Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
1.
|
Organization
and Going Concern
|
Immudyne,
Inc. (the “Company”) is a Delaware corporation established to develop, manufacture and sell natural immune support
products containing the Company’s proprietary yeast beta glucans, a group of beta glucans naturally occurring in the cell
walls of yeast that have been shown through testing and analysis to support the immune system. The Company’s products include
once a day oral intake tablets and topical creams and gels for skin application. The Company concentrates its sales and marketing
efforts on healthcare professionals, distributors for its all-natural raw material ingredient products and direct-to-consumer
sales.
In 2015,
the Company formed a joint venture domiciled in Puerto Rico, Innate Skincare, LLC d/b/a Innate Scientific, LLC (“Innate”).
Under the terms of the joint venture agreement, the Company held a 33.3% equity interest, and a 51% controlling voting interest,
in Innate. On January 20, 2016, Innate amended its limited liability company operating agreement and changed its legal name to
Immudyne PR LLC (“Immudyne PR”). On April 1, 2016, Immudyne PR further amended its operating agreement and restated
the Company’s ownership and voting interest in Immudyne PR increased to 78.16667% resulting in a charge to noncontrolling
interest and additional paid-in-capital of $91,612. Immudyne PR was formed to launch a complete skin care regime formulated using
strategic ingredients provided by the Company. Immudyne PR is also currently pursuing other opportunities.
The
Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances
from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sales volume
and the continued financial support from officers and directors or the issuance of additional shares of common stock.
The accompanying
financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization
of assets and the satisfaction of liabilities in the normal course of business. At September 30, 2016, the Company has an accumulated
deficit approximating $9.1 million and has incurred negative cash flows from operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Based
on the Company's cash balance at September 30, 2016, and projected cash needs for 2017, management estimates that it may need
to increase sales revenue and/or raise additional capital to cover operating and capital requirements for the 2017 year. Management
may raise the additional needed funds through increased sales volume, issuing additional shares of common stock or other equity
securities, or obtaining debt financing. Although management has been successful to date in raising necessary funding, there can
be no assurance that sales revenue will substantially increase or that any required future financing can be successfully completed
on a timely basis, or on terms acceptable to the Company.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies
|
Unaudited
Financial Statements
The
accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for
financial information and with the instructions to Form 10-Q. They do not include all information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. The unaudited financial statements
should be read in conjunction with those financial statements included in the Company’s previously filed Form 10-K for the
year ended December 31, 2015. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting
solely of normal recurring adjustments, have been made. Operating results for the nine months ended September 30, 2016 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Basis
of Presentation and Use of Estimates
The
consolidated financial statements include the accounts of the Company and its controlled subsidiary, Immudyne PR. The non- controlling
interest in Immudyne PR represents the 21.833% equity interest held by other members of the joint venture. All intercompany transactions
have been eliminated.
The
Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of
the more significant estimates required to be made by management include the valuation of inventory and stockholders’ equity
based transactions. Actual results could differ from those estimates.
Inventory
At
September 30, 2016 and December 31, 2015, inventory consisted primarily of cosmetic and nutraceutical additives, and finished
cosmetic products. Inventory is maintained in the Company’s leased Kentucky warehouse and third party warehouses in Pennsylvania
and Louisiana.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Inventory
(continued)
Inventory
is valued at the lower of cost or market with cost determined on a first-in, first-out (“FIFO”) basis. Management
compares the cost of inventory with the net realizable value and an allowance is made for writing down inventory to market value,
if lower. At September 30, 2016 and December 31, 2015, the Company recorded an inventory reserve in the amount of $20,000. Inventory
consists of the following:
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
49,083
|
|
|
$
|
25,761
|
|
|
Finished products
|
|
|
81,447
|
|
|
|
35,290
|
|
|
|
|
$
|
130,530
|
|
|
$
|
61,051
|
|
Revenue
Recognition
The Company’s policy
is to record revenue as earned when a firm commitment, indicating sales quantity and price exists, delivery has taken place and
collectability is reasonably assured. The Company generally records sales of nutraceutical and cosmetic additives once the product
is shipped to the customer, and for sales of finished cosmetic products once the customer places the order and the product is simultaneously
shipped, but in limited cases if title does not pass until the product reaches the customer’s delivery site, then recognition
of revenue is deferred until that time. Delivery is considered to have occurred when title and risk of loss have transferred to
the customer. Provisions for discounts, returns, allowances, customer rebates and other adjustments are netted with gross sales.
