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 June 30, 2016
OR
.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to
Commission File Number: 000-55218
TRXADE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
46-3673928
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1115 Gunn Hwy
Odessa, Florida 33556
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (800)-261-0281
Former name, former address and former fiscal year, if changed since last report: None
Indicate by check mark 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 past 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
. (Do not check if a smaller reporting company)
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 .
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 5, 2016
Common Stock, $0.00001 par value per share
31,535,827 shares
TRXADE GROUP, INC.FORM 10-QFor the Quarter Ended June 30, 2016
INDEX
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
a)
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)
3
b)
Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2016 and 2015 (unaudited)
4
c)
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)
5
d)
Notes to (unaudited) Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
15
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
16
SIGNATURES
17
2
PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements
Trxade Group, Inc.Consolidated Balance SheetsJune 30, 2016 and December 31, 2015(unaudited)
June 30,
December 31,
2016
2015
Assets
Current Assets
Cash
$
319,588
860,132
Accounts Receivable, net
373,653
498,100
Inventory, net
538,757
284,718
Prepaid Assets
203,538
201,361
Other Assets
-
183,359
Total Current Assets
1,435,536
2,027,670
Total Assets
Liabilities and Shareholders’ Equity (Deficit)
Current Liabilities
Accounts Payable
353,067
356,159
Accrued Liabilities
608,864
296,803
Promissory Note, net of $37,500 and $15,000 discount
212,500
235,000
Convertible Payable net of $0 and $35,697 discount
165,000
164,303
Total Current Liabilities
1,339,431
1,052,265
Long Term Liabilities
Convertible Note net of $256,273 and $241,612 discount
943,727
708,388
Total Liabilities
2,283,158
1,760,653
Shareholders’ Equity (Deficit)
Series A Preferred Stock, $.00001 par value, 10,000,000 authorized; 0 and 0 issued and outstanding, as of June 30, 2016 and December 31, 2015, respectively
Common Stock, $0.00001 par value; 100,000,000 shares authorized; 31,535,827 and 31,435,827 shares issued and outstanding, as of June 30, 2016 and December 31, 2015, respectively
315
314
Additional Paid-in Capital
6,275,229
5,915,674
Retained Earnings (Deficit)
(7,123,166)
(5,648,971)
Total Shareholders’ Equity (Deficit)
(847,622)
267,017
Total Liabilities and Shareholders’ Equity (Deficit)
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Trxade Group, Inc.Consolidated Statements of OperationsThree months and six months ended June 30, 2016 and 2015(unaudited)
Three Months Ended
Six Months Ended
Revenues
1,688,990
1,167,195
3,536,141
1,863,328
Cost of Sales
1,039,889
382,004
2,055,971
612,467
Gross Profit
649,101
785,191
1,480,170
1,250,861
Operating Expenses
General and Administrative
1,662,495
811,639
2,803,311
1,719,960
Operating Loss
(1,013,394)
(26,448)
(1,323,141)
(469,099)
Loss on Debt Extinguishment
37,579
Interest Expense
50,842
27,908
113,475
28,877
Net Loss
(1,101,815)
(54,356)
(1,474,195)
(497,976)
Basic loss per Common Share
(0.04)
(0.00)
(0.05)
(0.02)
Diluted loss per Common Share
Basic weighted average number of
Common Shares outstanding
31,468,245
31,269,160
Diluted weighted average number of
Trxade Group, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30, 2016 and 2015
(unaudited)
Operating Activities:
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Depreciation
2,400
Options expense
116,194
169,776
Bad Debt Expense
10,883
Amortization of debt discount
99,319
25,349
Changes in Operating assets and Liabilities:
Accounts Receivable
113,564
(67,781)
(2,177)
(130,639)
Inventory
(254,039)
(375,505)
(26,121)
(3,092)
217,360
327,061
33,258
Other Liabilities
(23,988)
Deferred Income
(22,568)
Net Cash used in operating activities
(845,544)
(696,435)
Financing Activities:
Cash paid as Original Debt Discount
(45,000)
Proceeds from Short Term Convertible Debt
200,000
Repayments of Short Term Convertible Debt
(50,000)
Proceeds from Short Term Promissory Note
205,000
Proceeds from Long Term Convertible Debt
250,000
Proceeds from issuance of Common Stock
150,000
Net Cash provided by financing activities
305,000
405,000
Net increase or (Decrease) in Cash
(540,544)
(291,435)
Cash at Beginning of the Year
705,602
Cash at June 30, 2016 and 2015
414,167
Supplemental Cash Flow Information
Cash Paid for Interest
9,739
11,028
Cash Paid for Income Taxes
Non-Cash Transactions
Reclass from accrued interest to short term convertible notes
15,000
Beneficial conversion features and relative fair value of warrants
55,783
107,093
Trxade Group, Inc.NOTES TO UNAUDITED FINANCIAL STATEMENTSFor the six months ended June 30, 2016 and 2015
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Trxade Group, Inc. (“Company”) owns 100% of Trxade, Inc. and Westminster Pharmaceutical LLC. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. Westminster Pharmaceutical LLC was formed in January 2013.
