UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 333-184487

 

IMMUDYNE, INC.

 

(Exact name of registrant as specified in its charter)

 

Delaware   76-0238453
(State or other jurisdiction of incorporation   (IRS Employer Identification No.)
or organization)    

 

50 Spring Meadow Rd.    
Mount Kisco, NY   10549
(Address of principal executive offices)   (Zip Code)

 

(914) 244-1777
(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.

YES  x    NO  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x    NO  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨
Non-accelerated filer    ¨ Smaller reporting company  x
(do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨   NO  x

30,729,973 shares of common stock outstanding as of May 14, 2015.

 

 

 

 
 

 

Immudyne, Inc.

 

Table of Contents

 

    Page
Note about Forward-Looking Statements 3
     
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information 21
Item 6. Exhibits 21
     
Signatures 22
     
Exhibit Index 23

 

2
 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our company that include, but are not limited to, projections of earnings, revenue or other financial items; statements of the plans, strategies and objectives of management for future operations; statements concerning proposed new products, services or developments; statements regarding future economic conditions or performance; statements of belief; and statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and other sections in this report. Other sections of this report include additional factors that could adversely impact our business and financial performance.

 

Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. Unless otherwise indicated, none of the independent industry publication market data cited in this report was prepared on our or our affiliates’ behalf.

 

The forward-looking statements made in this report are based only on events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

 

Additional information on the various risks and uncertainties potentially affecting our operating results are discussed in this report and other documents we file with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements.

 

As used in this report, “Immudyne,” “Company,” “we,” “our” and similar terms refer to Immudyne Inc., unless the context indicates otherwise.

 

3
 

 

PART I. FINANCIAL INFORMATION

 

Item 1.       Financial Statements

 

Immudyne, Inc.

 

Balance Sheet

 

   March 31,
2015
   December 31,
2014
 
   (unaudited)     
         
ASSETS        
Current Assets        
Cash  $70,051   $75,495 
Trade accounts receivable   73,450    14,970 
Inventory, net   43,460    41,008 
Total Current Assets   186,961    131,473 
           
Furnishings and equipment, net   29,505    43,748 
           
Total Assets  $216,466   $175,221 
           
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY          
Current Liabilities          
Accounts payable and accrued expenses  $251,455   $274,319 
Notes payable   91,943    27,200 
Total Current Liabilities   343,398    301,519 
           
Deferred tax liability   8,900    13,200 
Total Liabilities   352,298    314,719 
           
Stockholders’ (deficit) equity          
Common stock, $0.01 par value; 50,000,000 shares authorized, 30,729,973 shares issued and outstanding   307,299    307,299 
Additional paid-in capital   8,079,549    8,077,549 
Accumulated (deficit)   (8,522,680)   (8,524,346)
Total Stockholders’ (Deficit) Equity   (135,832)   (139,498)
           
Total Liabilities and Stockholders’ (Deficit) Equity  $216,466   $175,221 

 

See notes to financial statements

 

4
 

 

Immudyne, Inc.

 

Statement of Operations

(unaudited)

 

   Three Months Ended
March 31
 
   2015   2014 
         
Sales  $288,277   $192,429 
           
Cost of sales   74,216    49,090 
           
Gross Profit   214,061    143,339 
           
Compensation and related expenses   (85,390)   (164,021)
           
Professional fees   (35,508)   (54,593)
           
General and administrative expenses   (85,329)   (102,363)
           
Operating Income (Loss)   7,834    (177,638)
           
License Fee   -    25,000 
           
Other income   -    7,877 
           
Interest (expense)   (10,468)   (478)
           
Net (Loss) Before Taxes   (2,634)   (145,239)
           
Deferred income tax benefit   4,300    4,300 
           
Net Income (Loss)  $1,666   $(140,939)
           
Basic and diluted income (loss) per share  $0.00   $(0.00)
           
Average number of common shares outstanding          
Basic   30,729,973    30,171,640 
           
Diluted   31,363,306    30,171,640 

 

See notes to financial statements

 

5
 

 

Immudyne, Inc.