The Company accounts for such provisions during the same period in which the related revenues are earned. Customer discounts, returns
and rebates approximated $530,000 and $1,578,000 in the three-month and nine-month periods ended September 30, 2016, respectively.
Customer discounts, returns and rebates were not significant in the three-month and nine-month periods ended September 30, 2015.
Delivery
is considered to have occurred when title and risk of loss have transferred to the customer. If title does not pass until the
product reaches the customer’s delivery site or the customer accepts the product, then recognition of revenue is deferred
until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be
offered from time to time to customers purchasing large quantities on a per transaction basis.
Revenue
for the nine-month period ended September 30, 2016 consisted of nutraceutical and cosmetic additives ($757,961) and finished cosmetic
products ($3,494,743). Revenue for the nine month period ended September 30, 2015 consisted solely of nutraceutical and cosmetic
additives. Revenue for the three-month period ended September 30, 2016 consisted of nutraceutical and cosmetic additives ($229,741)
and finished cosmetic products ($1,154,688). Revenue for the three month period ended September 30, 2015 consisted solely of nutraceutical
and cosmetic additives.
Accounts
receivable
Accounts
receivable are carried at original invoice amount less an estimate made for holdbacks and doubtful receivables based on a review
of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition, credit history and current economic conditions and sets up
an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to
collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. At
September 30, 2016 and December 31, 2015 the accounts receivable reserve was approximately $122,000 and $18,000, respectively.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Segments
The
guidance for disclosures about segments of an enterprise requires that a public business enterprise report financial and descriptive
information about its operating segments. Generally, financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation. The Company manages its operations in two reportable segments for
purposes of assessing performance and making operating decisions. Revenue is generated predominately in the United States, and
all significant assets are held in the United States, or United States territories.
A
summary of the company’s reportable segments is as follows:
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
519,646
|
|
|
$
|
412,324
|
|
|
Finished Cosmetic Products
|
|
|
695,205
|
|
|
|
101,828
|
|
|
Eliminations
|
|
|
(135,476
|
)
|
|
|
(65,681
|
)
|
|
Total
|
|
$
|
1,079,375
|
|
|
$
|
448,471
|
|
|
Total sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
229,741
|
|
|
$
|
279,883
|
|
|
$
|
780,961
|
|
|
$
|
845,513
|
|
|
Finished Cosmetic Products
|
|
|
1,154,688
|
|
|
|
-
|
|
|
|
3,494,743
|
|
|
|
-
|
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,000
|
)
|
|
|
-
|
|
|
Total
|
|
$
|
1,384,429
|
|
|
$
|
279,883
|
|
|
$
|
4,252,704
|
|
|
$
|
845,513
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
(258,713
|
)
|
|
$
|
8,119
|
|
|
$
|
(653,757
|
)
|
|
$
|
(11,243
|
)
|
|
Finished Cosmetic Products
|
|
|
41,017
|
|
|
|
-
|
|
|
|
171,520
|
|
|
|
-
|
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
(217,696
|
)
|
|
$
|
8,119
|
|
|
$
|
(482,237
|
)
|
|
$
|
(11,243
|
)
|
As
of and for the nine months ended September 30, 2015, there were no assets, sales or net loss relative to the finished cosmetic
products segment.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Income
Taxes
The Company
files Corporate Federal and State tax returns, while Immudyne PR, which was formed as a limited liability corporation, files a
separate tax return with any tax liabilities or benefits passing through to its members.
The
Company records current and deferred taxes in accordance with Accounting Standards Codification (ASC) 740, “Accounting for
Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax
basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted
rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when
necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of
its deferred tax asset, a majority of which has been generated by a history of net operating losses and determines the necessity
for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement
recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the
tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood
of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position.
The
Company’s tax returns for all years since December 31, 2012, remain open to taxing authorities.
Stock-Based
Compensation
The
Company follows the provisions of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally
is recognized at fair value on the date of the grant and amortized over the respective vesting periods. The fair value of options
at the date of grant is estimated using the Black-Scholes option pricing model. The expected option life is derived from assumed
exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to
be outstanding. The expected volatility is based upon historical volatility of the Company’s shares using weekly price observations
over an observation period that approximates the expected life of the options. The risk-free rate approximates the U.S. Treasury
yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures,
the estimated forfeiture rate included in the option valuation was zero.
