Notes to Consolidated Financial Statements
September 30, 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 September 30, 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 September 30, 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
September 30, 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 Accounting Standard Codification (“ASC”) 810 Consolidation.
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 VIE’s. 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 September 30, 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 are included in the financial statements of Immudyne PR and further included in the consolidated financial
statements. As of September 30, 2017, the VIEs had assets of $3,096, liabilities of $10,146, revenues of $1,487, and operating
expenses of $2,119. 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 VIEs 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, chargebacks and other fees charged by such merchant bank is transferred to Immudyne
PR.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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 derivative
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 had reported the potential settlement obligation as a derivative liability. In the third quarter of 2017, the Company obtained
a majority of shareholders’ approval and amended its Articles of Incorporation to increase the number of shares of its authorized
common stock, therefore the derivative liability is no longer applicable.
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 September 30, 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 September 30, 2017
and December 31, 2016, the Company recorded an inventory reserve in the amount of $20,000. Inventory consists of the following:
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
68,852
|
|
|
$
|
38,460
|
|
|
Finished products
|
|
|
308,948
|
|
|
|
121,810
|
|
|
|
|
$
|
377,800
|
|
|
$
|
160,270
|
|
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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 $149,000 and $1,578,000 in the nine months ended September 30, 2017 and 2016, respectively. Customer discounts,
returns and rebates approximated $99,000 and $530,000 in the three months ended September 30, 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 nine months ended
September 30, 2017 consisted of nutraceutical and cosmetic additives ($981,356) and finished cosmetic products ($2,602,258). Revenue
for the nine months ended September 30, 2016 consists of nutraceutical and cosmetic additives ($757,961) and finished cosmetic
products ($3,494,743).
Revenue for the three months
ended September 30, 2017 consisted of nutraceutical and cosmetic additives ($277,463) and finished cosmetic products ($1,774,271).
Revenue for the three months ended September 30, 2016 consists of nutraceutical and cosmetic additives ($229,741) and finished
cosmetic products ($1,154,688).
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, 2017 and December 31, 2016,
the accounts receivable reserve was approximately $-0- and $37,800, respectively. As of September 30, 2017 and December 31, 2016,
the reserve for sales returns and allowances was approximately $26,000 and $50,500, respectively.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
1,615,632
|
|
|
$
|
556,234
|
|
|
Finished Cosmetic Products
|
|
|
763,609
|
|
|
|
422,288
|
|
|
Eliminations
|
|
|
(1,041,790
|
)
|
|
|
(188,698
|
)
|
|
Total
|
|
$
|
1,337,451
|
|
|
$
|
789,824
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
277,463
|
|
|
$
|
229,741
|
|
|
$
|
981,356
|
|
|
$
|
780,961
|
|
|
Finished Cosmetic Products
|
|
|
1,774,271
|
|
|
|
1,154,688
|
|
|
|
2,602,258
|
|
|
|
3,494,743
|
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,000
|
)
|
|
Total
|
|
$
|
2,051,734
|
|
|
$
|
1,384,429
|
|
|
$
|
3,583,614
|
|
|
$
|
4,252,704
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Net (loss) income by segment:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Nutraceutical and Cosmetic Additives
|
|
$
|
(1,244
|
)
|
|
$
|
141
|
|
|
$
|
180,388
|
|
|
$
|
115,083
|
|
|
Finished Cosmetic Products
|
|
|
145,563
|
|
|
|
41,017
|
|
|
|
(170,119
|
)
|
|
|
171,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
(417,886
|
)
|
|
|
(248,862
|
)
|
|
|
(884,299
|
)
|
|
|
(753,035
|
)
|
|
Other income (expense)
|
|
|
(378,324
|
)
|
|
|
(9,992
|
)
|
|
|
(154,101
|
)
|
|
|
(15,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
$
|
(651,891
|
)
|
|
$
|
(217,696
|
)
|
|
$
|
(1,028,131
|
)
|
|
$
|
(482,237
|
)
|
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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” and ASC 505-50 “Equity-Based Payments to Non-Employees”. 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, 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. The diluted earnings per share
computation includes the effect, if any, of shares that would be issuable upon the exercise of outstanding stock options, warrants,
derivative liability and convertible debt, reduced by the number of shares which are assumed to be purchased by the Company from
the resulting proceeds at the average market price during the period, when such amounts are dilutive to the earnings per share
calculation.
