10-K/A: Cyclo Therapeutics Files Amendment No. 2 to 2023 Annual Report, Cites SEC Comments and Merger Details

Cyclo Therapeutics has filed an amendment to its 2023 annual report to address SEC comments and provide additional details regarding its merger with Applied Molecular Transport, Inc.

Summary

• Cyclo Therapeutics filed Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2023, to address comments received from the SEC.
• The amendment includes changes to disclosures in Item 1 (Business), Item 7 (Management's Discussion and Analysis), and Item 9A (Controls and Procedures).
• The company completed a merger with Applied Molecular Transport, Inc. on December 27, 2023, in an all-stock transaction.
• Cyclo Therapeutics is a clinical-stage biotechnology company focused on developing cyclodextrin-based products for neurodegenerative diseases, particularly Niemann-Pick Type C disease (NPC).
• The company's lead drug candidate, Trappsol Cyclo, has received orphan drug designation in the U.S. and Europe for the treatment of NPC.
• The company is conducting a Phase III clinical trial for Trappsol Cyclo for NPC and a Phase II trial for Alzheimers disease.
• The company's legacy fine chemical business, which involves the sale of cyclodextrins, generated approximately $1.076 million in revenue for 2023.
• The company incurred a net loss of approximately $20.1 million for 2023, compared to a net loss of approximately $15.5 million in 2022.
• Research and development expenses increased to approximately $14.2 million in 2023, compared to $9 million in 2022.
• The company had a cash balance of approximately $9.2 million at December 31, 2023, and current liabilities of approximately $8.5 million.
• The company's auditors have expressed substantial doubt about its ability to continue as a going concern due to recurring losses and negative cash flows.

Sentiment

Score: 4

Explanation: The document highlights significant financial losses, a going concern warning from auditors, and internal control weaknesses, which are major negatives. However, there are some positives such as clinical trial progress and patent allowances, but the overall tone is cautious and concerning from an investment perspective.

Positives

• The company has completed a Phase I/II clinical study in Europe showing positive results for Trappsol Cyclo in treating NPC.
• The company has received a notice of allowance for its patent application for the treatment of Alzheimers disease.
• The company has orphan drug designation for Trappsol Cyclo in both the U.S. and Europe, providing market exclusivity upon approval.
• The company has a fast track designation from the FDA for Trappsol Cyclo for the treatment of NPC.
• The company has a rare pediatric disease designation from the FDA for NPC, which may lead to a priority review voucher.

Negatives

• The company has incurred significant net losses, approximately $20.1 million in 2023 and $15.5 million in 2022.
• The company's auditors have expressed substantial doubt about its ability to continue as a going concern.
• The company's disclosure controls and procedures were not effective at the reasonable assurance level.
• The company identified a material weakness in its internal controls related to the accounting of complex equity instruments.
• The company is dependent on a small number of customers for a substantial portion of its revenue.
• The company is dependent on third-party suppliers for its cyclodextrin products.
• The company faces competition from other entities developing treatments for NPC.

Risks

• The company's future profitability is uncertain, and it may not be able to sustain profitability if achieved.
• The company will need additional capital to fund its operations, and there is no guarantee that it will be available on acceptable terms.
• The company is largely dependent on the success of its Trappsol Cyclo product, which may not receive regulatory approval.
• Clinical trials may not support product claims or may result in the discovery of adverse side effects.
• The company has limited experience in conducting and managing clinical trials.
• The company relies on third parties for research, clinical trials, and manufacturing.
• The company may not be able to effectively market and distribute its products.
• The company faces competition from well-funded companies to treat NPC.
• The company's business and operations could suffer in the event of computer system failures or security breaches.
• The company's trade secrets may be inadequate to protect its intellectual property.
• The company may be susceptible to intellectual property suits.
• The company's business is subject to increasing government regulation and reform.
• The company may be negatively affected by currency exchange rate fluctuations.
• The market price of the company's common stock may be highly volatile.
• The company's failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a de-listing of its securities.

Future Outlook

The company expects to continue to raise additional capital through the sale of its securities from time to time for the foreseeable future to fund the development of its drug product candidates through clinical development, manufacturing, and commercialization.

Management Comments

• Management believes that Trappsol Cyclo can function like the NPC1 protein, allowing cholesterol and other lipids to be moved normally through cells.
• Management believes that the dollar value of the worldwide market for products containing cyclodextrins and for complexes of cyclodextrins can be substantially greater than that of the market sales of the cyclodextrin itself.

Industry Context

The company is pioneering the use of cyclodextrins as an active pharmaceutical ingredient, which is a novel approach in the pharmaceutical industry. The company faces competition from other entities developing treatments for NPC, but believes it may be the only company with a drug candidate that treats both the systemic and neurological manifestations of the disease.

Comparison to Industry Standards

• The company's approach of using cyclodextrins as an active pharmaceutical ingredient is unique compared to other companies that primarily use them as excipients.
• The company's focus on treating both systemic and neurological manifestations of NPC differentiates it from competitors like Actelion, which has a drug that treats some neurological symptoms, and Orphazyme and IntraBio, which are developing drugs with limited neurological benefits.
• The company's clinical progress and close connections with patient advocacy groups provide a competitive advantage over potential competitors.
• The company's experience in the cyclodextrin industry, spanning over 30 years, provides a significant business advantage.

Management Changes

Corporate Governance

Legal Proceedings

• In December 2023, two lawsuits were filed against AMTI in connection with the Merger. The Company has accrued an estimate of potential liability based on the best information available.
• The Company does not expect the lawsuits to have a material adverse effect on cash flows, financial condition, or results of operations.

Related Party Transactions

• The company has a consulting agreement with C.E. Rick Strattan, a director and former CEO.
• The company employs Joshua M. Fine, the son of the CEO, as its Chief Financial Officer.
• The company employs Kevin J. Strattan, the son of C.E. Rick Strattan, as its Vice President, Finance Compensation.
• The company employs Corey E. Strattan, the daughter-in-law of C.E. Rick Strattan, as a documentation specialist and logistics coordinator.
• Certain directors and officers participated in private placements of the company's securities.

Stakeholder Impact

• Shareholders face the risk of dilution from future equity offerings.
• Employees may be affected by potential cost-cutting measures if the company is unable to raise additional capital.
• Customers of the legacy fine chemical business may be affected by changes in the company's focus.
• Patients with NPC and Alzheimers disease may benefit from the company's drug development efforts, but there is no guarantee of success.
• Suppliers may be affected by changes in the company's purchasing patterns.

Next Steps

• The company will continue its ongoing Phase III clinical trial for Trappsol Cyclo for the treatment of NPC.
• The company will continue its Phase II clinical trial for Trappsol Cyclo for the treatment of Alzheimers disease.
• The company will continue to seek regulatory approvals for Trappsol Cyclo.
• The company will continue to operate its legacy fine chemical business.
• The company will continue to raise additional capital to fund its operations.

Key Dates

Keywords

Cyclo Therapeutics, Trappsol Cyclo, Niemann-Pick Type C disease, NPC, Alzheimers disease, cyclodextrins, biotechnology, clinical trials, orphan drug, FDA, merger, Applied Molecular Transport, financial results, research and development, pharmaceutical