Many
of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based
compensation expense.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share is based on the weighted average number of shares outstanding during each period presented. Warrants
and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common stock equivalents
are excluded from dilutive earnings per share when the effects would be antidilutive.
Common
stock equivalents comprising shares underlying 12,950,273 options and warrants for the three and nine months ended September 30,
2016 have not been included in the loss per share calculation as the effects are anti-dilutive. Common stock equivalents comprising
shares underlying 12,425,800 options and warrants for the three and nine months ended September 30, 2015 have not been included
in the loss per share calculations as the effects are anti-dilutive.
Recent
Accounting Pronouncements
In August 2016, the FASB issued ASU
No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).
ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice regarding how certain
cash receipts and cash payments are presented in the statement of cash flows. The standard provides guidance on the classification
of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent
consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from
the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial
interests in securitization transactions, and (8) separately identifiable cash flows. The Company is required to adopt ASU 2016-15
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis.
Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adoption
of ASU 2016-15.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09, “
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
,”
which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for
share-based payment award transactions, including: (a) income tax consequences; (b) classification flows of awards as either equity
or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The Company is in the process of evaluating the
impact of the adoption of ASU 2016-09 on its consolidated financial statements.
In
February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new
guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights
and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent
with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily
will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial
statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective
for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early
application permitted. The new standard is to be applied using a modified retrospective approach. The Company is in the process
of evaluating the impact of the new pronouncement on its consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board ("FASB") issued accounting guidance, "Revenue from Contracts
with Customers." The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods
or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled
in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance
for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications)
and clarify guidance for multiple-element arrangements. The standard will be effective for fiscal years and interim periods within
those years beginning after December 15, 2017. Accordingly, the Company will adopt this standard in the first quarter of fiscal
year 2018. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Recent
Accounting Pronouncements (continued)
In
July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 applies to inventory that is measured using first-in,
first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and
net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December
15, 2016. The Company is in the process of evaluating the impact of this ASU on its consolidated financial statements.
In
August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern". This ASU is intended
to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue
as a going concern and to provide related footnote disclosures. It is effective for annual periods beginning after December 15,
2016, with early adoption permitted. The Company does not expect it to have a material effect on the Company's consolidated financial
condition, results of operations, and cash flows.
All
other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements upon adoption.
Fair
Value of Financial Instruments
The carrying
value of the Company’s financial instruments, including cash, trade accounts receivable and accounts payable and accrued
expenses and the face amount of notes payable approximate fair value for all periods.
Noncontrolling
Interests
The
Company accounts for its less than 100% interest in Immudyne PR in accordance with ASC Topic 810, Consolidation, and accordingly
the Company presents noncontrolling interests as a component of equity on its consolidated balance sheet and reports the noncontrolling
interest’s share of the Immudyne PR net loss attributable to noncontrolling interests in the consolidated statement of operations.
Concentration
of Credit Risk
The
Company grants credit in the normal course of business to its customers. The Company periodically performs credit analysis and
monitors the financial condition of its customers to reduce credit risk.
The
Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company,
at times, maintains balances in various operating accounts in excess of federally insured limits.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Concentration
of Credit Risk (continued)
One
customer in the nutraceutical and cosmetic additives division accounted for 13% and 81% of consolidated sales for each of the
three month periods ended September 30, 2016 and 2015, respectively. This customer accounted for 15% and 83% of consolidated sales
for the nine month periods ended September 30, 2016 and 2015, respectively. This customer accounted for 0% and 43% of accounts
receivable at September 30, 2016 and December 31, 2015, respectively.
A
second customer in the nutraceutical and cosmetic additives division accounted for 3% and 13% of consolidated sales for each of
the three month periods ended September 30, 2016 and 2015, respectively. This customer accounted for 2% and 13% of consolidated
sales for the nine month periods ended September 30, 2016 and 2015, respectively. This customer accounted for 0% and 24% of accounts
receivable at September 30, 2016 and December 31, 2015, respectively.