The weighted average number of
common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, was 4,907,700 for the
three months ended September 30, 2017.
Common stock equivalents comprising
shares underlying 9,335,800 options and warrants for the nine months ended September 30, 2017 have not been included in the loss
per share calculation as the effects are anti-dilutive. Common stock equivalents comprising shares underlying 12,950,273 options
and warrants for the nine months ended September 30, 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
September 30, 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 because the Company’s business
focuses on e-commerce retail sales and commercial sales that do not use written contacts, rather the use of implied contracts recognizing
the sale when goods are ordered on our e-commerce platform or invoiced, respectively.
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.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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 13% and 13% of consolidated sales for the three-month periods ended September 30,
2017 and 2016, respectively. This customer accounted for 25% and 2% of consolidated sales for the nine month periods ended September
30, 2017 and 2016, respectively. This customer also accounted for 36% and 11% of the consolidated accounts receivable at September
30, 2017 and December 31, 2016, respectively.
In the finished cosmetic products
division, none of the credit card processors had a significant concentration of accounts receivable at September 30, 2017. In the
finished cosmetic products division, two credit card processors accounted for 35% and 32% of the consolidated 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. Interest
expense related to this loan for the period ended March 31, 2016 amounted to $3,063. In October 2016, the Company repaid the entire
principal balance.
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 nine months ended September 30, 2017 was $25,035. There was no amortization of debt discount during the
third quarter of 2017. During 2016, the Company repaid $68,600 of the principal balance. Interest expense related to these notes
for the nine months ended 2017 amounted to $131,117. 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, which satisfied the note in full. 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.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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 incurred 11% interest per annum and matured 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 which satisfied the note in full. 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. On April 17, 2017, the Company repaid this loan. In June 2017, the Company borrowed $74,043 from an American Express working
capital line with 90 days maturity. The interest for this loan is a flat fee of $1,111. On August 30, 2017, the Company repaid
this loan. In September 2017, the Company borrowed $77,333 from an American Express working capital line with 90 days maturity.
The interest for this loan is a flat fee of $1,160. As of September 30, 2017, there were approximately $60,000 available borrowings
under the working capital line.
Interest expense related to loans
from officers, directors and other related individuals amounted to $1,713 and $313 for the nine month periods ended September 30,
2017 and 2016, respectively. There was no interest expense for the three months ended September 30, 2017 and 2016 related to loans
from officers, directors and other related individuals as there were no loans outstanding during the three months ended September
30, 2017.
Total interest expense on notes
payable amounted to $650,718 and $15,805 for the nine months ended September 30, 2017 and 2016, respectively. Total interest expense
amounted to $1,111 and $9,992 for the three months ended September 30, 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 September 30, 2017, the Company had available net operating
loss carryforwards of approximately $5,032,100, 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
|
|
$
|
1,679,000
|
|
|
Accounts receivable reserves
|
|
|
-
|
|
|
Inventory reserves
|
|
|
7,000
|
|
|
Stock compensation
|
|
|
389,000
|
|
|
Net deferred tax asset
|
|
|
2,084,000
|
|
|
Valuation allowance
|
|
|
(2,084,000
|
)
|
|
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 well as a permanent difference
from the change in derivative liability. 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, 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 nine and three months ended September 30, 2017, the Company has recognized expense of $230,000 and
$76,667, respectively, in connection with these agreements. For the nine and three months ended September 30, 2016, the Company
has recognized expense of $230,000 and $76,667, respectively. As of September 30, 2017 and December 31, 2016, the unamortized portion
of these service agreements are $76,667 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 190,200 shares of outstanding Company common stock for a price per share of $0.24 to $0.45. As
of the September 30, 2017, a total of 515,200 shares are being held by the Company valued at cost is $163,701 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 issuance of a $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).