Trxade, Inc. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services.
Westminster Pharmaceutical LLC, provides US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals as well as access to current benchmark pricing of pharmaceuticals.
The accompanying unaudited interim financial statements of Trxade Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10K Registration Statement.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2015 as reported in the Company’s Registration Statement on Form 10K have been omitted Income (loss) Per Share – Basic net loss per common share is computed by dividing net loss available to commons stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilute. At June 30, 2016 diluted net loss per share is equivalent to basic net loss per share as the inclusion of any shares committed to be issued would be anti-dilutive.
The following table sets forth the computation of basic and diluted Loss per Share:
Three-month
Six-month
June 30, 2016
Numerator:
Numerator for basic EPS – income (loss)
Available to common shareholders
Numerator for diluted EPS – income (loss)
Income available to common shareholders
Denominator:
Denominator for basic EPS –
Weighted average shares
Denominator for diluted EPS -
Weighted-average shares and assumed Conversions
Basic loss per common share
Diluted loss per common share
NOTE 2 – SHORT-TERM DEBT
Convertible Promissory Note
Convertible promissory notes were issued in the aggregate amount of $200,000 in April and May 2015. The term of the notes was one year. Simple interest of 10% was payable at the maturity date of the note. Prior to maturity the notes may be converted for common stock at a conversion price of $1.50. The holders of the notes were granted warrants at one share of common stock for every $4.00 of the note principal amount, which totaled a warrant to purchase 50,000 shares of common stock. These warrants were issued at a strike price of $1.50 and an expiration date of five years from date of issuance.
In April and May 2016, $50,000 of the $200,000 in convertible promissory notes (plus $5,000 in interest) was repaid. A one-year extension was executed on the remaining notes and the interest owed, totaling $15,000 became part of the adjusted principal of notes and the balance of $165,000 is due May 2017. In connection with the one-year extension of the maturity date of the outstanding notes, the holders of the notes were granted warrants at one common stock for $4.00 of the note amount, and warrants to purchase 41,250 shares of common stock were issued at a strike price of $1.50 and an expiration date of five years from date of issuance. The amendment of the note was considered a debt extinguishment and a loss on extinguishment of debt was booked in the amount of $37,579 for the quarter ended June 30, 2016.
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815-40 and determined that the embedded conversion feature does not meet the definition of a derivative liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $53,546 was recorded in 2015 and $0 as of the date of the debt modification.
The Company also uses the Black-Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant. The Company accounted for the relative fair value of the warrants issued and a total debt discount $53,546 was recorded in 2015.
During the six months ended June 30, 2016, a debt discount of $ $35,697 was amortized.
As of June 30, 2016, the short term convertible notes had a principal balance of $165,000 with an unamortized debt discount of $0.
Promissory Note
In May 2015, a promissory note was issued in the face amount of $250,000. The term of that note was one year. The note has an original issuance discount of $45,000, thus the cash proceeds from the promissory note is $205,000.
