Notes to Consolidated Financial Statements
March 31, 2017
(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 (“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 increasing its ownership to 78.1667% 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. In the second quarter of 2017, Immudyne PR expanded their product
line and launched their in-licensed patented hair loss shampoo and conditioner.
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
March 31, 2017, the Company has an accumulated deficit approximating $10.7 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 March 31, 2017, and projected cash needs for 2017, management estimates
that it will need to increase sales revenue and/or raise additional capital to cover operating and capital requirements for the
remainder of the 2017 year. Management will need to 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
March 31, 2017
(unaudited)
2.
|
Summary of Significant Accounting Policies
|
Principles of
Consolidation
The Company evaluates the need to consolidate affiliates
based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The consolidated financial statements include the accounts
of the Company and its majority owned subsidiary, Immudyne PR and variable interest entities (VIE’s) in which the Company
has been determined to be the primary beneficiary. The non- controlling interest in Immudyne PR represents the 21.8333% equity
interest held by other members of the joint venture. All significant consolidated transactions and balances have been eliminated
in consolidation.
Variable Interest Entities
The Company follows ASC 810-10-15 guidance with respect
to accounting for variable interest entities (each, a “VIE”). These entities do not have sufficient equity at risk
to finance their activities without additional subordinated financial support from other parties or whose equity investors lack
any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will
absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership,
or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the
primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests,
that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets
both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most
significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right
to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration
of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.
As of March 31, 2017 and December 31, 2016, the Company
consolidated nine VIEs.
Immudyne PR as the primary beneficiary of Ace Account Management LLC, Innerwell Skincare LLC, MCD Merchants
LLC, One Equity Research LLC, Inate Gems LLC, Retriever Health Products LLC, Spurs 5, LLC, Salus LLC and Huntley LLC which are
qualified as VIEs. The assets and liabilities and revenues and expenses of these VIEs included in the financial statements of Immudyne
PR and further included in the consolidated financial statements. As of March 31, 2017, the VIEs had assets of $19,421, liabilities
of $5,748, revenues of $981, and operating expenses of $953. As of December 31, 2016, the VIEs had assets of $10,306, liabilities
of $5,748. The assets and liabilities include balances due from and due to the subsidiaries of Immudyne PR. Any inter-company receivables
and payables are eliminated upon consolidation of the VIE with Immudyne PR and Immudyne, Inc. No assets were pledged or given as
collateral against any borrowings.
The Company utilizes third party entities to provide
and increase credit card processing capacity and optimize corresponding rates and fees. A majority of these entities provide this
service as independent contractors in exchange for a one percent (1%) fee of the net revenues processed and collected by such
contractors from sales initiated by the Company. The VIEs consolidated in the Company’s financial statements are primarily
contracted to provide credit card processing through one or more merchant banks. Upon receipt of funds by each VIE, the collection
of receipts less any returns, chargeback and other fees charged by such merchant bank is transferred to Immudyne PR.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Use of Estimates
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 determination of reserves for accounts receivable, returns and allowances, the accounting for derivatives, the valuation
of inventory and stockholders’ equity based transactions. Actual results could differ from those estimates.
Derivative Liabilities
Under ASC 815-40-05, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in
a Company’s Own Stock, in the event the Company does not have a sufficient number of authorized and unissued shares of common
stock to satisfy obligations for stock options, warrants and other instruments potentially convertible into common stock, the fair
value of these instruments should be reported as a liability. Pursuant to the outstanding option, warrant and convertible debt
agreements, there is currently no effective registration statement covering the shares of common stock underlying these agreements,
which are currently subject to a cashless exercise whereby the holders, at their option, may surrender their options and warrants
to the company in exchange for shares of common stock. The number of shares of common stock into which an option or a warrant would
be exchangeable in such a cashless exercise depends on both the exercise price of the options or warrant and the market price of
the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the Company
could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the Company were unable to obtain
shareholder approval to increase the number of authorized shares, the Company could be obligated to settle such a cashless exercise
with cash rather than by issuing shares of common stock. Further, ASC 815-40-05 requires that the Company record the potential
settlement obligation at each reporting date using the current estimated fair value of these contracts, with any changes in fair
value being recorded through our statement of operations. The Company will continue to report the potential settlement obligation
as a liability until such time as these contracts are exercised or expire or we are otherwise able to modify the warrant agreement
to remove the provisions which require this treatment. The Company also plans to amend its Articles of Incorporation in the third
quarter of 2017 to increase the number of shares of its authorized common stock after the approval by its shareholders.