 

Statement of Stockholders’ (Deficit) Equity

(unaudited)

 

           Additional         
   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Capital   (Deficit)   Total 
                     
Balance at December 31, 2014   30,729,973   $307,299   $8,077,549   $(8,524,346)  $(139,498)
                          
Stock compensation expense             2,000    -    2,000 
                          
Net income   -    -    -    1,666    1,666 
                          
Balance at March 31, 2015   30,729,973   $307,299   $8,079,549   $(8,522,680)  $(135,832)

 

See notes to financial statements

 

6
 

 

Immudyne, Inc.

 

Statement of Cash Flows

(unaudited)

 

   Three Months Ended
March 31
 
   2015   2014 
         
CASH FLOWS FROM OPERATING ACTIVITIES        
Net Income (Loss)  $1,666   $(140,939)
Adjustments to reconcile net income (loss) to net cash (used) by operating activities          
Depreciation   14,243    14,244 
Deferred tax benefit   (4,300)   (4,300)
Stock compensation expense   2,000    28,000 
Changes in Assets And Liabilities          
Trade accounts receivable   (58,480)   (39,109)
Legal settlement proceeds receivable   -    132,000 
Inventory   (2,452)   (1,867)
Accounts payable and accrued expenses   (22,864)   5,324 
Net cash (used) by operating activities   (70,187)   (6,647)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in Adiuvo Investment S. A.   -    (100,000)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Increase in notes payable   100,000    - 
Repayment of notes payable   (35,257)   (12,000)
Net cash provided (used) by financing activities   64,743    (12,000)
           
Net (decrease) in cash   (5,444)   (118,647)
           
Cash at beginning of the period   75,495    155,056 
           
Cash at end of the period  $70,051   $36,409 
           
Supplemental Schedule of Non-Cash Activities          
Cash paid during the period for interest  $10,468   $- 

 

See notes to financial statements

 

7
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

1. Organization and Going Concern

 

Immudyne, Inc. (the “Company”) is a Delaware corporation established to develop, manufacture and sell natural immune support products. The Company has developed a proprietary approach to produce the purest particulate and soluble beta glucans derived from yeast. The Company’s core nutraceutical and cosmetic product lines consist of its pure yeast beta glucans in oral and topical applications to support the immune system. 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.

 

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, 2015, the Company has an accumulated deficit approximating $8.5 million and has incurred negative cash flows. 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, 2015, and projected cash needs for the remainder of 2015, management estimates that it will need to raise additional capital to cover operating and capital requirements for the 2015 year. Management plans on raising 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 required future financing can be successfully completed on a timely basis, or on terms acceptable to the Company.

 

2. Summary of Significant Accounting Policies

 

Unaudited Financial Statements

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for financial information and with the instructions to Form 10-Q. They do not include information and footnotes required by United States generally accepted accounting principles for complete financial statements. The unaudited financial statements should be read in conjunction with those financial statements included in the Company’s previously filed Form 10-K for the year ended December 31, 2014. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

8
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

Basis of Presentation and Use of Estimates

 

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates required to be made by management include the valuation of inventory, and stockholders’ equity based transactions. Actual results could differ from those estimates.

 

Inventory

 

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, 2015 and December 31, 2014 the Company recorded an inventory reserve in the amount of $40,000. Inventory consists of the following:

 

   March 31,
2015
   December 31,
2014
 
         
Raw materials  $411   $4,350 
Finished products   43,049    36,658 
   $43,460   $41,008 

 

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 once the product is shipped to the customer. If applicable, 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 have not been significant.

 

Delivery is considered to have occurred when title and risk of loss have transferred to the customer. If title does not pass until the product reaches the customer’s delivery site, then recognition of revenue is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis. There are no special post shipment obligations or acceptance provisions that exist with any sales arrangements.

 

9
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

Income Taxes

 

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, 2011, remain open to most 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. 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.

 

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.

 

10
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

The average diluted common shares outstanding for the quarter ended March 31, 2015 excludes the dilutive effect of 13,474,387 options and warrants since such options and warrants have an exercise price in excess of the average market value for the Company’s common stock for the quarter ended March 31, 2015. Common stock equivalents comprising 13,772,720 shares underlying options and warrants at March 31, 2014 have not been included in the loss per share calculation as the effects are anti-dilutive.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers" (Topic 606) ("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of fiscal 2017. Management is evaluating the provisions of this statement and has not determined what impact the adoption of ASU 2014-09 will have on the Company's financial position or results of operations.

 

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern". This ASU is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. It is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect it to have a material effect on the Company's 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 financial statements upon adoption.

