for the current public offering. The total amount paid to Geller to date was
$10,461 of which $4,660 was recorded as a consulting fee during the first
quarter of 1996.
Since all the services performed by Geller to date represent activities for
the purpose of promoting the current public offering, the total consulting
fees paid to Geller to date were deferred in the second quarter of 1996. In
addition, Rick Stratton, president of CTD, gave Geller $6,000 worth of CTD
stock on behalf of the Company to provide the above mentioned services. The
value of the stock given was recorded as a contribution to the Company and the
related expense to Geller was deferred.
The agreement was cancelled at the end of the initial three months.
In January 1996, the Company entered into an agreement with Diversified
Corporate Consulting Group, L.C., an unrelated company, to provide consulting
services to be completed within 12 months. In return, the Company agreed to
pay Diversified a) a $10,000 non-refundable initial fee, and b) common stock
of the Company, in a quantity equal to 10% of all outstanding common stock, in
lieu of document licensing fees and of required cash payments for up to an
aggregate of 260 hours of hourly consulting and licensing fees. The common
stock issued to Diversified on July 29, 1996, under this agreement was 110,010
shares.
NOTE 3 - COMMON STOCK TRANSACTIONS
During 1994, the Company adopted a non-qualified employee stock plan and
in December 1994 issued 25,000 shares to employees for future services.
The shares are nontransferable by the employees for five years. During
years three through five, the employee may request the Company to
purchase all or part of the shares at 50% of the current market price
of the stock at that date.
The Company valued the 25,000 shares at $37,500, which is approximately
50% less than the bid price at the date of issuance. The quoted market
price was not used to value the stock since the stock does not trade
freely in an established market and, thus, a market price could not
accurately be established. The Company recorded the $37,500 as stock
issued for future services, which is classified as a reduction to
stockholders' equity in the accompanying financial statements. The
-9-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONTINUED)
NOTE 3 - COMMON STOCK TRANSACTIONS (concluded)
Company is amortizing this amount to expense over five years on the
straight-line basis, the estimated benefit period of the future
services. Any unamortized amount will be charged to expense if an
employee terminates their employment with the Company. The Company
expensed $1,438 and $875 under this plan for the three months ended
September 30, 1996 and 1995, respectively, and expensed $4,312 and
$18,375 for the nine months ended September 30, 1996 and 1995.
In June 1995, the Company purchased 10,000 shares of its own common
stock for $25,000 from a former employee, payable over the next twelve
months. This stock was held in treasury and reissued under the employee
stock plan as noted above. As of September 30, 1996, all amounts have
been paid and no further payable is due.
Effective November 15, 1995, the Company adopted an employee stock purchase
plan. Under this plan, employees may purchase shares of Company stock up to
the amount of their gross pay for the period. These shares will be restricted
from sale for two years, therefore they will be sold to employees at 50% of
the most recent trading price at the date of purchase. This plan will expire
at the next private/public offering of Company stock. As of September 30,
1996, employees had purchased 33,400 shares for $9,953 under this plan. These
shares were issued on September 6, 1996.
On April 26, 1996, the Company resolved to authorize the issuance of 16,000
shares of voting common stock to Rick Stratton, President, as a bonus for
services rendered to the Company. These shares were issued on August 15,
1996.
In the second quarter of 1996, the Company amended its Articles of
Incorporation whereby the number of voting shares authorized was increased
from 5,000,000 to 10,000,000. In addition, non-voting common shares were
created. The total amount of non-voting common shares authorized is
10,000,000.
NOTE 4 - COMMON STOCK SUBJECT TO REPURCHASE
As detailed in Note 3 above, the Company established a nonqualified
employee stock plan in 1994, and issued shares under this plan in
December, 1994. Also, as noted above, the stock issued under this
Plan is redeemable by the Company at the option of the employee, at
-10-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONTINUED)
NOTE 4 - COMMON STOCK SUBJECT TO REPURCHASE (concluded)
50% of the then current market value. The employee can demand
redemption at any time beginning on the first day of the third year
after issuance ending five years after issuance.
The Company has reserved 100,000 of its common shares authorized of
5,000,000 to be used under this Plan.
The common stock subject to repurchase is reflected on the balance sheet
at 50% of the market value as of the balance sheet date. Changes in the
redemption amount are recognized in the accompanying statement of operations
as "Gain due to change in redemption price on common stock subject to
repurchase."
Common stock subject to repurchase are redeemable by the holder as follows:
Year Ending Shares Amount
1996 -- $ --
1997 15,000 5,625
1998 10,000 3,750
______ ______
Total 25,000 $9,375
====== ======
NOTE 5 - MAJOR CUSTOMERS
Sales to four customers for the nine months ended September 30, 1996,
comprised approximately 70% of total sales. Sales to four customers were 85%
of total sales for the nine months ended September 30, 1995.
NOTE 6- LINE OF CREDIT
The Company has a $75,000 line of credit with a bank. Interest is due
monthly at prime plus 2%. Any outstanding principal and interest is
due on October 31, 1996. The line is collateralized by accounts receivable and
inventory. As of September 30, 1996, there is $52,200 outstanding on this
line-of-credit. Total interest expense of $2,398 was recorded related to this
line-of-credit for the nine months ended September 30, 1996.
-11-
<PAGE>
CYCLODEXTRIN TECHNOLOGIES DEVELOPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(CONCLUDED)
NOTE 7 - JOINT VENTURE
Effective May 1, 1995, the Company entered into a joint venture
agreement with Ocumed, Inc. (Ocumed), an unrelated company. The joint
venture is organized as Ocudex, Inc. (Ocudex) with the Company and
Ocumed each owning 50% of Ocudex. The Company has committed to funding
Ocudex up to $120,000 over the next twelve months. The Company has
advanced Ocudex $51,000 as of September 30, 1996.
The Company accounts for its investment in the Ocudex joint venture
using the equity method of accounting whereby its investment is
carried at cost, including advances, adjusted for the Company's share
of earnings and losses. The Company experienced a realized loss
associated with this investment of $35 and $9,134 for the three and nine
months ended September 30, 1996, respectively.
-12-