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. The fair value of the shares and warrants issued were determined to be $131,103, of which $81,103 was included in general
and administrative expense as loss on settlement of other payables.
During the second quarter of
2017 the Company received subscriptions in the amount of 110,000 shares and issued 55,000 warrants and proceeds in the amount of
$25,300.
On June 1, 2017, the Company entered into an agreement
with a consultant to provide services, with a six month term, and issued 125,000 shares of common stock as compensation. The shares
were valued at $45,000 and the Company is recognizing the expense over the term of the agreement. For the three months ending September
30, 2017, $22,500 has been expensed and included in compensation and related expenses on the consolidated statement of operations.
In July 2017, the Company and
JLS Ventures entered into a separate three year incentivized second amendment to a Service Agreement effective July 1, 2017. As
compensation, the Company issued 900,000 shares of common stock valued at $270,000.
In July 2017, Mark McLaughlin,
the Company’s President and Chief Executive Officer, exercised 1,500,000 warrants on a cashless basis and was issued 1,140,000
shares of common stock.
In July 2017, Mark McLaughlin
exercised 1,000,000 options on a cashless basis and was issued 800,000 shares of common stock.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
In July 2017, Mark McLaughlin
exercised 339,473 options on a cashless basis and was issued 271,579 shares of common stock.
In August 2017, the Company issued 100,000 shares
of common stock valued at $40,000 to Acorn Management Partners L.L.C. (“Acorn”) for financial advisory, strategic business
planning and other investor relation services. The Company is recognizing the expense over the term of the agreement. For the three
months ending September 30, 2017, $26,667 has been expensed and included in compensation and related expenses on the consolidated
statement of operations.
In August 2017, the Company issued
50,000 shares of common stock valued at $20,000 to BV Global Fulfillment, LLC (“BV Global”) for fulfillment services.
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 nine months ended September
30, 2017, the net loss of Immudyne PR attributed to the noncontrolling interest amounted to $41,752. For the nine months ended
September 30, 2016, the net income of Immudyne PR attributed to the noncontrolling interest amounted to $6,439.
For the three months ended September
30, 2017, the net income of Immudyne PR attributed to the noncontrolling interest amounted to $27,172. For the three months ended
September 30, 2016, the net income of Immudyne PR attributed to the noncontrolling interest amounted to $8,955.
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.
In July 2017, the Company issued
75,000 service-based options valued at $30,438 to Brunilda McLaughlin as additional compensation in an employment agreement. These
options have an exercise price of $0.35 per shares, are fully vested, and expire in 10 years.
In July 2017, the Company issued
300,000 service-based options valued at $121,753 to three directors with an exercise price of $0.35 per share. The options are
fully vested and expire in 10 years. The Company is recognizing the expense over the term of the agreements. For the three months
ending September 30, 2017, $10,146 has been expensed and included in compensation and related expenses on the consolidated statement
of operations.
In July 2017, the Company issued
125,000 service-based options valued at $49,219 to a consultant with an exercise price of $0.40 per share. The options are fully
vested and expire in 5 years.
In July 2017, the Company issued
Mark McLaughlin a ten year option to buy 750,000 shares at $0.35 vesting one-third or 250,000 shares upon signing, and 250,000
shares on July 1, 2018 and 250,000 shares on July 1, 2019. Once the options are fully vested, they expire in 10 years. The options
vested at September 30, 2017 are valued at $101,461.
Accordingly, stock based compensation
expense for the nine months ended September 30, 2017 and 2016 included $406,247 and $40,829, respectively, related to such service-based
stock options. Stock based compensation expense for the three months ended September 30, 2017 and 2016 included $292,725 and $40,829,
respectively, related to such service-based stock options.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
A summary of the outstanding service-based options
are as follows:
|
|
|
Number of
Options
|
|
|
Balance at December 31, 2016
|
|
|
10,700,273
|
|
|
Issued
|
|
|
1,250,000
|
|
|
Exercised
|
|
|
(1,339,473
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
10,610,800
|
|
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 September 30, 2017
and December 31, 2016 amounted to $2,079,564 and $704,794, respectively.