Sequencing Policy
Under ASC 815-40-35, the Company
has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is
necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares, shares will
be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving
the first allocation of authorized but unissued shares, and all future instruments being classified as a derivative liability,
with the exception of instruments related to share-based compensation issued to employees or directors.
Inventory
At March 31, 2017 and December
31, 2016, 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.
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 March 31, 2017 and December
31, 2016, the Company recorded an inventory reserve in the amount of $20,000. Inventory consists of the following:
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
29,577
|
|
|
$
|
38,460
|
|
|
Finished products
|
|
|
107,361
|
|
|
|
121,810
|
|
|
|
|
$
|
136,938
|
|
|
$
|
160,270
|
|
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
2.
|
Summary of Significant Accounting Policies (continued)
|
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 $38,000 and $517,000 in the three months ended March 31, 2017 and 2016, respectively. 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 three months ended March 31, 2017 consisted
of nutraceutical and cosmetic additives ($256,563) and finished cosmetic products ($167,899). Revenue for the three months ended
March 31, 2016 consists of nutraceutical and cosmetic additives ($265,910) and finished cosmetic products ($1,375,118).
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 March 31, 2017 and December 31, 2016 the accounts receivable
reserve was approximately $37,800 for both periods. As of March 31, 2017 and December 31, 2016, the reserve for sales returns and
allowances was approximately $12,500 and $50,500, respectively.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(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.
The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates
the performance of segments based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).
A summary of the company’s
reportable segments is as follows:
|
Total assets:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
1,350,785
|
|
|
$
|
556,234
|
|
|
Finished Cosmetic Products
|
|
|
385,345
|
|
|
|
422,288
|
|
|
Eliminations
|
|
|
(662,428
|
)
|
|
|
(188,698
|
)
|
|
Total
|
|
$
|
1,073,702
|
|
|
$
|
789,824
|
|
|
|
|
Three Months ended
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
256,563
|
|
|
$
|
285,160
|
|
|
Finished Cosmetic Products
|
|
|
167,899
|
|
|
|
1,375,118
|
|
|
Eliminations
|
|
|
-
|
|
|
|
(19,250
|
)
|
|
Total
|
|
$
|
424,462
|
|
|
$
|
1,641,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income by segment:
|
|
|
|
|
|
|
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
26,807
|
|
|
$
|
84,777
|
|
|
Finished Cosmetic Products
|
|
|
(127,007
|
)
|
|
|
(69,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
(274,786
|
)
|
|
|
(120,708
|
)
|
|
Other income (expense)
|
|
|
(697,549
|
)
|
|
|
(3,063
|
)
|
|
Net (loss)
|
|
$
|
(1,072,535
|
)
|
|
$
|
(108,159
|
)
|
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(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, 2013, 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
March 31, 2017
(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
18,295,335 options and warrants for the three months ended March 31, 2017 have not been included in the loss per share calculation
as the effects are anti-dilutive. Common stock equivalents comprising shares underlying 12,525,273 options and warrants for the
three months ended March 31, 2016 have not been included in the loss per share calculations as the effects are anti-dilutive.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, Compensation
- Stock Compensation (Topic 718): Scope of Modification Accounting. The new standard provides guidance about which changes to the
terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement
is effective for annual reporting periods beginning after December 15, 2017 but early adoption is permitted. The Company is currently
evaluating the impact of adopting this guidance.
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 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. At this time, the adoption of this pronouncement is not expected to have a material
impact on the Company’s consolidated financial statements or related disclosures.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
2.
|
Summary of Significant Accounting Policies (continued)
|
Recent Accounting Pronouncements
(continued)
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 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.
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.