In May 2016, the promissory note was renewed in the face amount of $250,000 and the term was extended an additional year. The note has an original issuance discount of $45,000 and this amount was paid in cash at the renewal.
During the six months ended June 30, 2016, a debt discount of $22,500 was amortized.
As of June 30, 2016, the promissory note has a principal balance of $250,000 with an unamortized debt discount of $37,500.
NOTE 3 – LONG TERM DEBT
Secured convertible promissory notes were issued in the aggregate amount of $950,000 in November and December 2015. The original term of the notes was three years. In June 2016 the note was extended to a four-year maturity for consideration of a senior secured position on the assets of the Company. Interest rate is a “Royalty Payment” which consists of a percentage of net Profit of certain transactions, payable within 45 days of the end of each quarter. Prior to maturity the notes may be converted for common stock at a conversion price of $2.50. The holders of the notes were granted a warrant to purchase 316,667 shares of common stock at a strike price of $0.01 and an expiration date of five years from date of issuance
In June 2016 an additional $250,000 was issued under the secured convertible promissory notes. The holders of the notes were granted additional warrants (under the same terms above) to purchase 83,333 shares of common stock at a strike price of $0.01.
7
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815 40 and determined embedded conversion feature does not meet the definition of a liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $0 was recorded in 2015.
The Company also uses the Black-Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant. The Company accounted for relative fair value of the warrants issued and a total debt discount of $251,883 was recorded in 2015. An additional discount of $55,783 was recorded in 2016.
During the six months ended June 30, 2016, a debt discount of $41,122 was amortized. As of June 30, 2016, convertible note has a principal balance of $1,200,000, net of an unamortized debt discount of $256,273.
NOTE 4 - WARRANTS
For the six-month period ended June 30, 2016, 149,583 warrants were issued, and none were exercised or forfeited. The Company’s outstanding and exercisable warrants as of June 30, 2016 are presented below:
Number
Weighted Average
Contractual
Intrinsic
Outstanding
Exercise Price
Life in Years
Value
Warrants Outstanding as of December 31, 2015
845,000
0.61
3.77
435,900
Warrants Granted
149,583
0.42
5.00
Warrants Forfeited
Warrants Exercised
Warrants Outstanding as of June 30, 2016
994,583
0.58
4.14
434,566
NOTE 5 - OPTIONS
The Company maintains a stock option plan under which certain employees are awarded option grants based on a combination of performance and tenure. The stock option plan provides for the grant of up to 2,000,000 shares. All options may be exercised for a period up to 5 years following the grant date, after which they expire. Options are vested in 4 or 5 years from the grant date.
For the six-month period ended June 30, 2016, 176,500 options were issued, and 65,000 options were forfeited or expired due to employee resignation. The options were not vested and the option expense reversed was $47,370.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant.
Total compensation cost related to stock options was $116,194 for the six-months ended June 30, 2016. As of June 30, 2016, there was $398,736 of unrecognized compensation costs related to stock options, which is expected to be recognized over a weighted average period of 4.0 to 5.0 years. The following table represents stock option activity as of and for the period ended June 30, 2016:
Number of
Average
Options
Outstanding at December 31, 2015
1,200,000
1.07
5.19
Exercisable at December 31, 2015
332,000
1.04
3.34
28,000
Forfeited
42,500
1.56
8.17
Granted
176,000
1.02
9.78
Expired
22,500
1.53
7.82
Outstanding at June 30, 2016
1,311,500
1.13
5.70
Exercisable at June 30, 2016
511,688
3.07
7,516
8
NOTE 6 – EQUITY
Under a Private Offer Memorandum, 100,000 shares of common stock was issued for $150,000 cash in June 2016. The common stock was sold at $1.50 per share. In connection with this common stock offering warrants to purchase 25,000 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years.
NOTE 7– SEGMENT REPORTING
The Company classifies its business interests into two reportable segments, which are Trxade and Westminster. Trxade is our web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services, and Westminster provides pharmacies and other buying groups with pharmaceuticals.