 

Fair Value of Financial Instruments

 

The carrying value of the Company’s financial instruments, including cash, trade accounts receivable and accounts payable and accrued expenses and notes payable approximate fair value for all periods.

 

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.

 

11
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

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 accounted for 84% and 92% of sales for the three month periods ended March 31, 2015 and 2014, respectively. This customer accounted for 100% of accounts receivable at March 31, 2015 and December 31, 2014.

 

A second customer accounted for 12% of sales for three month period ended March 31, 2015.

 

3. Joint Venture Agreement

 

In December 2013 the Company entered into a memorandum of understanding (MOU) with Adiuvo Investment S.A. (AI), an investment company located in Poland, whereby AI paid the Company $100,000 for the option, which expired in September 2014, to purchase up to 10% of the outstanding stock in the Company at $0.25 per share. In January 2014 the Company invested $100,000 in AI in exchange for a minority interest of less than 1% in AI, and an option to acquire additional shares of AI up to an aggregate consideration of $1,500,000. Further, AI granted the Company the right to participate in any subsequent public offerings of AI and the option to buy up to 10% of AI. The Company’s investment in AI is accounted for at no value on the accompanying March 31, 2015 balance sheet.

 

4. Notes Payable

 

At March 31, 2015, notes payable are due to officers and directors and a commercial lender. A summary of activity is as follows:

 

     Officers and directors   Commercial lender   Total 
  Balance at December 31, 2014  $27,200   $-   $27,000 
  Borrowing   -    100,000    100,000 
  Repayments   (17,000)   (18,257)   (35,257)
  Balance at March 31, 2015  $10,200   $81,743   $91,743 

 

Notes payable due to officers and directors are payable on demand with interest at 5%. Interest expense for the three month period ended March 31, 2015 and 2014 amounted to $162 and $478, respectively.

 

The loan payable to the commercial lender requires payment of principal and interest in 252 daily payments of $492 each commencing January 12, 2015. Interest expense for the three month period ended March 31, 2015 amounted to $10,306.

 

Total interest expense on notes payable amounted to $10,468 and $478 for the three month periods ended March 31, 2015 and 2014, respectively.

 

12
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

5. Income Taxes

 

The Company is not expected to have taxable income in 2015 and incurred a loss for the year ended December 31, 2014 and accordingly, no provision for federal income tax has been made in the accompanying financial statements. At December 31, 2014, the Company had available net operating loss carryforwards of approximately $2,870,000, expiring during various years through 2034.

 

A summary of the deferred tax asset using an approximate 34% tax rate is as follows:

 

Net operating loss  $975,000 
Valuation allowance   (975,000)
Total  $- 

 

The net operating loss carryforwards could be subject to limitation in any given year in the event of a change in ownership as defined by IRC Section 382.

 

The deferred tax liability of $8,900 and $13,200 at March 31, 2015 and December 31, 2014, respectively, results from the difference in the carrying amount of furnishings and equipment between financial reporting and income tax reporting.

 

The deferred tax benefit included in the statement of operations represents the change in the deferred tax liability at each balance sheet date.

 

The difference between the statutory and the effective tax rate is primarily due to a change in valuation allowance on deferred taxes, as the Company has fully reserved the deferred tax asset resulting from available net operating loss carryforwards.

 

6. Stockholders’ Equity

 

In January 2014 the Company issued 100,000 shares of restricted common stock, valued at $28,000 to a consultant.

 

Service-Based Stock Options

 

Service-based options issued by the Company to various employees and consultants amounted to 10,335,000 at December 31, 2014 and March 31, 2015. All outstanding options are exercisable and have a cashless exercise provision, and certain options provide for accelerated vesting provisions and modifications, as defined, if the Company is sold or acquired. The intrinsic value of options outstanding and exercisable at March 31, 2015 amounted to $80,000.

 

13
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

The following is a summary of outstanding service-based options at March 31, 2015:

 

Exercise Price   Number of
Options
   Weighted Average
Remaining
Contractual
Life
 
          
$0.10   $1,000,000    3 years 
$0.20 - $0.25    8,185,000    7 years 
$0.40    1,150,000    7 years 
 Total   $10,335,000      

 

Performance-Based Stock Options

 

In August 2014, the Company issued 300,000 options with an exercise price of $0.20 to a consultant. The options are contingent upon the completion of a clinical study as defined. Management has valued these options at $8,000 and is amortizing them over the implicit service period of one year. At March 31, 2015, $4,000 had been amortized and the balance of $4,000 remained to be amortized during the year ending December 31, 2015.