Service-Based Stock Options (continued)
The significant assumptions used to determine the
fair values of options issued in 2017, using the Black-Scholes option-pricing model are as follows:
|
Significant assumptions:
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.49% -1.55
|
%
|
|
Expected stock price volatility
|
|
|
214% - 217
|
%
|
|
Expected dividend payout
|
|
|
—
|
|
|
Expected option life-years
|
|
|
3 years
|
|
|
Weighted average grant date fair value
|
|
$
|
0.23 - 0.43
|
|
|
Forfeiture rate
|
|
|
0
|
%
|
The following is a summary of outstanding service-based
options at September 30, 2017:
|
Exercise Price
|
|
Number of
Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
40,800
|
|
|
1 year
|
|
$0.20 - $0.25
|
|
|
8,620,000
|
|
|
5 years
|
|
$.35
|
|
|
625,000
|
|
|
10 years
|
|
$0.40
|
|
|
1,325,000
|
|
|
4 years
|
|
Total
|
|
|
10,610,800
|
|
|
|
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.
During 2016, the Company met
the performance criteria and accordingly, recorded stock based compensation expense of $165,241 and $513,804 for the three and
nine months ended September 30, 2016, respectively.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
Unvested
In February 2017, the Company
granted performance-based options to purchase 250,000 shares of common stock at exercise prices of $0.40. The options expire in
2027 and are exercisable upon the Company achieving annual sales revenue of $5,000,000. The options are valued at $55,439.
During 2017, the Company is expected
to meet the performance criteria and accordingly, recorded stock based compensation expense of $27,719 for the three and nine months
ended September 30, 2017, respectively.
The Company granted performance-based
options to purchase 900,000 shares of common stock at exercise price of $0.80. The options expire at various dates between 2021
and 2027 and are exercisable upon the Company achieving annual sales revenue of $10,000,000. During 2017, these unvested options
were cancelled.
In July 2017, the Company granted
performance-based options to purchase 6,000,000 shares of common stock with an exercise prices of $0.35 per share. The options
expire in 10 years and are exercisable upon cash received by Immudyne, Inc. from Immudyne PR between $4,000,000 and $7,000,000.
The aggregate fair value of these performance-based options is $2,446,739.
In the third quarter of 2017,
the Company granted performance-based options to purchase 3,150,000 shares of common stock with an exercise prices of $0.25 per
share. The options expire in 10 years and are exercisable upon the company achieving pre-tax earnings benchmarks between $4,000,000
and $7,000,000. The aggregate fair value of these performance-based options is $1,284,538.
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
|
|
|
1,954,891
|
|
|
$
|
0.19
|
|
|
2017 - 2019
|
|
Issued
|
|
|
2,566,367
|
|
|
|
0.40
|
|
|
2019 - 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,500,000
|
)
|
|
|
0.12
|
|
|
|
|
Balance at September 30, 2017
|
|
|
3,021,258
|
|
|
|
0.40
|
|
|
2017 - 2020
|
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.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
5.
|
Stockholders’ Equity (continued)
|
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 1,408,578 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.
In April 2017, the Company issued
55,000 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.
In April 2017, the Company issued
108,696 warrants with an exercise price of $0.40 per share, in relation to an issuance of common stock for conversion of a payable.
These warrants are fully vested and expire in three years.
The fair value of warrants granted
during the period ended September 30, 2017, was estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
|
Expected volatility
|
|
|
125% - 214%
|
|
|
Risk free interest rate
|
|
|
1.31% - 2.57%
|
|
|
Expected dividend yield
|
|
|
-
|
|
|
Expected term (in years)
|
|
|
0.9 - 8.1
|
|
|
Weighted average grant date fair value
|
|
|
$0.12 - 0.45
|
|
As of 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 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 $192,254, based on Level 2 valuation inputs.
On September 21, 2017, the Company
obtained majority shareholder approval and amended its Articles of Incorporation to increase the number of shares of its authorized
common stock, therefore the derivative liability is no longer applicable.