Three months ended June 30, 1016
Six months ended June 30, 2016
Trxade
585,495
676,233
1,217,261
1,179,936
Westminster
1,100,655
380,930
2,303,219
508,570
Segment Profit/Loss
(231,179)
160,382
(368,852)
65,730
(772,844)
(210,581)
(1,100,590)
(544,156)
345,526
470,225
993,048
769,384
Corporate Overhead was allocated based on revenue, and amounted to $(634,397) and $(237,027) for the three months June 30, 2016 and 2015, respectively. The amount was $(936,473) and $(494,631) for the six months ended June 30, 2016.
NOTE 8– CONTIGENCY
On November 19, 2015, Family Medicine Pharmacy, LLC filed a class-action claim against Trxade Group, Inc. and its wholly owned subsidiary Westminster Pharmaceutical, LLC, Inc. (Family Medicine Pharmacy, LLC v. Trxade Group, Inc. and Westminster, Inc., Case No.: 1:15-CV-00590-KD-B, United States District Court, Southern District of Alabama, Mobile Division). Family Medicine has served Trxade for allegedly utilizing a “junk fax” advertising program. On June 6, 2016, we entered into a binding memorandum of understanding with the plaintiff related to this litigation to resolve all claims in exchange for Trxade funding a settlement fund in the amount of $200,000. Pending objections and/or resolutions, we are currently waiting for the court’s final approval of the settlement. We believe this case will settle under the proposed settlement, therefore, under ASC 450 – “Contingencies”, an accrual of $200,000 is recorded as of June 30, 2016.
9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), including the Company’s Annual Report on Form 10-K. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion is based upon our unaudited Consolidated Financial Statements included elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales returns, pricing credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and intangible assets, contract manufacturer exposures for carrying and obsolete material charges, assumptions used in the valuation of stock-based compensation, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Company Overview
We have designed, developed, and now own and operate business-to-business web based marketplace focused on the US pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
We began operations under our predecessor in August of 2010 and spent over two years creating and enhancing our web-based services. Our services provide enhanced pricing transparency, purchasing capabilities and other value added services on a single platform to focus on serving the nation’s approximately 24,000 independent pharmacies with an annual purchasing power of $96 billion. Our national supplier partners are able to fulfill orders on our platform immediately and provide the pharmacy with cost saving payment terms and next day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National Association of Boards of Pharmacy (Model Act). Important additions to this platform further include the generation of pharmacy to pharmacy trading capabilities to help independents with their overstocked inventories in a more organized manner. We expanded rapidly in 2013 and broke the 1,000 member pharmacy mark that year.
In December 2013 we launched a second service to help pharmaceutical distributors better source their pharmaceutical needs within a highly structured single platform. This solution is designed to help purchasers overcome pharmaceutical supply issues related to drug shortages, as a means to control costs on drugs with volatile pricing and to help buyers make better purchasing choices based on their needs. Planned enhancements will expand this offering to manufactures and hospitals alike.
Additionally, we built and, in February 2014, launched, a new desktop application, named RxGuru, to bring product information on a just in time basis to our member base. Our pharmacy members should benefit immensely from this application by gaining advanced data analytics at point of purchase and patient care.
Other related developments include the creation of a Delaware registered supply arm, namely Westminster Pharmaceuticals, LLC, in April 2013 to take advantage of certain supply disruptions for specialty and other niche pharmaceuticals and operates via a third party logistics warehouse.
Company Organization
Westminster Pharmaceutical LLC, provides US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals.
Liquidity and Capital Resources
Liquidity Outlook
Cash Requirements
Our primary objectives for the remainder of 2016 are to continue the development of the Trxade Platform, and increase our client base. In addition, we expect to pursue raising capital to fund our operations and provide personnel to expand operations and required working capital.
We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
Expense
Amount
Cost of Sales(1)
General and administrative(2)
3,500,000
Total
4,700,000
(1)
Includes the cost of drugs for Westminster Pharmaceuticals.