 

As of March 31, 2015 in addition to the 300,000 options above, the Company had granted performance-based options to purchase 9,375,000 shares of common stock at exercise prices ranging from $0.20 to $5.00. The options expire at various dates between 2021 and 2024 and are exercisable upon the Company achieving annual sales revenue ranging from $2,000,000 and $100,000,000. The fair value of these performance-based options aggregated $340,000 and will be expensed over the implicit service period commencing once management believes the performance criteria will be met. Accordingly, at March 31, 2015, the unearned compensation for performance based options is $340,000.

 

Stock based compensation expense amounted to $2,000 and $0 for the three months ended March 31, 2015 and 2014, respectively. Such amounts are included in compensation and related expenses in the accompanying statement of operations.

 

Warrants

 

Warrants outstanding and exercisable amounted to 3,772,720 at December 31, 2014 and March 31, 2015. The weighted average exercise price of warrants outstanding at March 31, 2015 is $0.29. The warrants expire in 2015 and 2016.

 

7. Royalties

 

The Company is subject to a royalty agreement based upon sales of certain skin care products. The agreement requires the Company to pay a royalty based upon 8% of such sales, up to $227,175. Royalty expense approximated $19,000 and $14,000 for the three month periods ended March 31, 2015 and 2014, respectively. The remaining commitment at March 31, 2015, is approximately $1,000. The Company’s President has a 60% interest in the royalties.

 

At March 31, 2015 and December 31, 2014, included in accounts payable and accrued expenses was $151,986 and $132,986, respectively, in regards to this agreement.

 

14
 

 

Immudyne, Inc.

 

Notes to Financial Statements

March 31, 2015

 

8. Commitments and Contingencies

 

Leases

 

The Company leases a plant in Kentucky under an operating lease which expires May 31, 2016. Future minimum base rental payments required under the lease are as follows:

 

Year ending December 31    
     
2015 (9 months)  $31,640 
2016   17,578 
Total  $49,218 

 

Monthly base rental payments approximate $3,500. The lease agreement also provides for additional rents based on increases in building operating costs and real estate taxes. Rent expense for the three month periods ended March 31, 2015 and 2014, was $20,461 and $14,626, 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 ranging from $0.20 to $5.00, underlying 9,375,000 shares of common stock issuable upon the Company’s revenue exceeding amounts ranging from $2,000,000 to $100,000,000, 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.

 

Legal Matters

 

In the normal course of business operations the Company may become involved in various legal matters. At March 31, 2015, 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.

 

In November 2009, the Company entered into a settlement agreement to resolve all aspects of litigation relating to a patent suit. As part of that settlement agreement, the Company received $440,000 as reimbursement for litigation costs. The Company also was awarded $200,000 in eight installments of $25,000 every six months beginning on January 15, 2011, in return for an exclusive patent license. The term of the license agreement is consistent with the term of the $25,000 semiannual payments. The $25,000 installments have been recorded as revenue upon receipt of the funds. The Company received the final installment during the three months ended March 31, 2014.

 

9. Subsequent Events

 

The Company has evaluated subsequent events through the date these financial statements were issued and has determined that there are no subsequent events or transactions requiring recognition or disclosure in the financial statements.

  

* * * * *

 

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We manufacture, distribute and sell natural immune support products; namely proprietary yeast beta glucans which are natural extracts that have been shown through testing and analysis and scientific research to support the immune system. Yeast beta glucans are classified as generally recognized as safe (“GRAS”) by the Food and Drug Administration (“FDA”). We are and have been a science driven company for more than 25 years. Our products are used in in oral and topical applications. Historically, we have sold our proprietary additives, for both oral and topical use, primarily via business-to-business to large dietary supplement and cosmetic companies. We have also sold our own standalone product lines primarily on a word-of-mouth basis and through our website.

 

For the first time in our history, we hired a chief marketing officer in 2013, however, we experienced an overall decrease in sales in 2014 due to the lack of execution of plans to generate new business. Late in the second quarter of 2014, the aforementioned chief marketing officer resigned. We hired three senior marketing executives late in the fourth quarter of 2014 (and early in 2015). We have performance based contracts with these executives, allowing us to continue to maintain a relatively low overhead. Our priority is to actively pursue opportunities to market our products and increase sales.