Stock Based Compensation
The total stock based compensation
expense related Service-Based Stock Options and Performance-Based Stock Options and Warrants amounted to $142,045 and $40,829 for
the nine months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017 and 2016, total
stock based compensation amounted to $28,523 and $40,829, respectively. Such amounts are included in compensation and related expenses
in the accompanying statement of operations.
Common stock issued for services
amounted to $319,313 and $230,000 for the nine months ended September 30, 2017 and 2016, respectively. For the three months ended
September 30, 2017 and 2016, common stock issued for services amounted to $158,480 and $-0-, respectively. Such amounts are included
in compensation and related expenses in the accompanying statement of operations.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
The Company is subject to a royalty
agreement based upon sales of certain hair care products. For the three and nine months ended September 30, 2017, the Company recognized
$53,206 and $65,318, respectively, in royalty expense related to this agreement. As of September 30, 2017, the $65,318 was included
in accounts payable and accrued expenses in regards to this agreement. In addition, the Company shall pay a performance fee in
relation to this agreement. In April 2017, the Company issued 217,390 shares of common stock and 108,696 warrants, pursuant to
a subscription agreement, for the stated consideration and satisfaction of obligation to pay $50,000 of the performance fee (see
Note 7).
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 nine month periods ended September 30, 2017 and 2016, was $120,161 and $71,606, respectively. Rent expense for
the three month periods ended September 30, 2017 and 2016, was $46,061 and $27,706, 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.
In August 2017, the Company entered
into a Professional Service Agreement with Acorn Management Partners L.L.C. (“Acorn”) for financial advisory, strategic
business planning and other investor relation services for a year of one year effective August 8, 2017. During the term of the
Agreement, Acorn shall receive $7,500 cash monthly. As additional compensation, the Company shall issue within five (5) days of
signing 100,000 shares of the Company’s common stock and upon each three (3) month period thereafter during the term of the
Agreement an additional 100,000 shares of the Company’s common stock for a total of 400,000 shares of the Company’s
common stock.
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, 2017, -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 September 30, 2017, no bonus shares have been issued and no options have been
granted under these agreements.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 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 shall 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. For the three and nine months ended September 30, 2017, the Company recognized
expenses related to the performance fee in the amount of $16,667 and $100,000, respectively. In April 2017, the Company issued
217,390 shares of common stock and 108,696 warrants, pursuant to a subscription agreement, for the stated consideration and satisfaction
of obligation to pay $50,000 on the 180-day anniversary of the execution of this agreement. As of September 30, 2017, the balance
in accounts payable and accrued expenses is $0 expense related to this agreement.
Legal Matters
In the normal course of business
operations, the Company may become involved in various legal matters. At September 30, 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 and nine months ended September 30, 2016
this director was compensated $6,000 and $15,000, respectively. During 2017, legal and business advisory services were provided
to the Company by one of its directors. For the three and nine months ended September 30, 2016 this director was compensated $3,000
and $7,500, respectively.
During the nine months ended
September 30, 2017 and 2016, the Company’s President received $18,000 and $20,000, respectively for reimbursement of home
office expenditures, including rent, utilities and other related expenses for two offices. During the three months ended September
30, 2017 and 2016, the Company’s President received $6,000 and $6,000, respectively for reimbursement of these expenses.
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 $138,687 and $181,244 for the three and nine months
ended September 30, 2017, respectively, for these services. During the three and nine months ended September 30, 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. JLS Ventures LLC 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. JSDC, Inc. 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 October 2, 2017, Robert Kalkstein
was appointed as the Chief Financial Officer of Immudyne, Inc. The Company entered into a consulting agreement with Mr. Kalkstein,
which provides, among other things, for a fee of $2,750 per month through December 2017, $5,000 per month between January 2018
and March 2018 and $7,500 per month between April 2018 and September 2018. Additionally, Mr. Kalkstein was granted an option to
purchase 500,000 shares of the Company’s common stock at $0.40 per share, subject to the approval of the board of directors
of the Company and certain vesting requirements set forth in the consulting agreement.
Immudyne, Inc.