(2)
Includes wages and payroll, legal and accounting, marketing, rent and web development.
As of June 30, 2016, we had cash and cash equivalents of approximately $319,588 and other current assets of $1,115,948. Additional funds will be needed to continue to expand our platform and customer base, and cover general and administrative expense.
Since inception, we have funded our operations primarily through equity capital raises, convertible debt, loans and operational revenue. We expect to continue to do so in the future although no assurance can be given that we will be able to obtain financing on reasonable terms or revenues will continue. If we obtain additional financing by issuing equity securities, our existing stockholders’ ownership will be diluted. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. We may be unable to maintain operations at a level sufficient for investors to obtain a return on their investments in our common stock. Further, we may continue to be unprofitable.
We will need significantly more cash to implement our plan to operate a business-to-business web based marketplace focused on the US pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
Cash Flows
The following table summarizes our Consolidated Statement of Cash Flows for the six months ended June 30, 2016 and 2015:
Net cash provided by (used in):
Operating activities
Financing activities
Net decrease in cash and cash equivalents
11
Cash used in operating activities for the six months ended June 30, 2016 was $845,544. This is an increase of $149,109 from same period in 2015 and was due to increased staffing as the Company transitioned to its operational phase of wholesale pharmaceutical sales, continuing IT development of the Company’s web platform and settlement of lawsuits.
Cash provided by financing activities for the six months ended June 30, 2016 was $305,000. This is a decrease of $100,000 for the same period in 2015.
Historical Liquidity and Capital Resources
Working Capital
Our working capital as of June 30, 2016 and December 31, 2015 is summarized as follows:
December 31, 2015
Current assets
96,105
975,405
The decrease in our current assets was primarily due to a $540,544 cash decrease, due to increased staffing as the Company transitioned to its operational phase of wholesale pharmaceutical sales, continuing IT development of the Company’s web platform.
Current liabilities increase is primarily due to a $200,000 increase in accrued liabilities, which is related to the accrual of lawsuit settlement (See Note 7).
Results of Operations
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Six months ending
June 30, 2015
($)
Operating expenses:
2,687,117
1,550,184
Warrants and Options Expense
Total Operating Expenses
Loss from operations
(37,579)
(113,475)
(28,877)
Net loss
Revenues increased for the six months ended June 30, 2016 to $3,536,141 compared to $1,863,328 for the comparable period in 2015. This increase was primarily attributable to increase in Westminster Pharmaceuticals, LLC sales of pharmaceuticals.
Cost of sales increased for the six months ended June 30, 2016 to $2,055,971 compared to $612,427 for the comparable period in 2015. This increase was primarily attributable to an increase in revenue from the pharmaceutical sales which has higher cost of sales than our other revenue sources.
General and administrative expenses increased for the six months ended June 30, 2016 to $2,687,117 compared to $1,550,184 for the comparable period in 2015. A large component of general and administrative expenses in 2016 was affected by an increase in employee cash compensation expense due to increased staffing in the private label manufacturing area. The estimated $210,000 of litigation expenses are in 2016.
12
Warrant and options expense in the 2016 and 2015 periods represents compensation cost related to the issuance of employee stock options.
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Three months ending
1,576,013
757,900
86,482
53,739
(50,842)
(27,908)
Revenues increased for the three months ended June 30, 2016 to $1,688,990 compared to $1,167,195 for the comparable period in 2015. This increase was primarily attributable to pharmaceutical sales.
Cost of sales increased for the three months ended June 30, 2016 to $1,039,889 compared to $382,004 for the comparable period in 2015. This increase was primarily attributable to an increase in revenue from the pharmaceutical sales which has higher cost of sales than our other revenue sources. General and administrative expenses increased for the three months ended June 30, 2016 to $1,576,013 compared to $757,900 for the comparable period in 2015. A large component of general and administrative expenses in 2016 was affected by an increase in employee cash compensation expense due to increased staffing in the private label manufacturing area, software acquisitions and lawsuit settlements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition
In general, the Company accounts for revenue recognition in accordance with ASC 605, “Revenue Recognition”.
