See the $IMMD Q-10 here ::
Form 10-Q for IMMUDYNE, INC.
14-May-2013
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We manufacture, distribute and sell natural immune support products. We believe, based on testing and analysis conducted on our behalf, that our beta glucans derived from yeast are superior to other beta glucans. Beta glucans are a natural extract that has been shown through testing and analysis and scientific research to support the immune system. Our core nutraceutical and cosmetic product lines consist of yeast beta glucans in oral and topical applications. Our beta glucan products and manufacturing processes are protected by patents and trade secrets and are compliant with current GMPs. Yeast beta glucans are classified as GRAS by the FDA. Historically, we have sold our products primarily on a word-of-mouth basis through distributors and our website as standalone product lines, as well as business-to-business as dietary supplement and a cosmetic enhancement, and as a feed-additive for animal use. As of 2011, we began exiting this lower-margin market for feed-additive products. Our sales and marketing efforts going forward are concentrated on our oral and topical-use products for healthcare professionals, distributors and direct-to-consumer sales.
Significant factors that we believe could affect our operating results are (i) marketing and advertising expenses; (ii) protection of our intellectual property rights; and (iii) imposition of more stringent government regulations of our products.
Our marketing strategy is to promote sales of our oral and topical-use products, which constitute our core business. We believe that we are well positioned to capitalize on our development of proprietary and patented products and can now focus on commercializing sales on a more meaningful, global basis. We expect that a significant component of our selling, general and administration expenses going forward will 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 and growth of our business. These costs, along with the additional costs resulting from our operations as a public reporting company, could impact our future operating profitability.
On February 1, 2013, we hired a Chief Marketing Officer, the first such position in Company history. We are planning to introduce new products that leverage our proprietary knowledge and intellectual property. Though there can be no assurance that these new products will be successful, we believe we are well situated to execute our marketing plan. On April 18, 2013, we filed a Current Report on Form 8K with the Securities and Exchange Commission detailing our plans to execute a 15 month sales and marketing plan to accomplish increased revenue. A copy of this plan, along with an audio copy of our April 25, 2013 conference call, can be accessed at www.immudyne.com.
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 a favorable settlement. 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.
Our manufacturing processes are compliant in the U.S. with current cGMPs and our yeast beta glucan products are all natural. Further, 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, including reduced 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. While we believe that we will begin to generate increased sales, it is likely that we will require additional operating capital. Until we are in a position to obtain such capital from revenues to meet our normal business obligations, the Company 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 the Company will be successful in its endeavors to raise additional capital.
Results of Operations
Three Months Ended March 31, 2013, Compared to the Three Months Ended March 31, 2012
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales:
2013 2012
$ % of Sales $ % of Sales
Sales 230,258 178,536
Cost of sales 32,331 14 % 29,573 17 %
Gross profit 197,927 86 % 148,963 83 %
Operating expenses (268,444 ) (117 )% (184,789 ) (104 )%
Loss from operations (70,787 ) (31 )% (35,826 ) (20 )%
Other income 25,000 11 % 6,161 3 %
Interest (expense) - 0 % (2,928 ) (2 )%
Income tax benefit 4,300 2 % 4,300 2 %
Net loss (41,487 ) (19 )% (28,293 ) (16 )%
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Sales for the first quarter of 2013 were $230,258, an increase of 29% from $178,536 million for the same period in 2012. The increase in sales was attributable to increased demand for our oral and topical-use 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 9% to $32,331 in the first quarter of 2013 compared to $29,573 for the same period in 2012. Our slight increase in our total cost of sales was due to the increase in our revenues, offset by increase operating efficiencies in the manufacture of our products.
Gross profit increased 32% to $197,927 in the first quarter of 2013 compared to $148,963 for the same period in 2012.
Operating expenses consisted of general and administrative expense, compensation and related expense and professional fees. Operating expenses increased 45% to 268,444 in the first quarter of 2013 compared to $184,789 for the same period in 2012. General and administration expense decreased slightly to $86,082 in the first quarter of 2013 compared to $90,786 for the same period in 2012. Compensation and related expenses increased 99% to $135,891 in the first quarter of 2013 compared to $68,051 in the first quarter of 2012, primarily due to our hiring of the Company's first Chief Marketing Officer, in addition to the added expenses related to market research as the Company prepares to launch beta versions of new products. Professional fees increased 80% to $46,741 as a result of increase in audit, accounting and legal fees as, since the effectiveness of our registration statement on Form S-1 in the first quarter of 2013, we are now subject to ongoing reporting obligations with the Securities and Exchange Commission. The increase was also due, in part, to our uplisting to the OTCQB.
Other income was $25,000 for the first quarter of 2013 compared with other income of $6,161 in 2012. Other income in 2013 resulted from the receipt of a license fee, while other income in 2012 resulted from the write off of old accounts payable.
Our net loss for the first quarter of 2013 was $41,487 compared to net loss of $28,293 for the same period in 2012, an increase of $13,194 or 46%. Net loss as a percentage of sales was 18% in the first quarter of 2013 compared to net loss as a percentage of sales of 16% for the same period in 2012. Our increased net loss was primarily attributable to our increased operating expenses as a result of us becoming a fully reporting public company with the Securities and Exchange Commission and our uplisting to the OTCQB.
Liquidity and Capital Resources
Our principal demands for liquidity are to increase sales, purchase inventory and for sales distribution and general corporate purposes. We have limited operating capital and intend to meet our liquidity requirements, including purchase of raw materials and the expansion of our business, primarily through cash flow provided by operations. Historically, we also have funded operations through loans and advances from our directors and officers and offerings of equity securities. In 2012 and 2011, we raised $345,883 and $193,500, respectively, through sales of our common stock in private placements, as well as the exercising of stock options. We may seek additional financing in the form of loans from banks or our directors and officers, or funds raised through future offerings of our equity or debt, if and when we determine such offerings are required. Any future issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants.
Comparison of Years Ended March 31, 2013 and 2012
Net cash flow used in operating activities was $60,013 for the period ended March 31, 2013, compared to net cash flow provided by operating activities of $377 for the period ended March 31, 2012. The increase in net cash outflow in operating activities was attributable primarily to our become a fully reporting public company with the Securities and Exchange Commission and the hiring of a Chief Marketing Officer.
Private Placements
In a series of private placement transactions in the six months ended June 30, 2012, we issued 1,843,428 shares of our common stock and 3-year warrants to purchase 914,106 shares of our common stock at $0.40 per share to accredited investors at $0.17 per unit for $313,383.
In a series of private placement transactions in 2011, we issued (i) 621,053 shares of our common stock at $0.2286 per share for $142,000 and (ii) 302,941 shares of our common stock and 3-year warrants to purchase 151,500 shares of our common stock at $0.40 per share to accredited investors at $0.17 per unit for $51,500.
Indebtedness
From time to time, our directors, officers and other related individuals have made short-term advances to us for our operating needs. During the year ended December 31, 2012, notes payable due to officer and other related individuals totaling $50,729 were repaid and the balance of notes payable and amounts due to officer, aggregating $311,443, were converted to common stock. Interest expense on notes payable amounted to $3,371 for the year ended December 31, 2012.
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, 2013, we included $110,000 in accounts payable and accrued expenses relating to this royalty agreement, with the remaining commitment under the royalty agreement at approximately $101,000. Our President, Mr. McLaughlin, has a 60% interest in the royalties paid under the agreement and has voluntarily deferred payments due without interest until we have the financial wherewithal to pay such royalties.