 

Our plans are to increase sales on our oral and topical-use products for healthcare professionals, distributors and direct-to-consumer sales. We expect that a significant component of our selling, general and administration expenses going forward will continue to consist of marketing and advertising expenses to increase our sales. The primary components of our marketing and advertising expenses may include online sales promotions through our website, trade advertising, direct marketing to nutraceutical companies and industry associations, consumer research and search engine and digital advertising. We expect our selling, general and administrative expenses to increase in absolute dollars as we incur increased costs related to our marketing strategy. These costs, along with the additional costs resulting from our operations as a public reporting company, could continue to adversely impact our future results of operations. 

 

Additional significant factors that we believe will affect our operating results going forward are: (i) protection of our intellectual property rights; (ii) imposition of more stringent government regulations of our products; (iii) lack of adequate capital to effectuate our business plans; and (iv) lack of experienced personnel.

 

We historically have expended a significant amount of our funds on obtaining and protecting our patents, trade secrets and proprietary products. We rely on the patent and trademark protection laws in the U.S. to protect our intellectual property and maintain our competitive position in the marketplace. For several years, we were involved in complex litigation regarding patents and licenses critical to our products. In 2010, we prevailed on all major legal matters and reached favorable settlements. If additional litigation becomes necessary to protect our intellectual property rights, such litigation may be costly, divert our management’s attention away from our core business and have a negative impact on our operations. Furthermore, there is no guarantee that litigation would result in an outcome favorable to us. In addition, yeast beta glucans are designated as GRAS under current FDA regulations. Future government regulations may prevent or delay the introduction or require the reformulation of our products. Some agencies, such as the FDA, could require us to remove a particular product from the market, delay or prevent the import of raw materials for the manufacture of our products or otherwise disrupt the marketing of our products. Any such government actions could result in additional costs to us, reduce growth prospects, lost sales from products that we are required to remove from the market and potential product liability litigation.

 

We have limited operating capital and have funded operations in the past through the sales of our products and loans and advances from Mark McLaughlin, our President, and other directors. In addition, in the first quarter of 2014 we received $132,000 from a legal settlement that was used to fund our operations and on September 30, 2014, we borrowed $50,000 pursuant to a short term loan agreement entered into with a private investor for our ongoing working capital needs. This short term loan agreement was paid in full on its maturity on November 14, 2014. In the first quarter of 2015, we entered into another non-dilutive short term loan agreement with an investor for $100,000. With the proceeds from this loan, we plan on our operating business to be able to fund operations through the first half of 2015, however, in the event we require additional operating capital we will have to depend on sources other than operating revenues to meet our operating and capital needs. No assurance can be given that such sources will be available and no assurance can be given that Mr. McLaughlin or other directors who have in the past willingly funded operations will commit to do so in the future, or that we will be successful in our endeavors to raise additional capital. For additional information regarding these and other risks please see our Annual Report on Form 10K for the fiscal year ended December 31, 2014 filed with the SEC on March 30, 2015.

 

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Results of Operations

 

Three Months Ended March 31, 2015, Compared to the Three Months Ended March 30, 2014

 

The following table sets forth the results of our operations for the periods indicated as a percentage of net sales:

 

   2015   2014 
   $   % of Sales   $   % of Sales 
Sales   288,277         192,429      
Cost of sales   74,216    26%   49,090    26%
Gross profit   214,061    74%   143,339    74%
Operating expenses   (206,227)   (72)%   (320,977)   (167)%
Income (loss) from operations   7,834    3%   (177,638)   (92.5)%
Other income (expenses), net   (10,468)   (4)%   32,399    16.8%
Income tax benefit   4,300    2%   4,300    2.5%
Net income (loss)   1,666    0.1%   (140,939)   (73)%

 

Sales for the first quarter of 2015 were $288,277, an increase of 50% from $192,429 for the same period in 2014. Our increase in sales was primarily attributable to the increased demand for our products.

 

Cost of sales consists primarily of material costs, labor costs and related overhead directly attributable to the production of our products. Total cost of sales increased 51% to $74,216 in the first quarter of 2015 compared to $49,090 for the same period in 2014. Our cost of sales increased primarily due to our overall increase in sales during the quarter.