Trxade, Inc. generates net fee income as a percentage of the total transactions between the buyer (independent pharmacies) and the seller (wholesaler) of pharmaceutical drugs on the Trxade web-based platform. Revenue is recognized when (1) the price is fixed and determined as the buyer orders the drugs from the wholesaler. (2) The wholesaler has signed a contract with Trxade, Inc. which recognizes that an arrangement exists. (3) The wholesaler delivers the drugs purchased to the buyer, products are delivered. (4) The collectability is reasonably assured by the wholesaler through prior credit checks and payment experience.
Westminster Pharmaceutical LLC generates gross revenues from the sale of pharmaceutical drugs to independent pharmacies or wholesalers. The revenue recognized when (1) the price is fixed and determinable at the time of the transaction with an invoice. (2) The invoice is also persuasive evidence that an arrangement exists. (3) The products are delivered to the buyer. (4) The collectability of the resulting receivable is reasonably assured by credit check prior to the transaction and experience with the customer.
13
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”), Share Based Payments to Non-Employees which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying instruments vest.
The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and our principal accounting officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. Based on these evaluations, the Certifying Officers have concluded, that, as of the end of the period covered by this quarterly report on Form 10-Q:
(a)
our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(b)
our disclosure controls and procedures were not effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during the six months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
On November 19, 2015, Family Medicine Pharmacy, LLC filed a class-action claim against Trxade Group, Inc. and its wholly owned subsidiary Westminster Pharmaceutical, LLC, Inc. (Family Medicine Pharmacy, LLC v. Trxade Group, Inc. and Westminster, Inc., Case No.: 1:15-CV-00590-KD-B, United States District Court, Southern District of Alabama, Mobile Division). Family Medicine has served Trxade for allegedly utilizing a “junk fax” advertising program. On June 6, 2016, we entered into a binding memorandum of understanding will the plaintiff related to this litigation to resolve all claims in exchange for Trxade funding a settlement fund in the amount of $200,000. Pending objections and/or resolutions, we are currently waiting for the court’s final approval of the settlement. We believe this case will settle under the proposed settlement.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, which could materially affect our business, financial position and results of operations. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the SEC, and those included in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Warrants to purchase 41,250 shares of common stock were issued in May 2016 related to the extension of $165,000 of convertible promissory notes previously issued in April and May 2015. These warrants were issued at a strike price of $1.50 and a term of five (5) years.
In June 2016 additional secured convertible promissory notes totaling $250,000 were issued in connection with similarly issued notes. The term of the notes is three years. Interest rate is a “Royalty Payment” which consists of a percentage of net Profit of certain transactions, payable within 45 days of the end of each quarter. Prior to maturity the notes may be converted for common stock at a conversion price of $2.50. The holders of the notes were granted a warrant to purchase 83,333 shares of common stock at a strike price of $0.01 and an expiration date of five years from date of issuance.
Shares of common stock were issued June 2016 totalling100,000 shares. These were sold at $1.50 per share. In connection with this common stock offering warrants to purchase 25,000 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years.
The issuances of the secured convertible promissory notes, common stock and warrants described above were exempt from registration pursuant to Section 4(2), Rule 506 of Regulation D and/or Regulation S of the Securities Act since the foregoing issuances and grants did not involve a public offering, the recipients took the securities for investment and not resale, we took take appropriate measures to restrict transfer, and the recipients were (a) “accredited investors”; (b) had access to similar documentation and information as would be required in a Registration Statement under the Act; (c) were non-U.S. persons; and/or (d) were officers or directors of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
Exhibit No.
Description
31.A
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.B
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.A
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.B
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
XBRL
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.
By:
/s/ SUREN AJJARAPU
Suren Ajjarapu
Chief Executive Officer
Date: August 5, 2016
/s/ HOWARD DOSS
Howard Doss
Chief Financial Officer