Consolidation of Variable Interest Entities
In accordance with ASC 810-10-25-37 and as amended
by ASU 2009-17, the Company determines whether any legal entity in which the Company becomes involved is a VIE and subject to consolidation.
The Company conducts an assessment on an ongoing basis for each VIE including (1) the power to direct activities of the VIE that
most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or right to receive benefits
from the VIE that could potentially be significant to the VIE. As a result, the Company determined that nine (9) entities were
VIEs and subject to consolidation.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
2.
|
Summary of Significant Accounting Policies (continued)
|
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.
One customer in the nutraceutical and cosmetic additives division accounted for 59% and 16% of consolidated
sales for the three months ended March 31, 2017 and 2016, respectively. This customer also accounted for 45% and 54% of accounts
receivable at March 31, 2017 and December 31, 2016, respectively.
In the finished cosmetic products
division, two credit card processors accounted for 42% and 35% of accounts receivable at March 31, 2017. In the finished cosmetic
products division, two credit card processors accounted for 35% and 32% of accounts receivable at December 31, 2016.
In November 2015, the Company borrowed $100,000 from
a commercial lender. The loan incurred interest at 11% and with a maturity date of November 1, 2016. In October 2016, the Company
repaid the entire principal balance. Interest expense related to this loan for the period ended March 31, 2016 amounted to $3,063.
In the third quarter of 2016 the Company commenced an offering pursuant to which it offered 11% subordinated
promissory notes 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 were payable in February
2017 and one promissory note for $50,000 was payable in March 2017. In October 2016, the Company sold promissory notes totaling
$50,000 to two unrelated individuals. These promissory notes are payable in October 2017. In connection with these promissory notes
sold, pursuant to the Offering, the Company issued 250,000 shares of common stock valued at $58,750 which was recorded as a debt
discount and will be amortized over the term of these notes. Amortization of the debt discounts for the period ended March 31,
2017 was $25,035. During 2016, the Company repaid $68,600 of the principal balance. During 2017, the Company repaid $81,420 of
the principal balance and converted the remaining balance of $49,980 into 196,000 shares of common stock and 98,000 warrants. The
fair market value of the shares and warrants issued upon conversion was determined to be $179,384, of which $129,404 was included
in interest expense as loss on settlement of notes payable. Interest expense related to these notes for the three months ended
March 31, 2017 amounted to $131,117.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
3.
|
Notes Payable (continued)
|
In December 2016, the Company borrowed $100,000 from
an officer and issued a convertible promissory note with a maturity date of February 28, 2017. The loan incurs no interest. This
note is convertible if not repaid by the maturity date at a conversion price of $0.23 per Unit. Each Unit shall consist of one
share of the Company’s common stock and one three-year common-stock warrant to purchase one-half of one share of the Company’s
common stock with an exercise price of $0.40 per share. In March 2017, the Company repaid the entire outstanding balance of this
note.
In January 2017, the Company borrowed $200,000 and issued a promissory note with a 5% original issue discount
for a total principal amount of $210,000. The loan incurs 11% interest per annum and matures in various tranches from February
2017 through April 2017. In addition, the Company issued 217,391 shares of common stock related to this note. In February 2017,
the Company repaid $70,000 of the principal balance of this note. In March 2017, the Company converted the remaining $140,000 of
the principal balance of this note and accrued interest of $2,212 in exchange for 559,179 shares of common stock and 304,348 warrants.
The fair market value of the shares and warrants issued upon conversion was determined to be $566,030, of which $423,818 was included
in interest expense as loss on settlement of notes payable.
In February 2017, the Company borrowed $25,000 from
an American Express working capital line with 60 days maturity. The interest for this loan is a flat fee of $250. As of March 31,
2017, there were no available borrowings under the working capital line.
Interest expense related to loans from officers, directors
and other related individuals amounted to $1,713 and $312 for the three months ended March 31, 2017 and 2016, respectively.
Total interest expense on notes payable, inclusive of amortization of debt discount of $91,556 and $-0-, amounted
to $649,357 and $3,063 for the three months ended March 31, 2017 and 2016, respectively.