 

Gross profit increased 49.3% to $214,061 in the first quarter of 2015 compared to $143,339 for the same period in 2014 as result of our increased sales. Gross profit as a percentage of sales was relatively consistent from year to year as a result of our relatively consistent overhead expenses.

 

Operating expenses consisted of general and administrative expense, compensation and related expense and professional fees. Operating expenses decreased 36% to $206,227 in the first quarter of 2015 compared to $320,977 for the same period in 2014. General and administration expense decreased by 17% to $85,329 in the first quarter of 2015, compared to $102,363 for the same period in 2014, due to the decrease in the Company’s marketing expenses year over year as a result of the lack of execution of plans to generate new business in the 2014 period. Compensation and related expenses decreased by 48% to $85,390 in the first quarter of 2015, compared to $164,021 for the same period in 2014, due primarily to compensation paid in the 2014 period to our chief marketing officer who has since resigned. Professional fees decreased 35% to $35,508 in the first quarter of 2015, compared to $54,593 for the same period in 2014, as result of additional legal fees incurred in the 2014 period for the pursuit and settlement of litigation which was not similarly incurred in the 2015 period.

 

Net income for the first quarter of 2015 was $1,666 compared to net loss of $140,939 for the same period in 2014. Net income as a percentage of sales was 0.1% in the first quarter of 2015 compared to net loss as a percentage of sales of 73% for the same period in 2014. Our net income in the first quarter of 2015 as compared to net loss for the same period in 2014 was primarily attributable to our increased sales during the quarter.

 

Liquidity and Capital Resources

 

Our principal demands for liquidity are to increase sales, purchase inventory and for sales distribution and general corporate purposes. We incurred negative cash flows in the 2013 and 2014 fiscal years and had a negative net working capital position at March 31, 2015. As a result, our auditors have raised substantial doubt about our ability to continue as a going concern. We plan on our operating business (in conjunction with our short term non-dilutive borrowing in the first quarter of 2015) being able to fund operations through the first half of 2015. However, if necessary, we may raise additional capital through a private placement of common stock, obtaining debt financing or from advances from our President and/or directors.

 

In the first quarter of 2014, we received $132,000 pursuant to a legal settlement. On September 30, 2014, we borrowed $50,000 pursuant to a short term loan agreement entered into with a private investor for our ongoing working capital needs which was repaid with cash on hand. During 2014 notes payable due to officer and other related individuals totaling $30,000 were repaid and in the fourth quarter of 2014 we borrowed an additional $17,000 from our President, which was repaid in the first quarter of 2015. Additionally, in the first quarter of 2015 we entered into a short-term non-dilutive loan with an investor for $100,000. At March 31, 2015 we had notes payable outstanding of $91,943.

 

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There can be no assurance that required future financing can be successfully completed on a timely basis, or on terms acceptable to us. Any future issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness would increase our debt service obligations and would cause us to be subject to restrictive operating and financial covenants.

 

Additionally, at March 31, 2015 and December 31, 2014, one customer accounted for 100% of accounts receivable. We periodically perform a credit analysis and monitor the financial condition of this and other customers and do not foresee any difficulties in collecting our accounts receivable at this time.

 

We had negative net working capital of $156,437 at March 31, 2015, resulting in a decrease of $178,606 from net working capital of $22,169 at March 31, 2014. The ratio of current assets to current liabilities was .5 to 1 at March 31, 2015.

 

The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2015 and 2014:

 

   2015   2014 
Cash provided by (used in):          
Operating activities  $(70,187)  $(6,647)
Financing activities   64,743    (12,000)

 

Net cash flow used by operating activities was $70,187 for the three months ended March 31, 2015, compared to net cash flow used in operating activities of $6,647 for the same period in 2014. The increase in net cash outflow in operating activities was attributable primarily to our receipt of legal settlement proceeds in the first quarter of 2014 which was responsible for the lower level of cash outflows in 2014.

 

Net cash flows provided by financing activities was $64,743 for the three months ended March 31, 2015, from the $100,000 borrowed under a short-term non-dilutive loan agreement with a private investor offset by certain repayments on notes outstanding, compared to net cash flows used by financing activities of $12,000 for the repayment of a note issued by one of our directors.