The Company periodically borrows from
officers, directors, other related individuals and from commercial lenders. In November 2015 the Company borrowed $100,000 from
a commercial lender. The loan incurs interest at 11% and is payable on November 1, 2016 (See Note 9). Interest expense related
to this loan for the three and nine months ended September 30, 2016 amounted to $2,750 and $8,250, respectively. During the three
and nine months ended September 30, 2015 interest expense related to a loan from a second commercial lender amounted to $5,175
and $23,517, respectively.
In the third quarter of 2016 the Company
commenced an offering pursuant to which it offered 11% subordinated promissory notes due in six (6) months in fifty thousand ($50,000)
dollar increments combined with 62,500 shares of the Company’s Common Stock for a maximum offering amount of $200,000 (the
“Offering”). In August and September 2016, the Company sold promissory notes totaling $150,000 to three unrelated individuals.
Two of the promissory notes totaling $100,000 are payable in February 2017 and one promissory note for $50,000 is payable in March
2017. In connection with these promissory notes sold pursuant to the Offering, the Company issued 187,500 shares of common stock
valued at $41,875 which was recorded as a debt discount and will be amortized over the term of these notes. Amortization of the
debt discounts for the three and nine months ended September 30, 2016 was $5,990. As of September 30, 2016, the outstanding balance
of these notes were $150,000. Interest expense related to these notes for the three months ended September 30, 2016 amounted to
$1,253.
Interest expense related to loans
from officers, directors and other related individuals amounted to $313 and $9,531 for the nine month periods ended September 30,
2016 and 2015, respectively. Interest expense amounted to $0 and $9,247 for the three months ended September 30, 2016 and 2015,
respectively.
Total interest expense on
notes payable, inclusive of amortization of debt discount of $5,990 and $0, amounted to $15,805 and $33,048 for the nine months
ended September 30, 2016 and 2015, respectively. Total interest expense, inclusive of amortization of debt discount of $5,990 and
$0, amounted to $9,992 and $14,422 for the three months ended September 30, 2016 and 2015, respectively.
The
Company is not expected to have taxable income in 2016 and incurred a loss for the year ended December 31, 2015 and accordingly,
no provision for federal income tax has been made in the accompanying financial statements. At December 31, 2015, the Company
had available net operating loss carryforwards of approximately $2,730,000, expiring during various years through 2035.
A
summary of the deferred tax asset using an approximate 34% tax rate is as follows:
|
Deferred Tax Asset
|
|
$
|
930,000
|
|
|
Valuation allowance
|
|
|
(930,000
|
)
|
|
Total
|
|
$
|
-
|
|
The
net operating loss carryforwards could be subject to limitation in any given year in the event of a change in ownership as defined
by IRC Section 382.
The deferred
tax benefit included in the 2015 statement of operations represents the change in the deferred tax liability at each balance sheet
date.
The
difference between the statutory and the effective tax rate is primarily due to a change in valuation allowance on deferred taxes,
as the Company has fully reserved the deferred tax asset resulting from available net operating loss carryforwards.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
On April 1, 2016, the Company entered
into two agreements with two consultants to provide services over a nine month period in exchange for 2,300,000 shares of common
stock. The Company calculated a fair value of $690,000 based on the market price of the shares on the date of the agreements. During
the third quarter of 2016, the Company and the consultants renegotiated the agreements by extending the service requirement to
December 31, 2017. For the three and nine months ended September 30, 2016, the Company has recognized expense of $76,667 and $306,667,
respectively, in connection with these agreements.
On September 1, 2016, the Company
issued 200,000 shares of common stock for $46,000. In connection with this issuance the Company issued 100,000 warrants with an
exercise price of $0.50 per share. These warrants are fully vested and expire in two years.
In August 2016, the Company issued
125,000 shares of common stock pursuant to sale of two promissory notes in the Offering.
In September 2016, the Company issued
62,500 shares of common stock pursuant to the sale of one promissory note in the Offering.
In the third quarter of 2016, the
Company purchased 19,363 shares of outstanding Company common stock through an exchange for a price per share of $0.23 to $0.26.
As of the September 30, 2016, these shares being held by the Company valued at cost is $4,720 and are included in treasury stock
in the consolidated balance sheet.
Service-Based
Stock Options
In
May 2016, the Company issued 175,000 service-based options valued at $40,829 to two consultants at exercise prices of $0.20 per
share. The options are fully vested and expire in 10 years.
In
July 2016, the Company issued 50,000 service-based options valued at $12,398 to a consultant with an exercise price of $0.20 per
share. The options are fully vested and expire in 10 years.