Notes to Consolidated Financial Statements
September 30, 2017
(unaudited)
9.
|
Subsequent Events
(continued)
|
In October 2017, the Company
appointed Michael T. Bornstein, MD, PHD to the Board of Directors. As part of the compensation, the Company issued a ten year,
fully vested option to purchase 100,000 shares of common stock at an exercise price of $0.35 per share. In addition, the Company
issued ten year options that vest upon the Company achieving pre-tax earnings benchmarks between $4,000,000 and $7,000,000. The
exercise price for the options are $0.25 and $0.35 per share.
In November 2017, the Company
issued 135,721 shares of common stock and 67,861 warrants pursuant to a conversion of Immudyne PR equity contributions of $31,216
into equity of Immudyne, Inc. by the noncontrolling interest.
10.
|
Restatement of Financial Statements
|
The September 30, 2016 financial
statements were restated to reclassify marketing expense that was recorded in cost of goods sold to marketing expenses. There were
no other changes to the financial statements. These reclassifications have no impact on previously reported net income.
The following table
shows the changes made to the September 30, 2016 income statement.
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2016
|
|
|
September 30, 2016
|
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
Net sales
|
|
$
|
1,384,429
|
|
|
$
|
|
|
|
$
|
1,384,429
|
|
|
$
|
4,252,704
|
|
|
$
|
|
|
|
$
|
4,252,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
942,738
|
|
|
|
(554,536
|
)
|
|
|
388,202
|
|
|
|
2,981,657
|
|
|
|
(1,713,337
|
)
|
|
|
1,268,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
441,691
|
|
|
|
|
|
|
|
996,227
|
|
|
|
1,271,047
|
|
|
|
|
|
|
|
2,984,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
|
361,829
|
|
|
|
|
|
|
|
361,829
|
|
|
|
1,077,340
|
|
|
|
|
|
|
|
1,077,340
|
|
|
Professional fees
|
|
|
82,608
|
|
|
|
|
|
|
|
82,608
|
|
|
|
277,282
|
|
|
|
|
|
|
|
277,282
|
|
|
Marketing expenses
|
|
|
-
|
|
|
|
554,536
|
|
|
|
554,536
|
|
|
|
-
|
|
|
|
1,713,337
|
|
|
|
1,713,337
|
|
|
General and administrative expenses
|
|
|
204,958
|
|
|
|
|
|
|
|
204,958
|
|
|
|
382,857
|
|
|
|
|
|
|
|
382,857
|
|
|
Total operating expenses
|
|
|
649,395
|
|
|
|
|
|
|
|
1,203,931
|
|
|
|
1,737,479
|
|
|
|
|
|
|
|
3,450,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(207,704
|
)
|
|
|
|
|
|
|
(207,704
|
)
|
|
|
(466,432
|
)
|
|
|
|
|
|
|
(466,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(9,992
|
)
|
|
|
|
|
|
|
(9,992
|
)
|
|
|
(15,805
|
)
|
|
|
|
|
|
|
(15,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Before Taxes
|
|
|
(217,696
|
)
|
|
|
|
|
|
|
(217,696
|
)
|
|
|
(482,237
|
)
|
|
|
|
|
|
|
(482,237
|
)
|
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(217,696
|
)
|
|
|
|
|
|
|
(217,696
|
)
|
|
|
(482,237
|
)
|
|
|
|
|
|
|
(482,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
8,955
|
|
|
|
|
|
|
|
8,955
|
|
|
|
6,439
|
|
|
|
|
|
|
|
6,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) attributable to Immudyne, Inc.
|
|
$
|
(226,651
|
)
|
|
|
|
|
|
$
|
(226,651
|
)
|
|
$
|
(488,676
|
)
|
|
|
|
|
|
$
|
(488,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) per share attributable to Immudyne, Inc.
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,427,087
|
|
|
|
|
|
|
|
34,427,087
|
|
|
|
31,917,873
|
|
|
|
|
|
|
|
31,917,873
|
|
|
Diluted
|
|
|
34,427,087
|
|
|
|
|
|
|
|
34,427,087
|
|
|
|
31,917,873
|
|
|
|
|
|
|
|
31,917,873
|
|
* * * * *