 

Indebtedness

 

From time to time, our directors, officers and other related individuals have made short-term advances to us for our operating needs. At March 31, 2015, notes payable due to officers and directors totaled $10,200 and carried interest at 5% per annum. During the three months ended March 31, 2015, a total of $17,000 was repaid.  Interest expense on notes payable amounted to $162 for the three months ended March 31, 2015.

 

In the first quarter of 2015, we borrowed $100,000 pursuant to a short term non-dilutive loan agreement with a private investor. Interest and principal expense on this loan agreement for the three months ended March 31, 2015 amounted to $28,563.

 

We are subject to a royalty agreement pursuant to which we are required to pay a monthly royalty of 8% on all sales of certain skin care products up to $227,175. At March 31, 2015, we included $151,986 in accounts payable and accrued expenses relating to this royalty agreement, with the remaining commitment under the royalty agreement at approximately $1,000. Our President, Mr. McLaughlin, has a 60% interest in the royalties paid under the agreement and has voluntarily deferred payments due without interest until, from time to time, we have the financial wherewithal to pay such royalties.

 

Legal Matters

 

In October 2013, the Company agreed to a judgment against the estate of a former officer and related individuals in connection with a judgment in favor of the Company rendered in June 2000, finding that defendants in question had failed to use their best efforts in support of the Company in violation of an agreement between the parties.  Subsequently, a settlement was reached with these parties in the amount of $386,000.  During the year ended December 31, 2013, the Company received net proceeds of $78,000 and the balance, $132,000, net of related legal costs, was received in March 2014.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.

 

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We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies

 

While our significant accounting policies are described more fully in Note 2 to our financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

 

Basis of Presentation and Use of Estimates

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the U.S., or U.S. GAAP. In preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required by management include the valuation of inventory and stockholders’ equity-based transactions. Actual results could differ from those estimates.

 

Inventory

 

Inventory is valued at the lower of cost or market value with cost determined on a first-in, first-out basis. Management compares the cost of inventory with the net realizable value and an allowance is made for writing down their inventories to market value, if lower.

 

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 once the product is shipped to the customer. If applicable, 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 have not been significant.

 

Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Sales to international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then recognition of revenue is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis. There are no special post shipment obligations or acceptance provisions that exist with any sales arrangements.

 

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 our 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. 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. 

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers" (Topic 606) ("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of fiscal 2017. Management is evaluating the provisions of this statement and has not determined what impact the adoption of ASU 2014-09 will have on the Company's financial position or results of operations.

 

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In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern". This ASU is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. It is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect it to have a material effect on the Company's 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 financial statements upon adoption.

 

Item 3.       Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4.       Controls and Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer (“PEO”), who is also our Principal Financial Officer (“PFO”), of the design and effectiveness of our “disclosure controls and procedures” (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our PEO/PFO concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in disclosure controls and procedures which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment as the Company had only one officer; (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC Guidelines; and (iii) inadequate security and restricted access to computer systems including insufficient disaster recovery plans; and (iv) no written whistleblower policy. Once sufficient funds are available, our PEO/PFO plans to implement appropriate disclosure controls and procedures to remediate these material weaknesses, including (i) appointing additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting and a whistle blower policy; and (iii) implement sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II. OTHER INFORMATION

 

Item 1.       Legal Proceedings

 

We may become involved in various lawsuits and legal proceedings arising in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may have an adverse effect on our business, financial conditions or operating results. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Item 1A.    Risk Factors

 

You should consider carefully the factors discussed in the “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.       Defaults Upon Senior Securities

 

None.

 

Item 4.       Mine Safety Disclosures

 

Not applicable.

 

Item 5.       Other Information

 

None.

 

Item 6.       Exhibits

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  IMMUDYNE INC.
  (Registrant)
     
Date: May 14, 2015 By: /s/ Mark McLaughlin
    Mark McLaughlin
    Chief Executive Officer
    (Principal Executive Officer)

 

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EXHIBIT INDEX

 

Exhibit No.   Document Description
31.1 †   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 ‡   Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS†   XBRL Instance Document
101.SCH†   XBRL Schema Document
101.CAL†   XBRL Calculation Linkbase Document
101.DEF†   XBRL Definition Linkbase Document
101.LAB†   XBRL Label Linkbase Document
101.PRE†   XBRL Presentation Linkbase Document

 

† Filed herewith

‡ Furnished herewith

 

 

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