Accordingly,
stock based compensation for the three and nine months ended September 30, 2016 included $12,398 and $53,227, respectively, related
to such options.
A
Summary of the outstanding service-based options are as follows:
|
|
|
Number of
Options
|
|
|
Balance at December 31, 2015
|
|
|
11,025,273
|
|
|
Cancelled
|
|
|
(250,000
|
)
|
|
Issued
|
|
|
225,000
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
11,000,273
|
|
All
outstanding options are exercisable and have a cashless exercise provision, and certain options provide for accelerated vesting
provisions and modifications, as defined, if the Company is sold or acquired. The intrinsic value of options outstanding and exercisable
at September 30, 2016 amounted to $750,294.
The
significant assumptions used to determine the fair values of options issued, using a Black-Scholes option-pricing model are as
follows:
|
Significant assumptions :
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
0.78%
- 1.88
|
%
|
|
Expected stock price volatility
|
|
|
222.9%
- 248.4
|
%
|
|
Expected dividend payout
|
|
|
—
|
|
|
Expected option life-years
|
|
|
2 - 3
|
|
|
Weighted average grant date fair value
|
|
$
|
0.22 - 0.26
|
|
|
Forfeiture rate
|
|
|
0
|
%
|
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
5.
|
Stockholders’
Equity (continued)
|
Service-Based
Stock Options (continued)
The
following is a summary of outstanding service-based options at September 30, 2016:
|
Exercise Price
|
|
Number of
Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
1,680,273
|
|
|
|
2 years
|
|
|
$0.20 - $0.25
|
|
|
8,170,000
|
|
|
|
6 years
|
|
|
$0.40
|
|
|
1,150,000
|
|
|
|
5 years
|
|
|
Total
|
|
|
11,000,273
|
|
|
|
|
|
Performance-Based
Stock Options
The
Company had granted performance-based options to purchase 4,400,000 shares of common stock at exercise prices of $0.40 to $0.80.
The options expire at various dates between 2021 and 2026 and are exercisable upon the Company achieving annual sales revenue
of $5,000,000 and $10,000,000. The fair value of these performance-based options aggregated $169,035 to be expensed over the implicit
service period commencing once management believes the performance criteria will be met.
Management
believes the performance criteria for options exercisable upon the Company achieving annual sales revenue of $5,000,000, with
a fair value amounting to $133,324, will be met during the year ended December 31, 2016. Accordingly, stock based compensation
expense for the three and nine months ended September 30, 2016 includes $55,591 and $133,324, respectively, related to such options.
At September 30, 2016, the unearned compensation for all the performance based options is $35,711.
Stock based
compensation expense amounted to $165,241 and $10,500 for the three month periods ended September 30, 2016 and 2015, respectively.
Stock based compensation expense amounted to $513,804 and $14,500 for the nine month periods ended September 30, 2016 and 2015,
respectively. Such amounts are included in compensation and related expenses in the accompanying statement of operations.
Warrants
In
September 2016, the Company issued 100,000 warrants with an exercise price of $0.50 per share, in relation to a sale of common
stock. These warrants are fully vested and expire in two years.
In
September 2016, the Company issued 100,000 warrants with exercise prices between $0.20 and $0.50 per share, for consulting services.
These warrants are fully vested and expire in three years. The fair value of these warrants are $20,585 and is included in compensation
and related expenses in the accompanying statement of operations.
Warrants
outstanding and exercisable amounted to 1,950,000 and 1,750,000 at September 30, 2016 and December 31, 2015, respectively. The
weighted average exercise price of warrants outstanding at September 30, 2016 is $0.19. The warrants expire during November 2016
and September 2019.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
The Company was subject to
a royalty agreement based upon sales of certain skin care products. The agreement required the Company to pay a royalty based
upon 8% of such sales, up to $227,175. During the year ended December 31, 2015 the Company’s sales reached the maximum amount
under which the Company was required to pay a royalty under this agreement. No royalty expense was recognized for the three month
periods ended September 30, 2016 and 2015, respectively. Royalty expense amounted to $-0- and $20,157 for the nine month periods
ended September 30, 2016 and 2015, respectively. During December 2015, the Company’s President who had a 60% interest in
the royalties, converted royalties payable under the agreement in the amount of $84,868 to 499,225 shares of Company stock at
$0.17 cents per share.