The Company is not expected to have taxable income
in 2017 and incurred a loss for the year ended December 31, 2016 and accordingly, no provision for federal income tax has been
made in the accompanying financial statements. At March 31, 2017, the Company had available net operating loss carryforwards of
approximately $4,294,800, expiring during various years through 2037.
A summary of the deferred tax
asset using an approximate 34% tax rate is as follows:
|
Net operating loss
|
|
$
|
1,699,000
|
|
|
Accounts receivable reserves
|
|
|
17,000
|
|
|
Inventory reserves
|
|
|
7,000
|
|
|
Stock compensation
|
|
|
229,000
|
|
|
Net deferred tax asset
|
|
|
1,952,000
|
|
|
Valuation allowance
|
|
|
(1,952,000
|
)
|
|
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 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
March 31, 2017
(unaudited)
Common Stock
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 period ended March 31, 2017, the Company has
recognized expense of $76,667 in connection with these agreements. As of March 31, 2017 and December 31, 2016, the unamortized
portion of these service agreements are $230,000 and $306,667, respectively.
During 2016, the Company purchased 325,000 shares of
outstanding Company common stock through an exchange for a price per share of $0.23 to $0.29. During 2017, the Company purchased
an additional 12,800 shares of outstanding Company common stock for a price per share of $0.24 to $0.26. As of the March 31, 2017,
a total of 337,800 shares are being held by the Company valued at cost is $90,204 and are included in treasury stock in the consolidated
balance sheet.
In January 2017, the Company issued 1,183,490 shares
of common stock pursuant to a conversion of Immudyne PR equity contributions of $272,203 into equity of Immudyne, Inc. by the noncontrolling
interest.
In January 2017, the Company issued 217,391 shares
of common stock in relation to the remaining outstanding principal balance on the $210,000 note payable.
In the first quarter of 2017, the Company commenced
an offering to sell up to 4,000,000 shares of common stock at a price of $0.23 per share and warrants to purchase up to 2,000,000
shares of common stock excisable any time prior to the secondary anniversary of the issuance. The warrants are paired with the
stock on the basis of one warrant for every two shares of stock purchased. During the first quarter of 2017, the Company received
subscriptions in the amount of 2,817,156 shares and issued 1,408,578 warrants and proceeds in the amount of $647,944.
In March 2017, the Company issued 755,179 shares of common stock for the conversion of the outstanding balance
of three notes payable totaling $499,802 (see Note 3).
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
Noncontrolling Interest
On April 1, 2016, the Company increased its ownership
in Immudyne PR to 78.1667% decreasing the minority interest from 66.7% to 21.8333% resulting in a charge to noncontrolling interest
and additional paid-in-capital of $91,612.
For the three months ended March 31, 2017 and 2016,
the net loss of Immudyne PR attributed to the noncontrolling interest amounted to $27,730 and $46,110, respectively.
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 $12,397 to a consultant with an exercise price of $0.20 per share. The options are fully vested and expire in
10 years.
In November 2016, the Company issued 50,000 service-based
options valued at $9,980 to a consultant with an exercise price of $0.50 per share. The options are fully vested and expire in
2 years.
In February 2017, the Company issued 500,000 service-based options valued at $113,522 to a director 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 periods ended March 31, 2017 and 2016 included $113,522 and
$-0-, respectively, related to such service-based stock options.
