Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The filing identifies the registrant as Immudyne, Inc., not LifeMD, Inc.; verify that this is the intended filing. Immudyne develops and sells yeast beta-glucan immune-support ingredients and consumer skincare and hair-care products. Its majority-owned subsidiary, Immudyne PR, launched an in-licensed hair-loss shampoo and conditioner in Q2 2017.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1.107 million | $1.227 million | $1.532 million | $2.868 million |
| Gross profit / margin | $778,172 / 70% | $526,270 / 43% | $999,278 / 65% | $829,356 / 29% |
| Operating expenses | $1.004 million | $680,000 | $1.600 million | $1.088 million |
| Operating loss | $(225,477) | $(153,632) | $(600,463) | $(258,728) |
| Net income (loss) | $696,295 | $(156,382) | $(376,240) | $(264,541) |
| Net income (loss) attributable to Immudyne | $737,489 | $(199,976) | $(307,316) | $(262,025) |
Q2 earnings included a $922,022 gain from the change in fair value of derivative liabilities; six-month results included an $873,830 gain of this type. The six-month $649,607 interest expense included a $634,325 loss on settling notes and other payables, largely through equity issuance. These items materially affect comparisons with operating performance.
For the six months, operating cash outflow was $512,569, versus $76,662 in 2016; financing cash inflow was $766,094, versus $79,130. Cash rose to $436,086 from $182,561 at December 31, 2016. At June 30, current assets were $1.157 million and current liabilities $1.591 million, yielding negative working capital of $433,689 and a 0.73 current ratio. Stockholders’ deficit was $433,689.
Current liabilities included $74,043 of notes payable and $955,014 of derivative liabilities. Earlier borrowings were repaid or converted to equity; the company also had access to a $140,000 American Express working-capital line, with $66,000 available at June 30.
Material changes and management commentary
- Q2 sales declined 10% year over year; six-month sales declined 47%. Management attributed much of the first-half decline to resources devoted to preparing the hair-care launch and changing to an internal marketing strategy. Additives sales increased, while finished cosmetic products drove much of the first-half decline.
- Gross margin improved substantially, which management attributed to product mix and lower cost of sales following the marketing strategy shift. Operating expenses rose 48% in Q2 and 47% for the first half, including $289,070 of Q2 and $299,870 of first-half marketing expense not present in the comparable 2016 periods.
- Management expected existing operations and recent financing to fund operations through 2017, but said additional sales growth and/or financing might be needed. It cautioned that financing may not be available on acceptable terms or on time.
- The filing states that accumulated deficit was approximately $10.0 million and operating cash flows were negative, raising substantial doubt about the company’s ability to continue as a going concern. Management said the statements contain no adjustments for the outcome of this uncertainty.
- Disclosure controls were deemed ineffective. Reported material weaknesses included inadequate segregation of duties, insufficient written accounting and reporting procedures, weak computer access/security and disaster-recovery measures, and no written whistleblower policy.
- After quarter-end, the company entered into or amended compensation and services agreements involving substantial stock grants and options, including 900,000 shares issued to JLS Ventures valued at $432,000 and new CEO compensation and equity awards. The CEO also exercised warrants and options on a cashless basis in July.
Risks, contingencies, and unusual items
Key risks include continuing cash needs, potential dilution or added debt from future financing, customer concentration, and dependence on a major additives customer (42% of first-half sales and 60% of receivables at June 30). Derivative liabilities arose because the company lacked sufficient authorized shares to cover certain instruments; management planned to seek shareholder approval to increase authorized shares in Q3 2017. The filing also identifies potential intellectual-property and regulatory risks. Management reported no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Confirm issuer identity: the supplied filing is for Immudyne, Inc., although the request metadata names LifeMD, Inc.
- Assess cash runway and whether additional financing or materially higher sales are required to sustain operations.
- Separate operating results from the derivative fair-value gain and debt-settlement losses when evaluating earnings.
- Review the proposed authorized-share increase, derivative classification, outstanding options and warrants, and dilution from subsequent equity awards and exercises.
- Monitor sales trends by segment, customer concentration, and whether the hair-care launch can offset the decline in finished-product sales.
- Evaluate remediation of the disclosed material weaknesses in financial reporting controls.