Included
in accounts payable and accrued expenses at September 30, 2016 and December 31, 2015 was $56,579 in regards to this agreement.
7.
|
Commitments
and Contingencies
|
Leases
The
Company leases a plant in Kentucky under an operating lease which expired on May 31, 2016. Management is currently discussing
renewal lease options for the Kentucky plant and is operating on a month-to-month lease arrangement until a final agreement has
been accepted. Monthly base rental payments are approximately $9,000. In addition, Immudyne PR operates in Puerto Rico in space
owned by one of the parties to the joint venture. Rent expense for the three month periods ended September 30, 2016 and 2015,
was $27,706 and $15,286, respectively. Rent expense for the nine month periods ended September 30, 2016 and 2015, was $71,606
and $50,350, respectively.
Employment
and Consulting Agreements
The
Company has entered into various agreements with officers, directors, employees and consultants that expire in one to five years.
The agreements provide for annual compensation of up to $145,000 and the issuance of stock options, at exercise prices of $0.40
and $0.80, to purchase 4,400,000 shares of common stock issuable upon the Company’s revenue exceeding $5,000,000 and $10,000,000,
as defined. In addition, the agreements provide for bonus compensation to these individuals aggregating up to 15% (with no individual
having more than 5%) of the Company’s pretax income.
Restricted
Stock and Options
The Company has entered into
two agreements on April 1, 2016 with two consultants of Immudyne PR for business development, marketing and sales related services
(the “Consultant Agreements”). The consultants are treated as employees for accounting purposes. Upon signing, each
consultant was issued 1,000,000 restricted shares of Immudyne, Inc. common stock. In addition, each consultant shall receive an
additional 150,000 restricted shares of Immudyne, Inc. common stock for each $500,000 distributed by Immudyne PR to the Company.
For each consultant the amount of shares to be issued by the Company to the consultants shall be capped at 1,500,000 restricted
shares when Immudyne PR has transferred $5,000,000 to the Company, for a combined capped total of 3,000,000 restricted shares.
For the three and nine months ended September 30, 2016, 2,300,000 restricted shares of common stock have been issued related to
these agreements. The Company valued the shares at their grant date for a value of $0.30 per share for a total of $690,000 to be
expensed over the estimated service period ending December 31, 2017.
Immudyne,
Inc.
Notes
to Consolidated Financial Statements
September
30, 2016
(unaudited)
7.
|
Commitments
and Contingencies (continued)
|
Restricted
Stock and Options (continued)
In
addition, the Consulting Agreements provided that each consultant shall receive a bonus of an additional 750,000 restricted shares
of Immudyne Inc. common stock, plus an option to buy 1,000,000 shares of Immudyne, Inc. common stock at $0.20/share (including
a cashless exercise feature) when Immudyne PR has transferred to the Company at each of the following three (3) thresholds: $1,250,000,
$2,000,000 and $3,000,000 for a total of 2,250,000 of restricted shares of Immudyne, Inc. common stock and options to purchase
up to 3,000,000 shares of Immudyne, Inc. common stock at $0.20/share. As of September 30, 2016, no bonus shares have been issued
and no options have been granted under this agreement.
Legal
Matters
In
the normal course of business operations the Company may become involved in various legal matters. At September 30, 2016, the
Company’s management does not believe that there are any potential legal matters that could have an adverse effect on the
Company’s financial position.
8.
|
Related
Party Transactions
|
For the three and nine months
ended September 30, 2016 one of the Company’s directors, acting as an advisor for the Company, provided legal and business
advisory services and was compensated $6,000 and $15,000, respectively. During 2015 there was no compensation to this director.
In addition, for the three and nine months ended September 30, 2016 the Company’s President received $6,000 and $20,000,
respectively, for reimbursement of home office expenditures, including rent, utilities and other related expenses for two offices.
During 2015 the Company’s president was not reimbursed for home office expenditures.
The Company has evaluated
subsequent events through the date these financial statements were issued. In October 2016, the Company made principle payments
amounting to $18,800 on the outstanding promissory notes. In November 2016, the Company repaid the outstanding balance of the $100,000
commercial lender note. In October 2016, the Company sold an additional unit of the Offering borrowing $50,000 and issuing 62,500
of common stock. In October 2016, the Company purchased 27,637 shares of Company common stock at a cost of $7,382.
*
* * * *