A summary of the outstanding service-based
options are as follows:
|
|
|
Number
of
Options
|
|
|
Balance at December 31, 2016
|
|
|
10,700,273
|
|
|
Issued
|
|
|
500,000
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
11,200,273
|
|
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 service based options outstanding and exercisable at March 31, 2017 and December
31, 2016 amounted to $3,261,859 and $704,794, respectively.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
Service-Based Stock Options
(continued)
The significant assumptions used to determine the fair
values of options issued, using the Black-Scholes option-pricing model are as follows:
|
Significant assumptions:
|
|
|
|
|
Risk-free interest rate at grant date
|
|
1.49
%
|
|
Expected stock price volatility
|
|
216.7
%
|
|
Expected dividend payout
|
|
—
|
|
Expected option life-years
|
|
3
years
|
|
Weighted average grant date fair value
|
|
$0.24
|
|
Forfeiture rate
|
|
0
%
|
The following is a summary of
outstanding service-based options at March 31, 2017:
|
Exercise Price
|
|
Number of
Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
1,380,273
|
|
|
|
1 year
|
|
|
$0.20 - $0.25
|
|
|
8,620,000
|
|
|
|
5 years
|
|
|
$0.40
|
|
|
1,200,000
|
|
|
|
5 years
|
|
|
Total
|
|
|
11,200,273
|
|
|
|
|
|
Performance-Based Stock
Options
Vested
The Company granted performance-based options to purchase
2,925,000 shares of common stock at exercise prices of $0.40. The options expire at various dates between 2021 and 2026 and are
exercisable upon the Company achieving annual sales revenue of $5,000,000. During the year ended December 31, 2016, the Company
cancelled 287,500 of these service-based options issued to two consultants, valued at $12,457.
The fair value of the vested performance-based options
aggregated $120,867 and was expensed over the implicit service period commencing once management believed the performance criteria
was met. During 2016, the Company met the performance criteria and accordingly, recorded stock based compensation expense of $38,867
for the three months ended March 31, 2016.
Unvested
The Company granted performance-based options to purchase
1,150,000 shares of common stock at exercise prices of $0.40 and $0.80. The options expire at various dates between 2021 and 2027
and are exercisable upon the Company achieving annual sales revenue of $5,000,000 and $10,000,000. During the year ended
December 31, 2016, the Company cancelled 287,500 of these service-based options issued to two consultants, valued at $5,542.
The performance criteria for options exercisable upon the Company achieving annual sales revenue of $5,000,000
and $10,000,000 with an aggregate fair value of $85,608. As of March 31, 2017, no amounts have been expensed and the unearned compensation
for all the performance based options is $85,608.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
Warrants
The following is a summary of outstanding and exercisable
warrants:
|
|
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Year of
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
|
1,954,981
|
|
|
$
|
0.19
|
|
|
|
2017 - 2019
|
|
|
Issued
|
|
|
|
2,402,671
|
|
|
|
0.40
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
|
4,357,562
|
|
|
|
0.31
|
|
|
|
2017 - 2019
|
|
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.
In December 2016, the Company issued 37,500 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 December 2016, the Company issued 217,391 warrants
with an exercise price of $0.40 per share, in relation to an issuance of common stock. These warrants are fully vested and expire
in two years.
In January 2017, the Company issued 591,745 warrants
with an exercise price of $0.40 per share, in relation to an issuance of common stock for the conversion of an equity contribution
into Immudyne PR by the noncontrolling interest. These warrants are fully vested and expire in two years.
In March 2017, the Company issued 403,348 warrants
with an exercise price of $0.40 per share, in relation to an issuance of common stock for the conversion of debt. These warrants
are fully vested and expire in two years.
In the first quarter of 2017, the Company issued 1,407,578
warrants with an exercise price of $0.40 per share, in relation to a sale of common stock. These warrants are fully vested and
expire in two years.
The fair value of warrants granted during the period
ended March 31, 2017, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
Expected volatility
|
|
181% - 211%
|
|
|
Risk free interest rate
|
|
1.03% - 2.22
%
|
|
|
Expected dividend yield
|
|
-
|
|
|
Expected term (in years)
|
|
1.4 - 8.5
|
|
|
Weighted average grant date fair value
|
|
$
0.37 - 0.50
|
|
As of March 31, 2017 and December
31, 2016, certain of the Company’s stock options, stock warrants and convertible debt instruments were accounted for as derivative
liabilities due to insufficient authorized shares of common stock to settle outstanding contracts. At March 31, 2017 and December
31, 2016, the Company estimated the fair value of these stock options, stock warrants and embedded conversion features using the
Black-Scholes option pricing model (“Black-Scholes”) to be $1,809,890 and $192,254, based on Level 2 valuation inputs.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
Stock Based Compensation
The total stock based compensation expense related
Service-Based Stock Options, Performance-Based Stock Options and Warrants and common stock issued for service amounted to $190,189
and $38,867 for the three months ended March 31, 2017 and 2016, respectively. Such amounts are included in compensation and related
expenses in the accompanying statement of operations.
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, accordingly no royalty expense was incurred for the three month periods ended
March 31, 2017 and 2016, 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
March 31, 2017 and December 31, 2016 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. The Company’s principal executive
offices are in office space provided to us by the Company’s President, Mr. McLaughlin, at the rate of $2,000 per month, which
includes rents, utilities and other office related expenditures. This arrangement commenced as of January 1, 2016. In addition,
Immudyne PR utilizes office space in Puerto Rico which is subleased from Justin Schreiber (President of Immudyne PR) and incurs
expense of approximately $4,000 a month for this office space. Rent expense for the three month periods ended March 31, 2017 and
2016, was $36,061 and $16,616, 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 months ended March 31, 2017 and 2016, -0- restricted shares of common stock
have been issued related to these agreements. During 2016, 2,300,000 restricted shares of common stock were 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.
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 March 31, 2017, no bonus shares have been issued and no options have been granted under this
agreement.
Immudyne, Inc.
Notes to Consolidated Financial Statements
March 31, 2017
(unaudited)
7.
|
Commitments and Contingencies (continued)
|
Sole and Exclusive License,
Royalty, and Advisory Agreement
On September 1, 2016 Immudyne PR entered into a sole and exclusive license, royalty and advisory agreement
with Pilaris Laboratories, LLC (“Pilaris”) relating to Pilaris’ PilarisMax shampoo formulation and conditioner.
The term of the agreement will be the life of the US Patent held by Pilaris. As consideration for granting Immudyne PR this license,
Pilaris will receive on quarterly basis, 10% of the net income collected by the licensed products based on the following formula:
Net Income = total income – cost of goods sold – advertising and operating expenses directly related to the marketing
of the licensed products. In addition, Immudyne PR share pay Pilaris a performance fee of $50,000 on the 180-day anniversary of
the agreement and an additional $50,000 performance fee on the 365-day anniversary of the agreement. As of March 31, 2017, the
Company has accrued $58,333 expense related to this agreement.
Legal Matters
In the normal course of business operations, the Company
may become involved in various legal matters. At March 31, 2017, 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
|
During 2016, legal and business advisory services were
provided to the Company by one of its directors. For the three months ended March 31, 2016 this director was compensated $6,000.
No services were provided during the three months ended March 31, 2017.
During the three months ended March 31, 2017 and 2016,
the Company’s President received $8,000 and $8,000, respectively for reimbursement of home office expenditures, including
rent, utilities and other related expenses for two offices.
Immudyne, Inc. employs the wife of the President of the
Company as an accountant and incurs $3,000 per month, plus an annual incentive bonus award equal to 0.5% of the Company’s
pre-tax earnings.
Immudyne PR utilizes BV Global Fulfillment, owned by the father of Immudyne PR’s President, and incurred
$10,396 for the three months ended March 31, 2017 for these services. During the three months ended March 31, 2016, Immudyne PR
did not utilize BV Global Fulfillment.
Taggart International Trust (“Taggart”),
a shareholder, provides credit card processing services through one or more merchant banks. Taggart did not receive any compensation
for these services.
JLS Ventures LLC, owned by a shareholder, provides
credit card processing services through one or more merchant banks. Taggart did not receive any compensation for these services.
JSDC, Inc., owned by a shareholder, provides credit
card processing services through one or more merchant banks. Taggart did not receive any compensation for these services.
Immudyne PR utilizes office space in Puerto Rico which is subleased from the President of Immudyne PR and
incurs expense of approximately $4,000 a month for this office space.
The Company has evaluated subsequent
events through the date these financial statements were issued.
On April 24, 2017, the Company, issued 217,390 shares
of common stock pursuant to a stock subscription agreement and the Company issued 108,696 warrants with an exercise price of $0.40
per share for the stated consideration and satisfaction of obligation to pay $50,000 on the 180-day anniversary of the execution
of the Sole and Exclusive License, Royalty, and Advisory Agreement dated September 1, 2016 with Pilaris Laboratories, LLC.
* * * * *